10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 20, 2017

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)

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 and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted 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 and post 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	¨	(Do not check if a smaller reporting company)	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     x

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 27, 2017, there were 38,686,034 shares of the registrant’s common stock issued and outstanding.

Del Taco Restaurants, Inc.

Index

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of June 20, 2017 (Unaudited) and January 3, 2017	1
Unaudited Consolidated Statements of Comprehensive Income for the Twelve and Twenty-Four Weeks Ended June 20, 2017 and the Twelve and Twenty-Four Weeks Ended June 14, 2016	2
Unaudited Consolidated Statements of Cash Flows for the Twenty-Four Weeks Ended June 20, 2017 and the Twenty-Four Weeks Ended June 14, 2016	3
Notes to Consolidated Financial Statements (Unaudited)	4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3. Quantitative and Qualitative Disclosures about Market Risk	30
Item 4. Control and Procedures	32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	33
Item 1A. Risk Factors	33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 6. Exhibits	34

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Del Taco Restaurants, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share data)
	June 20, 2017			January 3, 2017
Assets	(Unaudited)
Current assets:
Cash and cash equivalents	$	4,925		$	8,795
Accounts and other receivables, net	3,118			4,141
Inventories	2,585			2,718
Prepaid expenses and other current assets	3,129			4,204
Total current assets	13,757			19,858
Property and equipment, net	135,142			138,320
Goodwill	319,778			320,025
Trademarks	220,300			220,300
Intangible assets, net	23,276			24,782
Other assets, net	3,658			3,872
Total assets	$	715,911		$	727,157
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	16,462		$	16,427
Other accrued liabilities	36,403			36,653
Current portion of capital lease obligations and deemed landlord financing liabilities	1,546			1,588
Total current liabilities	54,411			54,668
Long-term debt, capital lease obligations and deemed landlord financing liabilities, excluding current portion, net	160,204			173,743
Deferred income taxes	91,908			91,273
Other non-current liabilities	30,142			30,140
Total liabilities	336,665			349,824
Commitments and contingencies (Note 14)
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; 38,572,982 shares issued and outstanding at June 20, 2017; 39,153,503 shares issued and outstanding at January 3, 2017	4			4
Additional paid-in capital	352,712			360,131
Accumulated other comprehensive (loss) income	(64		)	172
Retained earnings	26,594			17,026
Total shareholders’ equity	379,246			377,333
Total liabilities and shareholders’ equity	$	715,911		$	727,157

See accompanying notes to consolidated financial statements.

1

Del Taco Restaurants, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands, except share and per share data)
	12 Weeks Ended						24 Weeks Ended
	June 20, 2017			June 14, 2016			June 20, 2017			June 14, 2016
Revenue:
Company restaurant sales	$	104,022		$	95,917		$	205,244		$	189,467
Franchise revenue	3,903			3,576			7,516			6,905
Franchise sublease income	656			533			1,166			1,057
Total revenue	108,581			100,026			213,926			197,429
Operating expenses:
Restaurant operating expenses:
Food and paper costs	28,770			26,358			56,688			52,487
Labor and related expenses	33,185			30,249			66,406			60,033
Occupancy and other operating expenses	20,918			19,526			41,636			39,649
General and administrative	9,055			8,214			18,360			16,506
Depreciation and amortization	5,278			5,532			10,381			11,018
Occupancy and other - franchise subleases	602			510			1,083			1,013
Pre-opening costs	151			35			177			128
Restaurant closure charges, net	6			(166		)	15			12
Loss on disposal of assets, net	340			62			291			137
Total operating expenses	98,305			90,320			195,037			180,983
Income from operations	10,276			9,706			18,889			16,446
Other expense
Interest expense	1,627			1,405			3,170			2,877
Transaction-related costs	—			126			—			191
Total other expense	1,627			1,531			3,170			3,068
Income from operations before provision for income taxes	8,649			8,175			15,719			13,378
Provision for income taxes	3,319			3,311			6,151			5,453
Net income	5,330			4,864			9,568			7,925
Other comprehensive loss:
Change in fair value of interest rate cap, net of tax	(148		)	—			(236		)	—
Total other comprehensive loss	(148		)	—			(236		)	—
Comprehensive income	$	5,182		$	4,864		$	9,332		$	7,925
Earnings per share:
Basic	$	0.14		$	0.13		$	0.25		$	0.21
Diluted	$	0.13		$	0.13		$	0.24		$	0.20
Weighted-average shares outstanding
Basic	38,535,855			38,292,215			38,769,895			38,545,115
Diluted	39,808,485			38,442,304			40,094,476			38,672,425

See accompanying notes to consolidated financial statements.

2

Del Taco Restaurants, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
	24 Weeks Ended
	June 20, 2017			June 14, 2016
Operating activities
Net income	$	9,568		$	7,925
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	10,381			11,018
Amortization of favorable and unfavorable lease assets and liabilities, net	(292		)	(280		)
Amortization of deferred financing costs and debt discount	178			178
Stock-based compensation	2,149			1,629
Deferred income taxes	792			3,052
Loss on disposal of assets, net	291			137
Restaurant closure charges	85			(137		)
Changes in operating assets and liabilities:
Accounts and other receivables, net	1,023			859
Inventories	133			379
Prepaid expenses and other current assets	1,075			371
Other assets	(60		)	—
Accounts payable	35			435
Other accrued liabilities	(304		)	(3,609		)
Other non-current liabilities	(240		)	(904		)
Net cash provided by operating activities	24,814			21,053
Investing activities
Purchases of property and equipment	(14,814		)	(15,546		)
Proceeds from disposal of property and equipment, net	7,733			4
Purchases of other assets	(470		)	(647		)
Proceeds from sale of company-operated restaurants	2,192			—
Net cash used in investing activities	(5,359		)	(16,189		)
Financing activities
Repurchase of common stock and warrants	(9,517		)	(6,943		)
Payment of tax withholding related to restricted stock vesting	(59		)	—
Payments on capital leases and deemed landlord financing	(759		)	(817		)
Proceeds from revolving credit facility	6,000			4,000
Payments on revolving credit facility	(19,000		)	(4,000		)
Proceeds from exercise of stock options	10			—
Net cash used in financing activities	(23,325		)	(7,760		)
Decrease in cash and cash equivalents	(3,870		)	(2,896		)
Cash and cash equivalents at beginning of period	8,795			10,194
Cash and cash equivalents at end of period	$	4,925		$	7,298
Supplemental cash flow information:
Cash paid during the period for interest	$	2,688		$	2,872
Cash paid during the period for income taxes	4,733			800
Supplemental schedule of non-cash activities:
Accrued property and equipment purchases	$	4,114		$	1,939
Write-offs of accounts receivables	—			72
Change in other asset for fair value of interest rate cap recorded to other comprehensive loss, net of tax	(236		)	—

See accompanying notes to consolidated financial statements

3

Del Taco Restaurants, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

1. Description of Business

Del Taco Restaurants, Inc. (f/k/a Levy Acquisition Corp. (“LAC”)) is a Delaware corporation headquartered in Lake Forest, California. The consolidated financial statements include the accounts of Del Taco Restaurants, Inc. and its wholly owned subsidiaries (collectively, the “Company” or “Del Taco”). The Company develops, franchises, owns, and operates Del Taco quick-service Mexican-American restaurants. At June 20, 2017, there were 304 company-operated and 251 franchise-operated Del Taco restaurants located in 15 states, including one franchise-operated unit in Guam. At June 14, 2016, there were 298 company-operated and 245 franchise-operated Del Taco restaurants located in 16 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.

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 3, 2017 ("2016 Form 10-K"). The accounting policies used in preparing these unaudited consolidated financial statements are the same as those described in our 2016 Form 10-K.

The Company’s fiscal year ends on the Tuesday closest to December 31. Fiscal year 2017 is a fifty-two week period ending January 2, 2018. In a fifty-two week fiscal year, the first, second and third quarters each include twelve weeks of operations and the fourth quarter includes sixteen weeks of operations. Fiscal year 2016 is the fifty-three week period ended January 3, 2017. In a fifty-three week fiscal year, the first, second and third quarters each include twelve weeks of operations and the fourth quarter includes seventeen weeks of operations. For fiscal year 2017, the Company’s accompanying financial statements reflect the twelve weeks ended June 20, 2017. For fiscal year 2016, the Company’s accompanying financial statements reflect the twelve weeks ended June 14, 2016.

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.

4

Del Taco Restaurants, Inc.

Notes to Consolidated Financial Statements (continued)

(Unaudited)

Management believes that such estimates have been based on reasonable and supportable assumptions and the resulting estimates are reasonable for use in the preparation of the consolidated financial statements. Actual results could differ from these estimates. The Company’s significant estimates include estimates for impairment of goodwill, intangible assets and property and equipment, valuations provided in business combinations, insurance reserves, restaurant closure reserves, stock-based compensation, contingent liabilities, certain leasing activities and income tax valuation allowances.

Recently Issued Accounting Standards

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2016-02, Leases (Topic 842). This guidance will result in key changes to lease accounting and will aim to bring leases onto balance sheets to give investors, lenders, and other financial statement users a more comprehensive view of a company's long-term financial obligations as well as the assets it owns versus leases. The new leasing standard will be effective for fiscal years beginning after December 15, 2018, and for interim periods within those fiscal years. The Company currently believes the guidance will have a material impact on its consolidated balance sheets. The Company has not selected an adoption method.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which provides a comprehensive new revenue recognition model that requires a company to recognize revenue in an amount that reflects the consideration it expects to receive for the transfer of promised goods or services to its customers. The standard also requires additional disclosure regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. This ASU is effective for annual periods and interim periods beginning after December 15, 2017. The ASU is to be applied retrospectively or using a cumulative effect transition method. The Company expects to adopt this new guidance in fiscal year 2018, and has not yet selected a transition method. The Company does not currently believe the new revenue recognition standard will materially impact the recognition of company restaurant sales or royalty fees from franchisees. Additionally, lease rental revenues are not within the scope of this new guidance. Based on a preliminary assessment, the Company expects the adoption of the new guidance to change the timing of the recognition of initial franchise fees, including franchise and development fees, and renewal fees. Currently, these fees are generally recognized upfront upon either the opening of the respective restaurant or when a renewal agreement becomes effective. The Company currently believes the new guidance will generally require these fees to be recognized over the term of the related franchise agreement for the respective restaurant. The Company is continuing to evaluate the impact the adoption of this new guidance will have on these and other revenue transactions in addition to the impact on accounting policies and related disclosures.

3. Restaurant Closure Charges, Net

At June 20, 2017 and January 3, 2017, the restaurant closure liability is $2.8 million and $3.1 million, respectively. The details of the restaurant closure activities are discussed below.

Restaurant Closures and Lease Reserves

The following table represents other restaurant closure liability activity related to restaurant closures prior to 2015 and sublease income shortfalls (in thousands):

	Total
Balance at January 3, 2017	$	1,365
Charges for accretion in current period	51
Cash payments	(141		)
Balance at June 20, 2017	$	1,275

The current portion of the restaurant closure liability is $0.3 million at both June 20, 2017 and January 3, 2017 and is included in other accrued liabilities in the consolidated balance sheets. The non-current portion of the restaurant closure liability is $1.0 million and $1.1 million at June 20, 2017 and January 3, 2017, respectively, and is included in other non-current liabilities in the consolidated balance sheets.

5

Del Taco Restaurants, Inc.

Notes to Consolidated Financial Statements (continued)

(Unaudited)

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 20, 2017, the Company recorded accretion expense related to the closures, offset by $0.1 million of sublease income from leases which are treated as deemed landlord financing. A summary of the restaurant closure liability activity for these 12 closed restaurants consisted of the following (in thousands):

	Contract termination costs			Other associated costs		Total
Balance at January 3, 2017	$	1,773		$	—	$	1,773
Charges for accretion in current period	33			—		33
Cash payments	(316		)	—		(316		)
Balance at June 20, 2017	$	1,490		$	—	$	1,490

The current portion of the restaurant closure liability is $0.2 million and $0.6 million at June 20, 2017 and January 3, 2017, respectively, and is included in other accrued liabilities in the consolidated balance sheets. The non-current portion of the restaurant closure liability is $1.3 million and $1.2 million at June 20, 2017 and January 3, 2017, respectively, and is included in other non-current liabilities in the consolidated balance sheets.

4. Summary of 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 or the leasehold interest to the real estate to 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 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 or unfavorable lease assets/liabilities with a corresponding offset to the gain or loss on the sale of the company-operated restaurants. The cash consideration per restaurant for franchise fees is consistent with the amounts stated in the related franchise agreements which are charged for separate standalone arrangements. Therefore, the Company recognizes the franchise fees when earned. Future royalty income is also recognized in revenue as earned.

The following table summarizes the number of company-operated restaurants sold to franchisees and the related gain recognized during the twenty-four weeks ended June 20, 2017 (dollars in thousands):

	24 Weeks Ended June 20, 2017
Company-operated restaurants sold to franchisees	5
Proceeds from the sale of company-operated restaurants	$	2,192
Net assets sold (primarily furniture, fixtures and equipment)	(1,261		)
Goodwill related to the company-operated restaurants sold to franchisees	(247		)
Net unfavorable lease liabilities (a)	(548		)
Other costs	(5		)
Gain on sale of company-operated restaurants (b)	$	131

^(a) The Company recorded favorable lease assets of $0.1 million and and unfavorable lease liabilities of $0.6 million as a result of subleasing land, buildings and leasehold improvements to franchisees, in connection with the sale of company-operated restaurants. 

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Del Taco Restaurants, Inc.

Notes to Consolidated Financial Statements (continued)

(Unaudited)

^(b) Included in loss on disposal of assets, net on the consolidated statements of comprehensive income.

5. Goodwill and other Intangible Assets

Goodwill was $319.8 million at June 20, 2017 compared to $320.0 million at January 3, 2017. The change is due to the sale of company-operated stores as described in more detail in Note 4.

There have been no changes in the carrying amount of trademarks since January 3, 2017.

The Company’s other intangible assets at June 20, 2017 and January 3, 2017 consisted of the following (in thousands):

	June 20, 2017							January 3, 2017
	Gross Carrying Amount		Accumulated Amortization			Net		Gross Carrying Amount		Accumulated Amortization			Net
Favorable lease assets	$	14,161	$	(3,849	)	$	10,312	$	14,176	$	(2,996	)	$	11,180
Franchise rights	15,489		(2,659		)	12,830		15,489		(2,038		)	13,451
Reacquired franchise rights	161		(27		)	134		161		(10		)	151
Total amortized other intangible assets	$	29,811	$	(6,535	)	$	23,276	$	29,826	$	(5,044	)	$	24,782

During the twenty-four weeks ended June 20, 2017, the Company wrote-off $15,000 of favorable lease assets related to the closure of one company-operated restaurant.

6. Debt, Obligations Under Capital Leases and Deemed Landlord Financing Liabilities

The Company’s long-term debt, capital lease obligations and deemed landlord financing liabilities at June 20, 2017 and January 3, 2017 consisted of the following (in thousands):

	June 20, 2017		January 3, 2017
2015 Senior Credit Facility, net of debt discount of $902 and $1,035 and deferred financing costs of $304 and $349 at June 20, 2017 and January 3, 2017, respectively	$	144,794	$	157,616
Total outstanding indebtedness	144,794		157,616
Obligations under capital leases and deemed landlord financing liabilities	16,956		17,715
Total debt	161,750		175,331
Less: amounts due within one year	1,546		1,588
Total amounts due after one year, net	$	160,204	$	173,743

At June 20, 2017 and January 3, 2017, 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 20, 2017. Substantially all of the assets of the Company are pledged as collateral under the 2015 Senior Credit Facility.

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Del Taco Restaurants, Inc.

Notes to Consolidated Financial Statements (continued)

(Unaudited)

At June 20, 2017, the weighted-average interest rate on the outstanding balance of the 2015 Senior Credit Facility was 2.8%. At June 20, 2017, the Company had a total of $85.7 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 $18.3 million which reduce availability under the 2015 Senior Credit Facility.

7. 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 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. During the period from July 1, 2016 through June 20, 2017, 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 on the term loans perfectly match with the interest rate cap reset dates and other critical terms during the twelve weeks ended June 20, 2017.

As of June 20, 2017, the Company was hedging forecasted transactions expected to occur through March 31, 2020. Assuming interest rates at June 20, 2017 remain constant, $0.3 million of interest expense related to hedges of these transactions is expected to be reclassified into earnings over the next 33 months. The Company intends to ensure that this hedge remains effective, therefore, approximately $20,000 is expected to be reclassified into interest expense over the next 12 months.

The effective portion of the 2016 Interest Rate Cap Agreement through June 20, 2017 was included in accumulated other comprehensive income.

8. 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 20, 2017 and January 3, 2017, the Company held certain assets and liabilities that are required to be measured at fair value on a recurring basis. For both periods, this included a derivative instrument related to interest rates. The Company determined the fair value of the interest rate cap contract based on counterparty quotes, with appropriate adjustments for any significant impact of nonperformance risk of the parties to the interest rate cap contract. Therefore, the Company categorized this interest rate cap contract as Level 2 fair value measurements. The fair value of the 2016 Interest Rate Cap Agreement was $0.2 million and $0.6 million at June 20, 2017 and January 3, 2017, respectively, and is included in other assets in the consolidated balance sheets.

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Del Taco Restaurants, Inc.

Notes to Consolidated Financial Statements (continued)

(Unaudited)

The Company's assets and liabilities measured at fair value on a recurring basis as of June 20, 2017 and January 3, 2017 were as follows (in thousands):

	June 20, 2017 (Unaudited)		Markets for Identical Assets (Level 1)		Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
2016 Interest Rate Cap Agreement	$	205	$	—	$	205	$	—
Total assets measured at fair value	$	205	$	—	$	205	$	—
	January 3, 2017		Markets for Identical Assets (Level 1)		Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
2016 Interest Rate Cap Agreement	$	598	$	—	$	598	$	—
Total assets measured at fair value	$	598	$	—	$	598	$	—

9. Other Accrued Liabilities and Other Non-current Liabilities

A summary of other accrued liabilities follows (in thousands):

	June 20, 2017		January 3, 2017
Employee compensation and related items	$	11,203	$	13,783
Accrued insurance	8,471		8,192
Accrued sales tax	5,264		3,916
Accrued advertising	2,325		1,657
Accrued real property tax	1,249		1,274
Accrued income tax	1,189		562
Restaurant closure liability	464		875
Other	6,238		6,394
	$	36,403	$	36,653

A summary of other non-current liabilities follows (in thousands):

	June 20, 2017		January 3, 2017
Unfavorable lease liabilities	$	15,911	$	17,072
Insurance reserves	4,305		4,269
Restaurant closure liability	2,301		2,263
Deferred rent liability	2,107		1,676
Deferred development and initial franchise fees	1,418		1,385
Unearned trade discount, non-current	1,392		1,596
Deferred gift card income	673		1,182
Other	2,035		697
	$	30,142	$	30,140

10. 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,

9

Del Taco Restaurants, Inc.

Notes to Consolidated Financial Statements (continued)

(Unaudited)

without limitation, stock options, stock appreciation rights, restricted stock, 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 20, 2017, there were 1,597,458 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 $1.1 million and $0.9 million for the twelve weeks ended June 20, 2017 and June 14, 2016, respectively, and $2.1 million and $1.6 million for the twenty-four weeks ended June 20, 2017 and June 14, 2016, respectively.

Restricted Stock Awards

A summary of outstanding and unvested restricted stock activity as of June 20, 2017 and changes during the period from January 3, 2017 through June 20, 2017 are as follows:

	Shares		Weighted-Average Grant Date Fair Value
Nonvested at January 3, 2017	1,133,822		$	10.40
Granted	72,570		13.59
Vested	(64,330	)	9.63
Forfeited	—		—
Nonvested at June 20, 2017	1,142,062		$	10.64

During the twenty-four weeks ended June 20, 2017, the Company made payments of $0.1 million related to tax withholding obligations for the vesting of restricted stock awards in exchange for 4,686 shares withheld. As of June 20, 2017, there was $8.3 million of unrecognized expense, net of estimated forfeitures, related to restricted stock which is expected to be recognized over a weighted-average remaining period of 2.3 years. The fair value of these awards was determined based on the Company’s stock price on the grant date.

Stock Options

A summary of stock option activity as of June 20, 2017 and changes during the period from January 3, 2017 through June 20, 2017 are as follows:

	Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
					(in years)
Options outstanding at January 3, 2017	334,500		$	9.94	6.1	$	1,464
Granted	5,000		14.55
Exercised	(1,000	)	9.88
Forfeited/Expired	(3,500	)	10.40
Options outstanding at June 20, 2017	335,000		$	10.01	5.7	$	1,252
Options exercisable at June 20, 2017	53,000		$	10.39	5.4	$	177
Options exercisable and expected to vest at June 20, 2017	316,050		$	10.02	5.7	$	1,178

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 3, 2017 and June 20, 2017, respectively.

10

Del Taco Restaurants, Inc.

Notes to Consolidated Financial Statements (continued)

(Unaudited)

As of June 20, 2017, there was $0.7 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 2.5 years.

11. 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. Purchases under the program may be made in open market or privately negotiated transactions. During the twelve weeks ended June 20, 2017, the Company repurchased 400,000 warrants for an average price per warrant of $3.75 for an aggregate cost of approximately $1.5 million, including incremental direct costs to acquire the warrants. During the twenty-four weeks ended June 20, 2017, the Company repurchased (1) 641,165 shares of common stock for an average price per share of $12.48 for an aggregate cost of approximately $8.0 million, including incremental direct costs to acquire the shares, and (2) 400,000 warrants for an average price per warrant of $3.75 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 20, 2017. As of June 20, 2017, there was approximately $25.3 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.

The 400,000 warrants purchased during the twelve and twenty-four weeks ended June 20, 2017 were purchased from PW Acquisitions, LP, a related party, at $3.75 per warrant, representing a 5% discount from the closing price of $3.95 per warrant on the transaction date. Patrick Walsh currently serves on the Company's Board of Directors and is the chief executive officer and managing member of the general partner of PW Acquisitions, LP.

12. Earnings per Share

Basic income per share is calculated by dividing net income attributable to Del Taco’s common shareholders for the period by the weighted average number of common shares outstanding for the period. In computing dilutive income per share, basic income per share is adjusted for the assumed issuance of all applicable potentially dilutive share-based awards, including warrants, restricted stock, common stock options and restricted stock units.

Below are basic and diluted net income per share for the periods indicated (amounts in thousands except share and per share data):

	12 Weeks Ended				24 Weeks Ended
	June 20, 2017		June 14, 2016		June 20, 2017		June 14, 2016
Numerator:
Net income	$	5,330	$	4,864	$	9,568	$	7,925
Denominator:
Weighted-average shares outstanding - basic	38,535,855		38,292,215		38,769,895		38,545,115
Dilutive effect of unvested restricted stock	492,065		150,089		476,284		127,310
Dilutive effect of stock options	23,550		—		23,226		—
Dilutive effect of warrants	757,015		—		825,071		—
Weighted-average shares outstanding - diluted	39,808,485		38,442,304		40,094,476		38,672,425
Net income per share - basic	0.14		$	0.13	0.25		$	0.21
Net income per share - diluted	0.13		$	0.13	0.24		$	0.20
Antidilutive stock options, unvested restricted stock awards and warrants excluded from the computations	36,500		12,720,918		36,500		12,800,021

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Del Taco Restaurants, Inc.

Notes to Consolidated Financial Statements (continued)

(Unaudited)

Antidilutive stock options, unvested restricted stock and warrants were excluded from the computation of diluted net income per share due to the assumed proceeds from the award’s exercise or vesting being greater than the average market price of the common shares.

13. Income Taxes

The effective income tax rates were 38.4% and 40.5% for the twelve weeks ended June 20, 2017 and June 14, 2016, respectively. The provision for income taxes consisted of income tax expense of $3.3 million for both the twelve weeks ended June 20, 2017 and June 14, 2016. The effective income tax rates were 39.1% and 40.8% for the twenty-four weeks ended June 20, 2017 and June 14, 2016, respectively. The provision for income taxes consisted of income tax expense of $6.2 million and $5.5 million for the twenty-four weeks ended June 20, 2017 and June 14, 2016, respectively.

The income tax expense for the twelve weeks ended June 20, 2017 is driven by the estimated effective income tax rate of 38.4% which primarily consists of statutory federal and state tax rates based on apportioned income, partially offset by federal targeted job credits. The income tax expense for the twelve weeks ended June 14, 2016 is driven by the estimated effective income tax rate of 40.5% which primarily consists of statutory federal and state tax rates based on apportioned income, as well as providing for deferred tax liabilities for the excess of the amount for financial reporting over the tax basis of an investment in a domestic subsidiary, partially offset by federal targeted job credits.

The income tax expense for the twenty-four weeks ended June 20, 2017 is driven by the estimated effective income tax rate of 39.1% which primarily consists of statutory federal and state tax rates based on apportioned income, partially offset by federal targeted job credits. The income tax expense for the twenty-four weeks ended June 14, 2016 is driven by the estimated effective income tax rate of 40.8% which primarily consists of statutory federal and state tax rates based on apportioned income, as well as providing for deferred tax liabilities for the excess of the amount for financial reporting over the tax basis of an investment in a domestic subsidiary, partially offset by federal targeted job credits.

Management believe it is more likely than not that all deferred tax assets will be realized and therefore no valuation allowance as of June 20, 2017 and January 3, 2017 is required.

14. Commitments and Contingencies

The primary claims in the Company’s business are workers’ compensation and general liabilities. These insurance programs are self-insured or high deductible programs with excess coverage that management believes is sufficient to adequately protect the Company. In the opinion of management, adequate provision has been made for all incurred claims up to the self-insured or high deductible limits, including provision for estimated claims incurred but not reported. Because of the uncertainty of the ultimate resolution of outstanding claims, as well as the uncertainty regarding claims incurred but not reported, it is possible that management’s provision for these losses could change materially. However, no estimate can currently be made of the range of additional losses.

Purchasing Commitments

The Company enters into various purchase obligations in the ordinary course of business, generally of short term nature. Those that are binding primarily relate to commitments for food purchases and supplies, amounts owed under contractor and subcontractor agreements, orders submitted for equipment for restaurants under construction, information technology service agreements and marketing initiatives, some of which are related to both company-operated and franchise-operated locations. The Company also has a long-term beverage supply agreement with a major beverage vendor whereby marketing rebates are provided to the Company and its franchisees based upon the volumes of purchases for system-wide restaurants which vary according to demand for beverage syrup. This contract has terms extending into 2021. The Company’s future estimated cash payments under existing contractual purchase obligations for goods and services as of June 20, 2017, are approximately $67.9 million. The Company has excluded agreements that are cancelable without penalty.

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Del Taco Restaurants, Inc.

Notes to Consolidated Financial Statements (continued)

(Unaudited)

Litigation

In July 2013, a former Del Taco employee filed a purported class action complaint alleging that Del Taco has failed to pay overtime wages and has not appropriately provided meal breaks to its California general managers. On June 23, 2017, the Court filed a tentative ruling granting Del Taco’s motion to decertify the sole remaining class. Legal proceedings are inherently unpredictable, and the Company is not able to predict the ultimate outcome or cost of the unresolved matter. However, based on management’s current understanding of the relevant facts and circumstances, the Company does not believe that these proceedings give rise to a probable or estimable loss and should not have a material adverse effect on the Company’s financial position, operations or cash flows. Therefore, Del Taco has not recorded any amount for the claim as of June 20, 2017.

In March 2014, a former Del Taco employee filed a purported class action complaint alleging that Del Taco has not appropriately provided meal breaks and failed to pay wages to its California hourly employees. Discovery is in process and Del Taco intends to assert all of its defenses to this threatened class action and the individual claims. Del Taco has several defenses to the action that it believes should prevent the certification of the class, as well as the potential assessment of any damages on a class basis. Legal proceedings are inherently unpredictable, and the Company is not able to predict the ultimate outcome or cost of the unresolved matter. However, based on management’s current understanding of the relevant facts and circumstances, the Company does not believe that these proceedings give rise to a probable or estimable loss and should not have a material adverse effect on the Company’s financial position, operations or cash flows. Therefore, Del Taco has not recorded any amount for the claim as of June 20, 2017.

The Company and its subsidiaries are parties to other legal proceedings incidental to their businesses, including claims alleging the Company’s restaurants do not comply with the Americans with Disabilities Act of 1990. In the opinion of management, based upon information currently available, the ultimate liability with respect to those other actions will not have a material effect on the operating results, cash flows or the financial position of the Company. However, due to the risks and uncertainties inherent in legal proceedings and litigation, actual results could differ from expectations.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Company's audited consolidated financial statements for the fiscal year ended January 3, 2017, and related notes thereto, along with the related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 13, 2017.

In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks and uncertainties such as the number of restaurants we intend to open, possible stock and warrant repurchases and estimates of our effective tax rates. We use words such as “estimates,” “projected,” “expects,” “anticipates,” “forecasts,” “plans,” “intends,” “believes,” “seeks,” “may,” “will,” “should,” “future,” “propose,” “preliminary,” “guidance” and variations of these words or similar expressions (or the negative versions of such words or expressions) to identify forward-looking statements.  These statements are based on assumptions and information available to us as of the date any such statements are made and are subject to risks and uncertainties.  These risks and uncertainties include, without limitation, consumer demand, our inability to successfully open company-operated or franchise-operated restaurants or establish new markets, competition in our markets, our inability to grow and manage growth profitably, adverse changes in food and supply costs, our inability to access additional capital, changes in applicable laws or regulations, food safety and foodborne illness concerns, our inability to manage existing and to obtain additional franchisees, our inability to attract and retain qualified personnel, our inability to profitably expand into new markets, and the possibility that we may be adversely affected by other economic, business, and/or competitive factors.  Our actual results may differ materially from those anticipated in these forward-looking statements due to these risks and uncertainties, as well as others, including, without limitation, those discussed in Item 1A. Risk Factors in our Annual Report on Form 10-K for our fiscal year ended January 3, 2017. We assume no obligation to update these forward-looking statements.

Fiscal Year

We operate on a 52- or 53-week fiscal year ending on the Tuesday closest to December 31 for financial reporting purposes. Fiscal year 2016 is the 53-week period ended January 3, 2017 (Fiscal 2016). Fiscal year 2017 will be a 52-week period ended January 2, 2018 (Fiscal 2017).

Overview

We are a nationwide operator and franchisor of restaurants featuring fresh and fast cuisine, including both Mexican inspired and American classic dishes. As of June 20, 2017, we have 555 Del Taco restaurants, a majority of these in the Pacific Southwest. In each of our restaurants, our food is made to order in working kitchens. We serve our customers fresh and high-quality food typical of fast casual restaurants but with the speed, convenience and value associated with traditional quick service restaurants (“QSRs”). With attributes of both a fast casual restaurant and a QSR — a combination we call QSR+ — we occupy a place in the restaurant market distinct from our competitors. With a menu designed to appeal to a wide variety of budgets and tastes and recently updated interior and exterior designs across most of our entire system, we believe that we are poised for growth, operating within the fastest growing segment of the restaurant industry, the limited service restaurant (“LSR”) segment. With an average system check of $7.13 during Fiscal 2016, we offer a compelling value proposition relative to both QSR and fast casual peers.

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Highlights and Trends

Second Quarter 2017 Highlights

Our second quarter 2017 results and highlights include the following:

• Total revenues increased 8.6% for the twelve weeks ended June 20, 2017 to $108.6 million compared to $100.0 million for the twelve weeks ended June 14, 2016 primarily due to growth in company-operated and franchise-operated same store sales and additional restaurants open during 2017 compared to 2016. Total revenues increased 8.4% for the twenty-four weeks ended June 20, 2017 to $213.9 million compared to $197.4 million for the twenty-four weeks ended June 14, 2016 primarily due to growth in company-operated and franchise-operated same store sales and additional restaurants open during 2017 compared to 2016.

• During the twelve weeks ended June 20, 2017, we opened a total of three new company-operated and franchise-operated restaurants. During the twenty-four weeks ended June 20, 2017, we opened a total of six new company-operated and franchise-operated restaurants. During the twelve weeks ended June 14, 2016, we opened a total of one new company-operated restaurant. During the twenty-four weeks ended June 14, 2016, we opened a total of three new company-operated and franchise-operated restaurants.

Same Store Sales

Same store sales growth reflects the change in year-over-year sales for the same store base. We include a restaurant in the same store base in the accounting period following its 18th full month of operations and exclude restaurant closures. The following table shows the same store sales growth for the twelve and twenty-four weeks ended June 20, 2017 and June 14, 2016:

	12 Weeks Ended				24 Weeks Ended
	June 20, 2017		June 14, 2016		June 20, 2017		June 14, 2016
Company-operated same store sales	6.9	%	3.1	%	5.4	%	3.0	%
Franchise-operated restaurants same store sales	7.5	%	3.6	%	6.0	%	3.7	%
System-wide same store sales	7.1	%	3.3	%	5.7	%	3.3	%

The increase in company-operated same store sales in the twelve weeks ended June 20, 2017 was driven by an increase in average check size of 5.4% and an increase in traffic of 1.5% compared to the twelve weeks ended June 14, 2016. The increase in company-operated same store sales in the twelve weeks ended June 14, 2016 was driven by an increase in average check size of 4.9%, partially offset by a decrease in traffic of 1.8% compared to the twelve weeks ended June 16, 2015.

The increase in company-operated same store sales in the twenty-four weeks ended June 20, 2017 was driven by an increase in average check size of 4.5% and an increase in traffic of 0.9% compared to the twenty-four weeks ended June 14, 2016. The increase in company-operated same store sales in the twenty-four weeks ended June 14, 2016 was driven by an increase in average check size of 5.2%, partially offset by a decrease in traffic of 2.2% compared to the twenty-four weeks ended June 16, 2015.

Restaurant Development

Del Taco restaurant counts at the end of the twelve and twenty-four weeks ended June 20, 2017 and June 14, 2016, are as follows:

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	12 Weeks Ended				24 Weeks Ended
	June 20, 2017		June 14, 2016		June 20, 2017		June 14, 2016
Company-operated restaurant activity:
Beginning of period	305		297		310		297
Openings	1		1		1		2
Closures	(2	)	—		(2	)	(1	)
Sold to franchisees	—		—		(5	)	—
Restaurants at end of period	304		298		304		298
Franchise-operated restaurant activity:
Beginning of period	249		246		241		247
Openings	2		—		5		1
Closures	—		(1	)	—		(3	)
Purchased from Company	—		—		5		—
Restaurants at end of period	251		245		251		245
Total restaurant activity:
Beginning of period	554		543		551		544
Openings	3		1		6		3
Closures	(2	)	(1	)	(2	)	(4	)
Restaurants at end of period	555		543		555		543

Since 2012, we have focused on repositioning our brand, increasing brand awareness, re-imaging our restaurants, strengthening operational capabilities and refinancing indebtedness to build a foundation for future organic and new unit growth. New restaurant development is expected to contribute to our growth strategy. We plan to open an estimated 23 to 26 system-wide restaurants in Fiscal 2017. From time to time, we and our franchisees may close restaurants.

Key Performance Indicators

In assessing the performance of our business, management utilizes a variety of financial and performance measures.

These key measures include company restaurant sales, same store sales, company-operated average unit volumes, restaurant contribution and restaurant contribution margin, number of new restaurant openings, EBITDA and Adjusted EBITDA.

Company Restaurant Sales

Company restaurant sales consists of sales of food and beverages in company-operated restaurants net of promotional allowances, employee meals and other discounts. Company restaurant sales in any period is directly influenced by the number of operating weeks in such period, the number of open restaurants, same store sales and per restaurant sales.

Seasonal factors and the timing of holidays cause revenue to fluctuate from quarter to quarter. Revenue per restaurant is typically lower in the first quarter due to reduced January traffic. As a result of seasonality, quarterly and annual results of operations and key performance indicators such as company restaurant sales and same store sales may fluctuate.

Same Store Sales Growth

We regularly monitor company, franchise and total system same store sales. Same store sales growth reflects the change in year-over-year sales for the comparable company, franchise and total system restaurant base. We include a restaurant in the same store base in the accounting period following its 18th full month of operations and exclude restaurant closures. As of June 20, 2017 and June 14, 2016, there were 293 and 287 restaurants, respectively, in the comparable company-operated restaurant base. As of June 20, 2017 and June 14, 2016, there were 240 and 238 restaurants, respectively, in the comparable franchise-operated restaurant base. This measure highlights the performance of existing restaurants as the impact of new restaurant openings is excluded. Same store sales growth can be generated by an increase in the number of transactions and/or by increases in the average check resulting from a shift in menu mix and/or higher prices resulting from new products, promotions or price increases.

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Company-Operated Average Unit Volumes

We measure company-operated average unit volumes (AUVs) on both a weekly and an annual basis. Weekly AUVs are calculated by dividing the sales from comparable company-operated restaurants over a seven day period from Wednesday to Tuesday by the number of comparable restaurants. Annual AUVs are calculated by dividing sales for the trailing 52-week period for all company-operated restaurants that are in the comparable base by the total number of restaurants in the comparable base for such period. This measurement allows management to assess changes in consumer traffic and spending patterns at our company-operated restaurants and the overall performance of the restaurant base.

Restaurant Contribution and Restaurant Contribution Margin

Restaurant contribution and restaurant contribution margin are neither required by, nor presented in accordance with U.S. GAAP. Restaurant contribution is defined as company restaurant sales less restaurant operating expenses, which are food and paper costs, labor and related expenses and occupancy and other operating expenses. Restaurant contribution margin is defined as restaurant contribution as a percentage of company restaurant sales. Restaurant contribution and restaurant contribution margin are supplemental measures of operating performance of restaurants and the calculations thereof may not be comparable to those reported by other companies. Restaurant contribution and restaurant contribution margin have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of results as reported under U.S. GAAP. Management believes that restaurant contribution and restaurant contribution margin are important tools for investors because they are widely-used metrics within the restaurant industry to evaluate restaurant-level productivity, efficiency and performance. Management uses restaurant contribution and restaurant contribution margin as key performance indicators to evaluate the profitability of incremental sales at Del Taco restaurants, to evaluate restaurant performance across periods and to evaluate restaurant financial performance compared with competitors. See the heading entitled "Management's Use of Non-GAAP Financial Measures" for the reconciliation of restaurant contribution to company restaurant sales.

Number of New Restaurant Openings

The number of restaurant openings reflects the number of new restaurants opened by us and our franchisees during a particular reporting period. Before a new restaurant opens, we and our franchisees incur pre-opening costs, as described below. Some new restaurants open with an initial start-up period of higher than normal sales volumes, which subsequently decrease to stabilized levels. Typically new restaurants experience normal inefficiencies in the form of higher food and paper, labor and other direct operating expenses and, as a result, restaurant contribution margins are generally lower during the start-up period of operation. Typically, the average start-up period after which new company restaurant sales and restaurant operating expenses normalize is approximately 26 to 52 weeks. In new markets, the length of time before average company restaurant sales and restaurant operating expenses for new restaurants stabilize is less predictable and can be longer as a result of limited knowledge of these markets and consumers’ limited awareness of our brand. When we enter new markets, we may be exposed to start-up times that are longer and restaurant contribution margins that are lower than typical historical experience, and these new restaurants may not be profitable and their sales performance may not follow historical patterns.

EBITDA and Adjusted EBITDA

EBITDA represents net income (loss) before interest expense, provision for income taxes, depreciation and amortization. Adjusted EBITDA represents net income (loss) before interest expense, provision for income taxes, depreciation, amortization and items that we do not consider representative of ongoing operating performance, as identified in the reconciliation table under the heading entitled "Management's Use of Non-GAAP Financial Measures."

EBITDA and Adjusted EBITDA as presented in this quarterly report are supplemental measures of performance that are neither required by, nor presented in accordance with U.S. GAAP. EBITDA and Adjusted EBITDA are not measurements of financial performance under U.S. GAAP and should not be considered as alternatives to net income (loss), income from operations or any other performance measures derived in accordance with U.S. GAAP or as alternatives to cash flow from operating activities as a measure of liquidity. In addition, in evaluating EBITDA and Adjusted EBITDA, you should be aware that in the future we may incur expenses or charges such as those added back to calculate EBITDA and Adjusted EBITDA. Our presentation of EBITDA and Adjusted EBITDA should not be construed as an inference that future results will be unaffected by unusual or nonrecurring items.

EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation, or as substitutes for analysis of results as reported under U.S. GAAP. Some of these limitations include but are not limited to:

(i) they do not reflect cash expenditures, or future requirements for capital expenditures or contractual commitments;

17

(ii) they do not reflect changes in, or cash requirements for, working capital needs;

(iii) they do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on debt;

(iv) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements;

(v) they do not adjust for all non-cash income or expense items that are reflected in the statements of cash flows;

(vi) they do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of ongoing operations; and

(vii) other companies in the industry may calculate these measures differently than we do, limiting their usefulness as comparative measures.

We compensate for these limitations by providing specific information regarding the U.S. GAAP amounts excluded from such non-GAAP financial measures. We further compensate for the limitations in the use of non-GAAP financial measures by presenting comparable U.S. GAAP measures more prominently.

We believe EBITDA and Adjusted EBITDA facilitate operating performance comparisons from period to period by isolating the effects of some items that vary from period to period without any correlation to core operating performance or that vary widely among similar companies. These potential differences may be caused by variations in capital structures (affecting interest expense), tax positions (such as the impact on periods or changes in effective tax rates or net operating losses) and the age and book depreciation of facilities and equipment (affecting relative depreciation expense). We also present EBITDA and Adjusted EBITDA because (i) we believe these measures are frequently used by securities analysts, investors and other interested parties to evaluate companies in their industry, (ii) we believe investors will find these measures useful in assessing our ability to service or incur indebtedness, and (iii) we use EBITDA and Adjusted EBITDA internally as benchmarks to compare performance to that of competitors. See the heading entitled "Management's Use of Non-GAAP Financial Measures" for the reconciliation of EBITDA and Adjusted EBITDA to net income (loss).

Key Financial Definitions

Company Restaurant Sales

Company restaurant sales represents sale of food and beverages in company-operated restaurants, net of promotional allowances, employee meals and other discounts. Company restaurant sales in any period is directly influenced by the number of operating weeks in such period, the number of open restaurants, same store sales performance and per restaurant sales.

Franchise Revenue

Franchise revenue consists of franchise royalty income from the franchisee and, to a lesser extent, renewal fees and franchise fees from franchise owners for new franchise restaurant openings. Franchise fees are recognized when all material obligations have been performed and conditions have been satisfied, typically when operations of a new franchise restaurant have commenced. The fees we collect upon signing a franchise agreement are deferred until operations have commenced.

Franchise Sublease Income

Franchise sublease 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.

Food and Paper Costs

Food and paper costs include the direct costs associated with food, beverage and packaging of menu items. The components of food and paper costs are variable in nature, change with sales volume and are impacted by menu mix and are subject to increases or decreases based on fluctuations in commodity costs. Other important factors causing fluctuations in food and paper costs include seasonality, promotional activity and restaurant level management of food and paper waste. Food and paper are a significant expense and can be expected to grow proportionally as company restaurant sales grows.

Labor and Related Expenses

Labor and related expenses include all restaurant-level management and hourly labor costs, including wages, benefits, bonuses, workers’ compensation expense, group health insurance, paid leave and payroll taxes. Like other expense items, we expect

18

labor and related expenses to grow proportionately as company restaurant sales grows. Factors that influence fluctuations in labor and related expenses include minimum wage, paid sick leave and payroll tax legislation, health care and workers compensation costs and the performance of Del Taco restaurants.

Occupancy and Other Operating Expenses

Occupancy and other operating expenses include all other restaurant-level operating expenses, such as rent, utilities, restaurant supplies, repairs and maintenance, credit and debit card processing fees, advertising, insurance, common area maintenance, real estate taxes and other restaurant operating costs.

General and Administrative Expenses

General and administrative expenses are comprised of expenses associated with corporate and regional supervision functions that support the operations of existing restaurants and development of new restaurants, including compensation and benefits, travel expenses, stock-based compensation expenses, legal and professional fees, information systems, corporate office occupancy costs and other related corporate costs. Also included are expenses above the restaurant level, including salaries for field management, such as area and regional managers, and franchise operational support. General and administrative expenses are expected to grow as we grow, including incremental legal, accounting, insurance, investor relations and other expenses that will be incurred as a public company.

Depreciation and Amortization

Depreciation and amortization expenses are periodic non-cash charges that consist of depreciation of fixed assets, including leasehold improvements and equipment, and amortization of various intangible assets primarily including franchise rights.

Occupancy and Other – Franchise Subleases

Occupancy and other – franchise subleases includes rent, property taxes and common area maintenance paid on properties subleased to franchisees where we remain primarily liable to the landlord.

Pre-opening Costs

Pre-opening costs are incurred in connection with opening of new restaurants and incurred prior to opening, including restaurant labor related to the hiring and training of restaurant employees, as well as supplies, occupancy and other operating expenses associated with the opening of new restaurants. Pre-opening costs are expensed as incurred.

Restaurant Closure Charges, Net

Restaurant closure charges, net, consists primarily of the future obligations associated with the closure or net sublease shortfall of a restaurant, including the present value of future lease obligations net of estimated sublease income, if any, accretion of the liability during the reporting period, any positive or negative adjustments to the liability as more information becomes available, sublease income from leases which are treated as deemed landlord financing as well as direct costs related to the restaurant closure.

Loss on Disposal of Assets, Net

Loss on disposal of assets, net includes the loss on disposal of assets related to sales, retirements and replacement or write-off of leasehold improvements, furniture, fixtures or equipment in the ordinary course of business, net of amortization of deferred gains on asset sales associated with sale-leaseback transactions and gains or losses recorded associated with the sale of company-operated stores to franchisees.

Interest Expense

Interest expense consists primarily of interest expense on outstanding debt including capital lease obligations and deemed landlord financing liabilities. Deferred financing costs and debt discount are amortized at cost over the life of the related debt.

Transaction-Related Costs

Transaction-related costs consists of direct costs incurred in connection with the strategic sale process which commenced during 2014 and resulted in a March 2015 stock purchase agreement and the Business Combination (defined in Note 1 to the

19

consolidated financial statements included in this quarterly report on Form 10-Q) consummated pursuant to the Merger Agreement (also defined in Note 1) on June 30, 2015.

Provision for Income Taxes

Provision for income taxes consists of federal and state current and deferred income tax expense.

20

Results of Operations

Comparison of Results of Operations for the Twelve Weeks Ended June 20, 2017 and Twelve Weeks Ended June 14, 2016

The following table presents operating results for the twelve weeks ended June 20, 2017 and twelve weeks ended June 14, 2016, in absolute terms and expressed as a percentage of total revenue (or company restaurant sales), as compared below:

	12 Weeks Ended
	June 20, 2017					June 14, 2016						Increase / (Decrease)
(Dollar amounts in thousands)	($)		(%)			($)			(%)			($)			(%)
Statement of Operations Data:
Revenue:
Company restaurant sales	$	104,022	95.8	%		$	95,917		95.9	%		$	8,105		8.4	%
Franchise revenue	3,903		3.6			3,576			3.6			327			9.1
Franchise sublease income	656		0.6			533			0.5			123			23.1
Total Revenue	108,581		100.0			100,026			100.0			8,555			8.6
Operating expenses
Restaurant operating expenses:
Food and paper costs	28,770		27.7		(1)	26,358			27.5		(1)	2,412			9.2
Labor and related expenses	33,185		31.9		(1)	30,249			31.5		(1)	2,936			9.7
Occupancy and other operating expenses	20,918		20.1		(1)	19,526			20.4		(1)	1,392			7.1
Total restaurant operating expenses	82,873		79.7		(1)	76,133			79.4		(1)	6,740			8.9
General and administrative	9,055		8.3			8,214			8.2			841			10.2
Depreciation and amortization	5,278		4.9			5,532			5.5			(254		)	(4.6	)
Occupancy and other-franchise subleases	602		0.6			510			0.5			92			18.0
Pre-opening costs	151		0.1			35			*			116			*
Restaurant closure charges, net	6		*			(166		)	(0.2	)		172			*
Loss on disposal of assets, net	340		0.3			62			0.1			278			*
Total operating expenses	98,305		90.5			90,320			90.3			7,985			8.8
Income from operations	10,276		9.5			9,706			9.7			570			5.9
Other expense
Interest expense	1,627		1.5			1,405			1.4			222			15.8
Transaction-related costs	—		—			126			0.1			(126		)	(100.0	)
Total other expense	1,627		1.5			1,531			1.5			96			6.3
Income from operations before provision for income taxes	8,649		8.0			8,175			8.2			474			5.8
Provision for income taxes	3,319		3.1			3,311			3.3			8			0.2
Net income	$	5,330	4.9	%		$	4,864		4.9	%		$	466		9.6	%

(1) As a percentage of company restaurant sales.

* Immaterial/not meaningful

Company Restaurant Sales

Company restaurant sales increased $8.1 million, or 8.4%, for the twelve weeks ended June 20, 2017, primarily due to an increase in company-operated same store sales of 6.9% and an increase from the net impact of restaurant openings, transfers and closures since the beginning of the second quarter of 2016. The growth in company-operated same store sales was primarily the result of an increase in average check size of 5.4%, and an increase in traffic of 1.5% compared to the prior period.

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Franchise Revenue

Franchise revenue increased $0.3 million, or 9.1%, for the twelve weeks ended June 20, 2017, primarily due to an increase in franchise-operated same store sales of 7.5%, an increase from the net impact of restaurant openings, transfers, and closures since the beginning of the second quarter of 2016, as well as an increase in initial fees during the second quarter of 2017.

Franchise Sublease Income

Franchise sublease income increased $0.1 million, or 23.1%, the twelve weeks ended June 20, 2017, primarily due to sublease income related to the sale of company-operated stores to franchisees during the first quarter of 2017 in which we retained the leasehold interest to the real estate (see Note 4 of the notes to consolidated financial statements for further discussion).

Food and Paper Costs

Food and paper costs increased $2.4 million, or 9.2% for the twelve weeks ended June 20, 2017 due to an increase in sales and modest commodity cost inflation. As a percentage of company restaurant sales, food and paper costs increased to 27.7% for the twelve weeks ended June 20, 2017 compared to 27.5% for the twelve weeks ended June 14, 2016. This increase was driven by commodity cost inflation and the impact of unfavorable menu mix, partially offset by modest menu price increases.

Labor and Related Expenses

Labor and related expenses increased $2.9 million, or 9.7% for the twelve weeks ended June 20, 2017, primarily due to increased labor costs resulting from a California minimum wage increase on January 1, 2017, increased paid sick leave expense and an increase in workers compensation expense due to higher payments and reserves related to underlying claims activity. As a percentage of company restaurant sales, labor and related expenses were 31.9% for the twelve weeks ended June 20, 2017 compared to 31.5% for the twelve weeks ended June 14, 2016. This percentage increase resulted primarily from the impact of the increased California minimum wage, increased paid sick leave expense and increased workers compensation expense discussed above, partially offset by the impact of modest menu price increases and the same store sales increase in traffic which helps to leverage the fixed components of labor costs.

Occupancy and Other Operating Expenses

Occupancy and other operating expenses increased $1.4 million, or 7.1% for the twelve weeks ended June 20, 2017, primarily due to increases in repairs, supplies and maintenance expense, rent and property taxes, and credit and debit card processing fees. In addition, advertising expense increased due to an increase in company restaurant sales, but remained consistent as a percentage of company restaurant sales. As a percentage of company restaurant sales, occupancy and other operating expenses were 20.1% for the twelve weeks ended June 20, 2017 compared to 20.4% for the twelve weeks ended June 14, 2016. This overall reduction as a percent of company restaurant sales was primarily due same store sales increases which helped to leverage the fixed components of occupancy and other operating expenses, partially offset by increased repairs, supplies and maintenance expense as a percent of company restaurant sales.

General and Administrative Expenses

General and administrative expenses increased $0.8 million, or 10.2% for the twelve weeks ended June 20, 2017, primarily due to an increase in management incentive compensation based on performance, stock-based compensation and incremental public company costs to support Sarbanes-Oxley Section 404(b) compliance in 2018. As a percentage of total revenue, general and administrative expense was 8.3% for the twelve weeks ended June 20, 2017 compared to 8.2% for the twelve weeks ended June 14, 2016. The increase as a percent of total revenue was due to the above mentioned cost increases partially offset by increased total revenue.

Depreciation and Amortization

Depreciation and amortization expenses decreased $0.3 million, or 4.6% for the twelve weeks ended June 20, 2017, primarily due to assets that became fully depreciated in the prior fiscal year partially offset by the addition of new assets. As a percentage of total revenue, depreciation and amortization expenses was 4.9% for the twelve weeks ended June 20, 2017 compared to 5.5% for the twelve weeks ended June 14, 2016.

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Occupancy and Other – Franchise Sublease

Occupancy and other – franchise sublease was $0.6 million and $0.5 million for the twelve weeks ended June 20, 2017 and June 14, 2016, respectively. The increase of $0.1 million was primarily due to sublease expense related to the sale of company-operated restaurants to franchisees during the first quarter of 2017 (see Note 4 of the notes to consolidated financial statements for further discussion).

Pre-opening Costs

Pre-opening costs were $151,000 for the twelve weeks ended June 20, 2017 compared to $35,000 for the twelve weeks ended June 14, 2016. The increase was due to an increased level of pre-opening activity compared to the prior year.

Restaurant Closure Charges, net

Restaurant closure charges, net, were $6,000 for the twelve weeks ended June 20, 2017 compared to $(166,000) for the twelve weeks ended June 14, 2016. The current quarter activity primarily includes accretion expense, partially offset by sublease income from leases which are treated as deemed landlord financing. The twelve weeks ended June 14, 2016 includes an adjustment to decrease the lease termination liability for one closed restaurant due to a change in estimate, partially offset by an adjustment to increase the lease termination liability for two closed restaurants due to changes in estimates, accretion expense and other incremental charges related to the 12 underperforming restaurants we closed during the fourth fiscal quarter of 2015.

Loss on Disposal of Assets, Net

Loss on disposal of assets, net was $0.3 million and $0.1 million for the twelve weeks ended June 20, 2017 and June 14, 2016, respectively. Current year loss was primarily related to the closure of two company-operated restaurants, a loss on the sale of owned land and building for an existing company-operated restaurant and the replacement of certain leasehold improvements and restaurant equipment. Prior year loss was primarily related to the closure of one company-operated restaurant and replacement of certain restaurant equipment.

Interest Expense

Interest expense was $1.6 million and $1.4 million for the twelve weeks ended June 20, 2017 and June 14, 2016, respectively. The increase is primarily due to a higher level of debt outstanding during the current year quarter compared to the prior year quarter and an increase in interest rates.

Transaction-Related Costs

Transaction-related costs were $0.1 million for the twelve weeks ended June 14, 2016 and primarily consist of direct costs incurred in connection with the Business Combination which closed on June 30, 2015. There were no such transaction-related costs for the twelve weeks ended June 20, 2017.

Provision for Income Taxes

The effective income tax rates were 38.4% for the twelve weeks ended June 20, 2017 compared to 40.5% for the twelve weeks ended June 14, 2016. The provision for income taxes consisted of income tax expense of $3.3 million for both the twelve weeks ended June 20, 2017 and June 14, 2016. The income tax expense related to the twelve weeks ended June 20, 2017 is driven by our estimated annual effective income tax rate which primarily consists of statutory federal and state tax rates based on apportioned income, partially offset by federal targeted job credits. The income tax expense related to the twelve weeks ended June 14, 2016 is driven by our estimated effective income tax rate which primarily consists of statutory federal and state tax rates based on apportioned income, as well as providing for deferred tax liabilities for the excess of the amount for financial reporting over the tax basis of an investment in a domestic subsidiary, partially offset by federal targeted job credits.

23

Comparison of Results of Operations for the Twenty-Four Weeks Ended June 20, 2017 and Twenty-Four Weeks Ended June 14, 2016

The following table presents operating results for the twenty-four weeks ended June 20, 2017 and twenty-four weeks ended June 14, 2016, in absolute terms and expressed as a percentage of total revenue (or company restaurant sales), as compared below:

	24 Weeks Ended
	June 20, 2017					June 14, 2016					Increase / (Decrease)
(Dollar amounts in thousands)	($)		(%)			($)		(%)			($)			(%)
Statement of Operations Data:
Revenue:
Company restaurant sales	$	205,244	95.9	%		$	189,467	96.0	%		$	15,777		8.3	%
Franchise revenue	7,516		3.5			6,905		3.5			611			8.8
Franchise sublease income	1,166		0.5			1,057		0.5			109			10.3
Total Revenue	213,926		100.0			197,429		100.0			16,497			8.4
Operating expenses
Restaurant operating expenses:
Food and paper costs	56,688		27.6		(1)	52,487		27.7		(1)	4,201			8.0
Labor and related expenses	66,406		32.4		(1)	60,033		31.7		(1)	6,373			10.6
Occupancy and other operating expenses	41,636		20.3		(1)	39,649		20.9		(1)	1,987			5.0
Total restaurant operating expenses	164,730		80.3		(1)	152,169		80.3		(1)	12,561			8.3
General and administrative	18,360		8.6			16,506		8.4			1,854			11.2
Depreciation and amortization	10,381		4.9			11,018		5.6			(637		)	(5.8	)
Occupancy and other-franchise subleases	1,083		0.5			1,013		0.5			70			6.9
Pre-opening costs	177		0.1			128		0.1			49			38.3
Restaurant closure charges, net	15		*			12		*			3			25.0
Loss on disposal of assets, net	291		0.1			137		0.1			154			*
Total operating expenses	195,037		91.2			180,983		91.7			14,054			7.8
Income from operations	18,889		8.8			16,446		8.3			2,443			14.9
Other expense
Interest expense	3,170		1.5			2,877		1.5			293			10.2
Transaction-related costs	—		—			191		0.1			(191		)	(100.0	)
Total other expense	3,170		1.5			3,068		1.6			102			3.3
Income from operations before provision for income taxes	15,719		7.3			13,378		6.8			2,341			17.5
Provision for income taxes	6,151		2.9			5,453		2.8			698			12.8
Net income	$	9,568	4.5	%		$	7,925	4.0	%		$	1,643		20.7	%

(1) As a percentage of company restaurant sales.

* Immaterial/not meaningful

Company Restaurant Sales

Company restaurant sales increased $15.8 million, or 8.3%, for the twenty-four weeks ended June 20, 2017, primarily due to an increase in company-operated same store sales of 5.4% and an increase from the net impact of restaurant openings, transfers and closures since the beginning of the first quarter of 2016. The growth in company-operated same store sales was primarily the result of an increase in average check size of 4.5%, and an increase in traffic of 0.9% compared to the prior period.

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Franchise Revenue

Franchise revenue increased $0.6 million, or 8.8%, for the twenty-four weeks ended June 20, 2017, primarily due to an increase in franchise-operated same store sales of 6.0%, an increase from the net impact of restaurant openings, transfers, and closures since the beginning of the first quarter of 2016, as well as an increase in initial fees during the first half of 2017.

Franchise Sublease Income

Franchise sublease income increased $0.1 million, or 10.3%, for twenty-four weeks ended June 20, 2017 primarily due to sublease income related to the sale of company-operated stores to franchisees during the first quarter of 2017 in which we retained the leasehold interest to the real estate (see Note 4 of the notes to consolidated financial statements for further discussion).

Food and Paper Costs

Food and paper costs increased $4.2 million, or 8.0% for the twenty-four weeks ended June 20, 2017 due to an increase in sales and modest commodity cost inflation. As a percentage of company restaurant sales, food and paper costs declined to 27.6% for the twenty-four weeks ended June 20, 2017 compared to 27.7% for the twenty-four weeks ended June 14, 2016. This reduction was driven by modest menu price increases partially offset by the impact of commodity cost inflation and unfavorable menu mix.

Labor and Related Expenses

Labor and related expenses increased $6.4 million, or 10.6% for the twenty-four weeks ended June 20, 2017, primarily due to increased labor costs resulting from a California minimum wage increase on January 1, 2017, an increase in workers compensation expense due to higher payments and reserves related to underlying claims activity and increased paid sick leave expense. As a percentage of company restaurant sales, labor and related expenses were 32.4% for the twenty-four weeks ended June 20, 2017 compared to 31.7% for the twenty-four weeks ended June 14, 2016. This percentage increase resulted primarily from the impact of the increased California minimum wage, increased workers compensation expense and increased paid sick leave expense discussed above, partially offset by the impact of modest menu price increases and the same store sales increase in traffic which helps to leverage the fixed components of labor costs.

Occupancy and Other Operating Expenses

Occupancy and other operating expenses increased $2.0 million, or 5.0% for the twenty-four weeks ended June 20, 2017, primarily due to increases in rent and property taxes, advertising, repairs, supplies and maintenance expense, and credit and debit card processing fees, partially offset by decreases in insurance and utilities. As a percentage of company restaurant sales, occupancy and other operating expenses were 20.3% for the twenty-four weeks ended June 20, 2017 compared to 20.9% for the twenty-four weeks ended June 14, 2016. This overall reduction as a percent of company restaurant sales was primarily due to reduced insurance and utility expenses, as well as same store sales increases which helped to leverage the fixed components of occupancy and other operating expenses, partially offset by increased repairs, supplies and maintenance expense as a percent of company restaurant sales.

General and Administrative Expenses

General and administrative expenses increased $1.9 million, or 11.2% for the twenty-four weeks ended June 20, 2017, primarily due to an increase in management incentive compensation based on performance, stock-based compensation and incremental public company costs to support Sarbanes-Oxley Section 404(b) compliance in 2018. As a percentage of total revenue, general and administrative expense was 8.6% for the twenty-four weeks ended June 20, 2017 compared to 8.4% for the twenty-four weeks ended June 14, 2016. The increase as a percent of total revenue was due to the above mentioned cost increases partially offset by increased total revenue.

Depreciation and Amortization

Depreciation and amortization expenses decreased $0.6 million, or 5.8% for the twenty-four weeks ended June 20, 2017, primarily due to assets that became fully depreciated in the prior fiscal year partially offset by the addition of new assets. As a percentage of total revenue, depreciation and amortization expenses was 4.9% for the twenty-four weeks ended June 20, 2017 compared to 5.6% for the twenty-four weeks ended June 14, 2016.

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Occupancy and Other – Franchise Sublease

Occupancy and other – franchise sublease was $1.1 million and $1.0 million for the twenty-four weeks ended June 20, 2017 and June 14, 2016, respectively. The increase of $0.1 million was primarily due to sublease expense related to the sale of company-operated restaurants to franchisees during the first quarter of 2017 (see Note 4 of the notes to consolidated financial statements for further discussion).

Pre-opening Costs

Pre-opening costs were $0.2 million for the twenty-four weeks ended June 20, 2017 compared to $0.1 million for the twenty-four weeks ended June 14, 2016. The increase was due to an increased level of pre-opening activity compared to the prior year.

Restaurant Closure Charges, net

Restaurant closure charges, net, were $15,000 for the twenty-four weeks ended June 20, 2017 compared to $12,000 for the twenty-four weeks ended June 14, 2016. Current year activity primarily includes accretion expense, partially offset by sublease income from leases which are treated as deemed landlord financing. The twenty-four weeks ended June 14, 2016 includes an adjustment to decrease the lease termination liability for one closed restaurant due to a change in estimate, partially offset by an adjustment to increase the lease termination for two closed restaurants due to changes in estimates, accretion expense and other incremental charges related to the 12 underperforming restaurants we closed during the fourth fiscal quarter of 2015. 

Loss on Disposal of Assets, Net

Loss on disposal of assets, net was $0.3 million and $0.1 million for the twenty-four weeks ended June 20, 2017 and June 14, 2016, respectively. Current year loss was primarily related to the closure of two company-operated restaurants, a loss on the sale of owned land and building for an existing company-operated restaurant and the replacement of certain leasehold improvements and restaurant equipment, partially offset by net gains recorded associated with the sale of company-operated stores to franchisees (see Note 4 of the notes to consolidated financial statements for further discussion). Prior year loss was primarily related to the closure of one company-operated restaurant and replacement of certain restaurant equipment.

Interest Expense

Interest expense was $3.2 million and $2.9 million for the twenty-four weeks ended June 20, 2017 and June 14, 2016, respectively. The increase is primarily due to a higher level of debt outstanding during the current year period compared to the prior year period and an increase in interest rates.

Transaction-Related Costs

Transaction-related costs were $0.2 million for the twenty-four weeks ended June 14, 2016 and primarily consist of direct costs incurred in connection with the Business Combination which closed on June 30, 2015. There were no such transaction-related costs for the twenty-four weeks ended June 20, 2017.

Provision for Income Taxes

The effective income tax rates were 39.1% for the twenty-four weeks ended June 20, 2017 compared to 40.8% for the twenty-four weeks ended June 14, 2016. The provision for income taxes consisted of income tax expense of $6.2 million for the twenty-four weeks ended June 20, 2017 and $5.5 million for the twenty-four weeks ended June 14, 2016. The income tax expense related to the twenty-four weeks ended June 20, 2017 is driven by our estimated annual effective income tax rate which primarily consists of statutory federal and state tax rates based on apportioned income, partially offset by federal targeted job credits. The income tax expense related to the twenty-four weeks ended June 14, 2016 is driven by our estimated effective income tax rate which primarily consists of statutory federal and state tax rates based on apportioned income, as well as providing for deferred tax liabilities for the excess of the amount for financial reporting over the tax basis of an investment in a domestic subsidiary, partially offset by federal targeted job credits.

Liquidity and Capital Resources

Potential Impacts of Market Conditions on Capital Resources

In recent years, we have experienced increases in same store sales and restaurant contribution. However, the restaurant industry is highly competitive and uncertainty exists as to the sustainability of these favorable trends.

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We believe that expected cash flow from operations, available cash of $4.9 million at June 20, 2017 and available borrowing capacity of $85.7 million at June 20, 2017 will be adequate to fund debt service requirements, operating lease obligations, capital expenditures and working capital obligations for at least the next 12 months. However, the ability to continue to meet these requirements and obligations will depend on, among other things, the ability to achieve anticipated levels of revenue and cash flow and the ability to manage costs and working capital successfully.

Summary of Cash Flows

Our primary sources of liquidity and capital resources have been cash provided from operations, cash and cash equivalents, and our senior secured credit facilities. Our primary requirements for liquidity and capital are new restaurants, existing restaurant capital investments (primarily maintenance and roll-out of equipment related to our strategy to emphasize freshness and speed), investments in infrastructure and information technology, interest payments on debt, lease obligations, income tax payments, purchases under our share and warrant repurchase program and working capital and general corporate needs. The working capital requirements are not significant since customers pay for their purchases in cash or by payment card (credit or debit) at the time of sale. Thus, we are able to sell many inventory items before we have to pay suppliers for such items since we typically have payment terms for our food and paper suppliers. Our company-operated restaurants do not require significant inventories.

The following table presents summary cash flow information for the periods indicated (in thousands).

	24 Weeks Ended
	June 20, 2017			June 14, 2016
Net cash provided by (used in)
Operating activities	$	24,814		$	21,053
Investing activities	(5,359		)	(16,189		)
Financing activities	(23,325		)	(7,760		)
Net decrease in cash	$	(3,870	)	$	(2,896	)

Cash Flows Provided by Operating Activities

In the twenty-four weeks ended June 20, 2017, cash flows provided by operating activities were $24.8 million. The cash flows provided by operating activities resulted from net income of $9.6 million, non-cash adjustments for asset depreciation and amortization of $10.3 million, stock-based compensation of $2.1 million, deferred income taxes of $0.8 million, loss on disposal of assets of $0.3 million and net working capital requirements of $1.7 million.

In the twenty-four weeks ended June 14, 2016, cash flows provided by operating activities were $21.1 million. The cash flows provided by operating activities resulted from net income of $7.9 million, non-cash adjustment for asset depreciation and amortization of $10.9 million, deferred income taxes of $3.1 million, stock-based compensation of $1.6 million, loss on disposal of assets of $0.1 million, partially offset by net working capital requirements of $2.4 million and restaurant closures charges of $0.1 million.

Cash Flows Used in Investing Activities

In the twenty-four weeks ended June 20, 2017, cash flows used in investing activities were $5.4 million, which were primarily the result of purchase of property and equipment and other assets of $15.3 million, partially offset by proceeds from the disposal of property and equipment of $7.7 million and proceeds from the sale of five company-operated restaurants for $2.2 million. See Note 4 of the notes to consolidated financial statements included elsewhere in this quarterly report on Form 10-Q for more information.

In the twenty-four weeks ended June 14, 2016, cash flows used in investing activities were $16.2 million, which were primarily the result of the purchase of property and equipment and other assets.

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Cash Flows Used in Financing Activities

In the twenty-four weeks ended June 20, 2017, cash flows used in financing activities were $23.3 million. The cash flows used in financing activities were primarily the result of the repurchase of 641,165 shares of our common stock and 400,000 warrants for an aggregate purchase price of $9.5 million, including incremental direct costs to acquire the shares and warrants, payments on capital lease and deemed landlord financing totaling $0.7 million and payments of tax withholding of $0.1 million related to restricted stock vesting. During the twenty-four weeks ended June 20, 2017, we borrowed $6.0 million on the revolving credit facility and made payments of $19.0 million on the revolving credit facility.

In the twenty-four weeks ended June 14, 2016, cash flows used in financing activities were $7.7 million. The cash flows used in financing activities were primarily the result of the repurchase of approximately 628,982 shares of our common stock and 241,806 warrants for an aggregate purchase price of $6.9 million, including incremental direct costs to acquire the shares, and payments on capital lease and deemed landlord financing totaling $0.8 million. During the twenty-four weeks ended June 14, 2016, we borrowed $4.0 million on the revolving credit facility and made payments of $4.0 million on the revolving credit facility.

Debt and Other Obligations

Senior Credit Facility

On August 4, 2015, we refinanced our existing senior credit facility and entered into the 2015 Senior Credit Facility which matures on August 4, 2020, and provides for a $250 million revolving credit facility. The 2015 Senior Credit Facility contains certain financial covenants, including the maintenance of a consolidated total lease adjusted leverage ratio and a consolidated fixed charge coverage ratio. We were in compliance with the financial covenants as of June 20, 2017.

The 2015 Senior Credit Facility does not have scheduled principal payments until its maturity on August 4, 2020.

At June 20, 2017, the weighted-average interest rate on the outstanding balance of the 2015 Senior Credit Facility was 2.8%. As of June 20, 2017 there were $146.0 million of borrowings under the 2015 Senior Credit Facility and letters of credit outstanding of $18.3 million. Unused borrowing capacity at June 20, 2017 was $85.7 million.

Hedging Arrangements

In June 2016, we 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 percentage (as provided by the 2015 Senior Credit Facility) to a capped interest rate of 2.00% plus the applicable percentage.

Stock Repurchase Program

In February 2016, the Board of Directors authorized a share repurchase program under which we may purchase up to $25.0 million in the aggregate of our common stock and warrants, which expires upon completion of the repurchase program, unless terminated earlier by the Board of Directors. On August 23, 2016, we announced that the Board of Directors increased the repurchase program by $25.0 million, to $50.0 million. Purchases under the program may be made in open market or privately negotiated transactions. During the twelve weeks ended June 20, 2017, we repurchased 400,000 warrants for an average price per warrant of $3.75 for an aggregate cost of approximately $1.5 million, including incremental direct costs to acquire the warrants. During the twenty-four weeks ended June 20, 2017, we repurchased (1) 641,165 shares of common stock for an average price per share of $12.48 for an aggregate cost of approximately $8.0 million, including incremental direct costs to acquire the shares, and (2) 400,000 warrants for an average price per warrant of $3.75 for an aggregate cost of approximately $1.5 million, including incremental direct costs to acquire the warrants. As of June 20, 2017, there was approximately $25.3 million remaining under the share repurchase program. We have no obligations to repurchase shares or warrants under this authorization, and the timing and value of shares and warrants purchased will depend on our stock price, warrant price, market conditions and other factors.

The 400,000 warrants purchased during the twelve and twenty-four weeks ended June 20, 2017 were purchased from PW Acquisitions, LP, a related party, at $3.75 per warrant, representing a 5% discount from the closing price of $3.95 per warrant

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on the transaction date. Patrick Walsh currently serves on our Board of Directors and is the chief executive officer and managing member of the general partner of PW Acquisitions, LP.

Management's Use of Non-GAAP Financial Measures

A reconciliation of company restaurant sales to restaurant contribution is provided below (in thousands):

	12 Weeks Ended						24 Weeks Ended
	June 20, 2017			June 14, 2016			June 20, 2017			June 14, 2016
Company restaurant sales	$	104,022		$	95,917		$	205,244		$	189,467
Restaurant operating expenses	82,873			76,133			164,730			152,169
Restaurant contribution	$	21,149		$	19,784		$	40,514		$	37,298
Restaurant contribution margin	20.3		%	20.6		%	19.7		%	19.7		%

The following table sets forth reconciliations of net income to EBITDA and Adjusted EBITDA (in thousands):

	12 Weeks Ended						24 Weeks Ended
	June 20, 2017			June 14, 2016			June 20, 2017			June 14, 2016
Net income	$	5,330		$	4,864		9,568			7,925
Non-GAAP adjustments:
Provision for income taxes	3,319			3,311			6,151			5,453
Interest expense	1,627			1,405			3,170			2,877
Depreciation and amortization	5,278			5,532			10,381			11,018
EBITDA	15,554			15,112			29,270			27,273
Stock-based compensation expense (a)	1,080			930			2,149			1,629
Loss on disposal of assets, net (b)	340			62			291			137
Restaurant closure charges, net (c)	6			(166		)	15			12
Amortization of favorable and unfavorable lease assets and liabilities, net (d)	(145		)	(140		)	(292		)	(280		)
Transaction-related costs (e)	—			126			—			191
Pre-opening costs (f)	151			35			177			128
Adjusted EBITDA	$	16,986		$	15,959		$	31,610		$	29,090

(a) Includes non-cash, stock-based compensation.

(b) Loss on disposal of assets, net includes the loss or gain on disposal of assets related to sales, retirements and replacement or write-off of leasehold improvements or equipment in the ordinary course of business, net of amortization of deferred gains on asset sales associated with sale-leaseback transactions and gains or losses recorded associated with the sale of company-operated stores to franchisees.

(c) Includes costs related to future obligations associated with the closure or net sublease shortfall of a restaurant.

(d) Includes amortization of favorable lease assets and unfavorable lease liabilities.

(e) Includes costs related to the strategic sale process which commenced during 2014 and resulted in the March 2015 stock purchase agreement and the June 2015 Business Combination consummated pursuant to the Merger Agreement.

(f) Pre-opening costs consist of costs directly associated with the opening of new restaurants and incurred prior to opening, including restaurant labor, supplies, cash and non-cash rent expense and other related pre-opening costs. These are generally incurred over the three to five months prior to opening.

29

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

We are exposed to market risk from changes in interest rates on our senior credit facility, which currently bears interest at variable rates. However, we seek to mitigate our variable interest rate risk on our senior credit facility by entering into an interest rate derivative on a portion of the senior credit facility, as discussed above under “—Liquidity and Capital Resources—Debt and Other Obligations—Hedging Arrangements” As of June 20, 2017, we had outstanding variable rate borrowings of $146.0 million. A 100 basis point increase in the effective interest rate applied to this borrowing would result in a pre-tax interest expense increase of approximately $1.5 million on an annualized basis.

Commodity Price Risk

We purchase certain products that are affected by commodity prices and are, therefore, subject to price volatility caused by weather, market conditions, potential cross-border taxes and tariffs and other factors which are not considered predictable or within our control. Although these products are subject to changes in commodity prices, certain purchasing contracts or pricing arrangements used contain risk management techniques designed to minimize price volatility. In many cases, we believe we will be able to address material commodity cost increases by adjusting menu pricing or making other operational adjustments that increase productivity. However, increases in commodity prices, without adjustments to menu prices, could increase restaurant operating costs as a percentage of restaurant sales.

Inflation

Inflation has an impact on food, paper, construction, utility, labor and benefits, rent, general and administrative and other costs, all of which can materially impact operations. We have a substantial number of hourly employees who are paid wage rates at or based on the applicable federal, state or local minimum wage and increases in the minimum wage will increase labor costs.

On July 1, 2014, the State of California (where most of our restaurants are located) increased its minimum wage to $9.00 per hour (from $8.00 per hour), and it increased to $10.00 per hour on January 1, 2016 and $10.50 per hour on January 1, 2017. On March 31, 2016, the California Legislature passed legislation which was designed to raise the statewide minimum wage gradually until it reaches $15.00 per hour in 2022 and it was signed into law on April 4, 2016. Under the new California law, minimum wage increased to $10.50 per hour in 2017, will increase to $11.00 in 2018 and then increase by an additional dollar each calendar year through 2022 when it reaches $15.00 per hour. Based on our current number of restaurants in California, this is expected to impact 368 restaurants in California of which 249 are company-operated and 119 are franchise-operated.

In addition, in September 2015, the Los Angeles County Board of Supervisors approved increases to the minimum wage to $15.00 per hour by 2020 with the first phase of the wage increase to $10.50 effective on July 1, 2016, followed by an increase to $12.00 per hour on July 1, 2017, $13.25 on July 1, 2018, and $14.25 on July 1, 2019 until it reaches $15.00 per hour on July 1, 2020. Also, in June 2016, the Los Angeles City Council approved a sick paid leave ordinance to provide six days of paid sick leave per year, with carry-over of 72 hours, effective July 1, 2016. These local ordinances impacted 25 company-owned restaurants and eight franchise-owned restaurants in the City of Los Angeles and in the unincorporated areas of the County of Los Angeles.

On March 14, 2016, the Pasadena City Council adopted an ordinance to increase Pasadena’s minimum wage. Beginning on July 1, 2016, employers with 26 or more employees must pay a minimum wage of $10.50 per hour to all employees who work at least 2 hours per week within Pasadena’s geographic bounds. The minimum wage will increase to $12.00 per hour on July 1, 2017, and $13.25 per hour on July 1, 2018. This impacted two company-operated restaurants.

On June 7, 2016, San Diego voters voted in favor of an ordinance to increase San Diego's minimum wage rate and allow employees working within the San Diego city limits to earn one hour of paid sick leave for every 30 hours worked. The San Diego City Council certified this minimum wage increase on July 11, 2016 with the increase taking effect on July 11, 2016. Under this ordinance, for any employee who works at least two hours within San Diego city limits, minimum wage would increase to $10.50 per hour on July 11, 2016, $11.50 per hour in 2017 and beginning 2019, the minimum wage rate will increase annually to an amount that corresponds to the prior year's increase, if any, in the cost of living. In addition, the ordinance provides up to five days of paid sick leave and allows unused sick leave to be carried over to the following year. This ordinance impacted three company-operated restaurants and two franchise-operated restaurants.

On November 8, 2016, Arizona voters voted in favor to increase the state minimum wage to $10.00 per hour effective January 1, 2017 (from $8.05 per hour) and to allow employees to earn one hour of paid sick leave for every 30 hours worked effective July 1, 2017. The minimum wage will increase to $10.50 per hour in 2018, $11.00 per hour in 2019, and $12.00 per hour in

30

2020. The law provides up to five days of paid sick leave per year. The new law impacted three company-operated restaurants and 33 franchise-operated restaurants.

Other municipalities may set minimum wages above the applicable federal or state standards. The federal minimum wage has been $7.25 per hour since July 24, 2009. Additional federally-mandated, state-mandated or locally mandated minimum wages may be raised in the future. Furthermore, on July 1, 2015, the Healthy Workplaces, Healthy Families Act of 2014 went into effect for California employees, which provides up to three days of paid sick leave for employees who work more than 30 days within a year.

We may be unable to increase our menu prices in order to pass future increased labor costs on to our customers, in which case our margins would be negatively affected, which could have a material adverse effect on our business, financial condition and results of operations. In addition, if our menu prices are increased to cover increased labor costs, the higher prices could adversely affect sales and thereby reduce our margins and profitability.

Critical Accounting Policies and Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We believe 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. Our significant estimates include estimates for impairment of goodwill, intangible assets and property and equipment, insurance reserves, restaurant closure reserves, stock-based compensation, contingent liabilities and income tax valuation allowances.

Accounting policies are an integral part of our financial statements. A thorough understanding of these accounting policies is essential when reviewing our reported results of operations and our financial position. Management believes that the critical accounting policies and estimates involve the most difficult management judgments due to the sensitivity of the methods and assumptions used. For a description of our critical accounting policies, refer to “Critical Accounting Policies and Use of Estimates” in Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year ended January 3, 2017 filed with the SEC on March 13, 2017. There have been no material changes in any of our critical accounting policies during the twenty-four week period ended June 20, 2017.

Recently Issued Accounting Standards

See Note 2, Basis of Presentation, of the notes to the accompanying unaudited consolidated financial statements, included elsewhere in this quarterly report on Form 10-Q, for a description of the recently issued accounting standards.

31

Item 4. Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Under the supervision and with the participation of our senior management, consisting of our chief executive officer and our chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report (the “Evaluation Date”). Based on that evaluation, the Company’s management, including our chief executive officer and chief financial officer, concluded that as of the Evaluation Date our disclosure controls and procedures were effective.

Our controls and procedures are based on assumptions. Additionally, even effective controls and procedures only provide reasonable assurance of achieving their objectives. Accordingly, we cannot guarantee that our controls and procedures will succeed or be adhered to in all circumstances.

We have evaluated our disclosure controls and procedures with the participation, and under the supervision, of our management, including our chief executive and chief financial officers. Based on this evaluation, our chief executive and chief financial officers have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

No changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the period covered by this report that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

32

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

See Note 14, Commitments and Contingencies, of the notes to the unaudited consolidated financial statements for a discussion of our legal matters.

Item 1A. Risk Factors

See “Item 1A. Risk Factors” included in the Annual Report on Form 10-K for the fiscal year ended January 3, 2017 filed with the SEC on March 13, 2017 for a discussion of our risk factors. There have been no material changes to our risk factors.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On March 7, 2016, we announced that our Board of Directors authorized a share repurchase program under which we may purchase up to $25.0 million in the aggregate of our common stock and warrants. On August 23, 2016, we announced the Board of Directors increased the repurchase program by $25.0 million, to $50.0 million. Purchases under the program may be made in open market or privately negotiated transactions and expires upon completion of the program, unless earlier terminated by our Board of Directors. During the twelve weeks ended June 20, 2017, we repurchased 400,000 warrants for an average price per warrant of $3.75 for an aggregate cost of approximately $1.5 million, including incremental direct costs to acquire the warrants. During the twenty-four weeks ended June 20, 2017, we repurchased (1) 641,165 shares of common stock for an average price per share of $12.48 for an aggregate cost of approximately $8.0 million, including incremental direct costs to acquire the shares, and (2) 400,000 warrants for an average price per warrant of $3.75 for an aggregate cost of approximately $1.5 million, including incremental direct costs to acquire the warrants. As of June 20, 2017, there was approximately $25.3 million remaining under the share repurchase program.

The following table summarizes shares and warrants repurchased during the quarter ended June 20, 2017. The average price paid per share and warrant in column (b) below does not include the cost of brokerage fees or the incremental direct costs to acquire the shares.

	(a)		(b)				(c)		(d)
	Total number of shares/warrants purchased		Average price paid per share		Average price paid per warrant		Total number of shares purchased as part of publicly announced programs	Total number of warrants purchased as part of publicly announced programs	Maximum dollar value that may yet be purchased under these programs
	Common Stock	Warrants
March 29, 2017 - April 25, 2017	—	400,000	$	—	$	3.75	—	400,000	$	25,261,970
April 26, 2017 - May 23, 2017	—	—	$	—	$	—	—	—	$	25,261,970
May 24, 2017 - June 20, 2017	—	—	$	—	$	—	—	—	$	25,261,970
Total	—	400,000	$	—	$	—

33

Item 6. Exhibits

Exhibit No.	Description
31.1	Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a).
31.2	Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a).
32.1	Certification of the Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350.
32.2	Certification of the Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350.
101.INS	XBRL Instance Document.
101.SCH	XBRL Taxonomy Extension Schema Document.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF	XBRL Taxonomy Extension Definition Document.

34

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DEL TACO RESTAURANTS, INC.

Date: July 27, 2017

/s/ John D. Cappasola, Jr.

Name: John D. Cappasola, Jr.

Title: President and Chief Executive Officer

(principal executive officer)

/s/ Steven L. Brake

Name: Steven L. Brake

Title: Executive Vice President and Chief Financial Officer

(principal financial officer)

35

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, John D. Cappasola, Jr., certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Del Taco Restaurants, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 27, 2017

/s/ John D. Cappasola, Jr.

John D. Cappasola, Jr.

President and Chief Executive Officer

(principal executive officer)

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Steven L. Brake, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Del Taco Restaurants, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 27, 2017

/s/ Steven L. Brake

Steven L. Brake

Executive Vice President and Chief Financial Officer

(principal financial officer)

EX-32.1

Exhibit 32.1

CERTIFICATION OF PERIOD REPORT

I, John D. Cappasola, Jr., President and Chief Executive Officer of Del Taco Restaurants, Inc. (the “Company”), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1) the Quarterly Report on Form 10-Q of the Company for the quarter ended June 20, 2017 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. 

Date: July 27, 2017

/s/ John D. Cappasola, Jr.

John D. Cappasola, Jr.

President and Chief Executive Officer

(principal executive officer)

EX-32.2

Exhibit 32.2

CERTIFICATION OF PERIOD REPORT

I, Steven L. Brake, Executive Vice President and Chief Financial Officer of Del Taco Restaurants, Inc. (the “Company”), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1) the Quarterly Report on Form 10-Q of the Company for the quarter ended June 20, 2017 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. 

Date: July 27, 2017

/s/ Steven L. Brake

Steven L. Brake

Executive Vice President and Chief Financial Officer

(principal financial officer)

XML

Document and Entity Information - shares	6 Months Ended
	Jun. 20, 2017	Jul. 27, 2017
Document And Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Jun. 20, 2017
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	Q2
Trading Symbol	TACO
Entity Registrant Name	Del Taco Restaurants, Inc.
Entity Central Index Key	0001585583
Current Fiscal Year End Date	--01-02
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		38,686,034

XML

Condensed Consolidated Balance Sheets - USD ($) $ in Thousands	Jun. 20, 2017	Jan. 03, 2017
Current assets:
Cash and cash equivalents	$ 4,925	$ 8,795
Accounts and other receivables, net	3,118	4,141
Inventories	2,585	2,718
Prepaid expenses and other current assets	3,129	4,204
Total current assets	13,757	19,858
Property and equipment, net	135,142	138,320
Goodwill	319,778	320,025
Trademarks	220,300	220,300
Intangible assets, net	23,276	24,782
Other assets, net	3,658	3,872
Total assets	715,911	727,157
Current liabilities:
Accounts payable	16,462	16,427
Other accrued liabilities	36,403	36,653
Current portion of capital lease obligations and deemed landlord financing liabilities	1,546	1,588
Total current liabilities	54,411	54,668
Long-term debt, capital lease obligations and deemed landlord financing liabilities, excluding current portion, net	160,204	173,743
Deferred income taxes	91,908	91,273
Other non-current liabilities	30,142	30,140
Total liabilities	336,665	349,824
Commitments and contingencies
Shareholders’ equity:
Preferred stock, $0.0001 par value; 1,000,000 shares authorized; no shares issued and outstanding	0	0
Common stock, $0.0001 par value; 400,000,000 shares authorized; 38,572,982 shares issued and outstanding at June 20, 2017; 39,153,503 shares issued and outstanding at January 3, 2017	4	4
Additional paid-in capital	352,712	360,131
Accumulated other comprehensive (loss) income	(64)	172
Retained earnings	26,594	17,026
Total shareholders’ equity	379,246	377,333
Total liabilities and shareholders’ equity	$ 715,911	$ 727,157

XML

Condensed Consolidated Balance Sheets (Parenthetical) - Successor [Member] - $ / shares	Jun. 20, 2017	Jan. 03, 2017
Preferred stock, par value (in dollars per share)	$ 0.0001	$ 0.0001
Preferred stock, shares authorized (in shares)	1,000,000	1,000,000
Preferred stock, shares issued (in shares)	0	0
Preferred stock, shares outstanding (in shares)	0	0
Common stock, par value (in dollars per share)	$ 0.0001	$ 0.0001
Common stock, shares authorized (in shares)	400,000,000	400,000,000
Common stock, shares issued (in shares)	38,572,982	39,153,503
Common stock, shares outstanding (in shares)	38,572,982	39,153,503

XML

Condensed Consolidated Statements of Comprehensive Income (Loss) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 20, 2017	Jun. 14, 2016	Jun. 20, 2017	Jun. 14, 2016
Revenue:
Company restaurant sales	$ 104,022	$ 95,917	$ 205,244	$ 189,467
Franchise revenue	3,903	3,576	7,516	6,905
Franchise sublease income	656	533	1,166	1,057
Total revenue	108,581	100,026	213,926	197,429
Restaurant operating expenses:
Food and paper costs	28,770	26,358	56,688	52,487
Labor and related expenses	33,185	30,249	66,406	60,033
Occupancy and other operating expenses	20,918	19,526	41,636	39,649
General and administrative	9,055	8,214	18,360	16,506
Depreciation and amortization	5,278	5,532	10,381	11,018
Occupancy and other - franchise subleases	602	510	1,083	1,013
Pre-opening costs	151	35	177	128
Restaurant closure charges, net	6	(166)	15	12
Loss on disposal of assets, net	340	62	291	137
Total operating expenses	98,305	90,320	195,037	180,983
Income from operations	10,276	9,706	18,889	16,446
Other expense
Interest expense	1,627	1,405	3,170	2,877
Transaction-related costs	0	126	0	191
Total other expense	1,627	1,531	3,170	3,068
Income from operations before provision for income taxes	8,649	8,175	15,719	13,378
Provision for income taxes	3,319	3,311	6,151	5,453
Net income	5,330	4,864	9,568	7,925
Other comprehensive loss:
Change in fair value of interest rate cap, net of tax	(148)	0	(236)	0
Total other comprehensive loss	(148)	0	(236)	0
Comprehensive income	$ 5,182	$ 4,864	$ 9,332	$ 7,925
Earnings per share:
Basic (in dollars per share)	$ 0.14	$ 0.13	$ 0.25	$ 0.21
Diluted (in dollars per share)	$ 0.13	$ 0.13	$ 0.24	$ 0.20
Weighted-average shares outstanding
Basic (in shares)	38,535,855	38,292,215	38,769,895	38,545,115
Diluted (in shares)	39,808,485	38,442,304	40,094,476	38,672,425

XML

Condensed Consolidated Statements of Cash Flows - USD ($) $ in Thousands	6 Months Ended
	Jun. 20, 2017	Jun. 14, 2016
Proceeds from Stock Options Exercised	$ 10	$ 0
Operating activities
Net income	9,568	7,925
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	10,381	11,018
Amortization of favorable and unfavorable lease assets and liabilities, net	(292)	(280)
Amortization of deferred financing costs and debt discount	178	178
Stock-based compensation	2,149	1,629
Deferred income taxes	792	3,052
Loss on disposal of assets, net	291	137
Restaurant closure charges	85	(137)
Changes in operating assets and liabilities:
Accounts and other receivables, net	1,023	859
Inventories	133	379
Prepaid expenses and other current assets	1,075	371
Other assets	(60)	0
Accounts payable	35	435
Other accrued liabilities	(304)	(3,609)
Other non-current liabilities	(240)	(904)
Net cash provided by operating activities	24,814	21,053
Investing activities
Purchases of property and equipment	(14,814)	(15,546)
Proceeds from disposal of property and equipment, net	7,733	4
Purchases of other assets	(470)	(647)
Proceeds from sale of company-operated restaurants	2,192	0
Net cash used in investing activities	(5,359)	(16,189)
Financing activities
Repurchase of common stock and warrants	(9,517)	(6,943)
Payment of tax withholding related to restricted stock vesting	(59)	0
Payments on capital leases and deemed landlord financing	(759)	(817)
Proceeds from revolving credit facility	6,000	4,000
Payments on revolving credit facility	(19,000)	(4,000)
Net cash used in financing activities	(23,325)	(7,760)
Decrease in cash and cash equivalents	(3,870)	(2,896)
Cash and cash equivalents at beginning of period	8,795	10,194
Cash and cash equivalents at end of period	4,925	7,298
Supplemental cash flow information:
Cash paid during the period for interest	2,688	2,872
Cash paid during the period for income taxes	4,733	800
Supplemental schedule of non-cash activities:
Accrued property and equipment purchases	4,114	1,939
Write-offs of accounts receivables	0	72
Change in other asset for fair value of interest rate cap recorded to other comprehensive loss, net of tax	$ (236)	$ 0

XML

Description of Business

6 Months Ended

Jun. 20, 2017

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”). The Company develops, franchises, owns, and operates Del Taco quick-service Mexican-American restaurants. At June 20, 2017, there were 304 company-operated and 251 franchise-operated Del Taco restaurants located in 15 states, including one franchise-operated unit in Guam. At June 14, 2016, there were 298 company-operated and 245 franchise-operated Del Taco restaurants located in 16 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.

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Basis of Presentation and Summary of Significant Accounting Policies

6 Months Ended

Jun. 20, 2017

Accounting Policies [Abstract]

Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements included herein have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”). For additional information, these unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended January 3, 2017 ("2016 Form 10-K"). The accounting policies used in preparing these unaudited consolidated financial statements are the same as those described in our 2016 Form 10-K.

The Company’s fiscal year ends on the Tuesday closest to December 31. Fiscal year 2017 is a fifty-two week period ending January 2, 2018. In a fifty-two week fiscal year, the first, second and third quarters each include twelve weeks of operations and the fourth quarter includes sixteen weeks of operations. Fiscal year 2016 is the fifty-three week period ended January 3, 2017. In a fifty-three week fiscal year, the first, second and third quarters each include twelve weeks of operations and the fourth quarter includes seventeen weeks of operations. For fiscal year 2017, the Company’s accompanying financial statements reflect the twelve weeks ended June 20, 2017. For fiscal year 2016, the Company’s accompanying financial statements reflect the twelve weeks ended June 14, 2016.

In the opinion of management, the accompanying consolidated financial statements reflect all adjustments which are necessary for a fair presentation of the consolidated financial position, results of operations and cash flows for the periods presented. The results of operations for such interim periods are not necessarily indicative of results of operations to be expected for the full fiscal year.

Principles of Consolidation

The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly and majority owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Management believes that such estimates have been based on reasonable and supportable assumptions and the resulting estimates are reasonable for use in the preparation of the consolidated financial statements. Actual results could differ from these estimates. The Company’s significant estimates include estimates for impairment of goodwill, intangible assets and property and equipment, valuations provided in business combinations, insurance reserves, restaurant closure reserves, stock-based compensation, contingent liabilities, certain leasing activities and income tax valuation allowances.

Recently Issued Accounting Standards

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2016-02, Leases (Topic 842). This guidance will result in key changes to lease accounting and will aim to bring leases onto balance sheets to give investors, lenders, and other financial statement users a more comprehensive view of a company's long-term financial obligations as well as the assets it owns versus leases. The new leasing standard will be effective for fiscal years beginning after December 15, 2018, and for interim periods within those fiscal years. The Company currently believes the guidance will have a material impact on its consolidated balance sheets. The Company has not selected an adoption method.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which provides a comprehensive new revenue recognition model that requires a company to recognize revenue in an amount that reflects the consideration it expects to receive for the transfer of promised goods or services to its customers. The standard also requires additional disclosure regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. This ASU is effective for annual periods and interim periods beginning after December 15, 2017. The ASU is to be applied retrospectively or using a cumulative effect transition method. The Company expects to adopt this new guidance in fiscal year 2018, and has not yet selected a transition method. The Company does not currently believe the new revenue recognition standard will materially impact the recognition of company restaurant sales or royalty fees from franchisees. Additionally, lease rental revenues are not within the scope of this new guidance. Based on a preliminary assessment, the Company expects the adoption of the new guidance to change the timing of the recognition of initial franchise fees, including franchise and development fees, and renewal fees. Currently, these fees are generally recognized upfront upon either the opening of the respective restaurant or when a renewal agreement becomes effective. The Company currently believes the new guidance will generally require these fees to be recognized over the term of the related franchise agreement for the respective restaurant. The Company is continuing to evaluate the impact the adoption of this new guidance will have on these and other revenue transactions in addition to the impact on accounting policies and related disclosures.

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Restaurant Closure Charges, Net

6 Months Ended

Jun. 20, 2017

Restructuring and Related Activities [Abstract]

Restaurant Closure Charges, Net

Restaurant Closure Charges, Net

At June 20, 2017 and January 3, 2017, the restaurant closure liability is $2.8 million and $3.1 million, respectively. The details of the restaurant closure activities are discussed below.

Restaurant Closures and Lease Reserves

The following table represents other restaurant closure liability activity related to restaurant closures prior to 2015 and sublease income shortfalls (in thousands):

	Total
Balance at January 3, 2017	$	1,365
Charges for accretion in current period	51
Cash payments	(141		)
Balance at June 20, 2017	$	1,275

The current portion of the restaurant closure liability is $0.3 million at both June 20, 2017 and January 3, 2017 and is included in other accrued liabilities in the consolidated balance sheets. The non-current portion of the restaurant closure liability is $1.0 million and $1.1 million at June 20, 2017 and January 3, 2017, respectively, and is included in other non-current liabilities in the consolidated balance sheets.

Restaurant Closure and Other Related Charges for 12 Underperforming Restaurants

During the fourth fiscal quarter of 2015, the Company closed 12 company-operated restaurants. During the twenty-four weeks ended June 20, 2017, the Company recorded accretion expense related to the closures, offset by $0.1 million of sublease income from leases which are treated as deemed landlord financing. A summary of the restaurant closure liability activity for these 12 closed restaurants consisted of the following (in thousands):

	Contract termination costs			Other associated costs		Total
Balance at January 3, 2017	$	1,773		$	—	$	1,773
Charges for accretion in current period	33			—		33
Cash payments	(316		)	—		(316		)
Balance at June 20, 2017	$	1,490		$	—	$	1,490

The current portion of the restaurant closure liability is $0.2 million and $0.6 million at June 20, 2017 and January 3, 2017, respectively, and is included in other accrued liabilities in the consolidated balance sheets. The non-current portion of the restaurant closure liability is $1.3 million and $1.2 million at June 20, 2017 and January 3, 2017, respectively, and is included in other non-current liabilities in the consolidated balance sheets.

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Summary of refranchising (Notes)

6 Months Ended

Jun. 20, 2017

Other Industries [Abstract]

Summary of Refranchising [Text Block]

Summary of 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 or the leasehold interest to the real estate to 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 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 or unfavorable lease assets/liabilities with a corresponding offset to the gain or loss on the sale of the company-operated restaurants. The cash consideration per restaurant for franchise fees is consistent with the amounts stated in the related franchise agreements which are charged for separate standalone arrangements. Therefore, the Company recognizes the franchise fees when earned. Future royalty income is also recognized in revenue as earned.

The following table summarizes the number of company-operated restaurants sold to franchisees and the related gain recognized during the twenty-four weeks ended June 20, 2017 (dollars in thousands):

	24 Weeks Ended June 20, 2017
Company-operated restaurants sold to franchisees	5
Proceeds from the sale of company-operated restaurants	$	2,192
Net assets sold (primarily furniture, fixtures and equipment)	(1,261		)
Goodwill related to the company-operated restaurants sold to franchisees	(247		)
Net unfavorable lease liabilities (a)	(548		)
Other costs	(5		)
Gain on sale of company-operated restaurants (b)	$	131

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Goodwill and other Intangible Assets

6 Months Ended

Jun. 20, 2017

Goodwill and Intangible Assets Disclosure [Abstract]

Goodwill and other Intangible Assets

Goodwill and other Intangible Assets

Goodwill was $319.8 million at June 20, 2017 compared to $320.0 million at January 3, 2017. The change is due to the sale of company-operated stores as described in more detail in Note 4.

There have been no changes in the carrying amount of trademarks since January 3, 2017.

The Company’s other intangible assets at June 20, 2017 and January 3, 2017 consisted of the following (in thousands):

	June 20, 2017							January 3, 2017
	Gross Carrying Amount		Accumulated Amortization			Net		Gross Carrying Amount		Accumulated Amortization			Net
Favorable lease assets	$	14,161	$	(3,849	)	$	10,312	$	14,176	$	(2,996	)	$	11,180
Franchise rights	15,489		(2,659		)	12,830		15,489		(2,038		)	13,451
Reacquired franchise rights	161		(27		)	134		161		(10		)	151
Total amortized other intangible assets	$	29,811	$	(6,535	)	$	23,276	$	29,826	$	(5,044	)	$	24,782

During the twenty-four weeks ended June 20, 2017, the Company wrote-off $15,000 of favorable lease assets related to the closure of one company-operated restaurant.

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Debt, Obligations Under Capital Leases and Deemed Landlord Financing Liabilities

6 Months Ended

Jun. 20, 2017

Debt Disclosure [Abstract]

Debt, Obligations Under Capital Leases and Deemed Landlord Financing Liabilities

Debt, Obligations Under Capital Leases and Deemed Landlord Financing Liabilities

The Company’s long-term debt, capital lease obligations and deemed landlord financing liabilities at June 20, 2017 and January 3, 2017 consisted of the following (in thousands):

	June 20, 2017		January 3, 2017
2015 Senior Credit Facility, net of debt discount of $902 and $1,035 and deferred financing costs of $304 and $349 at June 20, 2017 and January 3, 2017, respectively	$	144,794	$	157,616
Total outstanding indebtedness	144,794		157,616
Obligations under capital leases and deemed landlord financing liabilities	16,956		17,715
Total debt	161,750		175,331
Less: amounts due within one year	1,546		1,588
Total amounts due after one year, net	$	160,204	$	173,743

At June 20, 2017 and January 3, 2017, 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 20, 2017. Substantially all of the assets of the Company are pledged as collateral under the 2015 Senior Credit Facility.

At June 20, 2017, the weighted-average interest rate on the outstanding balance of the 2015 Senior Credit Facility was 2.8%. At June 20, 2017, the Company had a total of $85.7 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 $18.3 million which reduce availability under the 2015 Senior Credit Facility.

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Derivative Instruments

6 Months Ended

Jun. 20, 2017

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 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. During the period from July 1, 2016 through June 20, 2017, 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 on the term loans perfectly match with the interest rate cap reset dates and other critical terms during the twelve weeks ended June 20, 2017.

As of June 20, 2017, the Company was hedging forecasted transactions expected to occur through March 31, 2020. Assuming interest rates at June 20, 2017 remain constant, $0.3 million of interest expense related to hedges of these transactions is expected to be reclassified into earnings over the next 33 months. The Company intends to ensure that this hedge remains effective, therefore, approximately $20,000 is expected to be reclassified into interest expense over the next 12 months.

The effective portion of the 2016 Interest Rate Cap Agreement through June 20, 2017 was included in accumulated other comprehensive income.

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Fair Value Measurements

6 Months Ended

Jun. 20, 2017

Fair Value Disclosures [Abstract]

Fair Value Measurements

Fair Value Measurements

The fair values of cash and cash equivalents, accounts receivable, accounts payable and other accrued liabilities approximate their carrying amounts due to their short maturities. The carrying value of the 2015 Senior Credit Facility approximated fair value. The 2016 Interest Rate Cap Agreement is recorded at fair value in the Company’s consolidated balance sheets.

As of June 20, 2017 and January 3, 2017, the Company held certain assets and liabilities that are required to be measured at fair value on a recurring basis. For both periods, this included a derivative instrument related to interest rates. The Company determined the fair value of the interest rate cap contract based on counterparty quotes, with appropriate adjustments for any significant impact of nonperformance risk of the parties to the interest rate cap contract. Therefore, the Company categorized this interest rate cap contract as Level 2 fair value measurements. The fair value of the 2016 Interest Rate Cap Agreement was $0.2 million and $0.6 million at June 20, 2017 and January 3, 2017, 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 20, 2017 and January 3, 2017 were as follows (in thousands):

	June 20, 2017 (Unaudited)		Markets for Identical Assets (Level 1)		Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
2016 Interest Rate Cap Agreement	$	205	$	—	$	205	$	—
Total assets measured at fair value	$	205	$	—	$	205	$	—
	January 3, 2017		Markets for Identical Assets (Level 1)		Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
2016 Interest Rate Cap Agreement	$	598	$	—	$	598	$	—
Total assets measured at fair value	$	598	$	—	$	598	$	—

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Other Accrued Liabilities and Other Non-current Liabilities

6 Months Ended

Jun. 20, 2017

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):

	June 20, 2017		January 3, 2017
Employee compensation and related items	$	11,203	$	13,783
Accrued insurance	8,471		8,192
Accrued sales tax	5,264		3,916
Accrued advertising	2,325		1,657
Accrued real property tax	1,249		1,274
Accrued income tax	1,189		562
Restaurant closure liability	464		875
Other	6,238		6,394
	$	36,403	$	36,653

A summary of other non-current liabilities follows (in thousands):

	June 20, 2017		January 3, 2017
Unfavorable lease liabilities	$	15,911	$	17,072
Insurance reserves	4,305		4,269
Restaurant closure liability	2,301		2,263
Deferred rent liability	2,107		1,676
Deferred development and initial franchise fees	1,418		1,385
Unearned trade discount, non-current	1,392		1,596
Deferred gift card income	673		1,182
Other	2,035		697
	$	30,142	$	30,140

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Stock-Based Compensation

6 Months Ended

Jun. 20, 2017

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Stock-Based Compensation

Stock-Based Compensation

In connection with the approval of the Business Combination, the Del Taco Restaurants, Inc. 2015 Omnibus Incentive Plan (the “2015 Plan”) was approved by shareholders to offer eligible employees, directors and consultants cash and stock-based incentive awards. Awards under the 2015 Plan are generally not restricted to any specific form or structure and could include, without limitation, stock options, stock appreciation rights, restricted stock, 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 20, 2017, there were 1,597,458 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 $1.1 million and $0.9 million for the twelve weeks ended June 20, 2017 and June 14, 2016, respectively, and $2.1 million and $1.6 million for the twenty-four weeks ended June 20, 2017 and June 14, 2016, respectively.

Restricted Stock Awards

A summary of outstanding and unvested restricted stock activity as of June 20, 2017 and changes during the period from January 3, 2017 through June 20, 2017 are as follows:

	Shares		Weighted-Average Grant Date Fair Value
Nonvested at January 3, 2017	1,133,822		$	10.40
Granted	72,570		13.59
Vested	(64,330	)	9.63
Forfeited	—		—
Nonvested at June 20, 2017	1,142,062		$	10.64

During the twenty-four weeks ended June 20, 2017, the Company made payments of $0.1 million related to tax withholding obligations for the vesting of restricted stock awards in exchange for 4,686 shares withheld. As of June 20, 2017, there was $8.3 million of unrecognized expense, net of estimated forfeitures, related to restricted stock which is expected to be recognized over a weighted-average remaining period of 2.3 years. The fair value of these awards was determined based on the Company’s stock price on the grant date.

Stock Options

A summary of stock option activity as of June 20, 2017 and changes during the period from January 3, 2017 through June 20, 2017 are as follows:

	Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
					(in years)
Options outstanding at January 3, 2017	334,500		$	9.94	6.1	$	1,464
Granted	5,000		14.55
Exercised	(1,000	)	9.88
Forfeited/Expired	(3,500	)	10.40
Options outstanding at June 20, 2017	335,000		$	10.01	5.7	$	1,252
Options exercisable at June 20, 2017	53,000		$	10.39	5.4	$	177
Options exercisable and expected to vest at June 20, 2017	316,050		$	10.02	5.7	$	1,178

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 3, 2017 and June 20, 2017, respectively.

As of June 20, 2017, there was $0.7 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 2.5 years.

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Shareholders' Equity

6 Months Ended

Jun. 20, 2017

Equity [Abstract]

Shareholders' Equity

Shareholders’ Equity

On February 26, 2016, the Company's Board of Directors authorized a share repurchase program covering up to $25.0 million in the aggregate of the Company's common stock and warrants which was effective immediately and expires upon completion of the repurchase program, unless terminated earlier by the Board of Directors. On August 23, 2016, the Company announced that the Board of Directors increased the repurchase program by $25.0 million, to $50.0 million. Purchases under the program may be made in open market or privately negotiated transactions. During the twelve weeks ended June 20, 2017, the Company repurchased 400,000 warrants for an average price per warrant of $3.75 for an aggregate cost of approximately $1.5 million, including incremental direct costs to acquire the warrants. During the twenty-four weeks ended June 20, 2017, the Company repurchased (1) 641,165 shares of common stock for an average price per share of $12.48 for an aggregate cost of approximately $8.0 million, including incremental direct costs to acquire the shares, and (2) 400,000 warrants for an average price per warrant of $3.75 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 20, 2017. As of June 20, 2017, there was approximately $25.3 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.

The 400,000 warrants purchased during the twelve and twenty-four weeks ended June 20, 2017 were purchased from PW Acquisitions, LP, a related party, at $3.75 per warrant, representing a 5% discount from the closing price of $3.95 per warrant on the transaction date. Patrick Walsh currently serves on the Company's Board of Directors and is the chief executive officer and managing member of the general partner of PW Acquisitions, LP.

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Earnings per Share

6 Months Ended

Jun. 20, 2017

Earnings Per Share [Abstract]

Earnings per Share

Earnings per Share

Basic income per share is calculated by dividing net income attributable to Del Taco’s common shareholders for the period by the weighted average number of common shares outstanding for the period. In computing dilutive income per share, basic income per share is adjusted for the assumed issuance of all applicable potentially dilutive share-based awards, including warrants, restricted stock, common stock options and restricted stock units.

Below are basic and diluted net income per share for the periods indicated (amounts in thousands except share and per share data):

	12 Weeks Ended				24 Weeks Ended
	June 20, 2017		June 14, 2016		June 20, 2017		June 14, 2016
Numerator:
Net income	$	5,330	$	4,864	$	9,568	$	7,925
Denominator:
Weighted-average shares outstanding - basic	38,535,855		38,292,215		38,769,895		38,545,115
Dilutive effect of unvested restricted stock	492,065		150,089		476,284		127,310
Dilutive effect of stock options	23,550		—		23,226		—
Dilutive effect of warrants	757,015		—		825,071		—
Weighted-average shares outstanding - diluted	39,808,485		38,442,304		40,094,476		38,672,425
Net income per share - basic	0.14		$	0.13	0.25		$	0.21
Net income per share - diluted	0.13		$	0.13	0.24		$	0.20
Antidilutive stock options, unvested restricted stock awards and warrants excluded from the computations	36,500		12,720,918		36,500		12,800,021

Antidilutive stock options, unvested restricted stock and warrants were excluded from the computation of diluted net income per share due to the assumed proceeds from the award’s exercise or vesting being greater than the average market price of the common shares.

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Income Taxes

6 Months Ended

Jun. 20, 2017

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The effective income tax rates were 38.4% and 40.5% for the twelve weeks ended June 20, 2017 and June 14, 2016, respectively. The provision for income taxes consisted of income tax expense of $3.3 million for both the twelve weeks ended June 20, 2017 and June 14, 2016. The effective income tax rates were 39.1% and 40.8% for the twenty-four weeks ended June 20, 2017 and June 14, 2016, respectively. The provision for income taxes consisted of income tax expense of $6.2 million and $5.5 million for the twenty-four weeks ended June 20, 2017 and June 14, 2016, respectively.

The income tax expense for the twelve weeks ended June 20, 2017 is driven by the estimated effective income tax rate of 38.4% which primarily consists of statutory federal and state tax rates based on apportioned income, partially offset by federal targeted job credits. The income tax expense for the twelve weeks ended June 14, 2016 is driven by the estimated effective income tax rate of 40.5% which primarily consists of statutory federal and state tax rates based on apportioned income, as well as providing for deferred tax liabilities for the excess of the amount for financial reporting over the tax basis of an investment in a domestic subsidiary, partially offset by federal targeted job credits.

The income tax expense for the twenty-four weeks ended June 20, 2017 is driven by the estimated effective income tax rate of 39.1% which primarily consists of statutory federal and state tax rates based on apportioned income, partially offset by federal targeted job credits. The income tax expense for the twenty-four weeks ended June 14, 2016 is driven by the estimated effective income tax rate of 40.8% which primarily consists of statutory federal and state tax rates based on apportioned income, as well as providing for deferred tax liabilities for the excess of the amount for financial reporting over the tax basis of an investment in a domestic subsidiary, partially offset by federal targeted job credits.

Management believe it is more likely than not that all deferred tax assets will be realized and therefore no valuation allowance as of June 20, 2017 and January 3, 2017 is required.

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Commitments and Contingencies

6 Months Ended

Jun. 20, 2017

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

Commitments and Contingencies

The primary claims in the Company’s business are workers’ compensation and general liabilities. These insurance programs are self-insured or high deductible programs with excess coverage that management believes is sufficient to adequately protect the Company. In the opinion of management, adequate provision has been made for all incurred claims up to the self-insured or high deductible limits, including provision for estimated claims incurred but not reported. Because of the uncertainty of the ultimate resolution of outstanding claims, as well as the uncertainty regarding claims incurred but not reported, it is possible that management’s provision for these losses could change materially. However, no estimate can currently be made of the range of additional losses.

Purchasing Commitments

The Company enters into various purchase obligations in the ordinary course of business, generally of short term nature. Those that are binding primarily relate to commitments for food purchases and supplies, amounts owed under contractor and subcontractor agreements, orders submitted for equipment for restaurants under construction, information technology service agreements and marketing initiatives, some of which are related to both company-operated and franchise-operated locations. The Company also has a long-term beverage supply agreement with a major beverage vendor whereby marketing rebates are provided to the Company and its franchisees based upon the volumes of purchases for system-wide restaurants which vary according to demand for beverage syrup. This contract has terms extending into 2021. The Company’s future estimated cash payments under existing contractual purchase obligations for goods and services as of June 20, 2017, are approximately $67.9 million. The Company has excluded agreements that are cancelable without penalty.

Litigation

In July 2013, a former Del Taco employee filed a purported class action complaint alleging that Del Taco has failed to pay overtime wages and has not appropriately provided meal breaks to its California general managers. On June 23, 2017, the Court filed a tentative ruling granting Del Taco’s motion to decertify the sole remaining class. Legal proceedings are inherently unpredictable, and the Company is not able to predict the ultimate outcome or cost of the unresolved matter. However, based on management’s current understanding of the relevant facts and circumstances, the Company does not believe that these proceedings give rise to a probable or estimable loss and should not have a material adverse effect on the Company’s financial position, operations or cash flows. Therefore, Del Taco has not recorded any amount for the claim as of June 20, 2017.

In March 2014, a former Del Taco employee filed a purported class action complaint alleging that Del Taco has not appropriately provided meal breaks and failed to pay wages to its California hourly employees. Discovery is in process and Del Taco intends to assert all of its defenses to this threatened class action and the individual claims. Del Taco has several defenses to the action that it believes should prevent the certification of the class, as well as the potential assessment of any damages on a class basis. Legal proceedings are inherently unpredictable, and the Company is not able to predict the ultimate outcome or cost of the unresolved matter. However, based on management’s current understanding of the relevant facts and circumstances, the Company does not believe that these proceedings give rise to a probable or estimable loss and should not have a material adverse effect on the Company’s financial position, operations or cash flows. Therefore, Del Taco has not recorded any amount for the claim as of June 20, 2017.

The Company and its subsidiaries are parties to other legal proceedings incidental to their businesses, including claims alleging the Company’s restaurants do not comply with the Americans with Disabilities Act of 1990. In the opinion of management, based upon information currently available, the ultimate liability with respect to those other actions will not have a material effect on the operating results, cash flows or the financial position of the Company. However, due to the risks and uncertainties inherent in legal proceedings and litigation, actual results could differ from expectations.

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Basis of Presentation and Summary of Significant Accounting Policies (Policies)

6 Months Ended

Jun. 20, 2017

Accounting Policies [Abstract]

Basis of Presentation

Basis of Presentation

The accompanying unaudited consolidated financial statements included herein have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”). For additional information, these unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended January 3, 2017 ("2016 Form 10-K"). The accounting policies used in preparing these unaudited consolidated financial statements are the same as those described in our 2016 Form 10-K.

The Company’s fiscal year ends on the Tuesday closest to December 31. Fiscal year 2017 is a fifty-two week period ending January 2, 2018. In a fifty-two week fiscal year, the first, second and third quarters each include twelve weeks of operations and the fourth quarter includes sixteen weeks of operations. Fiscal year 2016 is the fifty-three week period ended January 3, 2017. In a fifty-three week fiscal year, the first, second and third quarters each include twelve weeks of operations and the fourth quarter includes seventeen weeks of operations. For fiscal year 2017, the Company’s accompanying financial statements reflect the twelve weeks ended June 20, 2017. For fiscal year 2016, the Company’s accompanying financial statements reflect the twelve weeks ended June 14, 2016.

In the opinion of management, the accompanying consolidated financial statements reflect all adjustments which are necessary for a fair presentation of the consolidated financial position, results of operations and cash flows for the periods presented. The results of operations for such interim periods are not necessarily indicative of results of operations to be expected for the full fiscal year.

Principles of Consolidation

Principles of Consolidation

The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly and majority owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Management believes that such estimates have been based on reasonable and supportable assumptions and the resulting estimates are reasonable for use in the preparation of the consolidated financial statements. Actual results could differ from these estimates. The Company’s significant estimates include estimates for impairment of goodwill, intangible assets and property and equipment, valuations provided in business combinations, insurance reserves, restaurant closure reserves, stock-based compensation, contingent liabilities, certain leasing activities and income tax valuation allowances

Recently Issued and Recently Adopted Accounting Standards

Recently Issued Accounting Standards

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2016-02, Leases (Topic 842). This guidance will result in key changes to lease accounting and will aim to bring leases onto balance sheets to give investors, lenders, and other financial statement users a more comprehensive view of a company's long-term financial obligations as well as the assets it owns versus leases. The new leasing standard will be effective for fiscal years beginning after December 15, 2018, and for interim periods within those fiscal years. The Company currently believes the guidance will have a material impact on its consolidated balance sheets. The Company has not selected an adoption method.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which provides a comprehensive new revenue recognition model that requires a company to recognize revenue in an amount that reflects the consideration it expects to receive for the transfer of promised goods or services to its customers. The standard also requires additional disclosure regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. This ASU is effective for annual periods and interim periods beginning after December 15, 2017. The ASU is to be applied retrospectively or using a cumulative effect transition method. The Company expects to adopt this new guidance in fiscal year 2018, and has not yet selected a transition method. The Company does not currently believe the new revenue recognition standard will materially impact the recognition of company restaurant sales or royalty fees from franchisees. Additionally, lease rental revenues are not within the scope of this new guidance. Based on a preliminary assessment, the Company expects the adoption of the new guidance to change the timing of the recognition of initial franchise fees, including franchise and development fees, and renewal fees. Currently, these fees are generally recognized upfront upon either the opening of the respective restaurant or when a renewal agreement becomes effective. The Company currently believes the new guidance will generally require these fees to be recognized over the term of the related franchise agreement for the respective restaurant. The Company is continuing to evaluate the impact the adoption of this new guidance will have on these and other revenue transactions in addition to the impact on accounting policies and related disclosures.

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Restaurant Closure Charges, Net (Tables)

6 Months Ended

Jun. 20, 2017

Restructuring and Related Activities [Abstract]

Restaurant Closure Liability Activity

The following table represents other restaurant closure liability activity related to restaurant closures prior to 2015 and sublease income shortfalls (in thousands):

	Total
Balance at January 3, 2017	$	1,365
Charges for accretion in current period	51
Cash payments	(141		)
Balance at June 20, 2017	$	1,275

Closure Liability Activity for 12 Closed Restaurants

A summary of the restaurant closure liability activity for these 12 closed restaurants consisted of the following (in thousands):

	Contract termination costs			Other associated costs		Total
Balance at January 3, 2017	$	1,773		$	—	$	1,773
Charges for accretion in current period	33			—		33
Cash payments	(316		)	—		(316		)
Balance at June 20, 2017	$	1,490		$	—	$	1,490

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Summary of refranchising (Tables)

6 Months Ended

Jun. 20, 2017

Other Industries [Abstract]

Summary of refranchising [Table Text Block]

The following table summarizes the number of company-operated restaurants sold to franchisees and the related gain recognized during the twenty-four weeks ended June 20, 2017 (dollars in thousands):

	24 Weeks Ended June 20, 2017
Company-operated restaurants sold to franchisees	5
Proceeds from the sale of company-operated restaurants	$	2,192
Net assets sold (primarily furniture, fixtures and equipment)	(1,261		)
Goodwill related to the company-operated restaurants sold to franchisees	(247		)
Net unfavorable lease liabilities (a)	(548		)
Other costs	(5		)
Gain on sale of company-operated restaurants (b)	$	131

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Goodwill and other Intangible Assets (Tables)

6 Months Ended

Jun. 20, 2017

Goodwill and Intangible Assets Disclosure [Abstract]

Schedule of Other Intangible Assets

The Company’s other intangible assets at June 20, 2017 and January 3, 2017 consisted of the following (in thousands):

	June 20, 2017							January 3, 2017
	Gross Carrying Amount		Accumulated Amortization			Net		Gross Carrying Amount		Accumulated Amortization			Net
Favorable lease assets	$	14,161	$	(3,849	)	$	10,312	$	14,176	$	(2,996	)	$	11,180
Franchise rights	15,489		(2,659		)	12,830		15,489		(2,038		)	13,451
Reacquired franchise rights	161		(27		)	134		161		(10		)	151
Total amortized other intangible assets	$	29,811	$	(6,535	)	$	23,276	$	29,826	$	(5,044	)	$	24,782

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Debt, Obligations Under Capital Leases and Deemed Landlord Financing Liabilities (Tables)

6 Months Ended

Jun. 20, 2017

Debt Disclosure [Abstract]

Schedule of Debt

The Company’s long-term debt, capital lease obligations and deemed landlord financing liabilities at June 20, 2017 and January 3, 2017 consisted of the following (in thousands):

	June 20, 2017		January 3, 2017
2015 Senior Credit Facility, net of debt discount of $902 and $1,035 and deferred financing costs of $304 and $349 at June 20, 2017 and January 3, 2017, respectively	$	144,794	$	157,616
Total outstanding indebtedness	144,794		157,616
Obligations under capital leases and deemed landlord financing liabilities	16,956		17,715
Total debt	161,750		175,331
Less: amounts due within one year	1,546		1,588
Total amounts due after one year, net	$	160,204	$	173,743

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Fair Value Measurements (Tables)

6 Months Ended

Jun. 20, 2017

Fair Value Disclosures [Abstract]

Schedule of Fair Value, Assets and Liabilities Measured on Recurring Basis [Table Text Block]

The Company's assets and liabilities measured at fair value on a recurring basis as of June 20, 2017 and January 3, 2017 were as follows (in thousands):

	June 20, 2017 (Unaudited)		Markets for Identical Assets (Level 1)		Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
2016 Interest Rate Cap Agreement	$	205	$	—	$	205	$	—
Total assets measured at fair value	$	205	$	—	$	205	$	—
	January 3, 2017		Markets for Identical Assets (Level 1)		Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
2016 Interest Rate Cap Agreement	$	598	$	—	$	598	$	—
Total assets measured at fair value	$	598	$	—	$	598	$	—

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Other Accrued Liabilities and Other Non-current Liabilities (Tables)

6 Months Ended

Jun. 20, 2017

Other Liabilities Disclosure [Abstract]

Summary of Other Accrued Liabilities

A summary of other accrued liabilities follows (in thousands):

	June 20, 2017		January 3, 2017
Employee compensation and related items	$	11,203	$	13,783
Accrued insurance	8,471		8,192
Accrued sales tax	5,264		3,916
Accrued advertising	2,325		1,657
Accrued real property tax	1,249		1,274
Accrued income tax	1,189		562
Restaurant closure liability	464		875
Other	6,238		6,394
	$	36,403	$	36,653

Summary of Other Non-current Liabilities

A summary of other non-current liabilities follows (in thousands):

	June 20, 2017		January 3, 2017
Unfavorable lease liabilities	$	15,911	$	17,072
Insurance reserves	4,305		4,269
Restaurant closure liability	2,301		2,263
Deferred rent liability	2,107		1,676
Deferred development and initial franchise fees	1,418		1,385
Unearned trade discount, non-current	1,392		1,596
Deferred gift card income	673		1,182
Other	2,035		697
	$	30,142	$	30,140

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Stock-Based Compensation (Tables)

6 Months Ended

Jun. 20, 2017

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Summary of Outstanding and Unvested Restricted Stock Activity

A summary of outstanding and unvested restricted stock activity as of June 20, 2017 and changes during the period from January 3, 2017 through June 20, 2017 are as follows:

	Shares		Weighted-Average Grant Date Fair Value
Nonvested at January 3, 2017	1,133,822		$	10.40
Granted	72,570		13.59
Vested	(64,330	)	9.63
Forfeited	—		—
Nonvested at June 20, 2017	1,142,062		$	10.64

Summary of Stock Options Activity

A summary of stock option activity as of June 20, 2017 and changes during the period from January 3, 2017 through June 20, 2017 are as follows:

	Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
					(in years)
Options outstanding at January 3, 2017	334,500		$	9.94	6.1	$	1,464
Granted	5,000		14.55
Exercised	(1,000	)	9.88
Forfeited/Expired	(3,500	)	10.40
Options outstanding at June 20, 2017	335,000		$	10.01	5.7	$	1,252
Options exercisable at June 20, 2017	53,000		$	10.39	5.4	$	177
Options exercisable and expected to vest at June 20, 2017	316,050		$	10.02	5.7	$	1,178

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Earnings per Share (Tables)

6 Months Ended

Jun. 20, 2017

Earnings Per Share [Abstract]

Schedule of Basic and Diluted Net Income (Loss) Per Share Data

Below are basic and diluted net income per share for the periods indicated (amounts in thousands except share and per share data):

	12 Weeks Ended				24 Weeks Ended
	June 20, 2017		June 14, 2016		June 20, 2017		June 14, 2016
Numerator:
Net income	$	5,330	$	4,864	$	9,568	$	7,925
Denominator:
Weighted-average shares outstanding - basic	38,535,855		38,292,215		38,769,895		38,545,115
Dilutive effect of unvested restricted stock	492,065		150,089		476,284		127,310
Dilutive effect of stock options	23,550		—		23,226		—
Dilutive effect of warrants	757,015		—		825,071		—
Weighted-average shares outstanding - diluted	39,808,485		38,442,304		40,094,476		38,672,425
Net income per share - basic	0.14		$	0.13	0.25		$	0.21
Net income per share - diluted	0.13		$	0.13	0.24		$	0.20
Antidilutive stock options, unvested restricted stock awards and warrants excluded from the computations	36,500		12,720,918		36,500		12,800,021

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Description of Business - Additional Information (Details)	Mar. 12, 2015	Jun. 20, 2017 state restaurant	Jun. 14, 2016 state restaurant
Franchisor Disclosure [Line Items]
Number of states in which entity operates | state		15	16
Stock purchase agreement date	Mar. 12, 2015
Entity Operated Units [Member]
Franchisor Disclosure [Line Items]
Number of restaurants		304	298
Franchised Units [Member]
Franchisor Disclosure [Line Items]
Number of restaurants		251	245
Franchised Units [Member] | GUAM
Franchisor Disclosure [Line Items]
Number of restaurants		1	1

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Restaurant Closure Charges, Net - Additional Information (Details)	3 Months Ended	4 Months Ended	6 Months Ended
	Jun. 20, 2017 USD ($)	Dec. 29, 2015 location	Jun. 20, 2017 USD ($)	Jun. 14, 2016 USD ($)	Jan. 03, 2017 USD ($)
Restructuring Cost and Reserve [Line Items]
Restructuring closure liability	$ 2,800,000		$ 2,800,000		$ 3,100,000
Current portion of restaurant closure liability	464,000		464,000		875,000
Non-current portion of restaurant closure liability	2,301,000		2,301,000		2,263,000
Charges for accretion in current period			85,000	$ (137,000)
Closure of 12 Underperforming Restaurants [Member]
Restructuring Cost and Reserve [Line Items]
Restructuring closure liability	1,490,000		1,490,000		1,773,000
Current portion of restaurant closure liability	200,000		200,000		600,000
Non-current portion of restaurant closure liability	1,300,000		1,300,000
Number of underperforming locations | location		12
Charges for accretion in current period			33,000
Sublease income	73,000
Facility Closing [Member]
Restructuring Cost and Reserve [Line Items]
Restructuring closure liability	1,275,000		1,275,000		1,365,000
Current portion of restaurant closure liability	300,000		300,000		300,000
Non-current portion of restaurant closure liability	$ 1,000,000		1,000,000		$ 1,100,000
Charges for accretion in current period			$ 51,000

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Restaurant Closure Charges, Net - Restaurant Closure Liability Activity (Details) - USD ($) $ in Thousands	6 Months Ended
	Jun. 20, 2017	Jun. 14, 2016
Restructuring Reserve [Roll Forward]
Closure liability, Beginning balance	$ 3,100
Charges for accretion in current period	85	$ (137)
Closure liability, Ending balance	2,800
Facility Closing [Member]
Restructuring Reserve [Roll Forward]
Closure liability, Beginning balance	1,365
Charges for accretion in current period	51
Cash payments	(141)
Closure liability, Ending balance	1,275
Closure of 12 Underperforming Restaurants [Member]
Restructuring Reserve [Roll Forward]
Closure liability, Beginning balance	1,773
Charges for accretion in current period	33
Cash payments	(316)
Closure liability, Ending balance	1,490
Closure of 12 Underperforming Restaurants [Member] | Contract termination costs
Restructuring Reserve [Roll Forward]
Closure liability, Beginning balance	1,773
Charges for accretion in current period	33
Cash payments	(316)
Closure liability, Ending balance	1,490
Closure of 12 Underperforming Restaurants [Member] | Other associated costs
Restructuring Reserve [Roll Forward]
Closure liability, Beginning balance	0
Charges for accretion in current period	0
Cash payments	0
Closure liability, Ending balance	$ 0

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Summary of refranchising (Details) $ in Thousands	6 Months Ended
	Jun. 20, 2017 USD ($) restaurant	Jun. 14, 2016 USD ($)	Jan. 03, 2017 USD ($)
Franchisor Disclosure [Line Items]
Proceeds from sale of company-operated restaurants	$ 2,192	$ 0
Favorable lease assets	23,276		$ 24,782
Unfavorable lease liabilities	$ 15,911		$ 17,072
Sale of company-operated restaurants [Member]
Franchisor Disclosure [Line Items]
Company-operated restaurants sold to franchisees | restaurant	5
Proceeds from sale of company-operated restaurants	$ 2,192
Net assets sold (primarily furniture, fixtures and equipment)	(1,261)
Goodwill related to the company-operated restaurants sold to franchisees	(247)
(Unfavorable)/favorable lease assets/liabilities	(548)
Other costs	(5)
Gain on sale of company-operated restaurants	131
Favorable lease assets	100
Unfavorable lease liabilities	$ 600

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Goodwill and other Intangible Assets - Schedule of Other Intangible Assets (Detail) - USD ($) $ in Thousands	Jun. 20, 2017	Jan. 03, 2017
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Amount	$ 29,811	$ 29,826
Accumulated Amortization	(6,535)	(5,044)
Net	23,276	24,782
Favorable Lease Assets [Member]
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Amount	14,161	14,176
Accumulated Amortization	(3,849)	(2,996)
Net	10,312	11,180
Franchise rights [Member]
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Amount	15,489	15,489
Accumulated Amortization	(2,659)	(2,038)
Net	12,830	13,451
Other Intangible Assets [Member]
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Amount	161	161
Accumulated Amortization	(27)	(10)
Net	$ 134	$ 151

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Goodwill and other Intangible Assets - Additional Information (Details) - USD ($)	6 Months Ended
	Jun. 20, 2017	Jan. 03, 2017
Finite-Lived Intangible Assets [Line Items]
Goodwill	$ 319,778,000	$ 320,025,000
Favorable lease assets write-off	$ 15,000

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Debt, Obligations Under Capital Leases and Deemed Landlord Financing Liabilities - Schedule of Debt (Detail) - USD ($) $ in Thousands	Jun. 20, 2017	Jan. 03, 2017
Debt Instrument [Line Items]
Total outstanding indebtedness	$ 144,794	$ 157,616
Obligations under capital leases and deemed landlord financing liabilities	16,956	17,715
Total debt	161,750	175,331
Less: amounts due within one year	1,546	1,588
Total amounts due after one year, net	160,204	173,743
2015 Revolving Credit Facility [Member]
Debt Instrument [Line Items]
Credit Facility	144,794	157,616
Debt discount	902	1,035
Deferred finance costs	$ 304	$ 349

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Debt, Obligations Under Capital Leases and Deemed Landlord Financing Liabilities - Additional Information (Detail) - USD ($)		6 Months Ended
	Aug. 04, 2015	Jun. 20, 2017	Jun. 14, 2016	Jan. 03, 2017
Debt Instrument [Line Items]
Payment of senior secured debt and costs associated with refinancing		$ 19,000,000	$ 4,000,000
2015 Revolving Credit Facility [Member]
Debt Instrument [Line Items]
Credit agreement issuance date	Aug. 04, 2015
Credit agreement maturity date	Aug. 04, 2020
Credit facility amount	$ 250,000,000
Letters of credit		18,300,000
Unamortized debt discount		$ 902,000		$ 1,035,000
Interest rate on outstanding balance of credit facility (percent)		2.80%
Availability for additional borrowings under credit facility		$ 85,700,000
Credit facility outstanding borrowings		$ 146,000,000

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Derivative Instruments - Additional Information (Details) - Interest Rate Cap [Member] - Cash Flow Hedging [Member]	Jun. 20, 2017 USD ($)
Derivative [Line Items]
Notional amount	$ 70,000,000
Cap interest rate	2.00%
Amount expected to be reclassified into earnings over the remaining term of the agreement	$ 300,000
Amount expected to be reclassified into interest expense over the next 12 months	$ 20,000

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Fair Value Measurements - Additional Information (Detail) - USD ($)	Jun. 20, 2017	Jan. 03, 2017
Interest Rate Cap [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Fair value of interest rate cap	$ 200,000.0	$ 600,000.0

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Fair Value Measurements Fair Value Measurement Summary of Assets and Liabilities Measured at Fair Value on Recurring Basis (Details) - USD ($) $ in Thousands	Jun. 20, 2017	Jan. 03, 2017
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Interest rate cap	$ 205	$ 598
Total assets measured at fair value	205	598
Markets for Identical Assets (Level 1)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Interest rate cap	0	0
Total assets measured at fair value	0	0
Observable Inputs (Level 2)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Interest rate cap	205	598
Total assets measured at fair value	205	598
Unobservable Inputs (Level 3)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Interest rate cap	0	0
Total assets measured at fair value	$ 0	$ 0

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Other Accrued Liabilities and Other Non-current Liabilities - Summary of Other Accrued Liabilities (Detail) - USD ($) $ in Thousands	Jun. 20, 2017	Jan. 03, 2017
Other Liabilities Disclosure [Abstract]
Employee compensation and related items	$ 11,203	$ 13,783
Accrued insurance	8,471	8,192
Accrued sales tax	5,264	3,916
Accrued income tax	1,189	562
Accrued advertising	2,325	1,657
Accrued real property tax	1,249	1,274
Restaurant closure liability	464	875
Other	6,238	6,394
Other accrued liabilities	$ 36,403	$ 36,653

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Other Accrued Liabilities and Other Non-current Liabilities - Summary of Other Non-current Liabilities (Detail) - USD ($) $ in Thousands	Jun. 20, 2017	Jan. 03, 2017
Other Liabilities Disclosure [Abstract]
Unfavorable lease liabilities	$ 15,911	$ 17,072
Insurance reserves	4,305	4,269
Restaurant closure liability	2,301	2,263
Unearned trade discount, non-current	1,392	1,596
Deferred development and initial franchise fees	1,418	1,385
Deferred gift card income	673	1,182
Deferred rent liability	2,107	1,676
Other	2,035	697
Other non-current liabilities	$ 30,142	$ 30,140

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Stock-Based Compensation - Additional Information (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 20, 2017	Jun. 14, 2016	Jun. 20, 2017	Jun. 14, 2016	Jan. 03, 2017
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Payments related to employee tax withholding obligations			$ 59	$ 0
Number of awards outstanding (in shares)	1,142,062		1,142,062		1,133,822
Number of stock options outstanding (in shares)	335,000		335,000		334,500
2015 Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Common stock reserved and authorized for issuance (in shares)	3,300,000		3,300,000
Common stock authorized and available for grant (in shares)	1,597,458		1,597,458
Stock-based compensation expense recorded	$ 1,100	$ 900	$ 2,100	$ 1,600
Restricted Stock [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Unrecognized compensation expense, net	8,300		$ 8,300
Weighted average period of recognition (in years)			2 years 3 months 18 days
Payments related to employee tax withholding obligations			$ 100
Shares paid for tax withholding for share based compensation			4,686
Stock Options [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Unrecognized stock compensation expense	$ 700		$ 700
Vesting period (in years)			2 years 6 months

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Stock-Based Compensation - Summary of Outstanding and Unvested Restricted Stock Activity (Details)	6 Months Ended
	Jun. 20, 2017 $ / shares shares
Shares
Nonvested Shares, Beginning balance (in shares) | shares	1,133,822
Granted (in shares) | shares	72,570
Vested (in shares) | shares	(64,330)
Forfeited (in shares) | shares	0
Nonvested Shares, Ending balance (in shares) | shares	1,142,062
Weighted-Average Grant Date Fair Value
Weighted-Average Grant Date Fair Value, Beginning balance (in dollars per share) | $ / shares	$ 10.40
Weighted-Average Grant Date Fair Value, Granted (in dollars per share) | $ / shares	13.59
Weighted-Average Grant Date Fair Value, Vested (in dollars per share) | $ / shares	9.63
Weighted-Average Grant Date Fair Value, Forfeited (in dollars per share) | $ / shares	0.00
Weighted-Average Grant Date Fair Value, Ending balance (in dollars per share) | $ / shares	$ 10.64

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Stock-Based Compensation - Summary of Stock Options Activity (Details) - USD ($) $ / shares in Units, $ in Thousands	6 Months Ended	12 Months Ended
	Jun. 20, 2017	Jan. 03, 2017
Shares
Options outstanding, Beginning balance (in shares)	334,500
Granted (in shares)	5,000
Exercised (in shares)	(1,000)
Forfeited (in shares)	(3,500)
Options outstanding, Ending balance (in shares)	335,000	334,500
Options exercisable (in shares)	53,000
Options exercisable and expected to vest (in shares)	316,050
Weighted Average Exercise Price
Weighted Average Exercise Price, Options outstanding, Beginning balance (in dollars per share)	$ 9.94
Weighted Average Exercise Price, Granted (in dollars per share)	14.55
Weighted Average Exercise Price, Exercised (in dollars per share)	9.88
Weighted Average Exercise Price, Forfeited (in dollars per share)	10.40
Weighted Average Exercise Price, Options outstanding, Ending balance (in dollars per share)	10.01	$ 9.94
Weighted Average Exercise Price, Options exercisable (in dollars per share)	10.39
Weighted Average Exercise Price, Options exercisable and expected (in dollars per share)	$ 10.02
Share-based Compensation Arrangement by Share-based Payment Award, Options, Additional Disclosures [Abstract]
Weighted Average Remaining Contractual Term, Options outstanding (in years)	5 years 8 months 12 days	6 years 1 month
Weighted Average Remaining Contractual Term, Options exercisable (in years)	5 years 4 months 24 days
Weighted Average Remaining Contractual Term, Options exercisable and expected to vest (in years)	5 years 8 months 12 days
Aggregate Intrinsic Value, Options outstanding, Beginning balance	$ 1,464
Aggregate Intrinsic Value, Options outstanding, Ending balance	1,252	$ 1,464
Aggregate Intrinsic Value, Options exercisable	177
Aggregate Intrinsic Value, Options excersiable and expected to vest	$ 1,178

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Shareholders' Equity - Additional Information (Detail) - USD ($)		3 Months Ended	6 Months Ended
	Mar. 29, 2017	Jun. 20, 2017	Jun. 20, 2017	Aug. 23, 2016	Feb. 26, 2016
Common Stock and Warrants [Member]
Class of Stock [Line Items]
Maximum authorized stock repurchase amount (up to)		$ 50,000,000	$ 50,000,000	$ 25,000,000	$ 25,000,000.0
Remaining authorized stock repurchase amount		$ 25,300,000	$ 25,300,000
Common Stock [Member]
Class of Stock [Line Items]
Shares repurchased (in shares)			641,165
Average price per share			$ 12.48
Shares repurchased, value			$ 8,000,000
Warrants [Member]
Class of Stock [Line Items]
Shares repurchased (in shares)	400,000	400,000	400,000
Average price per share	$ 3.75	$ 3.75	$ 3.75
Shares repurchased, value		$ 1,500,000	$ 1,500,000
Discount on repurchase	5.00%
Share Price	$ 3.95

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Earnings per Share - Schedule of Basic and Diluted Net Income per Share Data (Detail) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 20, 2017	Jun. 14, 2016	Jun. 20, 2017	Jun. 14, 2016
Numerator:
Net income	$ 5,330	$ 4,864	$ 9,568	$ 7,925
Denominator:
Weighted-average shares outstanding - basic (in shares)	38,535,855	38,292,215	38,769,895	38,545,115
Weighted-average shares outstanding - diluted	39,808,485	38,442,304	40,094,476	38,672,425
Net (loss) income per share - basic (in dollars per share)	$ 0.14	$ 0.13	$ 0.25	$ 0.21
Net (loss) income per share - diluted (in dollars per share)	$ 0.13	$ 0.13	$ 0.24	$ 0.20
Antidilutive stock options, unvested restricted stock awards, unvested RSUs and warrants excluded from the computations (in dollars per share)	36,500	12,720,918	36,500	12,800,021
Restricted Stock [Member]
Denominator:
Dilutive effect (in shares)	492,065	150,089	476,284	127,310
Stock Options [Member]
Denominator:
Dilutive effect (in shares)	23,550	0	23,226	0
Warrants [Member]
Denominator:
Dilutive effect (in shares)	757,015	0	825,071	0

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Income Taxes - Additional Information (Detail) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 20, 2017	Jun. 14, 2016	Jun. 20, 2017	Jun. 14, 2016	Jan. 03, 2017
Income Tax Disclosure [Abstract]
Effective income tax rates (percent)	38.40%	(40.50%)	39.10%	(40.80%)
Provision for income taxes	$ 3,319	$ 3,311	$ 6,151	$ 5,453
Valuation allowance	$ 0		$ 0		$ 0

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Commitments and Contingencies - Additional Information (Detail) $ in Millions	6 Months Ended
	Jun. 20, 2017 USD ($)
Loss Contingencies [Line Items]
Purchasing commitments contract extended terms	2021
Contractual purchase obligations for goods and services	$ 67.9