QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 18, 2019
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-36197
DEL TACO RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)
Delaware
46-3340980
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
25521 Commercentre Drive
Lake Forest, California
92630
(Address of principal executive offices)
(Zip Code)
(949) 462-9300
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.001 par value per share
TACO
NASDAQ Capital Market
Warrants, each exercisable for one share of common stock
TACOW
NASDAQ Capital Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer
x
Non-accelerated filer
¨
Smaller reporting company
¨
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of July 25, 2019, there were 37,056,452 shares of the registrant’s common stock issued and outstanding.
Current portion of finance lease obligations, other debt and deemed landlord financing liabilities
423
1,033
Current portion of operating lease liabilities
19,861
—
Total current liabilities
75,066
55,695
Long-term debt, finance lease obligations, other debt and deemed landlord financing liabilities, excluding current portion, net
146,587
178,664
Operating lease liabilities, excluding current portion
225,100
—
Deferred income taxes
69,958
69,471
Other non-current liabilities
15,336
32,852
Total liabilities
532,047
336,682
Commitments and contingencies (Note 15)
Shareholders’ equity:
Preferred stock, $0.0001 par value; 1,000,000 shares authorized; no shares issued and outstanding
—
—
Common stock, $0.0001 par value; 400,000,000 shares authorized; 36,795,532 shares issued and outstanding at June 18, 2019; 37,305,342 shares issued and outstanding at January 1, 2019
4
4
Additional paid-in capital
332,769
336,941
Accumulated other comprehensive (loss) income
(43
)
180
Retained earnings
90,578
85,149
Total shareholders’ equity
423,308
422,274
Total liabilities and shareholders’ equity
$
955,355
$
758,956
See accompanying notes to consolidated financial statements.
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
11,720
11,761
Amortization of favorable and unfavorable lease assets and liabilities, net
—
(250
)
Amortization of deferred financing costs, debt discount and interest rate cap
244
194
Amortization of operating lease assets
9,915
—
Stock-based compensation
3,254
2,634
Impairment of long-lived assets
3,694
1,661
Deferred income taxes
(138
)
471
Loss on disposal of assets, net
884
180
Restaurant closure charges
118
65
Changes in operating assets and liabilities:
Accounts and other receivables, net
904
1,272
Inventories
101
2
Prepaid expenses and other current assets
1,003
4,117
Other assets
(67
)
(41
)
Accounts payable
543
(2,867
)
Operating lease liabilities
(9,316
)
—
Other accrued liabilities
(1,446
)
1,890
Other non-current liabilities
865
1,195
Net cash provided by operating activities
25,795
29,723
Investing activities
Purchases of property and equipment
(17,895
)
(17,504
)
Proceeds from disposal of property and equipment, net
12,696
573
Purchases of other assets
(776
)
(743
)
Acquisition of franchisees
(3,120
)
—
Proceeds from sale of company-operated restaurants
2,090
—
Net cash used in investing activities
(7,005
)
(17,674
)
Financing activities
Repurchase of common stock and warrants
(7,373
)
(4,791
)
Payment of tax withholding related to restricted stock vesting
(84
)
(79
)
Payments on finance leases, other debt and deemed landlord financing
(267
)
(714
)
Proceeds from revolving credit facility
14,000
5,000
Payments on revolving credit facility
(27,000
)
(5,000
)
Proceeds from exercise of stock options
31
122
Net cash used in financing activities
(20,693
)
(5,462
)
(Decrease) increase in cash and cash equivalents
(1,903
)
6,587
Cash and cash equivalents at beginning of period
7,153
6,559
Cash and cash equivalents at end of period
$
5,250
$
13,146
Supplemental cash flow information:
Cash paid during the period for interest
$
3,008
$
3,412
Cash paid during the period for income taxes
1,764
666
Supplemental schedule of non-cash activities:
Accrued property and equipment purchases
$
5,939
$
1,833
Write-offs of accounts receivables
21
6
Amortization of interest rate cap into net income, net of tax
47
16
Change in other asset for fair value of interest rate cap recorded to other comprehensive (loss) income, net of tax
(270
)
289
Operating lease right-of-use assets obtained in exchange for lease obligations(1)
252,440
—
Finance lease right-of-use assets obtained in exchange for lease obligations(1)
1,185
—
Impairment on operating lease right-of-use assets related to the adoption of new accounting pronouncement
3,116
—
(1)Amounts for the twenty-four weeks ended June 18, 2019 include the transition adjustment for the adoption of Topic 842 discussed in Note 2 to the consolidated financial statements.
See accompanying notes to consolidated financial statements
Del Taco Restaurants, Inc. is a Delaware corporation headquartered in Lake Forest, California. The consolidated financial statements include the accounts of Del Taco Restaurants, Inc. and its wholly owned subsidiaries (collectively, the “Company” or “Del Taco”). The Company develops, franchises, owns, and operates Del Taco quick-service Mexican-American restaurants. At June 18, 2019, there were 310 company-operated and 273 franchise-operated Del Taco restaurants located in 14 states, including one franchise-operated unit in Guam. At June 19, 2018, there were 315 company-operated and 251 franchise-operated Del Taco restaurants located in 14 states, including one franchise-operated unit in Guam.
2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements included herein have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”). For additional information, these unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended January 1, 2019 ("2018 Form 10-K").
The Company’s fiscal year ends on the Tuesday closest to December 31. Fiscal year 2019 is a fifty-two week period ending December 31, 2019. Fiscal year 2018 is a fifty-two week period ended January 1, 2019. In a fifty-two week fiscal year, the first, second and third quarters each include twelve weeks of operations and the fourth quarter includes sixteen weeks of operations. For fiscal year 2019, the Company’s accompanying financial statements reflect the twelve weeks ended June 18, 2019. For fiscal year 2018, the Company’s accompanying financial statements reflect the twelve weeks ended June 19, 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 below in Note 2, using the modified retrospective method of transition. Current year results have been prepared in accordance with the new standard.
In the opinion of management, the accompanying consolidated financial statements reflect all adjustments which are necessary for a fair presentation of the consolidated financial position, results of operations and cash flows for the periods presented. The results of operations for such interim periods are not necessarily indicative of results of operations to be expected for the full fiscal year.
Principles of Consolidation
The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly and majority owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Management believes that such estimates have been based on reasonable and supportable assumptions and the resulting estimates are reasonable for use in the preparation of the consolidated financial statements. Actual results could differ from these estimates. The Company’s significant estimates include estimates for impairment of goodwill, intangible assets and property and equipment, valuations provided in business combinations, insurance reserves, restaurant closure reserves, stock-based compensation, contingent liabilities, certain leasing activities and income tax valuation allowances.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Recently Issued Accounting Standards
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which clarifies the accounting implementation costs in cloud computing arrangements. The standard is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact of the standard on its consolidated financial statements.
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 February 2016, the FASB issued ASU No. 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 2, 2019. At the beginning of the period of adoption, the Company recorded the cumulative effect of adoption 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.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Revenue Recognition
The adoption of Topic 606 in Fiscal 2018 changed the timing of the recognition of initial franchise fees, including franchise and development fees, and renewal fees, both included in franchise revenue in the consolidated statements of comprehensive income. Franchise and renewal fees are deferred and recognized over the term of the related franchise agreement for the respective restaurant. Franchise agreements typically have a term of twenty years.
During the twelve and twenty-four weeks ended June 18, 2019, the Company recognized approximately $20,000 and $41,000, respectively, in franchise revenue related to the amortization of the deferred franchise fees recognized at January 1, 2019. During the twelve and twenty-four weeks ended June 19, 2018, the Company recognized approximately $15,000 and $28,000, respectively, in franchise revenue related to the amortization of the deferred franchise fees recognized at January 2, 2018.
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 June 18, 2019 is as follows (in thousands):
FY 2019
$
65
FY 2020
118
FY 2021
116
FY 2022
116
FY 2023
112
Thereafter
1,315
Total Deferred Franchise Fees
$
1,842
Summary of Significant Accounting Policies
Except for the accounting policies for leases discussed in Note 7 that were updated as a result of adopting Topic 842, there have been no changes to our significant accounting policies described in the Annual Report on Form 10-K for the year ended January 1, 2019, filed with the SEC on March 18, 2019, that have had a material impact on our consolidated financial statements and related notes.
3. Impairment of Long-Lived Assets and Restaurant Closure Charges
Impairment of Long-Lived Assets
The Company evaluates long-lived assets for indicators of impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company considers a triggering event to have occurred related to a specific restaurant if the restaurant’s cash flows are less than a minimum threshold or if consistent levels of undiscounted cash flows for the remaining lease period are less than the carrying value of the restaurant’s assets. 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. We generally estimate 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 each operating lease asset, furniture, fixtures and equipment and leasehold improvements carrying amount over its estimated fair value.
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.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
During the twelve and twenty-four weeks ended June 18, 2019, the Company evaluated certain restaurants having indicators of impairment based on operating performance and recorded an additional impairment charge totaling $3.7 million related to two 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 twenty-four weeks ended June 19, 2018, the Company evaluated certain restaurants having indicators of impairment based on operating performance and recorded an impairment charge totaling $1.7 million related to two restaurants. The Company wrote-off the value of leasehold improvements and other equipment based on the estimate of future recoverable cash flows.
Restaurant Closure Charges, Net
At June 18, 2019 and January 1, 2019, the restaurant closure liability was $0.1 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 restaurant closures prior to 2015. During the twenty-four weeks ended June 18, 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 fiscal quarter of 2015, the Company closed 12 company-operated restaurants. During the twenty-four weeks ended June 18, 2019, in connection with the adoption of Topic 842, the Company reclassified approximately $1.9 million of the lease related restaurant closure liability to offset the respective operating lease right-of-use assets. A summary of the restaurant closure liability activity for these 12 closed restaurants consisted of the following (in thousands):
Total
Balance at January 1, 2019
$
2,092
Reclassified to operating lease right-of-use assets
(1,900
)
Cash payments
(192
)
Adjustments to estimates based on current activity
118
Balance at June 18, 2019
$
118
The current portion of the restaurant closure liability is $0.1 million at June 18, 2019 and $0.5 million at 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 zero and $1.6 million at June 18, 2019 and January 1, 2019, respectively, and is included in other non-current liabilities in the consolidated balance sheets.
Upon adoption of Topic 842, rent expense and non lease executory costs for these previously closed restaurants are now recorded to restaurant closure charges as incurred.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
4. Summary of Refranchising and Franchise Acquisitions
In connection with the sale of company-operated restaurants to franchisees, the Company typically enters into several agreements, in addition to an asset purchase agreement, with franchisees including franchise and lease agreements. The Company typically sells restaurants’ inventory and equipment and retains ownership of the leasehold interest to the real estate to sublease to the franchisee. The Company has determined that its restaurant dispositions usually represent multiple-element arrangements, and as a result, the cash consideration received is allocated to the separate elements based on their relative selling price. Cash consideration generally includes up-front consideration for the sale of the restaurants and franchise fees and future cash consideration for royalties and lease payments. The Company considers the future lease payments in allocating the initial cash consideration received. The Company compares the stated rent under the lease and/or sublease agreements with comparable market rents and the Company records favorable lease assets or unfavorable lease liabilities with a corresponding offset to the gain or loss on the sale of the company-operated restaurants. The cash consideration per restaurant for franchise fees is consistent with the amounts stated in the related franchise agreements which are charged for separate standalone arrangements. 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 thirteen company-operated restaurants to franchisees during the twenty-four weeks ended June 18, 2019. There was no refranchising activity during the twenty-four weeks ended June 19, 2018. The following table summarizes the related net loss recognized during the twenty-four weeks ended June 18, 2019 (dollars in thousands):
24 Weeks Ended
June 18, 2019
Company-operated restaurants sold to franchisees
13
Proceeds from the sale of company-operated restaurants
$
2,090
Net assets sold (primarily furniture, fixtures and equipment) (a)
(2,051
)
Goodwill related to the company-operated restaurants sold to franchisees
(83
)
Allocation to deferred franchise fees
(281
)
Favorable sublease assets, net (b)
260
Loss on sale of company-operated restaurants (c)
$
(65
)
(a) Included in assets held for sale at January 1, 2019.
(b) Comprised of favorable sublease assets of $1.0 million and unfavorable lease liabilities of $0.7 million.
(c) Included in loss on disposal of assets, net on the consolidated statements of comprehensive income.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
The Company acquired three franchise-operated restaurants during the twenty-four weeks ended June 18, 2019. The Company accounts for the acquisition of franchise-operated restaurants using the acquisition method of accounting for business combinations. The purchase price allocations were based on fair value estimates determined using significant unobservable inputs (Level 3). The goodwill recorded primarily relates to the market position and future growth potential of the markets acquired and is expected to be deductible for income tax purposes. There were no franchise acquisitions during the twenty-four weeks ended June 19, 2018. The following table provides detail of the combined acquisitions for the twenty-four weeks ended June 18, 2019 (dollars in thousands):
June 18, 2019
Franchise-operated restaurants acquired from franchisees
3
Goodwill
$
2,672
Restaurant and other equipment and leasehold improvements
578
Operating lease right-of-use assets
858
Operating lease liabilities
(858
)
Unfavorable lease liabilities (a)
(130
)
Total consideration
$
3,120
(a) The unfavorable lease liabilities of $0.1 million was recorded as an adjustment to the respective operating lease right-of-use asset.
5. Goodwill and other Intangible Assets
Goodwill was $324.1 million at June 18, 2019 compared to $321.5 million at January 1, 2019. The change is due to the sale of 13 company-operated restaurants and the purchase of three franchise-operated restaurants as described in more detail in Note 4.
There have been no changes in the carrying amount of trademarks since January 1, 2019.
The Company’s other intangible assets at June 18, 2019 and January 1, 2019 consisted of the following (in thousands):
June 18, 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
Favorable sublease assets
1,090
(39
)
1,051
—
—
—
Franchise rights
14,562
(4,891
)
9,671
15,032
(4,411
)
10,621
Reacquired franchise rights
800
(152
)
648
417
(107
)
310
Total amortized other intangible assets
$
16,452
$
(5,082
)
$
11,370
$
28,567
$
(10,060
)
$
18,507
During the twenty-four weeks ended June 18, 2019, the Company recorded $1.0 million of favorable sublease assets in connection with the sale of company-operated restaurants (see Note 4 for more information). Favorable sublease assets represents favorable subleases with franchisees recorded in connection with the sale of company-operated restaurants to franchisees.
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 Note 2 for more information) as of January 2, 2019. During the twenty-four weeks ended June 18, 2019, the Company reclassified $0.4 million of franchise rights as reacquired franchise rights related to the Company's acquisition of three franchise-operated restaurants and wrote off $11,000 of franchise rights associated with the closure of one franchise-operated restaurant.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
6. 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 June 18, 2019 and January 1, 2019 consisted of the following (in thousands):
June 18, 2019
January 1, 2019
2015 Senior Credit Facility, net of debt discount of $326 and $459 and deferred financing costs of $110 and $155 at June 18, 2019 and January 1, 2019, respectively
$
145,564
$
158,386
Total outstanding indebtedness
145,564
158,386
Obligations under finance lease, other debt and deemed landlord financing
liabilities
1,446
21,311
Total debt
147,010
179,697
Less: amounts due within one year
423
1,033
Total amounts due after one year, net
$
146,587
$
178,664
At June 18, 2019 and January 1, 2019, the Company assessed the amounts recorded under the 2015 Senior Credit Facility and determined that such amounts approximated fair value.
2015 Revolving Credit Facility
On August 4, 2015, the Company refinanced its existing senior credit facility and entered into a new credit agreement (the “Credit Agreement”). The Credit Agreement, which matures on August 4, 2020, provides for a $250 million revolving credit facility (the “2015 Senior Credit Facility”).
The Credit Agreement contains certain financial covenants, including the maintenance of a consolidated total lease adjusted leverage ratio and a consolidated fixed charge coverage ratio. The Company was in compliance with the financial covenants as of June 18, 2019. Substantially all of the assets of the Company are pledged as collateral under the 2015 Senior Credit Facility.
At June 18, 2019, the weighted-average interest rate on the outstanding balance of the 2015 Senior Credit Facility was 4.2%. At June 18, 2019, the Company had a total of $87.7 million of availability for additional borrowings under the 2015 Senior Credit Facility as the Company had $146.0 million of outstanding borrowings and letters of credit outstanding of $16.3 million which reduce availability under the 2015 Senior Credit Facility.
7. Leases
The Company's material leases consist of restaurant locations and its executive offices with expiration dates through 2044. In general, the leases have remaining terms of 1-20 years, most of which include options to extend the leases for additional five-year periods. The lease term is generally the minimum noncancelable period of the lease. The Company does not include option periods unless the Company determines that it is reasonably certain of exercising the option at inception or when a triggering event occurs.
The Company determines if an arrangement is a lease at inception. The right-of-use assets and lease liabilities are recognized at the lease commencement date. In determining the Company’s right-of-use assets and lease liabilities, the Company applies a discount rate to the lease payments within each lease agreement. As most of the Company’s lease agreements do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The right-of-use asset also includes any lease payments made and is reduced by lease incentives, initial direct costs incurred and impairment of operating lease right-of-use assets and adjusted by favorable lease assets and unfavorable lease liabilities.
Some of the Company's lease agreements contain rent escalation clauses (including adjustments based on changes in indexes), rent holidays, capital improvement funding or other lease concessions. The Company recognizes rental expense on a straight-line basis based on fixed components of a lease arrangement and the Company amortizes this expense over the term of the lease
Notes to Consolidated Financial Statements (continued)
(Unaudited)
beginning with the date of initial possession. Variable lease components represent amounts that are not fixed in nature and are recognized in expense as incurred.
The Company has subleased certain properties to other third parties where the Company remains primarily liable to the landlord for the performance of all obligations in the event that the sub-lessee does not perform its obligations under the lease. As a result of the sublease arrangements, future rental commitments under operating leases will be offset by sublease amounts to be paid by the sub-lessee. In general, the terms of the sublease are similar to the terms of the master lease.
The components of lease cost were as follows (in thousands):
Twelve Weeks Ended June 18, 2019
Twenty-Four Weeks Ended June 18, 2019
Operating lease cost
$
8,733
$
17,404
Finance lease cost:
Amortization of right of use assets
110
243
Interest on lease liabilities
24
51
Short-term lease cost
77
178
Variable lease cost
448
838
Sublease income
(1,134
)
(2,136
)
Total lease cost
$
8,258
$
16,578
Supplemental balance sheet information related to the Company's operating and finance leases (noting the financial statement caption each is included with) as of June 18, 2019 and January 1, 2019 was as follows (in thousands):
June 18, 2019
January 1, 2019
Operating lease assets:
Operating lease right-of-use assets
$
228,763
$
—
Operating lease liabilities:
Current portion of operating lease liabilities
$
19,861
$
—
Operating lease liabilities, excluding current portion
225,100
—
Total operating lease liabilities
$
244,961
$
—
Finance lease assets:
Buildings under finance leases
$
1,061
$
3,370
Accumulated depreciation
(228
)
(2,193
)
Finance lease asset, net
$
833
$
1,177
Finance lease obligations:
Current portion of finance lease obligations, other debt and deemed landlord financing liabilities
$
369
$
510
Long-term debt, finance lease obligations, other debt and deemed landlord
financing liabilities, excluding current portion, net
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Weighted Average Discount Rate
June 18, 2019
Operating leases
6.93
%
Finance leases
10.44
%
Supplemental cash flow information related to leases was as follows (in thousands):
Twenty-Four Weeks Ended June 18, 2019
Cash paid for amounts in the measurement of lease liabilities:
Operating cash flows used for operating leases
$
14,238
Operating cash flows used for finance leases
$
51
Financing cash flows used for finance leases
$
243
The estimated future lease payments as of June 18, 2019, are as follows (in thousands):
Finance Lease Liabilities
Operating Lease Liabilities
Operating Subleases
Net Lease Commitments
2019
$
277
$
18,040
$
(1,739
)
$
16,578
2020
335
36,269
(3,383
)
33,221
2021
200
35,069
(3,484
)
31,785
2022
79
33,948
(3,465
)
30,562
2023
79
31,233
(3,291
)
28,021
Thereafter
132
211,457
(26,969
)
184,620
Total lease payments
$
1,102
$
366,016
$
(42,331
)
$
324,787
Amounts representing interest
(179
)
(121,055
)
(121,234
)
Present value of lease obligations
$
923
$
244,961
$
203,553
Rental commitments and sublease rental receipts as of January 1, 2019, under finance and operating leases having an initial non-cancelable term of one year or more are shown in the following table (in thousands):
Finance Lease and Deemed Landlord Financing Liabilities
Notes to Consolidated Financial Statements (continued)
(Unaudited)
As of June 18, 2019, we have legally binding lease payments related to restaurant leases that have not yet commenced of $22.5 million.
During the twenty-four weeks ended June 18, 2019, the Company entered into three sale leaseback arrangements with third party private investors, with two arrangements occurring during the first quarter 2019 and one during the second quarter 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, net in the consolidated statements of comprehensive income. The assets sold were included in assets held for sale as of January 1, 2019.
8. Derivative Instruments
2016 Interest Rate Cap Agreement
In June 2016, the Company entered into an interest rate cap agreement that became effective July 1, 2016, to hedge cash flows associated with interest rate fluctuations on variable rate debt, with a termination date of March 31, 2020 ("2016 Interest Rate Cap Agreement"). The 2016 Interest Rate Cap Agreement had an initial notional amount of $70.0 million of the 2015 Senior Credit Facility that effectively converted that portion of the outstanding balance of the 2015 Senior Credit Facility from variable rate debt to capped variable rate debt, resulting in a change in the applicable interest rate from an interest rate of one-month LIBOR plus the applicable margin (as provided by the 2015 Senior Credit Facility) to a capped interest rate of 2.00% plus the applicable margin. As of June 18, 2019, one-month LIBOR was 2.44%. During the twelve and twenty-four weeks ended June 18, 2019, the Company received payments totaling approximately $0.1 million and $0.2 million, respectively, related to the 2016 Interest Rate Cap Agreement. During the period from July 1, 2016 through June 18, 2019, the 2016 Interest Rate Cap Agreement had no hedge ineffectiveness.
To ensure the effectiveness of the 2016 Interest Rate Cap Agreement, the Company elected the one-month LIBOR rate option for its variable rate interest payments on term balances equal to or in excess of the applicable notional amount of the interest rate cap agreement as of each reset date. The reset dates and other critical terms on the term loans perfectly match with the interest rate cap reset dates and other critical terms during the twenty-four weeks ended June 18, 2019.
During the twelve weeks and twenty-four weeks ended June 18, 2019, the Company reclassified approximately $37,000 and $0.1 million, respectively, of interest expense related to the hedges of these transactions into earnings. As of June 18, 2019, the Company was hedging forecasted transactions expected to occur through March 31, 2020. Assuming interest rates at June 18, 2019 remain constant, $0.2 million of interest expense related to hedges of these transactions is expected to be reclassified into earnings over the next 9 months. The Company intends to ensure that this hedge remains effective, therefore, approximately $0.2 million is expected to be reclassified into interest expense over the next 9 months.
The effective portion of the 2016 Interest Rate Cap Agreement through June 18, 2019 was included in accumulated other comprehensive income.
9. Fair Value Measurements
The fair values of cash and cash equivalents, accounts receivable, accounts payable and other accrued liabilities approximate their carrying amounts due to their short maturities. The carrying value of the 2015 Senior Credit Facility approximated fair value. The 2016 Interest Rate Cap Agreement is recorded at fair value in the Company’s consolidated balance sheets.
As of June 18, 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, this included a derivative instrument related to interest rates. The Company determined the fair value of the interest rate cap contract based on counterparty quotes, with appropriate adjustments for any significant impact of nonperformance risk of the parties to the interest rate cap contract. Therefore, the Company categorized
Notes to Consolidated Financial Statements (continued)
(Unaudited)
this interest rate cap contract as Level 2 fair value measurements. The fair value of the 2016 Interest Rate Cap Agreement was $0.1 million and $0.5 million at June 18, 2019 and January 1, 2019, respectively, and is included in other assets in the consolidated balance sheets.
The Company's assets and liabilities measured at fair value on a recurring basis as of June 18, 2019 and January 1, 2019 were as follows (in thousands):
June 18, 2019 (Unaudited)
Markets for Identical Assets
(Level 1)
Observable Inputs (Level 2)
Unobservable Inputs (Level 3)
2016 Interest Rate Cap Agreement
$
127
$
—
$
127
$
—
Total assets measured at fair value
$
127
$
—
$
127
$
—
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
$
—
10. Other Accrued Liabilities and Other Non-current Liabilities
A summary of other accrued liabilities follows (in thousands):
June 18, 2019
January 1, 2019
Employee compensation and related items
$
10,746
$
12,888
Accrued sales tax
5,654
3,952
Accrued insurance
5,412
5,664
Accrued property and equipment purchases
4,177
3,196
Accrued advertising
2,079
1,578
Accrued real property tax
1,651
1,420
Other
5,375
6,087
$
35,094
$
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):
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).
11. Stock-Based Compensation
In connection with the approval of the Business Combination, the Del Taco Restaurants, Inc. 2015 Omnibus Incentive Plan (the “2015 Plan”) was approved by shareholders to offer eligible employees, directors and consultants cash and stock-based incentive awards. Awards under the 2015 Plan are generally not restricted to any specific form or structure and could include, without limitation, stock options, stock appreciation rights, restricted stock, restricted stock units, other stock-based awards, other cash-based compensation and performance awards. Under the plan, there were 3,300,000 shares of common stock reserved and authorized. At June 18, 2019, there were 803,701 shares of common stock available for grant under the 2015 Plan.
Stock-Based Compensation Expense
The total compensation expense related to the 2015 Plan was $1.7 million and $1.4 million for the twelve weeks ended June 18, 2019 and June 19, 2018, respectively and $3.3 million and $2.6 million for the twenty-four weeks ended June 18, 2019 and June 19, 2018, respectively.
Restricted Stock Awards
A summary of outstanding and unvested restricted stock activity as of June 18, 2019 and changes during the period from January 1, 2019 through June 18, 2019 are as follows:
Shares
Weighted-Average
Grant Date
Fair Value
Nonvested at January 1, 2019
1,234,531
$
12.87
Granted
113,853
10.56
Vested
(69,749
)
11.62
Nonvested at June 18, 2019
1,278,635
$
12.73
For both the twenty-four weeks ended June 18, 2019 and June 19, 2018, the Company made payments of $0.1 million related to tax withholding obligations for the vesting of restricted stock awards in exchange for 13,172 and 9,892 shares withheld, respectively. As of June 18, 2019, there was $8.6 million of unrecognized stock compensation expense, net of estimated forfeitures, related to restricted stock awards that is expected to be recognized over a weighted-average remaining period of 2.1 years. The fair value of these awards was determined based on the Company’s stock price on the grant date.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Stock Options
A summary of stock option activity as of June 18, 2019 and changes during the period from January 1, 2019 through June 18, 2019 are as follows:
Options
Weighted Average Exercise Price
Weighted Average Remaining Contractual Term
Aggregate Intrinsic Value
(in years)
(in thousands)
Options outstanding at January 1, 2019
453,250
$
11.74
5.0
$
77
Granted
5,000
10.43
Exercised
(3,000
)
10.40
Forfeited/Expired
(13,500
)
12.49
Options outstanding at June 18, 2019
441,750
$
11.71
4.5
$
361
Options exercisable at June 18, 2019
187,496
$
10.60
3.7
$
220
Options exercisable and expected to vest at June 18, 2019
409,301
$
11.58
4.4
$
353
The aggregate intrinsic value in the table above is the amount by which the current market price of the Company's stock exceeds the exercise price on January 1, 2019 and June 18, 2019, respectively.
As of June 18, 2019, there was $0.5 million of unrecognized stock compensation expense, net of estimated forfeitures, related to stock option grants which is expected to be recognized over a weighted-average remaining period of 2.0 years.
12. Shareholders’ Equity
On February 26, 2016, the Company's Board of Directors authorized a share repurchase program covering up to $25.0 million in the aggregate of the Company's common stock and warrants which was effective immediately and expires upon completion of the repurchase program, unless terminated earlier by the Board of Directors. On August 23, 2016, the Company announced that the Board of Directors increased the repurchase program by $25.0 million, to $50.0 million. The Board of Directors authorized an additional increase for the repurchase program effective July 23, 2018 of another $25.0 million, to a total of $75.0 million. Purchases under the program may be made in open market or privately negotiated transactions. During the twelve weeks ended June 18, 2019, the Company repurchased (1) 303,607 shares of common stock for an average price per share of $10.05 for an aggregate cost of approximately $3.1 million, including incremental direct costs to acquire the shares, and (2) 6,186 warrants for an average price per warrant of $1.30 for an aggregate cost of approximately $8,000, including incremental direct costs to acquire the warrants. During the twenty-four weeks ended June 18, 2019, the Company repurchased (1) 574,481 shares of common stock for an average price per share of $10.17 for an aggregate cost of approximately $5.9 million, including incremental direct costs to acquire the shares, and (2) 846,441 warrants for an average price per warrant of $1.78 for an aggregate cost of approximately $1.5 million, including incremental direct costs to acquire the warrants. The Company expects to retire the repurchased shares and therefore has accounted for them as constructively retired as of June 18, 2019. As of June 18, 2019, there was approximately $22.3 million remaining under the share repurchase program. The Company has no obligations to repurchase shares or warrants under this authorization, and the timing and value of shares and warrants purchased will depend on the Company's stock price, warrant price, market conditions and other factors.
13. Earnings Per Share
Basic income per share is calculated by dividing net income attributable to Del Taco’s common shareholders for the period by the weighted average number of common shares outstanding for the period. In computing diluted income per share, basic income per share is adjusted for the assumed issuance of all applicable potentially dilutive share-based awards, including warrants, restricted stock and common stock options.