DEL TACO RESTAURANTS, INC., 10-K filed on 3/13/2020
Annual Report
v3.20.1
Document and Entity Information - USD ($)
12 Months Ended
Dec. 31, 2019
Mar. 09, 2020
Jun. 18, 2019
Document And Entity Information [Abstract]      
Document Type 10-K    
Amendment Flag false    
Document Period End Date Dec. 31, 2019    
Document Fiscal Year Focus 2019    
Document Fiscal Period Focus FY    
Entity Registrant Name Del Taco Restaurants, Inc.    
Entity Central Index Key 0001585583    
Current Fiscal Year End Date --12-31    
Entity Well-known Seasoned Issuer No    
Entity Current Reporting Status Yes    
Entity Voluntary Filers No    
Entity Filer Category Accelerated Filer    
Entity Common Stock, Shares Outstanding   37,080,960  
Entity Public Float     $ 365,160,000
Entity Emerging Growth Company false    
Entity Small Business false    
Entity Shell Company false    
v3.20.1
Consolidated Balance Sheets - USD ($)
$ in Thousands
Dec. 31, 2019
Jan. 01, 2019
Current assets:    
Cash and cash equivalents $ 1,421 $ 7,153
Accounts and other receivables, net 3,580 3,167
Inventories 3,123 2,932
Prepaid expenses and other current assets 2,289 4,935
Assets held for sale 8,411 14,794
Total current assets 18,824 32,981
Property and equipment, net 156,921 161,429
Operating Lease, Right-of-Use Asset 258,278 0
Goodwill 192,739 321,531
Trademarks 220,300 220,300
Intangible assets, net 10,827 18,507
Other assets, net 4,568 4,208
Total assets 862,457 758,956
Current liabilities:    
Accounts payable 19,652 19,877
Other accrued liabilities 34,577 34,785
Current portion of capital lease obligations and deemed landlord financing liabilities 220 1,033
Operating Lease, Liability, Current 17,848 0
Total current liabilities 72,297 55,695
Long-term debt, finance lease obligations, other debt and deemed landlord financing liabilities, excluding current portion, net 144,581 178,664
Operating Lease, Liability 257,361 0
Deferred income taxes 69,510 69,471
Other non-current liabilities 16,601 32,852
Total liabilities 560,350 336,682
Commitments and contingencies
Shareholders’ equity:    
Preferred Stock, Value, Issued 0 0
Common Stock, Value, Issued 4 4
Additional paid-in capital 333,379 336,941
Accumulated other comprehensive (loss) income (52) 180
(Accumulated deficit) retained earnings (31,224) 85,149
Total shareholders’ equity 302,107 422,274
Total liabilities and shareholders’ equity $ 862,457 $ 758,956
v3.20.1
Consolidated Balance Sheets (Parenthetical) - $ / shares
Dec. 31, 2019
Jan. 01, 2019
Preferred stock, par value (in dollars per share) $ 0.0001 $ 0.0001
Preferred stock, shares authorized (in shares) 1,000,000 1,000,000
Preferred stock, shares issued (in shares) 0 0
Preferred stock, shares outstanding (in shares) 0 0
Common stock, par value (in dollars per share) $ 0.0001 $ 0.0001
Common stock, shares authorized (in shares) 400,000,000 400,000,000
Common stock, shares issued (in shares) 37,059,202 37,305,342
Common stock, shares outstanding (in shares) 37,059,202 37,305,342
v3.20.1
Consolidated Statements of Comprehensive Income (Loss) - USD ($)
12 Months Ended
Dec. 31, 2019
Jan. 01, 2019
Jan. 02, 2018
Revenue:      
Total revenue $ 512,951,000 $ 505,490,000 $ 471,456,000
Restaurant operating expenses:      
Labor and related expenses 156,095,000 151,954,000 145,012,000
Occupancy and other operating expenses 105,376,000 97,745,000 92,825,000
General and administrative 43,877,000 43,773,000 38,154,000
Franchise advertising expenses 14,516,000 13,300,000 0
Depreciation and amortization 25,488,000 25,794,000 23,362,000
Occupancy and other - franchise subleases and other 4,463,000 3,167,000 2,608,000
Pre-opening costs 1,650,000 1,584,000 1,591,000
Goodwill, Impaired, Accumulated Impairment Loss 118,250,000    
Goodwill, Impairment Loss 118,250,000 0 0
Impairment of long-lived assets 7,159,000 3,861,000 0
Restaurant closure charges, net 2,961,000 394,000 191,000
Loss on disposal of assets and adjustments to assets held for sale, net 9,448,000 1,012,000 1,075,000
Total operating expenses 619,994,000 471,457,000 430,209,000
(Loss) income from operations (107,043,000) 34,033,000 41,247,000
Other expense (income), net:      
Interest expense 7,235,000 9,075,000 7,200,000
Other income (364,000) (660,000) 0
Total other expense, net 6,871,000 8,415,000 7,200,000
(Loss) income from operations before provision (benefit) for income taxes (113,914,000) 25,618,000 34,047,000
Provision (benefit) for income taxes 4,371,000 6,659,000 (15,824,000)
Net (loss) income (118,285,000) 18,959,000 49,871,000
Other comprehensive (loss) income:      
Change in fair value of interest rate cap, net of tax (364,000) 122,000 (162,000)
Reclassification of interest rate cap amortization included in net income, net of tax 132,000 44,000 4,000
Total other comprehensive (loss) income, net (232,000) 166,000 (158,000)
Comprehensive (loss) income $ (118,517,000) $ 19,125,000 $ 49,713,000
(Loss) earnings per share:      
Basic (in dollars per share) $ (3.20) $ 0.50 $ 1.29
Diluted (in dollars per share) $ (3.20) $ 0.49 $ 1.25
Weighted-average shares outstanding:      
Basic (in shares) 37,018,445 38,106,057 38,689,508
Diluted (in shares) 37,018,445 38,683,959 39,949,907
Company restaurant sales      
Revenue:      
Revenue $ 473,991,000 $ 471,193,000 $ 452,148,000
Franchise revenue      
Revenue:      
Revenue 19,002,000 17,569,000 16,464,000
Franchise advertising contributions      
Revenue:      
Revenue 14,516,000 13,300,000 0
Franchise sublease and other income      
Revenue:      
Revenue 5,442,000 3,428,000 2,844,000
Food and paper costs      
Restaurant operating expenses:      
Food and paper costs $ 130,711,000 $ 128,873,000 $ 125,391,000
v3.20.1
Consolidated Statements of Shareholders' Equity - USD ($)
Total
Common Stock
Additional Paid-in Capital
Accumulated Other Comprehensive Loss
Retained Earnings (Accumulated Deficit)
Beginning Balance at Jan. 03, 2017 $ 377,333,000 $ 4,000 $ 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
Stock-based compensation 4,876,000 $ 0 4,876,000    
Common stock of Del Taco Restaurants, Inc. released from possible redemption, Shares   0      
Other comprehensive income (loss), net of tax (158,000)     (158,000)  
Comprehensive income (loss) 49,713,000        
Stock-based compensation 99,000   99,000    
Tax withholdings on restricted stock vesting (1,923,000)   (1,923,000)    
Restricted stock awards vested, shares   257,518      
Exercise of stock options, shares   9,750      
Repurchase of common stock, shares   (986,497)      
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      
Net income (loss) 3,229,000        
Beginning Balance at Jan. 02, 2018 416,249,000 $ 4,000 349,334,000 14,000 66,897,000
Beginning Balance, Shares at Jan. 02, 2018   38,434,274      
Net income (loss) 18,959,000       18,959,000
Other comprehensive income (loss), net of tax 166,000     166,000  
Comprehensive income (loss) 19,125,000        
Stock-based compensation 6,079,000   6,079,000    
Tax withholdings on restricted stock vesting (2,378,000)   (2,378,000)    
Restricted stock awards vested, shares   257,389      
Restricted stock awards vested, value   $ 0      
Exercise of stock options, shares   21,750      
Exercise of stock options, value 222,000   222,000    
Repurchase of common stock, shares   (1,408,071)      
Stock Repurchased During Period, Value   $ 0      
Repurchase of common stock, value (16,316,000)   (16,316,000)    
Ending Balance at Jan. 01, 2019 422,274,000 $ 4,000 336,941,000 180,000 85,149,000
Ending Balance, Shares at Jan. 01, 2019   37,305,342      
Adjustment for adoption of new lease standard, net of tax         (707,000)
Net income (loss) 1,425,000        
Beginning Balance at Jan. 01, 2019 422,274,000 $ 4,000 336,941,000 180,000 85,149,000
Beginning Balance, Shares at Jan. 01, 2019   37,305,342      
Net income (loss) (118,285,000)       (118,285,000)
Other comprehensive income (loss), net of tax (232,000)     (232,000)  
Comprehensive income (loss) (118,517,000)        
Stock-based compensation 6,293,000   6,293,000    
Tax withholdings on restricted stock vesting (2,602,000)   (2,602,000)    
Restricted stock awards vested, shares   316,341      
Restricted stock awards vested, value   $ 0      
Exercise of stock options, shares   12,000      
Exercise of stock options, value 120,000   120,000    
Repurchase of common stock, shares   (574,481)      
Stock Repurchased During Period, Value   $ 0      
Repurchase of common stock, value (7,373,000)   (7,373,000)    
Ending Balance at Dec. 31, 2019 $ 302,107,000 $ 4,000 $ 333,379,000 $ (52,000) (31,224,000)
Ending Balance, Shares at Dec. 31, 2019   37,059,202      
Adjustment for adoption of new lease standard, net of tax         $ 1,912,000
v3.20.1
Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2019
Jan. 01, 2019
Jan. 02, 2018
Operating activities      
Net (loss) income $ (118,285) $ 18,959 $ 49,871
Adjustments to reconcile net (loss) income to net cash provided by operating activities:      
Allowance for doubtful accounts 41 45 0
Depreciation and amortization 25,488 25,794 23,362
Amortization of favorable and unfavorable lease assets and liabilities, net 0 (767) (809)
Amortization of deferred financing costs, debt discount and interest rate cap 550 445 389
Operating Lease, Right-of-Use Asset, Amortization 21,681 0 0
Stock-based compensation 6,293 6,079 4,876
Goodwill, Impairment Loss 118,250 0 0
Impairment of long-lived assets 7,159 3,861 0
Deferred income taxes (583) 1,097 (22,594)
Loss on disposal of assets and adjustments to assets held for sale, net 9,448 1,012 1,075
Restaurant closure charges 0 (449) (379)
Other Noncash Income 0 (523) 0
Changes in operating assets and liabilities:      
Accounts and other receivables, net (349) 616 313
Inventories (191) (220) 6
Prepaid expenses and other current assets (732) 1,949 (2,580)
Other assets (273) (125) (162)
Accounts payable (271) 2 2,332
Increase (Decrease) in Operating Lease Liabilities (18,846) 0 0
Other accrued liabilities (1,308) (488) (1,526)
Other non-current liabilities 973 3,647 2,856
Net cash provided by operating activities 49,045 61,832 57,788
Investing activities      
Purchases of property and equipment (43,696) (48,032) (50,627)
Proceeds from disposal of property and equipment, net 14,107 1,323 9,907
Purchases of other assets (2,039) (1,474) (1,033)
Acquisition of franchisees (4,832) (1,841) (1,128)
Proceeds from Divestiture of Businesses 7,187 0 2,192
Net cash used in investing activities (29,273) (50,024) (40,689)
Financing activities      
Proceeds from deemed landlord financing liabilities 0 2,675 3,925
Repurchase of common stock and warrants (7,373) (16,316) (13,849)
Payment of tax withholding related to restricted stock vesting, option exercises and distribution of restricted stock units (2,602) (2,378) (1,923)
Payments on finance leases, other debt and deemed landlord financing (635) (1,417) (1,587)
Proceeds from revolving credit facility 41,000 31,000 31,500
Payments on revolving credit facility (55,000) (25,000) (37,500)
Payments of Debt Issuance Costs (1,014) 0 0
Proceeds from Stock Options Exercised 120 222 99
Net cash used in financing activities (25,504) (11,214) (19,335)
(Decrease) increase in cash and cash equivalents (5,732) 594 (2,236)
Cash and cash equivalents at beginning of period 7,153 6,559 8,795
Cash and cash equivalents at end of period 1,421 7,153 6,559
Supplemental cash flow information:      
Interest Paid, Excluding Capitalized Interest, Operating Activities 6,919 8,823 6,873
Cash paid during the period for income taxes, net of tax refunds 3,856 3,061 9,441
Supplemental schedule of non-cash activities:      
Accrued property and equipment purchases 5,729 5,691 5,134
Write-offs against bad debt reserves 30 26 0
Amortization of interest rate cap into net income, net of tax 132 44 4
Change in other asset for fair value of interest rate cap recorded to other comprehensive (loss) income, net of tax (364) 122 (162)
Operating Lease, Right-of-Use Asset 298,942 0 0
Finance Lease, Right-of-Use Asset 1,185 0 0
Impairment of Operating Lease, Right-of-Use Asset $ 3,116 $ 0 $ 0
v3.20.1
Description of Business
12 Months Ended
Dec. 31, 2019
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Description of Business
Description of Business

Del Taco Restaurants, Inc. (f/k/a Levy Acquisition Corp. (“LAC”)) is a Delaware corporation headquartered in Lake Forest, California. The consolidated financial statements include the accounts of Del Taco Restaurants, Inc. and its wholly owned subsidiaries (collectively, the “Company” or “Del Taco”), one of which is Del Taco LLC which has all of the material assets and operations of the Company. The Company develops, franchises, owns, and operates Del Taco quick-service Mexican-American restaurants. At December 31, 2019, there were 300 company-operated and 296 franchise-operated Del Taco restaurants located in 15 states, including one franchise-operated unit in Guam. At January 1, 2019, there were 322 company-operated and 258 franchise-operated Del Taco restaurants located in 14 states, including one franchise-operated unit in Guam.
The Company was originally incorporated in Delaware on August 2, 2013 as a special purpose acquisition company, formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or other similar business combination with one or more businesses. On June 30, 2015 (the "Closing Date"), the Company consummated its business combination with Del Taco Holdings, Inc. (“DTH”) pursuant to the agreement and plan of merger dated as of March 12, 2015 by and among LAC, Levy Merger Sub, LLC (“Levy Merger Sub”), LAC’s wholly owned subsidiary, and DTH (the “Merger Agreement”). Under the Merger Agreement, Levy Merger Sub merged with and into DTH, with DTH surviving the merger as a wholly-owned subsidiary of the Company (the “Business Combination” or “Merger”). In connection with the closing of the Business Combination, the Company changed its name from Levy Acquisition Corp. to Del Taco Restaurants, Inc.
v3.20.1
Basis of Presentation and Summary of Significant Accounting Policies
12 Months Ended
Dec. 31, 2019
Accounting Policies [Abstract]  
Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation

The Company uses a fifty-two or fifty-three week fiscal year ending on the Tuesday closest to December 31. Fiscal years 2019, 2018 and 2017 are 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. 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 2019, the Company’s financial statements reflect the fifty-two weeks ended December 31, 2019. For fiscal year 2018, the Company's financial statements reflect the fifty-two weeks ended January 1, 2019. For fiscal year 2017, the Company’s financial statements reflect the fifty-two weeks ended January 2, 2018.

Effective January 2, 2019 (the first day of fiscal year 2019), the Company adopted the requirements of Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842), as discussed in Note 2, using the modified retrospective method of transition. Current year results have been prepared in accordance with the new standard.

Certain reclassifications have been made to prior period financial statements to conform to the current period presentation.
Principles of Consolidation
The consolidated financial statements included herein have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and the rules and regulations of Securities and Exchange Commission (“SEC”). The accompanying consolidated financial statements include the accounts of the Company and its wholly and majority owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Management believes that such estimates have been based on reasonable and supportable assumptions and the resulting estimates are reasonable for use in the preparation of the consolidated financial statements. Actual results could differ from these estimates. The Company’s significant estimates include estimates for impairment of goodwill, intangible assets and property and equipment, valuations provided in business combinations, insurance reserves, restaurant closure reserves, stock-based compensation, contingent liabilities, certain leasing activities and income tax valuation allowances.


SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Variable Interest Entities
In accordance with Accounting Standards Codification ("ASC") 810, Consolidation, the Company applies the guidance related to variable interest entities ("VIE"), which defines the process for how an enterprise determines which party consolidates a VIE as primarily a qualitative analysis. The enterprise that consolidates the VIE (the primary beneficiary) is defined as the enterprise with (1) the power to direct activities of the VIE that most significantly affect the VIE's economic performance and (2) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE. The Company franchises its operations through franchise agreements entered into with franchisees and therefore, the Company does not possess any ownership interests in franchise entities or other affiliates. The franchise agreements are designed to provide the franchisee with key decision-making ability to enable it to oversee its operations and to have a significant impact on the success of the franchise, while the Company’s decision-making rights are related to protecting the Company’s brand. Based upon the Company’s analysis of all the relevant facts and considerations of the franchise entities, the Company has concluded that the franchise agreements are not variable interest entities.
Revenue Recognition
We recognize revenue in accordance with ASC 606, Revenue from Contracts with Customers, which we adopted on January 3, 2018.
Company Restaurant Sales from the operation of company-operated restaurants are recognized when food and service is delivered to customers. The Company reports revenue net of promotional allowances as well as sales taxes collected from customers and remitted to governmental taxing authorities.
Franchise Revenue is comprised of (i) development fees, (ii) franchise fees, (iii) on-going royalties, (iv) renewal fees and (v) other franchise revenue. Development and franchise fees, portions of which are collected in advance and are non-refundable, received pursuant to individual development agreements, grant the right to develop franchise-operated restaurants in future periods in specific geographic areas. Both development fees and franchise fees are deferred and recognized as revenue over the term of the related franchise agreement for the respective restaurant, and renewal fees are deferred and recognized as revenue over the term of the renewal agreement. Development fees and franchise fees are generally recognized as revenue upon the termination of the development agreement with the franchisee. Deferred development fees and deferred franchise fees are included in other non-current liabilities on the consolidated balance sheets. Royalties from franchise-operated restaurants are based on a percentage of franchise restaurant sales and are recognized in the period the related franchise-operated restaurant sales occur. To a lesser extent, franchise revenue also includes pass-through fees for services such as software maintenance and technology subscriptions since we are considered the principal related to the purchase and sale of the services to the franchisee and have no remaining performance obligations. The related expenses are recognized in general and administrative expenses.
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 December 31, 2019 is as follows (in thousands):
FY 2020
 
$
165

FY 2021
 
159

FY 2022
 
159

FY 2023
 
152

FY 2024
 
150

Thereafter
 
1,746

Total deferred franchise fees
 
$
2,531

Franchise advertising contributions consist of a percentage of franchise restaurant's net sales, typically 4%, paid to the Company for advertising and promotional services that the Company provides. The offset is recorded to franchise advertising expenses.
Franchise sublease and other income consists of rental income received from franchisees related to properties where we have subleased a leasehold interest to the franchisee but remain primarily liable to the landlord. The related expenses are recognized in Occupancy and Other - Franchise Subleases and Other. Franchise sublease income also includes rental income for closed restaurant properties where we have subleased to a third party but remain primarily liable to the landlord. The related expenses are recognized in Restaurant Closure Charges, net. Franchise other income also includes information technology hardware such as point of sale equipment, tables, kitchen display systems, servers, scanners and printers that we occasionally purchase from third party vendors and then sell to franchisees. Since we are considered the principal related to the purchase and sale of the hardware to the franchisee and have no remaining performance obligations, the franchisee reimbursement is recognized as Franchise Sublease and Other Income upon transfer of the hardware. The related expenses are recognized in Occupancy and Other - Franchise Subleases and Other.
Gift Cards
The Company sells gift cards to customers in its restaurants. The gift cards sold to customers have no stated expiration dates and are subject to potential escheatment laws in the various jurisdictions in which the Company operates. Deferred gift card income totaled $3.1 million and $2.8 million as of December 31, 2019 and January 1, 2019, respectively. The current portion of the deferred gift card income is included in other accrued liabilities on the consolidated balance sheets and totaled $1.6 million and $1.5 million as of December 31, 2019 and January 1, 2019, respectively. The non-current portion of the deferred gift card income was $1.5 million and $1.3 million as December 31, 2019 and January 1, 2019, respectively, and is included in other non-current liabilities on the consolidated balance sheets. The Company recognizes revenue from gift cards: (i) when the gift card is redeemed by the customer; or (ii) under the delayed recognition method, when the likelihood of the gift card being redeemed by the customer is remote (gift card breakage) and the Company determines that there is not a legal obligation to remit the unredeemed gift cards to the relevant jurisdiction. The determination of the gift card breakage rate is based upon Company specific historical redemption patterns. Recognized gift card breakage revenue was not significant to any period presented in the consolidated statements of comprehensive income. Any future revisions to the estimated breakage rate may result in changes in the amount of breakage revenue recognized in future periods but is not expected to be significant.
Cash and Cash Equivalents
The Company considers short-term, highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. Amounts receivable from credit card issuers are typically converted to cash within 2 to 4 days of the original sales transaction and are considered to be cash equivalents.
Accounts and Other Receivables, Net
Accounts and other receivables, net consist primarily of receivables from franchisees, sublease tenants, a vendor and landlords. Receivables from franchisees include sublease rents, royalties, services and contractual marketing fees associated with the franchise agreements. Sublease tenant receivables relate to subleased properties where the Company is a party and obligated on the primary lease agreement. The vendor receivable is for earned reimbursements from a vendor, and the landlord receivables are for earned landlord reimbursement related to restaurants opened. The allowance for doubtful accounts is based on historical experience and a review on a specific identification basis of the collectability of existing receivables and totaled $0.1 million as of both December 31, 2019 and January 1, 2019.
Vendor Allowances
The Company receives support from one of its vendors in the form of reimbursements. The reimbursements are agreed upon with the vendor, but do not represent specific, incremental, identifiable costs incurred by the Company in selling the vendor’s products. Such reimbursements are recorded as a reduction of the costs of purchasing the vendor’s products. The non-current portion of reimbursements received by the Company in advance is included in other non-current liabilities on the consolidated balance sheets and totaled $0.3 million and $0.7 million as of December 31, 2019 and January 1, 2019, 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 December 31, 2019 and January 1, 2019, respectively.
Inventories
Inventories, consisting of food items, packaging and beverages, are valued at the lower of cost (first-in, first-out method) or net realizable value.
Assets Held for Sale
Assets held for sale include the net book value of property and equipment and goodwill for Company-operated restaurants that the Company plans to sell within the next year to new or existing franchisees, as well as the net book value of owned property that the Company plans to sell and lease back within the next year. Long-lived assets that meet the held for sale criteria are held for sale and reported at the lower of their carrying value or fair value, less estimated costs to sell. Gains and losses realized on sale-leaseback transactions are recognized immediately. If the determination is made that the Company no longer expects to sell an asset within the next year, the asset is reclassified out of assets held for sale.
Property and Equipment
Property and equipment includes land, buildings, leasehold improvements, restaurant and other equipment, restaurant property leased to others and buildings under finance leases. Land, buildings, leasehold improvements, property and equipment acquired in business combinations are initially recorded at their estimated fair value. Land, buildings, leasehold improvements, property and equipment acquired or constructed in the normal course of business are initially recorded at cost. The Company provides for depreciation and amortization based on the estimated useful lives of assets using the straight-line method.
 
Estimated useful lives for property and equipment are as follows:
Buildings
  
20–35 years
Leasehold improvements
  
Shorter of useful life (typically 20 years) or lease term
Buildings under finance 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 $22.7 million for the fifty-two weeks ended December 31, 2019, $23.1 million for the fifty-two weeks ended January 1, 2019 and $21.0 million for the fifty-two weeks ended January 2, 2018. These amounts include $0.5 million for the fifty-two weeks ended December 31, 2019 related to buildings under finance leases, as well as $0.9 million and 1.2 million for the fifty-two weeks ended January 1, 2019 and January 2, 2018, respectively, related to buildings under capital leases. Accumulated depreciation and amortization associated with property and equipment includes $0.3 million related to buildings under finance leases as of December 31, 2019, as well as $2.2 million and $2.5 million related to buildings under capital leases as of January 1, 2019 and January 2, 2018, respectively.
The Company capitalizes construction costs which consist of internal payroll and payroll related costs and travel costs related to the successful acquisition, development, design and construction of the Company's new restaurants. Capitalized construction costs totaled $1.8 million for the fifty-two weeks ended December 31, 2019 and $1.6 million for both the fifty-two weeks ended January 1, 2019 and fifty-two weeks ended January 2, 2018. If the Company subsequently makes a determination that a site for which development costs have been capitalized will not be acquired or developed, any previously capitalized development costs are expensed and included in general and administrative expenses in the consolidated statements of comprehensive income. The Company capitalizes interest in connection with the construction of its restaurants. Interest capitalized totaled approximately $0.1 million for each of the fifty-two weeks ended December 31, 2019, the fifty-two weeks ended January 1, 2019, and the fifty-two weeks ended January 2, 2018.
Gains and losses on the disposal of assets are recorded as the difference between the net proceeds received, if any, and net carrying values of the assets disposed and are included in loss on disposal of assets, net in the consolidated statements of comprehensive (loss) income.
Deferred Financing Costs
Deferred financing costs represent third-party debt costs that are capitalized and amortized to interest expense over the associated term of the debt agreement using the effective interest method. Deferred financing costs, along with lender debt discount, are presented net of the related debt balances on the consolidated balance sheets.
Goodwill and Trademarks
The Company’s goodwill and trademarks are not amortized, but tested annually for impairment and tested more frequently for impairment if events and circumstances indicate that the asset might be impaired. The Company conducts annual goodwill and trademark impairment tests in the fourth quarter of each fiscal year or whenever an indicator of impairment exists.
In assessing potential goodwill impairment, the Company has the option to first assess the qualitative factors to determine whether events or circumstances indicate that it is more likely than not that the fair value of net assets, including goodwill, is less than its carrying amount. If the qualitative factors indicate that it is more likely than not that the fair value of net assets, including goodwill, is less than the carrying amount, the Company performs a quantitative impairment test. 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. As the Company adopted ASU 2017-04, Simplifying the Test for Goodwill Impairment, in 2019, the Company recognizes goodwill impairment for the carrying amount in excess of fair value. The Company also performs an annual impairment test for indefinite-lived intangible assets during the fourth fiscal quarter of each year, or more frequently if impairment indicators arise.
In assessing potential impairments during the fourth quarter of 2019, the Company noted its stock price experienced a sustained decrease beginning in October 2019. As such, it bypassed the qualitative assessment and performed a quantitative assessment using both the discounted cash flow method and guideline public company method, weighting both equally in the assessment. Based on this quantitative analysis, it was determined that the fair value of the Company was less than its carrying value. The Company recognized an impairment charge of $118.3 million, equal to the excess of the carrying amount above fair value. The impairment charge was recorded in impairment of goodwill on the consolidated statements of comprehensive (loss) income.
During the fourth quarter of 2019, the Company also performed a quantitative impairment analysis of its indefinite-lived trademark using the relief from royalty method. Based on this analysis, the fair value of the Company's trademark was greater than its carrying value, and as such, no impairment was needed.
Intangible Assets, Net
Intangible assets primarily include franchise rights, reacquired franchise rights and favorable lease assets. 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 (loss) income over the remaining term of the franchise agreements. Reacquired franchise rights, which represent the fair value of reacquired rights that were previously granted to franchisees to use Del Taco's trade name under a franchise agreement, are amortized on a straight-line basis to depreciation and amortization in the consolidated statements of comprehensive (loss) income over the term of the former franchise agreement. 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. In connection with the adoption of Topic 842, the Company reclassified its favorable lease assets to operating lease right-of-use assets as discussed in further detail in Note 6. As such, intangible assets did not include favorable lease assets as of December 31, 2019.
Other Assets, Net
Other assets, net consist of security deposits, straight-line rental income related to subleases 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 $2.9 million and $2.3 million as of December 31, 2019 and January 1, 2019, respectively, and is included in other assets, net in the consolidated balance sheets. Capitalized software costs totaled $2.0 million for the fifty-two weeks ended December 31, 2019, $1.5 million for the fifty-two weeks ended January 1, 2019 and $1.0 million for the fifty-two weeks ended January 2, 2018. Amortization expenses totaled $1.4 million for the fifty-two weeks ended December 31, 2019, $1.2 million for the fifty-two weeks ended January 1, 2019 and $1.0 million for the fifty-two weeks ended January 2, 2018.
Long-Lived Assets
Long-lived assets, including property and equipment and definite-lived intangible assets, are reviewed by the Company for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Long-lived assets are grouped and evaluated for impairment at the lowest level for which there are identifiable cash flows that are independent of the cash flows of other groups of assets. The Company evaluates such cash flows for individual restaurants and franchise agreements on an undiscounted basis. If it is determined that the carrying amounts of such long-lived assets are not recoverable, the assets are written down to their estimated fair values. The Company generally estimates fair value using either the land and building real estate value for the respective restaurant or the discounted value of the estimated cash flows associated with the respective restaurant or agreement. During the fifty-two weeks ended December 31, 2019, the Company evaluated certain restaurants having indicators of impairment based on operating performance and recorded an impairment charge totaling $7.2 million related to seven restaurants. During the fifty-two weeks ended January 1, 2019, the Company recorded an impairment charge totaling $3.9 million related to five restaurants. No such impairment charges were recorded during the fifty-two weeks ended January 2, 2018.
Rent Expense
The Company has non-cancelable lease agreements for certain restaurant land and buildings under terms ranging up to 50 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 finance lease. Certain leases provide for contingent rentals based on percentages of net restaurant sales or have other provisions obligating the Company to pay related property taxes and certain other expenses. Contingent rentals are generally based on restaurant 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 through 2018 prior to the adoption of Topic 842. In connection with the adoption of Topic 842 in 2019, the Company reclassified these deferred rent liabilities to the operating lease right-of-use asset. In addition, the Company subleases certain buildings to franchisees and other unrelated third parties, which are classified as operating leases.
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 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. The Company is not the primary obligor for its workers' compensation insurance policy, so therefore, the Company records a liability up to its deductible exposure.
Insurance Recovery Assets
In the normal course of its business, the Company incurs losses, such as those resulting from property damage and legal actions, that are covered by the Company's insurance policies. The Company records insurance recovery assets for losses it is entitled to recover under its insurance policies and when such recovery is probable. In determining whether a recovery is probable, the Company considers whether the Company has exceeded its deductible, the limits of its insurance policies and subsequent payment of claims.
Advertising Costs
Franchisees pay a weekly fee to the Company of 4% of their restaurants’ net sales as reimbursement for advertising and promotional services that the Company provides. Fees received in advance of payment for provided services are included in other accrued liabilities and were $0.6 million and $0.7 million at December 31, 2019 and January 1, 2019, respectively. Company-operated restaurants contribute to the advertising fund on the same basis as franchise-operated restaurants. At December 31, 2019 and January 1, 2019, the Company had an additional $0.8 million and $0.9 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 (loss) income for Company expenses and included in franchise advertising expenses in the consolidated statements of comprehensive (loss) income for franchise expenses. Advertising expenses for the Company were $18.8 million for the fifty-two weeks ended December 31, 2019, $19.0 million for the fifty-two weeks ended January 1, 2019 and $18.1 million for the fifty-two weeks ended January 2, 2018.
Pre-opening Costs
Pre-opening costs, which include restaurant labor, supplies, cash and non-cash rent expense and occupancy and other operating costs incurred prior to the opening of a new restaurant are expensed as incurred. Pre-opening costs were $1.7 million for the fifty-two weeks ended December 31, 2019, and $1.6 million for both the fifty-two weeks ended January 1, 2019 and the fifty-two weeks ended January 2, 2018.
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. Prior to the adoption of Topic 842, 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. After the adoption of Topic 842, these restaurant closure obligations primarily consist of rent, property tax and common area maintenance on closed restaurant properties and the present value of non-lease executory costs for closed restaurant properties, net of estimated sublease income. Changes to the estimated liability for future non-lease executory costs based on new facts and circumstances are considered to be a change in estimate and are recorded prospectively. The change resulting from the adoption of Topic 842 led to an increase in restaurant closure charges for the fifty-two weeks ended December 31, 2019 as compared to the fifty-two weeks ended January 1, 2019.
Stock-Based Compensation Expense
The Company recognizes compensation expense for all share-based payment awards made to employees and non-employee board of directors based on their estimated grant date fair values using the Black-Scholes option pricing model for option grants and the closing price of the underlying common stock on the date of the grant for restricted stock awards. The Company recognizes these compensation costs for only those awards expected to vest, on a straight-line basis over the requisite service period of the award. The Company estimates the number of awards expected to vest based, in part, on historical forfeiture rates and also based on management's expectations of employee turnover within the specific employee groups receiving the awards. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods, if actual forfeitures differ from those estimates. Stock-based compensation expense for the Company’s stock-based compensation awards is recognized ratably over the vesting period on a straight-line basis.
Income Taxes
The Company uses the liability method of accounting for income taxes. Deferred income taxes are provided for temporary differences between financial statement and income tax reporting, using tax rates scheduled to be in effect at the time the items giving rise to the deferred taxes reverse. The Company recognizes the impact of a tax position in the financial statements if that position is more likely than not of being sustained by the taxing authority. Accordingly, the Company reports a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
Derivative Instruments and Hedging Activities
The Company is exposed to variability in future cash flows resulting from fluctuations in interest rates related to its variable rate debt. As part of its overall strategy to manage the level of exposure to the risk of fluctuations in interest rates, the Company has used various interest rate contracts including interest rate caps. The Company recognizes all derivative instruments as either assets or liabilities at fair value in the consolidated balance sheets. When they qualify as hedging instruments, the Company designates interest rate caps as cash flow hedges of forecasted variable rate interest payments on certain debt principal balances.
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing hedge ineffectiveness are recognized in current earnings.
The Company enters into interest rate derivative contracts with major banks and is exposed to losses in the event of nonperformance by these banks. The Company anticipates, however, that these banks will be able to fully satisfy their obligations under the contracts. Accordingly, the Company does not obtain collateral or other security to support the contracts.
Contingencies
The Company recognizes liabilities for contingencies when an exposure that indicates it is probable that an asset has been impaired or that a liability has been incurred and the amount of impairment or loss can be reasonably estimated. The Company’s ultimate legal and financial liability with respect to such matters cannot be estimated with certainty and requires the use of estimates. When the reasonable estimate is a range, the recorded loss will be the best estimate within the range. The Company records legal settlement costs when those costs are probable and reasonably estimable.
Comprehensive (Loss) Income
Comprehensive (loss) income 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 (loss) income, net of tax.
Segment Information
An operating segment is defined as a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses, and about which separate financial information is regularly evaluated by the Company’s chief operating decision makers in deciding how to allocate resources. Similar operating segments can be aggregated into a single operating segment if the businesses are similar. Management has determined that the Company has one operating segment, and therefore one reportable segment. The Company’s chief operating decision maker (CODM) is its Chief Executive Officer; its CODM reviews financial performance and allocates resources at a consolidated level on a recurring basis.
Related Party Transactions
Of the 424,439 warrants purchased during the fifty-two weeks ended January 2, 2018, 400,000 warrants were purchased from PW Acquisitions, LP, a related party at that time, at $3.75 per warrant, representing a 5% discount from the closing price of $3.95 per warrant on the transaction date. The chief executive officer and managing member of the general partner of PW Acquisitions, LP was a member of the Company's Board of Directors at the time of the transaction.
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 December 31, 2019, Del Taco operated and franchised a total of 372 restaurants in California (233 company-operated and 139 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 August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, and issued additional clarifications and improvements during 2018. This guidance amends and simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management activities in the financial statements. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. There was no material impact on the Company's consolidated financial statements and related disclosures as a result of adopting this standard.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350), along with related clarifications and improvements. This guidance results in the simplification of the goodwill impairment test. ASU 2017-04 eliminates the second step of the two-step goodwill impairment test, which required entities to calculate the implied fair value of goodwill in order to measure goodwill impairment. Instead, goodwill impairment is measured based on the excess of a reporting unit's carrying value over its fair value. The standard is effective for fiscal years beginning after December 15, 2019; however, the Company early adopted the standard during the fifty-two weeks ended December 31, 2019. Refer to Note 6 for further discussion of the impact on the Company's consolidated financial statements as a result of adopting this standard.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), along with related clarifications and improvements. This guidance results in key changes to lease accounting and aims to bring leases onto balance sheets to give investors, lenders, and other financial statement users a more comprehensive view of a company's long-term financial obligations as well as the assets it owns versus leases. The pronouncement requires lessees to recognize a liability for lease obligations, which represents the discounted obligation to make future lease payments, and a corresponding right-of-use asset on the balance sheet. The Company adopted the requirements of the new lease standard effective January 2, 2019, the first day of fiscal year 2019, electing the optional transition method to apply the standard as of the effective date and therefore will not apply the standard to the comparative periods presented in the Company's financial statements. During the process of adoption, the Company made the following elections:

The Company elected the package of practical expedients which allowed the Company to not reassess:
Whether existing or expired contracts contain leases under the new definition of a lease;
Lease classification for existing or expired leases; and
Initial direct costs for any expired or existing leases to determine if they would qualify for capitalization under ASC 842.
The Company did not elect the hindsight practical expedient, which permits the use of hindsight when determining lease term and impairment of operating lease assets.
The Company did not elect the land easement practical expedient, which permits an entity to continue applying its current policy for accounting for land easements that existed as of, or expired before, the effective date of Topic 842.
The Company elected to make the accounting policy election for short-term leases, permitting the Company to not apply the recognition requirements of this standard to short-term leases with terms of 12 months or less.

Upon adoption of ASU 2016-02, the Company recorded operating lease right-of-use assets and operating lease liabilities and derecognized all landlord funded assets, deemed landlord financing liabilities, deferred rent liabilities and favorable lease assets and unfavorable lease liabilities upon transition. Upon adoption, the Company recorded operating lease liabilities of approximately $230.6 million based on the present value of the remaining rental payments using discount rates as of the effective date. In addition, the Company recorded corresponding operating lease right-of-use assets of approximately $218.9 million, calculated as the initial amount of the Company's operating lease liabilities adjusted for prepaid and deferred rent, unamortized favorable lease assets and unamortized unfavorable lease liabilities, liabilities associated with lease termination costs and impairment of right-of-use assets recognized in retained earnings as of January 1, 2019. At the beginning of the period of adoption, the Company recorded the cumulative effect of adoption of $1.9 million to retained earnings. Beginning in fiscal 2019, leases historically treated as deemed landlord financing liabilities will be treated as operating leases resulting in an increase in occupancy and other expense and a decrease to depreciation expense and interest expense.
The impact of the adoption of ASC 2016-02 on the consolidated balance sheet was as follows:

 
 
January 1, 2019
 
Effect of Adoption of Topic 842 (Leases)
 
January 2, 2019
Assets
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 
$
7,153

 
$

 
$
7,153

Accounts and other receivables, net
 
3,167

 

 
3,167

Inventories
 
2,932

 

 
2,932

Prepaid expenses and other current assets
 
4,935

 
(2,564
)
 
2,371

Assets held for sale
 
14,794

 

 
14,794

Total current assets
 
32,981

 
(2,564
)
 
30,417

Property and equipment, net
 
161,429

 
(13,839
)
 
147,590

Operating lease right-of-use assets
 

 
218,855

 
218,855

Goodwill
 
321,531

 

 
321,531

Trademarks
 
220,300

 

 
220,300

Intangible assets, net
 
18,507

 
(7,576
)
 
10,931

Other assets, net
 
4,208

 

 
4,208

Total assets
 
$
758,956

 
$
194,876

 
$
953,832

Liabilities and shareholders' equity
 
 
 
 
 


Current liabilities:
 
 
 
 
 


Accounts payable
 
$
19,877

 
$

 
$
19,877

Other accrued liabilities
 
34,785

 
(425
)
 
34,360

Current portion of finance lease obligations and deemed landlord finacing liabilities
 
1,033

 
(547
)
 
486

Current portion of operating lease liabilities
 

 
17,303

 
17,303

Total current liabilities
 
55,695

 
16,331

 
72,026

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

 
(19,040
)
 
159,624

Operating lease liabilities
 

 
213,313

 
213,313

Deferred income taxes
 
69,471

 
708

 
70,179

Other non-current liabilities
 
32,852

 
(18,348
)
 
14,504

Total liabilities
 
336,682

 
192,964

 
529,646

Shareholders' equity:
 
 
 
 
 

Preferred stock
 

 

 

Common stock
 
4

 

 
4

Additional paid-in capital
 
336,941

 

 
336,941

Accumulated other comprehensive income
 
180

 

 
180

Retained earnings
 
85,149

 
1,912

 
87,061

Total shareholders' equity
 
422,274

 
1,912

 
424,186

Total liabilities and shareholders' equity
 
$
758,956

 
$
194,876

 
$
953,832






Recently Issued Accounting Standards

In June 2016, the FASB issued ASU 2016-13, Financial Statements - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The standard is effective for fiscal years beginning after December 15, 2019. The Company does not expect the adoption of ASU 2016-13 to have a material impact on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which clarifies the accounting implementation costs in cloud computing arrangements. The standard is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact of the standard on its consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing the following exceptions: (1) exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or gain from other items; (2) exception to the requirement to recognize a deferred tax liability for equity method investments when a subsidiary becomes an equity method investment; and (3) exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. Furthermore, ASU 2019-12 simplifies the accounting for income taxes by doing the following: (1) requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax; (2) requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction; (3) specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements; and (4) requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company is currently evaluating the impact of the standard on its consolidated financial statements.
v3.20.1
Restaurant Closure and Other Related Charges
12 Months Ended
Dec. 31, 2019
Restructuring and Related Activities [Abstract]  
Restaurant Closure and Other Related Charges
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.  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 the discounted value of the estimated cash flows associated with the respective restaurant or agreement, using Level 3 inputs. The impairment charges represent the excess of the aggregate carrying value of a restaurant's operating lease right-of-use asset, furniture, fixtures and equipment and leasehold improvements over its estimated fair value. Impairment charges are allocated to a restaurant's operating lease right-of-use assets, furniture, fixtures and equipment and leasehold improvements on a pro rata basis based on the respective assets' carrying values.

In connection with the adoption of Topic 842, the Company evaluated the operating lease right-of-use assets for impairment, indicating the carrying amount of the operating lease assets for certain restaurants may not be recoverable, and recorded an impairment charge totaling $3.1 million at January 2, 2019 based on the estimates of future recoverable cash flows.

During the fifty-two weeks ended December 31, 2019, the Company evaluated certain restaurants having indicators of impairment based on operating performance and recorded an impairment charge totaling $7.2 million related to seven restaurants. The Company wrote-off a portion of the operating lease right-of-use assets, furniture, fixtures and equipment and leasehold improvements based on the estimate of future recoverable cash flows. During the fifty-two weeks ended January 1, 2019, the Company evaluated certain restaurants that had indicators of impairment based on operating performance and recorded an impairment charge totaling $3.9 million related to five restaurants. The Company wrote-off the value of furniture, fixtures and equipment and leasehold improvements based on the estimate of future recoverable cash flows. No impairment charges were recorded in continuing operations in the accompanying consolidated statements of comprehensive (loss) income for any other periods presented.

Restaurant Closure Charges, Net
At December 31, 2019 and January 1, 2019, the restaurant closure liability was $0.4 million and $2.4 million, respectively. The details of the restaurant closure activities are discussed below.
Restaurant Closures and Lease Reserves
At January 1, 2019, the restaurant closure liability balance was $0.3 million related to restaurants closures prior to 2015. During the fifty-two weeks ended December 31, 2019, in connection with the adoption of Topic 842, the Company reclassified the $0.3 million restaurant closure liability to offset the respective operating lease right-of-use assets.
Restaurant Closure and Other Related Charges for 12 Underperforming Restaurants
During the fourth quarter of 2015, the Company closed 12 company-operated restaurants. During the fifty-two weeks ended December 31, 2019, in connection with the adoption of Topic 842, the Company reclassified approximately $1.9 million of the lease related closure liability to offset the respective operating lease right-of-use assets. A summary of the restaurant closure liability activity, which relates to contract termination costs, for these 12 closed restaurants consisted of the following (in thousands):
 
Total
Balance at January 3, 2017
$
1,773

Charges for accretion in current period
70

Cash payments
(376
)
Adjustment to estimates based on current activity
144

Balance at January 2, 2018
1,611

Charges for accretion in current period
61

Cash payments
(327
)
Adjustment to estimates based on current activity
747

Balance at January 1, 2019
2,092

Reclassified to operating lease right-of-use assets
(1,900
)
Cash payments
(263
)
Adjustment to estimates based on current activity
508

Balance at December 31, 2019
$
437



The current portion of the restaurant closure liability is $0.1 million and $0.5 million at December 31, 2019 and January 1, 2019, respectively, and is included in other accrued liabilities in the consolidated balance sheets. The non-current portion of the restaurant closure liability is $0.3 million and $1.6 million at December 31, 2019 and January 1, 2019, respectively, and is included in other non-current liabilities in the consolidated balance sheets. The restaurant closure liability is expected to be settled in 2021.
v3.20.1
Property and Equipment, Net
12 Months Ended
Dec. 31, 2019
Property, Plant and Equipment [Abstract]  
Property and Equipment, Net
Property and Equipment, Net
Property and equipment, net at December 31, 2019 and January 1, 2019 consisted of the following, excluding amounts related to properties classified as held for sale (in thousands):
 
 
December 31, 2019
 
January 1, 2019
Land
 
$
1,927

 
$
1,929

Buildings
 
4,569

 
4,335

Restaurant and other equipment
 
92,025

 
87,767

Leasehold improvements
 
116,177

 
121,409

Buildings under finance leases
 
871

 
3,390

Restaurant property leased to others
 
10,899

 
991

Construction-in-progress
 
11,680

 
10,697

 
 
238,148

 
230,518

Less: Accumulated depreciation
 
(81,227
)
 
(69,089
)
Property and equipment, net
 
$
156,921

 
$
161,429

v3.20.1
Summary of Refranchsing and Franchise Acquisitions (Notes)
12 Months Ended
Dec. 31, 2019
Franchise Acquisitions [Abstract]  
Refranchising and Franchise Acquisitions
Summary of Refranchising, Assets Held for Sale and Franchise Acquisitions
Refranchising
In connection with the sale of company-operated restaurants to franchisees, the Company typically enters into several agreements, in addition to an asset purchase agreement, with franchisees including franchise and lease agreements. The Company typically sells the restaurants' inventory and equipment and retains ownership of the leasehold interest on the real estate of the lease and/or sublease to the franchisee. The Company has determined that its restaurant dispositions usually represent multiple-element arrangements, and as such, the cash consideration is allocated to the separate elements based on their relative selling price. Cash consideration generally includes up-front consideration for the sale of the restaurants and franchise fees and future cash consideration for royalties and lease payments. The Company considers the future lease payments in allocating the initial cash consideration received. The Company compares the stated rent under the lease and/or sublease agreements with comparable market rents, and the Company records sublease assets/liabilities with a corresponding offset to the gain or loss on the sale of the company-operated restaurants. Sublease assets represent subleases with stated rent above comparable market rents. Sublease assets are amortized to sublease income over the term of the related sublease. Sublease liabilities represent subleases with stated rent below comparable market rents and are amortized to sublease income over the term of the related sublease. Both sublease assets and sublease liabilities arise from the sale of company-operated restaurants to franchisees. The cash consideration per restaurant for franchise fees is consistent with the amounts stated in the related franchise agreements, which are also charged for separate standalone arrangements. Therefore, the Company initially defers and subsequently recognizes the franchise fees over the term of the franchise agreement. Future royalty income is also recognized in revenue as earned.
The Company sold 31 company-operated restaurants to franchisees during the fifty-two weeks ended December 31, 2019 and 5 company-operated restaurants to franchisees during the fifty-two weeks ended January 2, 2018. The Company did not sell any company-operated restaurants to franchisees during the fifty-two weeks ended January 1, 2019. The following table provides detail of the related gain (loss) recognized during the fifty-two weeks ended December 31, 2019, January 1, 2019 and January 2, 2018 (dollars in thousands):
 
52 Weeks Ended December 31, 2019
 
52 Weeks Ended January 1, 2019
 
52 Weeks Ended January 2, 2018
Company-operated restaurants sold to franchisees
31
 

 
5
 
 
 
 
 
 
Proceeds from the sale of company-operated restaurants, net of selling costs
$
7,310

 
$

 
$
2,192

Net assets sold (primarily furniture, fixtures and equipment)
(4,952
)
 

 
(1,261
)
Goodwill related to the company-operated restaurants sold to franchisees
(6,078
)
 

 
(247
)
Allocation to deferred franchise fees
(771
)
 

 

Sublease liabilities, net (a)
(50
)
 

 
(548
)
Other direct costs
(123
)
 

 
(5
)
(Loss) gain on sale of company-operated restaurants (b)
$
(4,664
)
 
$

 
$
131

(a) During the fifty-two weeks ended December 31, 2019, the Company recorded sublease assets of $1.2 million and sublease liabilities of $1.3 million. During the fifty-two weeks ended January 2, 2018, the Company recorded sublease assets of $0.1 million and sublease liabilities of $0.6 million.
(b) Included in loss on disposal of assets and adjustments to assets held for sale, net on the consolidated statements of comprehensive (loss) income.
Assets Held for Sale
Assets held for sale include the net book value of property and equipment for Company-operated restaurants that the Company plans to sell within the next year to new or existing franchisees. Long-lived assets that meet the criteria are held for sale and reported at the lower of their carrying value or fair value less estimated cost to sell.
During the fifty-two weeks ended December 31, 2019, the Company reclassified approximately $6.8 million of property and equipment and approximately $14.8 million of goodwill related to the Company-operated restaurants the Company plans to sell to assets held for sale, and also recorded an $8.7 million adjustment to the assets held for sale in order to record the assets held for sale at their estimated net realizable value, net of estimated direct selling costs and estimated sublease assets and liabilities. The estimated fair value of assets held for sale is based upon Level 2 inputs, which include an asset purchase agreement and negotiated or proposed letters of intent. During the fourth quarter of fiscal 2019, the Company sold 18 restaurants that had been reclassified to assets held for sale during the fifty-two weeks ended December 31, 2019, decreasing the asset held for sale balance by $4.5 million (see the discussion above under Refranchising for further information).
During the fifty-two weeks ended December 31, 2019, the Company entered into three sale-leaseback arrangements with third party private investors, with two arrangements completed during the first quarter of fiscal 2019 and one during the second quarter of fiscal 2019. These sale-leaseback transactions do not provide for any continuing involvement by the Company other than normal leases where the Company intends to use the property during the lease term. The leases have been accounted for as operating leases. The net proceeds from the transactions totaled approximately $12.7 million. Under two of the arrangements, the Company sold the land and buildings related to restaurants constructed during 2018 and leased them back for a term of 20 years. Under one of the arrangements, the Company sold the land related to a restaurant constructed during 2018 and leased it back for a term of 20 years. The sale of these properties resulted in a loss of approximately $0.2 million which is included in loss on disposal of assets and adjustments to assets held for sale, net in the consolidated statements of comprehensive (loss) income. The assets sold were included in assets held for sale as of January 1, 2019.
Assets held for sale at December 31, 2019 and January 1, 2019 consisted of the following (in thousands):
 
 
December 31, 2019
 
January 1, 2019
Other property and equipment held for sale
 
$
4,025

 
$
2,023

Goodwill (a)
 
4,386

 

Assets held for sale and leaseback
 

 
12,771

Assets held for sale
 
$
8,411

 
$
14,794

(a) During the fifty-two weeks ended December 31, 2019, the Company reclassified $14.8 million of goodwill to assets held for sale, including $6.1 million related to 18 stores that were subsequently sold during the fifty-two weeks ended December 31, 2019. The Company also recorded an $8.7 million adjustment to the goodwill component of assets held for sale to record the assets at their estimated net realizable value and relieved $1.7 million from the goodwill component of assets held for sale upon the sale of 18 stores that were classified as held for sale.

Franchise Acquisitions
The Company acquired four franchise-operated restaurants during the fifty-two weeks ended December 31, 2019, three franchise-operated restaurant during the fifty-two weeks ended January 1, 2019 and one franchise-operated restaurants during the fifty-two weeks ended January 2, 2018. The Company accounts for the acquisition of franchise-operated restaurants using the acquisition method of accounting for business combinations. The purchase price allocations were based on fair value estimates determined using significant unobservable inputs (Level 3). The goodwill recorded primarily relates to the market position and future growth potential of the markets acquired and is expected to be deductible for income tax purposes.
The following table provides detail of the combined acquisitions for the fifty-two weeks ended December 31, 2019, January 1, 2019 and January 2, 2018 (dollars in thousands):
 
 
52 Weeks Ended December 31, 2019
 
52 Weeks Ended January 1, 2019
 
52 Weeks Ended January 2, 2018
Franchise-operated restaurants acquired from franchisees
 
4
 
3
 
1
 
 
 
 
 
 
 
Goodwill
 
$
4,302

 
$
893

 
$
860

Property and equipment
 
660

 
798

 
360

Reacquired franchise rights
 

 
150

 

Operating lease right-of-use assets
 
2,006

 

 

Operating lease liabilities
 
(2,006
)
 

 

Unfavorable lease liabilities (a)
 
(130
)
 

 
(85
)
Liabilities assumed
 

 

 
(7
)
Total Consideration
 
$
4,832

 
$
1,841

 
$
1,128



(a) Unfavorable lease liabilities of $0.1 million for the fifty-two weeks ended December 31, 2019 were recorded as an adjustment to the respective operating lease right-of-use asset.

During the fifty-two weeks ended January 1, 2019, the Company wrote-off $0.6 million of unfavorable lease liabilities related to franchise subleases, offset by $0.1 million of straight line deferred rent assets (included in other assets) which were terminated in connection with the Company's acquisition of the related franchise-operated restaurants.
v3.20.1
Goodwill and Other Intangible Assets
12 Months Ended
Dec. 31, 2019
Goodwill and Intangible Assets Disclosure [Abstract]  
Goodwill and Other Intangible Assets
Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the fifty-two weeks ended December 31, 2019 are as follows (in thousands):
 
Goodwill
Balance as of January 1, 2019
$
321,531

Acquisition of franchise-operated restaurants
4,302

Sale of company-operated restaurants to franchisees
(83
)
Goodwill reclassified to held for sale
(14,761
)
Impairment of goodwill
(118,250
)
Balance as of December 31, 2019
$
192,739



The decrease in goodwill was due primarily to an impairment of $118.3 million as described in more detail below and the reclassification of goodwill to held for sale of $14.8 million related to the Company's refranchising plans during the fifty-two weeks ended December 31, 2019 as described in more detail in Note 5.

During the fourth quarter of fiscal 2019, the Company experienced a sustained decline in its stock price, which is an indicator of impairment. As such, the Company performed a quantitative goodwill impairment assessment using both the discounted cash flow method and guideline public company method to determine the fair value of its reporting unit. Significant assumptions and estimates used in determining fair value include future revenues, operating costs, working capital changes, capital expenditures, a discount rate that approximates the Company’s weighted average cost of capital and a selection of comparable companies. Based on the quantitative assessment, the Company determined that the fair value of its reporting unit was less than its carrying value. As the Company early adopted ASU 2017-04, Simplifying the Test for Goodwill Impairment, during the fourth quarter of fiscal 2019, it recognized a goodwill impairment charge of $118.3 million, equal to the excess of the reporting unit’s carrying value above fair value. The impairment charge was recorded in impairment of goodwill on the consolidated statements of comprehensive (loss) income.
The carrying value of trademarks was $220.3 million at both December 31, 2019 and January 1, 2019.
The Company’s other intangible assets at December 31, 2019 and January 1, 2019 consisted of the following (in thousands):
 
 
December 31, 2019
 
January 1, 2019
 
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Favorable lease assets
 
$

 
$

 
$

 
$
13,118

 
$
(5,542
)
 
$
7,576

Sublease assets
 
1,340

 
(82
)
 
1,258

 

 

 

Franchise rights
 
14,298

 
(5,465
)
 
8,833

 
15,032

 
(4,411
)
 
10,621

Reacquired franchise rights
 
943

 
(207
)
 
736

 
417

 
(107
)
 
310

Total amortized other intangible assets
 
$
16,581

 
$
(5,754
)
 
$
10,827

 
$
28,567

 
$
(10,060
)
 
$
18,507



Favorable lease assets are related to below-market leasing arrangements. In connection with the adoption of Topic 842, the Company reclassified $7.6 million of favorable lease assets, net to operating lease right-of-use assets (see Notes 2 and 15 for more information) as of January 2, 2019.

During the fifty-two weeks ended December 31, 2019, the Company recorded $1.2 million of sublease assets in connection with the sale of company-operated restaurants (see Note 5 for more information).
During the fifty-two weeks ended December 31, 2019, the Company wrote-off $0.1 million of franchise rights associated with the closure of three franchise operated restaurants, and the Company reclassified $0.5 million of franchise rights as reacquired franchise rights from the acquisition of four franchise locations. During the fifty-two weeks ended January 1, 2019, the Company wrote-off $0.1 million of franchise rights associated with the closure of one franchise operated restaurant, $0.1 million of franchise rights associated with six franchise locations were fully amortized and the Company reclassified $24,000 of franchise rights as reacquired franchise rights from the acquisition of one franchise location.
Sublease assets are amortized using the straight-line method over the remaining life of the sublease. The weighted-average amortization period as of December 31, 2019 for sublease assets was 14.3 years. 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 period as of December 31, 2019 for franchise rights was 12.9 years. Reacquired franchise rights are amortized using the straight-line method over the remaining life of the former franchise agreement. The weighted-average amortization period as of December 31, 2019 for reacquired franchise rights was 9.8 years.
Amortization expense for amortizable intangible assets and other assets totaled $2.8 million, $3.1 million and $3.3 million for the fifty-two weeks ended December 31, 2019, January 1, 2019 and January 2, 2018, respectively. Amortization for sublease assets totaled $82,000, $12,000 and $5,000 for the fifty-two weeks ended December 31, 2019, January 1, 2019 and January 2, 2018, respectively. Amortization expense for franchise rights totaled $1.3 million, $1.4 million and $1.3 million for the fifty-two weeks ended December 31, 2019, January 1, 2019 and January 2, 2018, respectively. Amortization expense for reacquired franchise rights totaled $101,000, $58,000 and $40,000 for the fifty-two weeks ended December 31, 2019, January 1, 2019 and January 2, 2018, respectively. The estimated future amortization for sublease assets, franchise rights and reacquired franchise rights for the next five fiscal years is as follows (in thousands):

 
 
Sublease Assets
 
Franchise Rights
 
Reacquired Franchise Rights
2020
 
$
95

 
$
1,137

 
$
105

2021
 
95

 
1,027

 
101

2022
 
95

 
930

 
78

2023
 
92

 
845

 
67

2024
 
92

 
770

 
66

v3.20.1
Debt, Obligations Under Capital Leases and Deemed Landlord Financing Liabilities
12 Months Ended
Dec. 31, 2019
Debt Disclosure [Abstract]  
Debt, Obligations Under Capital Leases and Deemed Landlord Financing Liabilities
Debt, Obligations Under Finance Leases and Deemed Landlord Financing Liabilities
The Company’s long-term debt, finance lease obligations, other debt and deemed landlord financing liabilities at December 31, 2019 and January 1, 2019 consisted of the following (in thousands): 
 
 
December 31, 2019
 
January 1, 2019
2015 Senior Credit Facility, as amended, net of unamortized debt discount of $231 and $459 and deferred financing costs of $1,038 and $155 at December 31, 2019 and January 1, 2019, respectively
 
$
143,731

 
$
158,386

Total outstanding indebtedness
 
143,731

 
158,386

Obligations under finance leases, other debt and deemed landlord financing liabilities
 
1,070

 
21,311

Total debt, net
 
144,801

 
179,697

Less: amounts due within one year
 
220

 
1,033

Total amounts due after one year, net
 
$
144,581

 
$
178,664

 
At December 31, 2019 and January 1, 2019, the Company assessed the amounts recorded under the 2015 Senior Credit Facility, as amended, and determined that such amounts approximated fair value.
2015 Senior Credit Facility
On August 4, 2015, the Company refinanced its then existing senior credit facility and entered into a new credit agreement (the the “Senior Credit Facility”). The Senior Credit Facility, which was to mature on August 4, 2020, provided for a $250 million revolving credit facility.
Prior to September 2019, at the Company’s option, loans under the Senior Credit Facility bore 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 was calculated as the highest of (a) the Federal Funds Rate plus 0.50%, (b) the published Bank of America prime rate, and (c) LIBOR plus 1.00%. For LIBOR loans, the applicable margin was in the range of 1.50% to 2.50%, and for base rate loans the applicable margin was in the range of 0.50% to 1.50%. The Senior Credit Facility capacity used to support letters of credit incurred fees equal to the applicable margin of 1.75%. The Senior Credit Facility unused commitment was 0.20% fee prior to the amendment.
In September 2019, the Company refinanced the Senior Credit Facility, pursuant to Amendment No. 4 to the Credit Agreement among Del Taco, as borrower, the Company and its subsidiaries, as guarantors, Bank of America, N.A. as administrative agent and letter of credit issuer, the lenders party thereto, and other parties thereto, which provides for a $250 million five-year senior secured revolving facility. The Senior Credit Facility, as amended, includes a sub limit of $35 million for letters of credit. The Senior Credit Facility, as amended, will mature on September 19, 2024. Substantially all of the assets of the Company are pledged as collateral under the Senior Credit Facility.
Borrowings under the Senior Credit Facility, as amended, bear interest, at the borrower's option, at rates based upon either LIBOR or a base rate, plus, for each rate, a margin determined in accordance with a lease-adjusted consolidated leverage ratio-based pricing grid. The base rate is calculated as the highest of (a) the Federal Funds Rate plus 0.50%, (b) the published Bank of America prime rate, or (c) Eurodollar Rate plus 1.00%. For Eurodollar loans, the margin is in the range of 1.25% to 2.00%. For base rate loans, the margin is in the range of 0.25% to 1.00%. Borrowings under the Senior Credit Facility, as amended, may be repaid and reborrowed.
The Senior Credit Facility, as amended, 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 December 31, 2019. Substantially all of the assets of the Company are pledged as collateral under the Senior Credit Facility.
Upon the original refinancing in August 2015, the Company capitalized lender debt discount costs and deferred financing costs of $1.4 million and $0.5 million, respectively, related to the Senior Credit Facility. In September 2019, the Company capitalized deferred financing costs of $1.0 million in connection with the amendment of the Senior Credit Facility. Debt discount costs and deferred financing costs are presented net of the outstanding balance on the consolidated balance sheets and will be amortized to interest expense over the term of the facility. Amortization of deferred financing costs and debt discount totaled $0.4 million for each of the fifty-two weeks ended December 31, 2019, the fifty-two weeks ended January 1, 2019 and the fifty-two weeks ended January 2, 2018.
At December 31, 2019, the weighted average interest rate on the outstanding balance of the Senior Credit Facility, as amended, was 3.55%. At December 31, 2019, the Company had a total of $87.7 million of availability for additional borrowings under the Senior Credit Facility, as amended, as the Company had $145.0 million of outstanding borrowings and $17.3 million of letters of credit outstanding which reduce availability under the Senior Credit Facility, as amended.
Other Debt Information

Based on debt agreements and leases in place as of December 31, 2019, future maturities of debt were as follows (in thousands):
 
2020
 
$
220

2021
 
225

2022
 
115

2023
 
121

2024
 
145,129

Thereafter
 
260

Total maturities
 
146,070

Less: debt discount and deferred financing costs
 
(1,269
)
Total debt, net
 
$
144,801

v3.20.1
Derivative Instruments
12 Months Ended
Dec. 31, 2019
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments
Derivative Instruments
In June 2016, the Company entered into an interest rate cap agreement that became effective July 1, 2016, to hedge cash flows associated with interest rate fluctuations on variable rate debt, with a termination date of March 31, 2020 ("2016 Interest Rate Cap Agreement"). The 2016 Interest Rate Cap Agreement has a notional amount of $70.0 million that effectively converted that portion of the outstanding balance of the revolving 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 to a capped interest rate of 2.00% plus the applicable margin. During the period from July 1, 2016 through December 31, 2019, the 2016 Interest Rate Cap Agreement had no hedge ineffectiveness.
2016 Interest Rate Cap Agreement
To ensure the effectiveness of the 2016 Interest Rate Cap Agreement, the Company elected the one-month LIBOR rate option for its variable rate interest payments on term balances equal to or in excess of the applicable notional amount of the interest rate cap agreement as of each reset date. The reset dates and other critical terms perfectly match with the interest rate cap reset dates and other critical terms during the fifty-two weeks ended December 31, 2019.
During the fifty-two weeks ended December 31, 2019, the Company reclassified $0.2 million of interest expense related to hedges of these transactions into earnings. As of December 31, 2019, the Company was hedging forecasted transactions expected to occur through March 31, 2020. Assuming interest rates at December 31, 2019 remain constant, $0.1 million of interest expense related to hedges of these transactions is expected to be reclassified into earnings over the next three 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 three months.
The effective portion of the 2016 Interest Rate Cap Agreement through December 31, 2019 was included in accumulated other comprehensive income.
v3.20.1
Fair Value Measurements
12 Months Ended
Dec. 31, 2019
Fair Value Disclosures [Abstract]  
Fair Value Measurements
Fair Value Measurements
The fair values of cash and cash equivalents, accounts receivable, accounts payable and other accrued liabilities approximate their carrying amounts due to their short maturities. The carrying value of the 2015 Senior Credit Facility, as amended, approximated its fair value. The 2016 Interest Rate Cap Agreement is recorded at fair value in the Company’s consolidated balance sheets.
As of December 31, 2019 and January 1, 2019, 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 $0.0 million at December 31, 2019 and $0.5 million at January 1, 2019 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):
 
 
 
December 31, 2019
 
January 1, 2019
 
 
Estimated
Fair Value
 
Book Value
 
Estimated
Fair Value
 
Book Value
2015 Senior Credit Facility, as amended
 
$
143,731

 
$
143,731

 
$
158,386

 
$
158,386


The Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2019 and January 1, 2019 were as follows (in thousands):
 
December 31, 2019
 
Markets for Identical Assets
(Level 1)
 
Observable Inputs (Level 2)
 
Unobservable Inputs (Level 3)
2016 Interest Rate Cap Agreement
$

 
$

 
$

 
$

Total assets measured at fair value
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
 
January 1, 2019
 
Markets for Identical Assets (Level 1)
 
Observable Inputs (Level 2)
 
Unobservable Inputs (Level 3)
2016 Interest Rate Cap Agreement
$
499

 
$

 
$
499

 
$

Total assets measured at fair value
$
499

 
$

 
$
499

 
$

v3.20.1
Other Accrued Liabilities and Other Non-current Liabilities
12 Months Ended
Dec. 31, 2019
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):
 
 
December 31, 2019
 
January 1, 2019
Employee compensation and related items
 
$
10,008

 
$
12,888

Accrued insurance
 
5,900

 
5,664

Accrued sales tax
 
4,099

 
3,952

Accrued property and equipment purchases
 
3,190

 
3,196

Accrued real property tax
 
1,652

 
1,420

Accrued gift cards
 
1,585

 
1,531

Accrued rent and related items
 
1,382

 
1,248

Accrued advertising
 
1,345

 
1,578

Restaurant closure liabilities
 
129

 
623

Other
 
5,287

 
2,685

 
 
$
34,577

 
$
34,785


 
On January 2, 2019, the first day of Fiscal 2019, the Company reclassified $0.4 million of current restaurant closure liabilities to operating lease right-of-use assets in connection with the adoption of Topic 842 (see Note 2 for more information).

A summary of other non-current liabilities follows (in thousands):
 
 
December 31, 2019
 
January 1, 2019
Unfavorable lease liabilities
 
$

 
$
11,975

Sublease liabilities
 
1,223

 

Insurance reserves
 
8,110

 
8,794

Deferred rent liability
 

 
4,594

Deferred development and initial franchise fees
 
4,241

 
2,742

Deferred gift card income
 
1,474

 
1,290

Unearned trade discount, non-current
 
320

 
739

Restaurant closure liabilities
 
308

 
1,788

Other
 
925

 
930

 
 
$
16,601

 
$
32,852



On January 2, 2019, the first day of Fiscal 2019, the Company reclassified $12.0 million of unfavorable lease liabilities, $4.6 million of deferred rent liabilities and $1.8 million of restaurant closure liabilities to the respective operating lease right-of-use assets in connection with the adoption of Topic 842 (see Note 2 for more information).
v3.20.1
Stock-Based Compensation
12 Months Ended
Dec. 31, 2019
Share-based Payment Arrangement [Abstract]  
Stock-Based Compensation
Stock-Based Compensation
2015 Omnibus Incentive Plan
In connection with the approval of the Business Combination, the Del Taco Restaurants, Inc. 2015 Omnibus Incentive Plan (the “2015 Plan”) was approved by shareholders to offer eligible employees, directors and consultants cash and stock-based incentive awards. Awards under the 2015 Plan are generally not restricted to any specific form or structure and could include, without limitation, stock options, stock appreciation rights, restricted stock, other stock-based awards, other cash-based compensation and performance awards. Under the 2015 Plan, there are 3,300,000 shares of common stock reserved and authorized. At December 31, 2019, there were 704,948 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 $6.3 million for the fifty-two weeks ended December 31, 2019, $6.1 million for the fifty-two weeks ended January 1, 2019 and $4.9 million for the fifty-two weeks ended January 2, 2018.
Restricted Stock Awards
During the fifty-two weeks ended December 31, 2019, 531,173 shares of restricted stock were granted to certain directors, officers and employees of the Company under the 2015 Plan. These restricted stock awards for officers and employees vest on a straight-line basis in equal annual installments over four years from the grant date and over one year from the grant date for directors.
A summary of outstanding and unvested restricted stock activity as of December 31, 2019 and changes during the period from January 1, 2019 through December 31, 2019 are as follows:
 
 
Shares
 
Weighted-Average
Grant Date
Fair Value
Nonvested at January 1, 2019
 
1,234,531

 
$
12.87

Granted
 
531,173

 
12.17

Vested
 
(520,835
)
 
12.04

Forfeited
 
(102,151
)
 
12.89

Nonvested at December 31, 2019
 
1,142,718

 
$
12.92



During the fifty-two weeks ended December 31, 2019 and January 1, 2019, the Company made payments of $2.6 million and $2.4 million, respectively, related to tax withholding obligations for the vesting of restricted stock awards in exchange for 204,494 and 168,484 shares withheld, respectively. As of December 31, 2019, there was $9.3 million of unrecognized compensation expense, net of estimated forfeitures, related to restricted stock, which is expected to be recognized over a weighted-average period of 2.5 years. The weighted average grant date fair value of restricted stock awards granted was $12.17, $13.88 and $13.64 during the fifty-two weeks ended December 31, 2019, fifty-two weeks ended January 1, 2019 and fifty-two weeks ended January 2, 2018, respectively. The total fair value of awards that became fully vested during the fifty-two weeks ended December 31, 2019, fifty-two weeks ended January 1, 2019 and fifty-two weeks ended January 2, 2018 was $6.6 million, $5.9 million and $5.4 million, respectively.
Stock Options
During the fifty-two weeks ended December 31, 2019, 5,000 stock options were granted to an employee of the Company under the 2015 Plan. The stock options vest on a straight-line basis in equal annual installments over four years from the grant date.
A summary of stock option activity as of December 31, 2019 and changes during the period from January 1, 2019 through December 31, 2019 are as follows:
 
 
Shares
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term (in Years)
 
Aggregate Intrinsic Value
(in thousands)
Options outstanding at January 1, 2019
 
453,250

 
$
11.74

 
5.0
 
$
77

Granted
 
5,000

 
10.43

 

 

Exercised
 
(12,000
)
 
10.05

 

 

Forfeited / Expired
 
(33,500
)
 
12.47

 

 

Options outstanding at December 31, 2019
 
412,750

 
$
11.71

 
3.8
 
$

Options exercisable at December 31, 2019
 
276,498

 
$
11.02

 
3.3
 
$

Options exercisable and expected to vest at December 31, 2019
 
391,896

 
$
11.62

 
3.7
 
$


The aggregated 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 December 31, 2019 and January 1, 2019, respectively.
The following table reflects the weighted-average assumptions used in the Black-Scholes option-pricing model to value the stock options granted in the fifty-two weeks ended December 31, 2019, the fifty-two weeks ended January 1, 2019 and the fifty-two weeks ended January 2, 2018:
 
 
52 Weeks Ended
December 31, 2019
 
52 Weeks Ended
January 1, 2019
 
52 Weeks Ended
January 2, 2018
Expected volatility
 
35.61
%
 
36.29
%
 
36.09
%
Risk-free rate of return
 
2.49
%
 
2.71
%
 
1.86
%