FALSE2020Q3000158558312/291972318881,038P5Y00015855832020-01-012020-09-08xbrli:shares00015855832020-10-12iso4217:USD00015855832020-09-0800015855832019-12-31iso4217:USDxbrli:shares0001585583us-gaap:ProductMember2020-06-172020-09-080001585583us-gaap:ProductMember2019-06-192019-09-100001585583us-gaap:ProductMember2020-01-012020-09-080001585583us-gaap:ProductMember2019-01-022019-09-100001585583us-gaap:FranchiseMember2020-06-172020-09-080001585583us-gaap:FranchiseMember2019-06-192019-09-100001585583us-gaap:FranchiseMember2020-01-012020-09-080001585583us-gaap:FranchiseMember2019-01-022019-09-100001585583taco:FranchiseAdvertisingContributionMember2020-06-172020-09-080001585583taco:FranchiseAdvertisingContributionMember2019-06-192019-09-100001585583taco:FranchiseAdvertisingContributionMember2020-01-012020-09-080001585583taco:FranchiseAdvertisingContributionMember2019-01-022019-09-100001585583taco:FranchiseSubleaseIncomeMember2020-06-172020-09-080001585583taco:FranchiseSubleaseIncomeMember2019-06-192019-09-100001585583taco:FranchiseSubleaseIncomeMember2020-01-012020-09-080001585583taco:FranchiseSubleaseIncomeMember2019-01-022019-09-1000015855832020-06-172020-09-0800015855832019-06-192019-09-1000015855832019-01-022019-09-100001585583us-gaap:ServiceMember2020-06-172020-09-080001585583us-gaap:ServiceMember2019-06-192019-09-100001585583us-gaap:ServiceMember2020-01-012020-09-080001585583us-gaap:ServiceMember2019-01-022019-09-100001585583us-gaap:CommonStockMember2019-01-010001585583us-gaap:AdditionalPaidInCapitalMember2019-01-010001585583us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-01-010001585583us-gaap:RetainedEarningsMember2019-01-0100015855832019-01-010001585583srt:CumulativeEffectPeriodOfAdoptionAdjustmentMemberus-gaap:RetainedEarningsMember2019-01-010001585583srt:CumulativeEffectPeriodOfAdoptionAdjustmentMember2019-01-010001585583us-gaap:RetainedEarningsMember2019-01-022019-03-2600015855832019-01-022019-03-260001585583us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-01-022019-03-260001585583us-gaap:AdditionalPaidInCapitalMember2019-01-022019-03-260001585583us-gaap:CommonStockMember2019-01-022019-03-260001585583us-gaap:CommonStockMember2019-03-260001585583us-gaap:AdditionalPaidInCapitalMember2019-03-260001585583us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-03-260001585583us-gaap:RetainedEarningsMember2019-03-2600015855832019-03-260001585583us-gaap:RetainedEarningsMember2019-03-272019-06-1800015855832019-03-272019-06-180001585583us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-03-272019-06-180001585583us-gaap:AdditionalPaidInCapitalMember2019-03-272019-06-180001585583us-gaap:CommonStockMember2019-03-272019-06-180001585583us-gaap:CommonStockMember2019-06-180001585583us-gaap:AdditionalPaidInCapitalMember2019-06-180001585583us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-06-180001585583us-gaap:RetainedEarningsMember2019-06-1800015855832019-06-180001585583us-gaap:RetainedEarningsMember2019-06-192019-09-100001585583us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-06-192019-09-100001585583us-gaap:AdditionalPaidInCapitalMember2019-06-192019-09-100001585583us-gaap:CommonStockMember2019-06-192019-09-100001585583us-gaap:CommonStockMember2019-09-100001585583us-gaap:AdditionalPaidInCapitalMember2019-09-100001585583us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-09-100001585583us-gaap:RetainedEarningsMember2019-09-1000015855832019-09-100001585583us-gaap:CommonStockMember2019-12-310001585583us-gaap:AdditionalPaidInCapitalMember2019-12-310001585583us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-12-310001585583us-gaap:RetainedEarningsMember2019-12-310001585583us-gaap:RetainedEarningsMember2020-01-012020-03-2400015855832020-01-012020-03-240001585583us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-01-012020-03-240001585583us-gaap:AdditionalPaidInCapitalMember2020-01-012020-03-240001585583us-gaap:CommonStockMember2020-01-012020-03-240001585583us-gaap:CommonStockMember2020-03-240001585583us-gaap:AdditionalPaidInCapitalMember2020-03-240001585583us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-03-240001585583us-gaap:RetainedEarningsMember2020-03-2400015855832020-03-240001585583us-gaap:RetainedEarningsMember2020-03-252020-06-1600015855832020-03-252020-06-160001585583us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-03-252020-06-160001585583us-gaap:AdditionalPaidInCapitalMember2020-03-252020-06-160001585583us-gaap:CommonStockMember2020-03-252020-06-160001585583us-gaap:CommonStockMember2020-06-160001585583us-gaap:AdditionalPaidInCapitalMember2020-06-160001585583us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-06-160001585583us-gaap:RetainedEarningsMember2020-06-1600015855832020-06-160001585583us-gaap:RetainedEarningsMember2020-06-172020-09-080001585583us-gaap:AdditionalPaidInCapitalMember2020-06-172020-09-080001585583us-gaap:CommonStockMember2020-06-172020-09-080001585583us-gaap:CommonStockMember2020-09-080001585583us-gaap:AdditionalPaidInCapitalMember2020-09-080001585583us-gaap:RetainedEarningsMember2020-09-08taco:restaurant0001585583us-gaap:EntityOperatedUnitsMember2020-09-080001585583us-gaap:FranchisedUnitsMember2020-09-08taco:state0001585583country:GUus-gaap:FranchisedUnitsMember2020-09-080001585583us-gaap:EntityOperatedUnitsMember2019-09-100001585583us-gaap:FranchisedUnitsMember2019-09-100001585583country:GUus-gaap:FranchisedUnitsMember2019-09-10taco:location0001585583taco:Closureof12UnderperformingRestaurantsMemberus-gaap:ContractTerminationMember2019-12-310001585583taco:Closureof12UnderperformingRestaurantsMemberus-gaap:ContractTerminationMember2019-01-010001585583taco:Closureof12UnderperformingRestaurantsMemberus-gaap:ContractTerminationMember2020-01-012020-09-080001585583taco:Closureof12UnderperformingRestaurantsMemberus-gaap:ContractTerminationMember2019-01-022019-09-100001585583taco:Closureof12UnderperformingRestaurantsMemberus-gaap:ContractTerminationMember2020-09-080001585583taco:Closureof12UnderperformingRestaurantsMemberus-gaap:ContractTerminationMember2019-09-10taco:restaurants00015855832020-01-012020-06-16taco:franchise0001585583us-gaap:TrademarksMember2020-01-012020-09-080001585583taco:SubleaseAssetsMember2020-09-080001585583taco:SubleaseAssetsMember2019-12-310001585583us-gaap:FranchiseRightsMember2020-09-080001585583us-gaap:FranchiseRightsMember2019-12-310001585583taco:OtherFiniteLivedIntangibleAssetsMember2020-09-080001585583taco:OtherFiniteLivedIntangibleAssetsMember2019-12-310001585583taco:SaleofcompanyoperatedrestaurantsMember2020-09-080001585583taco:SaleofcompanyoperatedrestaurantsMember2019-09-100001585583us-gaap:FranchiseRightsMembertaco:OneFranchiseLocationMember2019-01-022019-09-100001585583taco:TwoThousandFifteenRevolvingCreditFacilityMember2020-09-080001585583taco:TwoThousandFifteenRevolvingCreditFacilityMember2019-12-310001585583taco:TwoThousandFifteenRevolvingCreditFacilityMember2015-08-040001585583us-gaap:LetterOfCreditMembertaco:TwoThousandFifteenRevolvingCreditFacilityMember2015-08-04xbrli:pure0001585583srt:MinimumMember2020-01-012020-09-080001585583srt:MaximumMember2020-01-012020-09-08taco:leaseback_arrangement0001585583taco:SaleofLandandBuildingMember2020-01-012020-09-0800015855832019-05-100001585583taco:SaleofLandandBuildingMember2019-01-022019-09-100001585583us-gaap:CashFlowHedgingMemberus-gaap:InterestRateCapMember2020-09-080001585583us-gaap:FairValueInputsLevel1Member2019-12-310001585583us-gaap:FairValueInputsLevel2Member2019-12-310001585583us-gaap:FairValueInputsLevel3Member2019-12-310001585583taco:TwoThousandFifteenOmnibusIncentivePlanMember2020-09-080001585583taco:TwoThousandFifteenOmnibusIncentivePlanMember2020-06-172020-09-080001585583taco:TwoThousandFifteenOmnibusIncentivePlanMember2020-01-012020-09-080001585583taco:TwoThousandFifteenOmnibusIncentivePlanMember2019-01-022019-09-100001585583us-gaap:RestrictedStockMember2019-12-310001585583us-gaap:RestrictedStockMember2020-01-012020-09-080001585583us-gaap:RestrictedStockMember2020-09-080001585583taco:CommonStockandWarrantsMember2016-02-260001585583taco:CommonStockandWarrantsMember2016-08-230001585583taco:CommonStockandWarrantsMember2018-07-230001585583us-gaap:CommonStockMember2019-01-022019-09-100001585583us-gaap:WarrantMember2019-01-022019-09-100001585583us-gaap:WarrantMember2020-01-012020-09-080001585583taco:CommonStockandWarrantsMember2020-09-080001585583taco:RestrictedStockAndRestrictedStockUnitMember2020-06-172020-09-080001585583taco:RestrictedStockAndRestrictedStockUnitMember2019-06-192019-09-100001585583taco:RestrictedStockAndRestrictedStockUnitMember2020-01-012020-09-080001585583taco:RestrictedStockAndRestrictedStockUnitMember2019-01-022019-09-100001585583us-gaap:EmployeeStockOptionMember2020-06-172020-09-080001585583us-gaap:EmployeeStockOptionMember2019-06-192019-09-100001585583us-gaap:EmployeeStockOptionMember2020-01-012020-09-080001585583us-gaap:EmployeeStockOptionMember2019-01-022019-09-100001585583us-gaap:WarrantMember2020-06-172020-09-080001585583us-gaap:WarrantMember2019-06-192019-09-100001585583us-gaap:WarrantMember2020-01-012020-09-080001585583us-gaap:WarrantMember2019-01-022019-09-10
Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark one)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 8, 2020

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)
 
 
Delaware46-3340980
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
25521 Commercentre DriveLake Forest, California92630
(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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.0001 Par ValueTACOThe Nasdaq Stock 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   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      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  
As of October 12, 2020, there were 37,324,593 shares of the registrant’s common stock issued and outstanding.



Table of Contents

Del Taco Restaurants, Inc.
Index

PART I. FINANCIAL INFORMATION
PART II. OTHER INFORMATION



Table of Contents

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

Del Taco Restaurants, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share data)
 September 8, 2020December 31, 2019
Assets(Unaudited)
Current assets:
Cash and cash equivalents$5,359 $1,421 
Accounts and other receivables, net3,731 3,580 
Inventories2,640 3,123 
Prepaid expenses and other current assets2,541 2,289 
Assets held for sale1,495 8,411 
Total current assets15,766 18,824 
Property and equipment, net147,569 156,921 
Operating lease right-of-use assets250,154 258,278 
Goodwill108,979 192,739 
Trademarks208,400 220,300 
Intangible assets, net10,202 10,827 
Other assets, net4,610 4,568 
Total assets$745,680 $862,457 
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable$17,616 $19,652 
Other accrued liabilities45,690 34,577 
Current portion of finance lease obligations and other debt
199 220 
Current portion of operating lease liabilities
20,116 17,848 
Total current liabilities83,621 72,297 
Long-term debt, finance lease obligations and other debt, excluding current portion, net
123,380 144,581 
Operating lease liabilities, excluding current portion253,121 257,361 
Deferred income taxes61,466 69,510 
Other non-current liabilities16,274 16,601 
Total liabilities537,862 560,350 
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; 37,324,593 shares issued and outstanding at September 8, 2020; 37,059,202 shares issued and outstanding at December 31, 2019
4 4 
Additional paid-in capital336,285 333,379 
Accumulated other comprehensive loss (52)
Accumulated deficit(128,471)(31,224)
Total shareholders’ equity207,818 302,107 
Total liabilities and shareholders’ equity$745,680 $862,457 
See accompanying notes to consolidated financial statements.
1

Table of Contents


Del Taco Restaurants, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
(In thousands, except share and per share data)
12 Weeks Ended36 Weeks Ended
 September 8, 2020September 10, 2019September 8, 2020September 10, 2019
Revenue:
Company restaurant sales$109,522 $111,059 $305,116 $329,142 
Franchise revenue5,169 4,490 14,080 13,193 
Franchise advertising contributions4,001 3,458 9,995 10,048 
Franchise sublease and other income2,090 1,191 5,971 3,472 
Total revenue120,782 120,198 335,162 355,855 
Operating expenses:
Restaurant operating expenses:
Food and paper costs29,051 30,761 82,988 90,434 
Labor and related expenses35,450 36,304 101,995 108,542 
Occupancy and other operating expenses25,302 25,386 72,099 73,522 
General and administrative10,841 10,421 30,139 31,735 
Franchise advertising expenses4,001 3,458 9,995 10,048 
Depreciation and amortization6,055 5,941 18,477 17,661 
Occupancy and other - franchise subleases and other1,766 1,011 5,088 2,858 
Pre-opening costs63 465 359 720 
Impairment of goodwill  87,277  
Impairment of trademarks  11,900  
Impairment of long-lived assets 1,407 8,287 5,101 
Restaurant closure charges, net413 588 1,406 1,718 
Loss on disposal of assets and adjustments to assets held for sale, net140 7,906 697 8,790 
Total operating expenses113,082 123,648 430,707 351,129 
Income (loss) from operations7,700 (3,450)(95,545)4,726 
Other expense (income), net
Interest expense941 1,663 3,730 5,169 
Other income   (201)
Total other expense, net941 1,663 3,730 4,968 
Income (loss) from operations before provision (benefit) for income taxes6,759 (5,113)(99,275)(242)
Provision (benefit) for income taxes962 2,556 (2,028)3,910 
Net income (loss)5,797 (7,669)(97,247)(4,152)
Other comprehensive income (loss):
Change in fair value of interest rate cap, net of tax (75) (345)
Reclassification of interest rate cap amortization included in net income, net of
tax
 32 5279
Total other comprehensive (loss) income, net (43)52 (266)
Comprehensive income (loss)$5,797 $(7,712)$(97,195)$(4,418)
Earnings (loss) per share:
Basic$0.16 $(0.21)$(2.62)$(0.11)
Diluted$0.15 $(0.21)$(2.62)$(0.11)
Weighted-average shares outstanding
Basic37,293,390 37,023,287 37,152,419 37,000,331 
Diluted37,420,043 37,023,287 37,152,419 37,000,331 
See accompanying notes to consolidated financial statements.
2

Table of Contents


Del Taco Restaurants, Inc.
Consolidated Statements of Shareholders’ Equity
(Unaudited)
(In thousands, except share data)
    AccumulatedRetained
AdditionalOtherEarningsTotal
 PreferredCommon StockPaid-inComprehensive(AccumulatedShareholders’
 StockSharesAmountCapitalIncome (Loss)Deficit)Equity
Balance at January 1, 2019
$— 37,305,342 $4 $336,941 $180 $85,149 $422,274 
Adjustment for adoption of new lease standard, net of tax
— — — — 1,912 1,912 
Net income
— — — — — 1,425 1,425 
Other comprehensive loss, net of tax
— — — — (118)— (118)
Comprehensive income
1,307 
Stock-based compensation
— — — 1,577 — — 1,577 
Issuance of vested
restricted stock, net of
shares withheld for tax
withholding
— 13,172 — (84)— — (84)
Exercise of stock options— 1,500 — 16 — — 16 
Repurchase of common
     stocks and warrants
— (270,874)— (4,306)— — (4,306)
Balance at March 26, 2019
— 37,049,140 4 334,144 62 88,486 422,696 
Net income
— — — — — 2,092 2,092 
Other comprehensive loss, net of tax
— — — — (105)— (105)
Comprehensive income
1,987 
Stock-based compensation
— — — 1,677 — — 1,677 
Issuance of vested
restricted stock, net of
shares withheld for tax
withholding
— 48,499 — — — — — 
Exercise of stock options— 1,500 — 15 — — 15 
Repurchase of common
     stocks and warrants
— (303,607)— (3,067)— — (3,067)
Balance at June 18, 2019
— 36,795,532 4 332,769 (43)90,578 423,308 
Net loss— — — — — (7,669)(7,669)
Other comprehensive loss,
net of tax
— — — — (43)— (43)
Comprehensive loss(7,712)
  Stock-based compensation— — — 1,347 — — 1,347 
Issuance of vested
restricted stock, net of
shares withheld for tax
withholding
— 254,670 — (2,518)— — (2,518)
Exercise of stock options— 9,000 — 89 — — 89 
Balance at September 10,
2019
$— 37,059,202 $4 $331,687 $(86)$82,909 $414,514 
3

Table of Contents

Del Taco Restaurants, Inc.
Consolidated Statements of Shareholders’ Equity
(Unaudited)
(In thousands, except share data)
Accumulated
AdditionalOtherTotal
PreferredCommon StockPaid-inComprehensiveAccumulatedShareholders’
StockSharesAmountCapitalIncome (Loss)DeficitEquity
Balance at December 31, 2019
$— 37,059,202 $4 $333,379 $(52)$(31,224)$302,107 
Net loss
— — — — — (102,468)(102,468)
Other comprehensive income, net of tax
— — — — 45 — 45 
Comprehensive loss
(102,423)
Stock-based compensation
— — — 1,225 — — 1,225 
Issuance of vested
restricted stock, net of
shares withheld for tax
withholding
— 21,758 — (105)— — (105)
Balance at March 24, 2020
— 37,080,960 4 334,499 (7)(133,692)200,804 
Net loss— — — — — (576)(576)
Other comprehensive
income, net of tax
— — — — 7 — 7 
Comprehensive loss(569)
  Stock-based compensation— — — 1,413 — — 1,413 
Issuance of vested
restricted stock, net of
shares withheld for tax
withholding
— 42,016 — — — — — 
Balance at June 16, 2020— 37,122,976 4 335,912  (134,268)201,648 
Net income— — — — — 5,797 5,797 
Comprehensive income5,797 
  Stock-based compensation— — — 1,267 — — 1,267 
Issuance of vested
restricted stock, net of
shares withheld for tax
withholding
— 201,617 — (894)— — (894)
Balance at September 8, 2020$— 37,324,593 $4 $336,285 $— $(128,471)$207,818 





See accompanying notes to consolidated financial statements.
4

Table of Contents


Del Taco Restaurants, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
36 Weeks Ended
 September 8, 2020September 10, 2019
Operating activities
Net loss$(97,247)$(4,152)
Adjustments to reconcile net loss to net cash provided by operating activities:
Allowance for doubtful accounts15  
Depreciation and amortization18,477 17,661 
Amortization of deferred financing costs, debt discount and interest rate cap251 376 
Amortization of operating lease assets15,200 14,886 
Stock-based compensation3,905 4,601 
Impairment of goodwill87,277  
Impairment of trademarks11,900  
Impairment of long-lived assets8,287 5,101 
Deferred income taxes(8,059)1,210 
Loss on disposal of assets and adjustments to assets held for sale, net697 8,790 
Restaurant closure charges92 118 
Changes in operating assets and liabilities:
Accounts and other receivables, net(166)394 
Inventories483 55 
Prepaid expenses and other current assets1,071 (330)
Other assets(252)(124)
Accounts payable(365)1,293 
Operating lease liabilities(14,513)(13,584)
Other accrued liabilities13,148 2,307 
Other non-current liabilities(678)161 
Net cash provided by operating activities39,523 38,763 
Investing activities
Purchases of property and equipment(16,335)(28,440)
Proceeds from disposal of property and equipment, net1,440 14,130 
Purchases of other assets(1,094)(1,051)
Acquisition of franchisees (4,833)
Proceeds from sale of company-operated restaurants2,558 2,090 
Net cash used in investing activities(13,431)(18,104)
Financing activities
Repurchase of common stock and warrants (7,373)
Payment of tax withholding related to restricted stock vesting(999)(2,602)
Payments on finance leases and other debt(155)(389)
Proceeds from revolving credit facility65,000 27,000 
Payments on revolving credit facility(86,000)(36,000)
Proceeds from exercise of stock options 120 
Net cash used in financing activities(22,154)(19,244)
Increase in cash and cash equivalents3,938 1,415 
Cash and cash equivalents at beginning of period1,421 7,153 
Cash and cash equivalents at end of period$5,359 $8,568 
Supplemental cash flow information:
Cash paid during the period for interest$3,255 $4,720 
Cash paid during the period for income taxes1,060 1,764 
Supplemental schedule of non-cash activities:
Accrued property and equipment purchases$1,783 $5,768 
Write-offs of accounts receivables 21 
Amortization of interest rate cap into net income, net of tax
52 79 
Change in other asset for fair value of interest rate cap recorded to other comprehensive (loss) income, net of tax
 (345)
Operating lease right-of-use assets obtained in exchange for lease obligations
13,139 262,369 
Finance lease right-of-use assets obtained in exchange for lease obligations
 1,185 
Impairment on operating lease right-of-use assets related to the adoption of new accounting pronouncements
 3,116 

See accompanying notes to consolidated financial statements.


5

Table of Contents

Del Taco Restaurants, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
1. Description of Business
Del Taco Restaurants, Inc. is a Delaware corporation headquartered in Lake Forest, California. The consolidated financial statements include the accounts of Del Taco Restaurants, Inc. and its wholly owned subsidiaries (collectively, the “Company” or “Del Taco”). The Company develops, franchises, owns, and operates Del Taco quick-service Mexican-American restaurants. At September 8, 2020, there were 295 company-operated and 301 franchise-operated Del Taco restaurants located in 15 states, including one franchise-operated unit in Guam. At September 10, 2019, there were 312 company-operated and 274 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 December 31, 2019 ("2019 Form 10-K").
 
The Company’s fiscal year ends on the Tuesday closest to December 31. Fiscal year 2020 is a fifty-two week period ending December 29, 2020. Fiscal year 2019 is the fifty-two week period ended December 31, 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 2020, the Company’s accompanying financial statements reflect the twelve weeks ended September 8, 2020. For fiscal year 2019, the Company’s accompanying financial statements reflect the twelve weeks ended September 10, 2019.
In the opinion of management, the accompanying consolidated financial statements reflect all adjustments which are necessary for a fair presentation of the consolidated financial position, results of operations and cash flows for the periods presented. The results of operations for such interim periods are not necessarily indicative of results of operations to be expected for the full fiscal year.
Principles of Consolidation
The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly and majority owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Management believes that such estimates have been based on reasonable and supportable assumptions and the resulting estimates are reasonable for use in the preparation of the consolidated financial statements. Actual results could differ from these estimates. The Company’s significant estimates include estimates for impairment of goodwill, intangible assets and property and equipment, valuations provided in business combinations, insurance reserves, restaurant closure reserves, stock-based compensation, contingent liabilities, certain leasing activities and income tax valuation allowances.
Recently Issued Accounting Standards
In December 2019, the Financial Accounting Standard Board ("FASB") issued Accounting Standards Update ("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
6

Table of Contents

Del Taco Restaurants, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
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 if 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.
Recently Adopted 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. There was no material impact on the Company's consolidated financial statements and related disclosures as a result of adopting this standard.
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. There was no material impact on the Company's consolidated financial statements and related disclosures as a result of adopting this standard.
Summary of Significant Accounting Policies
There have been no changes to our significant accounting policies described in the 2019 Form 10-K filed with the SEC on March 13, 2020 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 right-of-use asset, furniture, fixtures and equipment and leasehold improvement's carrying amount over its estimated fair value.
During the twelve and thirty-six weeks ended September 8, 2020, the Company evaluated certain restaurants having indicators of impairment based on operating performance, taking into consideration the negative impact of the COVID-19 pandemic on forecasted restaurant performance, which resulted in elevated impairment charges for the thirty-six weeks ended September 8, 2020. No impairment charges were recorded during the twelve weeks ended September 8, 2020. During the thirty-six weeks ended September 8, 2020, the Company recorded a non-cash impairment charge totaling $8.3 million related to eight restaurants based on the estimate of future recoverable cash flows.
7

Table of Contents

Del Taco Restaurants, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
During the twelve weeks ended September 10, 2019, the Company evaluated certain restaurants having indicators of impairment based on operating performance and recorded an impairment charge totaling $1.4 million related to one restaurant based on the estimate of future recoverable cash flows. During the thirty-six weeks ended September 10, 2019, the Company evaluated certain restaurants having indicators of impairment based on operating performance and recorded an impairment charge totaling $5.1 million related to three restaurants based on the estimate of future recoverable cash flows.
Restaurant Closure Charges
The restaurant closure liability was $0.5 million and $0.4 million at September 8, 2020 and December 31, 2019, respectively, and relates to the non-lease executory costs associated with company-operated restaurants that were closed during the fourth quarter of 2015. A summary of the restaurant closure liability activity for these closed restaurants consisted of the following (in thousands):
36 Weeks Ended
September 8, 2020September 10, 2019
Beginning Balance$437 $2,092 
Reclassified to operating lease right-of-use assets (1,900)
Cash payments(2)(192)
Adjustments to estimates based on current activity 118 
Accretion16  
Ending Balance$451 $118 

During the thirty-six weeks weeks ended September 10, 2019, in connection with the adoption of ASU 2016-02, Leases, the Company reclassified $1.9 million of the lease-related restaurant closure liability to offset the respective operating lease right-of-use assets.
The current portion of the restaurant closure liability was $0.2 million and $0.1 million as of September 8, 2020 and December 31, 2019, respectively, and is included in other accrued liabilities in the consolidated balance sheets. The non-current portion of the restaurant closure liability was $0.3 million as of both September 8, 2020 and December 31, 2019, respectively, and is included in other non-current liabilities in the consolidated balance sheets. The restaurant closure liability is expected to be settled by 2022.
8

Table of Contents

Del Taco Restaurants, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
4. Summary of Refranchising and Franchise Acquisitions
Refranchising
In connection with the sale of company-operated restaurants to franchisees, the Company typically enters into several agreements, in addition to an asset purchase agreement, with franchisees including franchise and lease agreements. The Company typically sells 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 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 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 franchise revenue as earned.
The Company sold six company-operated restaurants to franchisees during the thirty-six weeks ended September 8, 2020 and 13 company-operated restaurants to franchisees during the thirty-six weeks ended September 10, 2019. The following table summarizes the net loss recognized related to these transactions (dollars in thousands):
36 Weeks Ended September 8, 202036 Weeks Ended September 10, 2019
Company-operated restaurants sold to franchisees6 13 
Proceeds from the sale of company-operated restaurants, net of selling costs$2,558 $2,090 
Net assets sold (primarily furniture, fixtures and equipment) (a)
(2,086)(2,051)
Goodwill related to the company-operated restaurants sold to franchisees(1,196)(83)
Allocation to deferred franchise fees(193)(281)
Sublease assets, net220 260 
Gain on lease termination40  
Loss on sale of company-operated restaurants, net (b)
$(657)$(65)

(a) Of the net assets sold during the thirty-six weeks ended September 8, 2020, $0.7 million was included in assets held for sale as of December 31, 2019. The net assets sold during the thirty-six weeks ended September 10, 2019 were all included in assets held for sale as of January 1, 2019.
(b) Of the loss related to the company-operated restaurants sold during the thirty-six weeks ended September 8, 2020, $0.6 million was previously recognized during the fifty-two weeks ended December 31, 2019 as a fair value adjustment to the assets held for sale balance. The loss on sale of company-operated restaurants is included in loss on disposal of assets and adjustments to assets held for sale, net on the consolidated statements of comprehensive income (loss).

Assets Held for Sale

Assets held for sale includes 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 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.
9

Table of Contents

Del Taco Restaurants, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
As of December 31, 2019, the Company classified 19 company-operated restaurants as held for sale. During the twelve weeks ended March 24, 2020, the Company sold five of these restaurants as discussed in the Refranchising section above and determined that the remaining 14 company-operated restaurants would not be sold within the next year and therefore reclassified the related long-lived assets back to held for use. The Company reclassified the assets back to held for use at their carrying amount before they were classified as held for sale, adjusted for depreciation expense that would have been recognized had the assets been continuously classified as held for use. As such, the Company recognized a loss of $0.5 million related to the reclassification which is included in loss on disposal of assets and adjustments to assets held for sale, net in the consolidated statement of comprehensive income (loss). As of September 8, 2020, the Company classified the land and building related to a previously closed company-operated restaurant as held for sale and recorded a $0.2 million adjustment to assets held for sale in order to recognize the assets at their estimated net realizable value less estimated costs to sell. The estimated fair value of assets held for sale is based upon Level 2 inputs, which include previous negotiations with a third party. Assets held for sale at September 8, 2020 and December 31, 2019 consisted of the following (in thousands):
September 8, 2020December 31, 2019
Land$561 $ 
Building934  
Other property and equipment 4,025 
Goodwill 4,386 
$1,495 $8,411 

Franchise Acquisitions
There were no franchise acquisitions during the thirty-six weeks ended September 8, 2020. The Company acquired four franchise-operated restaurants during the thirty-six weeks ended September 10, 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. The following table provides detail of the combined acquisitions for the thirty-six weeks ended September 10, 2019 (dollars in thousands):
36 Weeks Ended
September 10, 2019
Franchise-operated restaurants acquired from franchisees4
Goodwill$4,302 
Restaurant and other equipment and leasehold improvements660 
Operating lease right-of-use assets2,006 
Operating lease liabilities(2,006)
Unfavorable lease liabilities(130)
Total consideration$4,832 

The unfavorable lease liability of $0.1 million was recorded as an adjustment to the respective operating lease right-of-use asset.
10

Table of Contents

Del Taco Restaurants, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
5. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the thirty-six weeks ended September 8, 2020 are as follows (in thousands):
Goodwill
Balance as of December 31, 2019$192,739 
Goodwill reclassified from held for sale3,517 
Impairment of goodwill(87,277)
Balance as of September 8, 2020$108,979 

The decrease in goodwill was primarily due to an impairment of $87.3 million during the thirty-six weeks ended September 8, 2020. In March 2020, the outbreak of the COVID-19 pandemic prompted authorities in most jurisdictions where the Company operates to issue stay-at-home orders, leading to an unexpected significant disruption to the Company's business requiring the Company to close restaurant dining rooms and operate with only drive-thru, take-out and delivery orders. As such, the consequences of the outbreak of the COVID-19 pandemic coupled with a sustained decline in the Company's stock price were determined to be indicators of impairment. As such, using Level 3 inputs, the Company performed a quantitative goodwill impairment assessment during the first quarter of 2020 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 and recognized a non-cash goodwill impairment charge of $87.3 million, equal to the excess of the reporting unit's carrying value above its fair value. The impairment charge was recorded in impairment of goodwill on the consolidated statements of comprehensive income (loss). Since June 30, 2015, the date of the business combination between Del Taco and Levy Acquisition Corporation, accumulated goodwill impairment losses were $205.6 million and $118.3 m