TACO 10-Q Quarterly Report Sept. 6, 2016 | Alphaminr
Del Taco Restaurants, Inc.
ALPHAMINR

TACO 10-Q Quarter ended Sept. 6, 2016

Balance Sheet
Cash Flow
Income Statement
Debt
DEL TACO RESTAURANTS, INC.
10-Q 1 tacoq32016.htm 10-Q Document

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 September 6, 2016
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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting 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
¨
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 October 17, 2016 , there were 39,153,003 shares of the registrant’s common stock issued and outstanding.



Del Taco Restaurants, Inc.
Index

PART I. FINANCIAL INFORMATION
PART II. OTHER INFORMATION



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Del Taco Restaurants, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share data)
Successor
September 6, 2016
December 29, 2015
Assets
(Unaudited)
Current assets:
Cash and cash equivalents
$
11,603

$
10,194

Accounts and other receivables, net
3,194

3,220

Inventories
2,510

2,806

Prepaid expenses and other current assets
5,244

3,545

Total current assets
22,551

19,765

Property and equipment, net
122,982

114,030

Goodwill
319,526

318,275

Trademarks
220,300

220,300

Intangible assets, net
25,903

28,373

Other assets, net
3,308

2,829

Total assets
$
714,570

$
703,572

Liabilities and shareholders’ equity
Current liabilities:
Accounts payable
$
17,133

$
16,831

Other accrued liabilities
36,294

32,897

Current portion of capital lease obligations and deemed landlord financing liabilities
1,639

1,725

Total current liabilities
55,066

51,453

Long-term debt, capital lease obligations and deemed landlord financing liabilities, excluding current portion, net
169,107

167,968

Deferred income taxes
86,323

79,523

Other non-current liabilities
33,400

36,251

Total liabilities
343,896

335,195

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; 39,365,513 shares issued and outstanding at September 6, 2016; 38,802,425 shares issued and outstanding at December 29, 2015
4

4

Additional paid-in capital
361,805

372,260

Accumulated other comprehensive loss
(122
)
—

Retained earnings (accumulated deficit)
8,987

(3,887
)
Total shareholders’ equity
370,674

368,377

Total liabilities and shareholders’ equity
$
714,570

$
703,572

See accompanying notes to consolidated financial statements.

1

Del Taco Restaurants, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
(In thousands, except share and per share data)
Successor
Predecessor
12 Weeks Ended
September 6, 2016
10 Weeks Ended
September 8, 2015
2 Weeks Ended
June 30, 2015
Revenue:
Company restaurant sales
$
100,173

$
78,874

$
15,891

Franchise revenue
3,686

2,694

546

Franchise sublease income
560

467

95

Total revenue
104,419

82,035

16,532

Operating expenses:
Restaurant operating expenses:
Food and paper costs
27,574

22,567

4,607

Labor and related expenses
30,748

23,512

4,712

Occupancy and other operating expenses
20,911

17,024

3,653

General and administrative
8,566

5,824

1,004

Depreciation and amortization
5,157

4,147

664

Occupancy and other - franchise subleases
521

437

87

Pre-opening costs
94

41

28

Restaurant closure charges, net
(133
)
19

—

Loss on disposal of assets
54

1

84

Total operating expenses
93,492

73,572

14,839

Income from operations
10,927

8,463

1,693

Other expenses:
Interest expense
1,412

1,725

664

Transaction-related costs
490

11,978

61

Debt modification costs
—

78

1

Total other expenses
1,902

13,781

726

Income (loss) from operations before provision (benefit) for income taxes
9,025

(5,318
)
967

Provision (benefit) for income taxes
4,076

(3,132
)
(1,449
)
Net income (loss)
4,949

(2,186
)
2,416

Other comprehensive loss:
Change in fair value of interest rate cap
(122
)
—

(1
)
Total other comprehensive loss
(122
)
—

(1
)
Comprehensive income (loss)
$
4,827

$
(2,186
)
$
2,415

Earnings (loss) per share:
Basic
$
0.13

$
(0.06
)
$
0.36

Diluted
$
0.13

$
(0.06
)
$
0.36

Weighted-average shares outstanding
Basic
38,465,064

38,802,425

6,707,776

Diluted
38,688,961

38,802,425

6,707,776

See accompanying notes to consolidated financial statements.

2

Del Taco Restaurants, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
(In thousands, except share and per share data)
Successor
Predecessor
36 Weeks Ended
September 6, 2016
10 Weeks Ended
September 8, 2015
26 Weeks Ended
June 30, 2015
Revenue:
Company restaurant sales
$
289,640

$
78,874

$
200,676

Franchise revenue
10,591

2,694

6,693

Franchise sublease income
1,617

467

1,183

Total revenue
301,848

82,035

208,552

Operating expenses:
Restaurant operating expenses:
Food and paper costs
80,061

22,567

57,447

Labor and related expenses
90,781

23,512

61,120

Occupancy and other operating expenses
60,560

17,024

43,611

General and administrative
25,072

5,824

14,850

Depreciation and amortization
16,175

4,147

8,252

Occupancy and other - franchise subleases
1,534

437

1,109

Pre-opening costs
222

41

276

Restaurant closure charges, net
(121
)
19

94

Loss on disposal of assets
191

1

99

Total operating expenses
274,475

73,572

186,858

Income from operations
27,373

8,463

21,694

Other expenses:
Interest expense
4,289

1,725

11,491

Transaction-related costs
681

11,978

7,255

Debt modification costs
—

78

139

Change in fair value of warrant liability
—

—

(35
)
Total other expenses
4,970

13,781

18,850

Income (loss) from operations before provision (benefit) for income taxes
22,403

(5,318
)
2,844

Provision (benefit) for income taxes
9,529

(3,132
)
740

Net income (loss)
12,874

(2,186
)
2,104

Other comprehensive income (loss):
Change in fair value of interest rate cap
(122
)
—

(24
)
Reclassification of interest rate cap amortization included in net income (loss)
—

—

58

Total other comprehensive income (loss), net
(122
)
—

34

Comprehensive income (loss)
$
12,752

$
(2,186
)
$
2,138

Earnings (loss) per share:
Basic
$
0.33

$
(0.06
)
$
0.38

Diluted
$
0.33

$
(0.06
)
$
0.37

Weighted-average shares outstanding
Basic
38,518,431

38,802,425

5,492,417

Diluted
38,682,273

38,802,425

5,610,859



3

Del Taco Restaurants, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Successor
Predecessor
36 Weeks Ended
September 6, 2016
10 Weeks Ended
September 8, 2015
26 Weeks Ended
June 30, 2015
Operating activities
Net income (loss)
$
12,874

$
(2,186
)
$
2,104

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization
16,175

4,289

8,249

Amortization of favorable and unfavorable lease assets and liabilities, net
(420
)
(142
)
3

Amortization of deferred financing costs and debt discount
267

37

908

Subordinated note interest paid-in-kind
—

—

37

Debt modification costs
—

78

139

Stock-based compensation
2,630

146

532

Change in fair value of warrant liability
—

—

(35
)
Deferred income taxes
6,019

—

551

Loss on disposal of assets
191

1

99

Restaurant closure charges
(403
)
—

—

Changes in operating assets and liabilities:
Accounts and other receivables, net
26

938

154

Inventories
296

(217
)
145

Prepaid expenses and other current assets
(1,699
)
(1,985
)
(426
)
Accounts payable
302

(2,100
)
4,222

Other accrued liabilities
3,374

779

(5,026
)
Other non-current liabilities
(936
)
(1,477
)
(1,573
)
Net cash provided by (used in) operating activities
38,696

(1,839
)
10,083

Investing activities
Purchases of property and equipment
(23,143
)
(7,723
)
(14,813
)
Proceeds from disposal of property and equipment
5

—

42

Proceeds from the Company's trust account
—

149,989

—

Purchases of other assets
(1,538
)
(297
)
(513
)
Acquisition of Del Taco Holdings, net of cash acquired
—

(89,827
)
—

Net cash (used in) provided by investing activities
(24,676
)
52,142

(15,284
)
Financing activities
Proceeds from term loan, net of debt discount
—

—

23,654

Proceeds from issuance of common stock
—

35,000

91,236

Repurchase of common stock and warrants
(12,169
)
—

—

Payment of tax withholding related to restricted stock vesting, option exercises and distribution of restricted stock units
(916
)
—

(7,533
)
Payments on term loan
—

(227,100
)
—

Payments on capital leases and deemed landlord financing
(1,214
)
(328
)
(831
)
Payment on subordinated notes
—

—

(108,113
)
Proceeds from revolving credit facility
14,000

162,556

10,000

Payments on revolving credit facility
(12,000
)
(7,000
)
(6,000
)
Payment for interest rate cap
(312
)
—

—

Payments for debt issue costs
—

(484
)
(593
)
Repayment of note payable
—

(523
)
—

Payment of deferred underwriter compensation
—

(5,250
)
—

Net cash (used in) provided by financing activities
(12,611
)
(43,129
)
1,820

Increase (decrease) in cash and cash equivalents
1,409

7,174

(3,381
)
Cash and cash equivalents at beginning of period
10,194

—

8,553

Cash and cash equivalents at end of period
$
11,603

$
7,174

$
5,172

Supplemental cash flow information:
Cash paid during the period for interest
$
4,279

$
1,180

$
13,548

Cash paid during the period for income taxes
811

—

46

Supplemental schedule of non-cash activities:
Accrued property and equipment purchases
$
3,672

$
2,322

$
2,460

Write-offs of accounts receivables
72

—

—

Amortization of interest rate cap into net loss, net of tax
—

—

58

Change in other asset for fair value of interest rate cap recorded to other comprehensive loss, net
(122
)
—

(24
)
Warrant liability reclassified to equity upon exercise of warrants
—

—

8,274

Issuance of shares for consideration in the acquisition of Del Taco Holdings, Inc.
—

189,305

—

Issuance of warrants as payment for working capital loans
—

389

—

Common stock of Del Taco Restaurants, Inc. reclassified to equity upon release from possible redemption
—

136,213

—

See accompanying notes to consolidated financial statements

4

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 September 6, 2016 (Successor), there were 300 company-operated and 246 franchised Del Taco restaurants located in 16 states, including one franchised unit in Guam. At September 8, 2015 (Successor), there were 306 company-operated and 241 franchised Del Taco restaurants located in 16 states, including one franchised 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. See Note 3 for further discussion of the Business Combination.
2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and the rules and regulations of Securities and Exchange Commission (“SEC”). For additional information, these consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 29, 2015 ("2015 Form 10-K"). The accounting policies used in preparing these consolidated financial statements are the same as those described in our 2015 Form 10-K.
As a result of the Business Combination, the Company is the acquirer for accounting purposes, and DTH is the acquiree and accounting predecessor. The Company’s financial statement presentation distinguishes a “Predecessor” for DTH for periods prior to the Closing Date. The Company is the “Successor” for periods after the Closing Date, which includes consolidation of DTH subsequent to the Business Combination on June 30, 2015. The Merger was accounted for as a business combination using the acquisition method of accounting, and the Successor financial statements reflect a new basis of accounting that is based on the fair value of the net assets acquired. See Note 3 for further discussion of the Business Combination. As a result of the application of the acquisition method of accounting as of the Closing Date, the financial statements for the Predecessor period and for the Successor period are presented on a different basis and are therefore, not comparable. The historical financial information of Del Taco, formerly LAC, prior to the Business Combination have not been reflected in the financial statements as those amounts have been considered de-minimus.
The Company’s fiscal year ends on the Tuesday closest to December 31. Fiscal year 2016 is the fifty-three week period ended January 3, 2017 (Successor). Fiscal year 2015 is the fifty-two week period ended December 29, 2015 (Successor). 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. In a fifty-two week fiscal year, the first, second and third quarters each include twelve weeks of operations and the fourth quarter includes sixteen weeks of operations. For fiscal year 2016 , the Company’s accompanying financial statements reflect the twelve weeks and thirty-six weeks ended September 6, 2016 (Successor). For fiscal year 2015 , the Company’s accompanying financial statements reflect the two and twenty-six weeks ended June 30, 2015 (Predecessor) and the ten weeks ended September 8, 2015 (Successor).
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

5

Del Taco Restaurants, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)

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 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 March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting , which is intended to simplify various aspects of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. This standard is effective for annual reporting periods beginning after December 15, 2016, and interim periods within that reporting period, with early adoption permitted. The Company is currently evaluating the impact of the standard on its consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU No. 2016-04, Liabilities-Extinguishment of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products, which is designed to provide guidance and eliminate diversity in the accounting for the derecognition of financial liabilities related to certain prepaid stored-value products using a revenue-like breakage model. This standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. This standard is to be applied retrospectively or using a cumulative effect transition method as of the date of adoption. The Company is currently evaluating the impact of the standard on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) . This guidance will result in key changes to lease accounting and will aim to bring leases onto balance sheets to give investors, lenders, and other financial statement users a more comprehensive view of a company's long-term financial obligations as well as the assets it owns versus leases. The new leasing standard will be effective for fiscal years beginning after December 15, 2018, and for interim periods within those fiscal years. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements as well as the expected 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 is currently evaluating which transition method to use and the effect that this pronouncement will have on its consolidated financial statements and related disclosures.

6

Del Taco Restaurants, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)

3. Business Combination
On June 30, 2015 , the Company and DTH completed the Business Combination pursuant to the Merger Agreement under which the Company’s wholly-owned subsidiary, Levy Merger Sub, merged with and into DTH, with DTH surviving the merger as a wholly-owned subsidiary of the Company.
Concurrent with the execution of the Merger Agreement, Levy Epic Acquisition Company, LLC (“Levy Newco”), Levy Epic Acquisition Company II, LLC (“Levy Newco II” and with Levy Newco, the “Levy Newco Parties”), DTH and the DTH stockholders entered into a stock purchase agreement (the “Stock Purchase Agreement”). Pursuant to the Stock Purchase Agreement, the Levy Newco Parties agreed to purchase 2,348,968 shares of DTH common stock from DTH for $91.2 million in cash, and to purchase 740,564 shares of DTH common stock directly from existing DTH shareholders for $28.8 million in cash (the “Initial Investment”). As a result of this Initial Investment, an aggregate of 3,089,532 shares of DTH common stock was purchased by the Levy Newco Parties for total cash consideration of $120.0 million .
The total purchase price paid to DTH stockholders (except for the Levy NewCo Parties) was $284.3 million . The closing of the Business Combination and the Initial Investment were accounted for as related events transferring control of DTH to the Company through a minority investment in the Initial Investment and a controlling interest at the closing of the Business Combination.
The Company recorded an allocation of the purchase price to DTH’s tangible and identifiable intangible assets acquired and liabilities assumed based on their fair value as of the Closing Date. The final purchase price allocation is as follows (in thousands):

Purchase Price
Allocation
Cash and cash equivalents
$
5,173

Accounts receivable and other receivables
3,228

Inventories
2,541

Prepaid expenses and other current assets
4,266

Total current assets
15,208

Property and equipment
105,524

Intangible assets
250,490

Other assets
4,194

Total identifiable assets acquired
375,416

Accounts payable
(18,866
)
Other accrued liabilities
(26,607
)
Current portion of capital lease obligations and deemed landlord financing liabilities
(1,670
)
Long-term debt, capital lease obligations and deemed landlord financing liabilities
(246,562
)
Deferred income taxes
(80,254
)
Other long-term liabilities
(36,208
)
Net identifiable liabilities assumed
(34,751
)
Goodwill
319,056

Total gross consideration
$
284,305


During the twenty-four weeks ended June 14, 2016 (Successor), the Company recorded a net $0.8 million adjustment to goodwill due to a change in estimate for the liability for deferred income taxes.
For the twelve and thirty-six weeks ended September 6, 2016 (Successor), the Company incurred approximately $0.5 million and $0.7 million , respectively, of transaction expenses, of which $(0.1) million and $0.1 million , respectively, related to the Business Combination. During the twelve weeks ended September 6, 2016 , the Company was able to recover legal defense

7

Del Taco Restaurants, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)

costs related to a purported class action and derivative complaint (see Note 14 for further discussion) of $0.2 million from its insurance company related to costs previously expensed. For the ten weeks ended September 8, 2015 (Successor) and the two and twenty-six weeks ended June 30, 2015 (Predecessor), the Company incurred approximately $12.0 million , $0.1 million and $7.3 million , respectively, of transaction expenses directly related to the Business Combination.
4. Restaurant Closure Charges, Net
At September 6, 2016 (Successor) and December 29, 2015 (Successor), the restaurant closure liability is $3.1 million and $4.8 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 December 29, 2015 (Successor)
$
1,023

Charges for accretion in current period
57

Cash payments
(73
)
Balance at September 6, 2016 (Successor)
$
1,007

The current portion of the restaurant closure liability is $0.1 million at both September 6, 2016 (Successor) and December 29, 2015 (Successor), respectively, and is included in other accrued liabilities in the consolidated balance sheets. The non-current portion of the restaurant closure liability is $0.9 million at both September 6, 2016 (Successor) and December 29, 2015 (Successor), 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 twelve and thirty-six weeks ended September 6, 2016 (Successor), the Company recorded accretion expense related to the closures as well as $0.1 million and $0.2 million , respectively, related to the write-off of fixed assets associated with the closures. During the thirty-six weeks ended September 6, 2016 (Successor), the Company recorded net adjustments to the lease termination liability for four closed restaurants due to changes in estimates based on executed subleases.
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 December 29, 2015 (Successor)
$
3,637

$
163

$
3,800

Charges for accretion in current period
96

—

96

Cash payments
(1,076
)
(163
)
(1,239
)
Adjustments to estimates based on current activity
(552
)
—

(552
)
Balance at September 6, 2016 (Successor)
$
2,105

$
—

$
2,105

The current portion of the restaurant closure liability is $0.9 million and $1.5 million at September 6, 2016 (Successor) and December 29, 2015 (Successor), respectively, and is included in other accrued liabilities in the consolidated balance sheets. The non-current portion of the restaurant closure liability is $1.2 million and $2.3 million at September 6, 2016 (Successor) and December 29, 2015 (Successor), respectively, and is included in other non-current liabilities in the consolidated balance sheets.

8

Del Taco Restaurants, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)

5. Goodwill and other Intangible Assets
Goodwill was $319.5 million at September 6, 2016 (Successor) compared to $318.3 million at December 29, 2015 (Successor). The increase was due to an adjustment to the purchase price allocation as described in more detail in Note 3 and $0.4 million related to the purchase of a franchise restaurant during the twelve weeks ended September 6, 2016 .
There have been no changes in the carrying amount of trademarks since December 29, 2015 (Successor).
The Company’s other intangible assets at September 6, 2016 (Successor) and December 29, 2015 (Successor) consisted of the following (in thousands):
Successor
September 6, 2016
December 29, 2015
Gross
Carrying
Amount
Accumulated
Amortization
Net
Gross
Carrying
Amount
Accumulated
Amortization
Net
Favorable lease assets
$
14,207

$
(2,409
)
$
11,798

$
14,207

$
(1,020
)
$
13,187

Franchise rights
15,783

(1,678
)
14,105

15,897

(711
)
15,186

Total amortized other intangible assets
$
29,990

$
(4,087
)
$
25,903

$
30,104

$
(1,731
)
$
28,373


Goodwill and intangible assets at September 6, 2016 (Successor) and December 29, 2015 (Successor) are based on the purchase price allocation of DTH, which is based on valuations performed to determine the fair value of the acquired assets as of the acquisition date. See Note 3 for further discussion of the acquisition of DTH. During the thirty-six weeks ended September 6, 2016 (Successor), the Company wrote-off $0.1 million of franchise rights associated with the closure of three franchise locations.
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 September 6, 2016 (Successor) and December 29, 2015 (Successor) consisted of the following (in thousands):
Successor
September 6, 2016
December 29, 2015
2015 Senior Credit Facility, net of debt discount of $1,128 and $1,328 and deferred financing costs of $381 and $448 at September 6, 2016 (Successor) and December 29, 2015 (Successor), respectively
$
154,491

$
152,224

Total outstanding indebtedness
154,491

152,224

Obligations under capital leases and deemed landlord financing liabilities
16,255

17,469

Total debt
170,746

169,693

Less: amounts due within one year
1,639

1,725

Total amounts due after one year, net
$
169,107

$
167,968

At September 6, 2016 (Successor) and December 29, 2015 (Successor), the Company assessed the amounts recorded under the 2015 Senior Credit Facility and determined that such amounts approximated fair value.
2015 Revolving Credit Facility (Successor)
On August 4, 2015 , the Company refinanced its existing senior credit facility (“2013 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 Company utilized $164 million of proceeds from the Credit Agreement to refinance in total its 2013 Senior Credit Facility and pay costs associated with the refinancing. The 2013 Senior Credit Facility, as amended March 20, 2015, totaled $267.1 million , consisting of an initial $227.1 million term loan (“2013 Term Loan”) and a $40 million revolver (“2013 Revolver”). At the time of the refinance, a $162.5 million term loan

9

Del Taco Restaurants, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)

balance was outstanding and $17.6 million of revolver capacity was utilized to support outstanding letters of credit under the 2013 Senior Credit Facility.
At the Company’s option, loans under the 2015 Senior Credit Facility may bear interest at a base rate or LIBOR, plus an applicable margin determined in accordance with a consolidated total lease adjusted leverage ratio-based pricing grid. The base rate is calculated as the highest of (a) the Federal Funds Rate plus 1/2 of 1%, (b) the prime rate of Bank of America, and (c) LIBOR plus 1.00% . For LIBOR loans, the applicable margin is in the range of 1.50% to 2.50% , and for base rate loans the applicable margin is in the range of 0.50% and 1.50% . The applicable margin was initially set at 2.00% for LIBOR loans and at 1.00% for base rate loans until delivery of financial statements and a compliance certificate for the fourth fiscal quarter ending after the closing date of the Credit Agreement. Following delivery of financial statements and a compliance certificate for the fourth fiscal quarter ending December 29, 2015 (Successor), the applicable margin decreased 0.25% for both LIBOR loans and base rate loans during the first fiscal quarter of 2016. The 2015 Senior Credit Facility capacity used to support letters of credit currently incurs fees equal to the applicable margin of 1.75% . The 2015 Senior Credit Facility unused commitment currently incurs a 0.20% fee.

The Credit Agreement contains certain financial covenants, including the maintenance of a consolidated total lease adjusted leverage ratio and a consolidated fixed charge coverage ratio. The Company was in compliance with the financial covenants as of September 6, 2016 (Successor). Substantially all of the assets of the Company are pledged as collateral under the 2015 Senior Credit Facility.
The Company capitalized lender costs and deferred financing costs of $1.4 million and $0.5 million , respectively, in connection with the refinancing and expensed $0.1 million as debt modification costs in the consolidated statements of comprehensive income (loss) for the ten weeks ended September 8, 2015 (Successor). Lender debt discount costs and deferred financing costs associated with the 2015 Senior Credit Facility are presented net of the 2015 Senior Credit Facility balance on the consolidated balance sheets and will be amortized to interest expense over the term of the 2015 Senior Credit Facility. Amortization of deferred financing costs and debt discount related to the 2015 Senior Credit Facility totaled $0.1 million and $0.3 million during the twelve weeks and thirty-six weeks ended September 6, 2016 (Successor), respectively.
At September 6, 2016 (Successor), the weighted-average interest rate on the outstanding balance of the Senior Credit Facility was 2.3% . At September 6, 2016 (Successor), the Company had a total of $75.0 million of availability for additional borrowings under the 2015 Senior Credit Facility as the Company had $156.0 million of outstanding borrowings and letters of credit outstanding of $19.0 million which reduce availability under the 2015 Senior Credit Facility.
DTH 2013 Senior Credit Facility
In March 2015, DTH amended its 2013 Senior Credit Facility to increase the 2013 Term Loan by $25.1 million to $227.1 million (the “March 2015 Debt Refinance”). A portion of the proceeds from Step 1 of the Business Combination, described in Note 3, proceeds of $10 million from the 2013 Revolver and the March 2015 Debt Refinance proceeds were used to fully redeem the then outstanding balance of the subordinated notes of $111.2 million .
On March 12, 2015, DTH satisfied the rating condition in its 2013 Senior Credit Facility resulting in a decrease in interest rate to LIBOR (not to be less than 1.00% ) plus a margin of 4.25% .
The Company incurred lender costs and third-party costs associated with the March 2015 Debt Refinance of $1.6 million of which $1.5 million was capitalized as lender debt discount and $0.1 million was expensed as debt modification costs in the consolidated statements of comprehensive income (loss) for the twenty-six weeks ended June 30, 2015 (Predecessor).
Lender debt discount costs and deferred financing costs associated with the 2013 Senior Credit Facility were amortized to interest expense over the term of the 2013 Term Loan using the effective interest method. Amortization of deferred financing costs including debt discount totaled $0.1 million and $0.9 million during the two and twenty-six weeks ended June 30, 2015, respectively.

10

Del Taco Restaurants, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)

Subordinated Notes (Predecessor)
In connection with Step 1 of the Business Combination and the March 2015 Debt Refinance discussed above, DTH fully redeemed the outstanding balance of the Sagittarius Restaurants LLC (SAG Restaurants) subordinated notes (“SAG Restaurants Sub Notes”) and F&C Restaurant Holding Co. (F&C RHC) subordinated notes (“F&C RHC Sub Notes”) on March 20, 2015 of $111.2 million .
For the twenty-six weeks ended June 30, 2015 (Predecessor), interest expense related to the SAG Restaurants Sub Notes and F&C RHC Sub Notes was $3.1 million .
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 September 6, 2016 (Successor), the 2016 Interest Rate Cap Agreement had no hedge ineffectiveness.
As of December 29, 2015 (Successor) and through June 30, 2016, the Company had an interest rate cap agreement to hedge cash flows associated with interest rate fluctuations on variable rate debt ("2010 Interest Rate Cap Agreement"). The 2010 Interest Rate Cap Agreement had a notional amount of $87.5 million as of December 29, 2015 (Successor). The individual caplet contracts within the interest rate cap agreement expired at various dates through June 30, 2016.
2016 Interest Rate Cap Agreement (Successor)
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 and thirty-six weeks ended September 6, 2016 (Successor), respectively.
As of September 6, 2016 (Successor), the Company was hedging forecasted transactions expected to occur through March 31, 2020. Assuming interest rates at September 6, 2016 (Successor) remain constant, $0.3 million of interest expense related to hedges of these transactions is expected to be reclassified into earnings over the next 43 months. The Company intends to ensure that this hedge remains effective, therefore, approximately one thousand dollars is expected to be reclassified into interest expense over the next 12 months.
The effective portion of the 2016 Interest Rate Cap Agreement through September 6, 2016 (Successor) was included in accumulated other comprehensive income.
2010 Interest Rate Cap Agreement (Predecessor)
To ensure the effectiveness of the 2010 Interest Rate Cap Agreement through June 30, 2015 (Predecessor), the Company elected the three-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 two and twenty-six weeks ended June 30, 2015 (Predecessor).
As of the July 1, 2015 interest reset date, 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 2010 Interest Rate Cap Agreement,

11

Del Taco Restaurants, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)

and as a result, this hedge became ineffective. Therefore, after July 1, 2015 through June 30, 2016, any changes in fair value were recorded through interest expense.
The effective portion of the 2010 Interest Rate Cap Agreement through June 30, 2015 (Predecessor) was included in accumulated other comprehensive income and included as a fair value adjustment through the purchase price allocation as described in Note 3.

Warrant Liability (Predecessor)
On March 20, 2015, warrants to purchase 597,802 shares of DTH common stock held by a former large shareholder of DTH were exercised at a strike price of $25.00 per share based on a fair value of $8.3 million determined based on the common stock price of the Initial Investment discussed above in Note 3. Upon exercise, 384,777 shares of DTH common stock were redeemed as payment for the strike price resulting in 213,025 shares of DTH common stock being issued. DTH recorded a mark-to-market adjustment of $35,000 to reduce the liability during the twenty-six weeks ended June 30, 2015 (Predecessor) and then reclassified the balance of the warrant liability of $8.3 million to shareholders’ equity.
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 and 2010 Interest Rate Cap Agreements are recorded at fair value in the Company’s consolidated balance sheets.
As of September 6, 2016 (Successor) and December 29, 2015 (Successor), the Company held certain assets and liabilities that are required to be measured at fair value on a recurring basis. For both periods, these included derivative instruments related to interest rates. The Company determined the fair values of the interest rate cap contracts based on counterparty quotes, with appropriate adjustments for any significant impact of nonperformance risk of the parties to the interest rate cap contracts. Therefore, the Company has categorized these interest rate cap contracts as Level 2 fair value measurements. The fair value of the 2016 Interest Rate Cap Agreement was $0.2 million at September 6, 2016 (Successor) and is included in other assets in the Consolidated Balance Sheets. The fair value of the 2010 Interest Rate Cap Agreement was zero at December 29, 2015 (Successor).
The following is a summary of the estimated fair values for the long-term debt instruments (in thousands):
Successor
September 6, 2016
December 29, 2015
Estimated
Fair Value
Book Value
Estimated
Fair Value
Book Value
2015 Senior Credit Facility
$
154,491

$
154,491

$
152,224

$
152,224



12

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 September 6, 2016 (Successor) and December 29, 2015 (Successor) were as follows (in thousands):

(Unaudited) September 6, 2016
Markets for Identical Assets
(Level 1)
Observable Inputs (Level 2)
Unobservable Inputs (Level 3)
2016 Interest Rate Cap Agreement
$
190

$
—

$
190

$
—

Total assets measured at fair value
$
190

$
—

$
190

$
—

December 29, 2015
Markets for Identical Assets (Level 1)
Observable Inputs (Level 2)
Unobservable Inputs (Level 3)
2010 Interest Rate Cap Agreement
$
—

$
—

$
—

$
—

Total assets measured at fair value
$
—

$
—

$
—

$
—

9. Other Accrued Liabilities and Other Non-current Liabilities
A summary of other accrued liabilities follows (in thousands):
Successor
September 6, 2016
December 29, 2015
Employee compensation and related items
$
7,847

$
7,818

Accrued insurance
7,091

7,168

Accrued sales tax
3,926

3,604

Accrued bonus
3,173

5,352

Accrued income tax
2,724

30

Accrued advertising
2,452

999

Accrued real property tax
1,743

1,378

Restaurant closure liability
1,033

1,617

Other
6,305

4,931

$
36,294

$
32,897

A summary of other non-current liabilities follows (in thousands):
Successor
September 6, 2016
December 29, 2015
Unfavorable lease liabilities
$
17,876

$
19,685

Insurance reserves
6,335

5,963

Restaurant closure liability
2,079

3,206

Unearned trade discount, non-current
1,736

2,028

Deferred development and initial franchise fees
1,700

1,920

Deferred gift card income
1,356

2,217

Deferred rent liability
1,348

731

Other
970

501

$
33,400

$
36,251


13

Del Taco Restaurants, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)

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, 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 September 6, 2016 (Successor), there were 1,554,882 shares of common stock available for grant under the 2015 Plan.
Stock-Based Compensation Expense (Successor)
The total compensation expense related to the 2015 Plan was $1.0 million and $2.6 million for the twelve and thirty-six weeks ended September 6, 2016 (Successor), respectively.
Restricted Stock Awards (Successor)
A summary of outstanding and unvested restricted stock activity as of September 6, 2016 (Successor) and changes during the period December 29, 2015 (Successor) through September 6, 2016 (Successor) is as follows:
Shares
Weighted-Average
Grant Date
Fair Value
Nonvested at December 29, 2015 (Successor)
946,494

$
11.16

Granted
461,124

9.30

Vested
(265,046
)
11.25

Forfeited
—

—

Nonvested at September 6, 2016 (Successor)
1,142,572

$
10.39

During the thirty-six weeks ended September 6, 2016, the Company made payments of $0.9 million related to tax withholding obligations for the vesting of restricted stock awards in exchange for shares withheld. As of September 6, 2016 (Successor), $10.6 million of total unrecognized expense related to unvested restricted stock grants is expected to be recognized over a weighted-average period of 3.0 years . The fair value of these awards was determined based on the Company’s stock price on the grant date.
Stock Options (Successor)
A summary of stock option activity as of September 6, 2016 (Successor) and changes during the period December 29, 2015 (Successor) through September 6, 2016 (Successor) is as follows:
Options
Weighted Average Exercise Price
Weighted Average Remaining Contractual Term
Aggregate Intrinsic Value
(in years)
Options outstanding at December 29, 2015 (Successor)
224,000

$
10.40

6.5
$
67

Granted
122,000

9.14



Exercised
—

—



Forfeited
(8,500
)
10.40



Options outstanding at September 6, 2016 (Successor)
337,500

$
9.95

6.4
$
419

Options exercisable at September 6, 2016 (Successor)
54,250

$
10.40

6.2
$
43

Options exercisable and expected to vest at September 6, 2016 (Successor)
305,296

$
9.96

6.4
$
376


14

Del Taco Restaurants, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)

The aggregate intrinsic value in the table above is the amount by which the current market price of the Company's stock on December 29, 2015 (Successor) or September 6, 2016 (Successor), respectively, exceeds the exercise price.
As of September 6, 2016 (Successor), $0.9 million of total unrecognized stock compensation expense, net of forfeitures, related to stock option grants is expected to be recognized over a weighted average period of 3.2 years .
Stock-Based Compensation Expense (Predecessor)
In connection with Step 1 of the Business Combination consummated on March 20, 2015, all unvested restricted stock units (“RSUs”) under the Predecessor incentive plan became fully vested and all vested RSUs were then immediately settled for shares of DTH common stock, net of shares withheld for minimum statutory employee tax withholding obligations and all unvested stock options under the Predecessor plan became fully vested and all vested stock options were also exercised and shares were issued, net of shares withheld for the applicable option strike price and employee tax withholding obligations. An aggregate of 237,948 shares of DTH common stock were issued and 247,552 shares of DTH common stock were withheld for applicable option strike price and employee tax withholding obligations. In exchange for the shares withheld, DTH made payments of $7.5 million related to employee tax withholding obligations.
No RSUs or stock options remained outstanding under the Predecessor plan after March 20, 2015 or as of September 6, 2016 (Successor). DTH recorded stock-based compensation expense of $0.5 million , which included all remaining unrecognized compensation expense related to the accelerated vesting on RSUs and stock options on March 20, 2015, for the twenty-six weeks ended June 30, 2015 (Predecessor).
11. Shareholders’ Equity
On July 11, 2016, the Company commenced an offer to exchange 0.2780 shares of the Company's common stock for each outstanding Company warrant exercisable for shares at an exercise price of $11.50 per share (approximately one share for every 3.6 warrants tendered), up to a maximum of 6,750,000 warrants, which amount was subsequently increased to 7,750,000 warrants. The offer to exchange expired on August 8, 2016. A total of 5,516,243 warrants were tendered in the exchange offer. All of the Company's directors and executive officers who control or beneficially owned warrants participated in the offer and in aggregate tendered 1,501,800 of their warrants. The Company accepted for exchange all such warrants and issued an aggregate of 1,533,542 shares of the Company's common stock in exchange for the warrants tendered, representing approximately 4% of the shares outstanding after such issuance. After completion of the offer to exchange, 6,646,574 warrants remained outstanding. The warrants will expire on June 30, 2020, unless sooner exercised or redeemed by the Company in accordance with the terms of the warrants.
For the twelve and thirty-six weeks ended September 6, 2016 (Successor), the Company incurred approximately $0.6 million , of transaction expenses related to the offer to exchange.
On February 26, 2016, the Company's Board of Directors authorized a share repurchase program covering up to $25.0 million 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 September 6, 2016 (Successor), the Company repurchased (1) 505,808 shares of common stock for an average price per share of $9.45 for an aggregate cost of approximately $4.8 million , and (2) 235,000 warrants for an average price per warrant of $1.85 for an aggregate cost of approximately $0.4 million , including incremental direct costs to acquire the shares and warrants. During the thirty-six weeks ended September 6, 2016 (Successor), the Company repurchased (1) 1,134,790 shares of common stock for an average price per share of $9.78 for an aggregate cost of approximately $11.2 million , and (2) 476,806 warrants for an average price per warrant of $2.11 for an aggregate cost of approximately $1.0 million including incremental direct costs to acquire the shares and warrants. The Company expects to retire the repurchased shares and warrants and therefore has accounted for them as constructively retired as of September 6, 2016 (Successor). As of September 6, 2016 (Successor), there was approximately $37.9 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.

15

Del Taco Restaurants, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)

12. Earnings per Share
Basic income (loss) per share is calculated by dividing net income (loss) attributable to Del Taco’s common shareholders for the Successor period and to DTH’s common shareholders for the Predecessor period by the weighted average number of common shares outstanding for the period. In computing dilutive income (loss) per share, basic income (loss) 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 (loss) per share for the periods indicated (amounts in thousands except share and per share data):
Successor
Predecessor
12 Weeks Ended
September 6, 2016
10 Weeks Ended
September 8, 2015
2 Weeks Ended
June 30, 2015
Numerator:
Net income (loss)
$
4,949

$
(2,186
)
$
2,416

Denominator:
Weighted-average shares outstanding - basic
38,465,064

38,802,425

6,707,776

Dilutive effect of unvested restricted stock and RSUs
223,897

—

—

Dilutive effect of stock options
—

—

—

Dilutive effect of warrants
—

—

—

Weighted-average shares outstanding - diluted
38,688,961

38,802,425

6,707,776

Net income (loss) per share - basic
$
0.13

$
(0.06
)
$
0.36

Net income (loss) per share - diluted
$
0.13

$
(0.06
)
$
0.36

Antidilutive stock options, unvested restricted stock awards, unvested RSUs and warrants excluded from the computations
10,829,117

2,632,739

—

Successor
Predecessor
36 Weeks Ended
September 6, 2016
10 Weeks Ended
September 8, 2015
26 Weeks Ended
June 30, 2015
Numerator:
Net income (loss)
$
12,874

$
(2,186
)
$
2,104

Denominator:
Weighted-average shares outstanding - basic
38,518,431

38,802,425

5,492,417

Dilutive effect of unvested restricted stock and RSUs
163,842

—

13,972

Dilutive effect of stock options
—

—

93,634

Dilutive effect of warrants
—

—

10,836

Weighted-average shares outstanding - diluted
38,682,273

38,802,425

5,610,859

Net income (loss) per share - basic
$
0.33

$
(0.06
)
$
0.38

Net income (loss) per share - diluted
$
0.33

$
(0.06
)
$
0.37

Antidilutive stock options, unvested restricted stock awards, unvested RSUs and warrants excluded from the computations
12,126,069

2,632,739

—

Antidilutive stock options, unvested restricted stock and warrants were excluded from the computation of diluted net income (loss) 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 or due to the Company incurring net losses for the periods presented.

16

Del Taco Restaurants, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)

13. Income Taxes
The effective income tax rates were 45.2% for the twelve weeks ended September 6, 2016 (Successor) compared to 58.9% and (149.8)% for the ten weeks ended September 8, 2015 (Successor) and the two weeks ended June 30, 2015 (Predecessor), respectively. The provision for income taxes consisted of income tax (benefit) expense of $4.1 million for the twelve weeks ended September 6, 2016 (Successor) and $(3.1) million and $(1.4) million for the ten weeks ended September 8, 2015 (Successor) and the two weeks ended June 30, 2015 (Predecessor), respectively. The effective income tax rates were 42.5% and 26.0% for the thirty-six weeks ended September 6, 2016 (Successor) and the twenty-six weeks ended June 30, 2015 (Predecessor), respectively. The provision for income taxes consisted of income tax expense of $9.5 million and $0.7 million for the thirty-six weeks ended September 6, 2016 (Successor) and the twenty-six weeks ended June 30, 2015 (Predecessor), respectively.
The income tax expense related to the twelve weeks ended September 6, 2016 (Successor) is driven by the estimated effective income tax rate of 45.2% 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. In addition, the effective tax rate is also driven by transaction-related costs incurred in connection with the warrant tender offer which are not deductible for taxes as well as lower stock compensation expense deductible for tax related to the June 30, 2016 vesting of certain restricted stock awards as compared to the cumulative amount recorded as stock-based compensation expense, partially offset by federal targeted job credits. The income tax expense related to the ten weeks ended September 8, 2015 (Successor) and the two weeks ended June 30, 2015 (Predecessor) primarily related to the increase in deferred tax liabilities for indefinite-lived assets and the related effect of maintaining a full valuation allowance against certain of deferred tax assets as of June 16, 2015 (Predecessor).
The income tax expense related to the thirty-six weeks ended September 6, 2016 (Successor) is driven by the estimated effective income tax rate of 42.5% 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. In addition, the effective rate is also driven by transaction-related costs incurred in connection with the warrant tender offer which are not deductible for taxes as well as lower stock compensation expense deductible for tax related to the June 30, 2016 vesting of certain restricted stock awards as compared to the cumulative amount recorded as stock-based compensation expense, partially offset by federal targeted job credits. The income tax expense related to the twenty-six weeks ended June 30, 2015 (Predecessor) primarily related to the increase in deferred tax liabilities for indefinite-lived assets and the related effect of maintaining a full valuation allowance against certain of deferred tax assets as of June 30, 2015 (Predecessor).
As part of purchase accounting, the Company was required to record all of DTH’s acquired assets and liabilities at their acquisition date fair value, including deferred income taxes. The Company considered the weight of both positive and negative evidence and concluded that it is more likely than not that net deferred tax assets will be realized and that no valuation allowance was required as of the date of acquisition. As a result, the Company established deferred tax assets as well as deferred tax liabilities related to indefinite-lived intangibles through the purchase price allocation (see Note 3). In addition, after considering the Business Combination, the projected post-combination results and all available evidence, the Company released $1.9 million of valuation allowance through income tax benefit in accordance with ASC 805-740-30-3 during the ten week period ended September 8, 2015 (Successor).
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.

17

Del Taco Restaurants, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)

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 franchised locations. The Company also has a long-term beverage supply agreement with a major beverage vendor whereby marketing rebates are provided to the Company and its franchisees based upon the volumes of purchases for system-wide restaurants which vary according to demand for beverage syrup. This contract has terms extending into 2021 . The Company’s future estimated cash payments under existing contractual purchase obligations for goods and services as of September 6, 2016 (Successor), are approximately $79.1 million . The Company has excluded agreements that are cancelable without penalty.
Litigation
On April 23, 2015, a purported class action and derivative complaint, Jeffery Tomasulo, on behalf of himself and all others similarly situated v. Levy Acquisition Sponsor, LLC, Lawrence F. Levy, Howard B. Bernick, Marc S. Simon, Craig J. Duchossois, Ari B. Levy, Steven C. Florsheim, Gregory G. Flynn, Del Taco Holdings, Inc., and Levy Acquisition Corp. (“Complaint”), was filed in the Circuit Court of Cook County, Illinois (the “Circuit Court”), relating to the then proposed Business Combination pursuant to the Merger Agreement. The Complaint, which purported to be brought as a class action on behalf of all of the holders of the Company’s common stock, generally alleged that the Company’s pre-merger directors breached their fiduciary duties to stockholders by facilitating the then proposed Business Combination and that the Company’s preliminary proxy statement that was filed with the SEC on April 2, 2015 was materially misleading and/or incomplete. On May 19, 2016, Tomasulo, on behalf of himself and members of a settlement class entered into a Stipulation of Settlement with the defendants pursuant to which the plaintiff class broadly released claims relating to the Merger, including all claims that the Company’s preliminary proxy statement or definitive proxy statement were misleading or improper. Under the settlement, defendants were not required to make any payment to the plaintiff or the plaintiff class but agreed to pay a portion of the hourly fee accrued by plaintiff’s counsel. On July 26, 2016, the Court held a final hearing and then certified a settlement class, approved the Stipulation of Settlement and entered a final judgment dismissing the action.
The Company has a directors and officers liability insurance policy to cover legal defense costs and settlements stemming from covered claims, subject to an insurance deductible of $0.25 million per claim. The Company's insurance company has acknowledged coverage for claims asserted in the Complaint against covered persons, subject to a reservation of rights. The Company anticipates that any attorney's fees or expenses awarded by the Court in connection with any settlement will be paid in full by the insurance company, together with all or substantially all of any additional legal fees that may be incurred in connection with the action. As of December 29, 2015 (Successor), the Company had an insurance receivable of $0.3 million for legal defense costs it paid in excess of the deductible. The reimbursement from the insurance company was received in January 2016. During the twelve and thirty-six weeks ended September 6, 2016 (Successor), the Company incurred $0.1 million and $0.3 million , respectively, in legal defense fees for which the Company has recorded a corresponding insurance receivable of $0.4 million as of September 6, 2016 (Successor). The reimbursement for the insurance company was received by October 2016.
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. Discovery has been completed and the parties are preparing their motions for and opposition to class certification. 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 September 6, 2016 (Successor).
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

18

Del Taco Restaurants, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)

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 September 6, 2016 (Successor).
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.
15. Subsequent Events
On October 12, 2016, Del Taco acquired five franchised restaurants in and around Bakersfield, CA from a single franchisee.


19

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 December 29, 2015 (Successor), 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 8, 2016.
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 franchised 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 December 29, 2015. We assume no obligation to update these forward-looking statements.
As a result of the Business Combination (defined in Note 1 to the consolidated financial statements included in this quarterly report on Form 10-Q), we are the acquirer for accounting purposes, and Del Taco Holdings, Inc. ("DTH") is the acquiree and accounting predecessor. Our financial statement presentation distinguishes a "Predecessor" for DTH for periods prior to the Closing Date. We are the "Successor" for periods after the Closing Date, which includes consolidation of DTH subsequent to the Business Combination on June 30, 2015. The application of acquisition accounting for the Business Combination significantly affected certain assets, liabilities and expenses. As a result, financial information as of September 6, 2016 and for the twelve and thirty-six weeks ended September 6, 2016 may not be comparable to Del Taco’s Predecessor financial information for the twelve and thirty-six weeks ended September 8, 2015 . Therefore, we did not combine certain financial information for the ten weeks ended September 8, 2015 with Del Taco’s predecessor financial information for the two weeks ended June 30, 2015 and for the twenty-six weeks ended June 30, 2015 for comparison to prior periods. We have combined our same store sales, company restaurant sales, franchise revenue, franchise sublease income, food and paper costs, labor and related expenses, general and administrative expenses, occupancy and other – franchise subleases, pre-opening costs, restaurant closure charges and loss on disposal of assets for the ten weeks ended September 8, 2015 with Del Taco’s predecessor same store sales, company restaurant sales, franchise revenue, franchise sublease income, food and paper costs, labor and related expenses, general and administrative expenses, occupancy and other – franchise subleases, pre-opening costs, restaurant closure charges and loss on disposal of assets for the two weeks ended June 30, 2015 and the twenty-six weeks ended June 30, 2015. Same store sales, company restaurant sales, franchise revenue, franchise sublease income, food and paper costs, labor and related expenses, restaurant closure charges and loss on disposal of assets were not affected by acquisition accounting. Refer to Notes 2 and 3 to the consolidated financial statements included elsewhere in this quarterly report on Form 10-Q for additional information on the acquisition accounting for the Business Combination.
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 2015 is the 52-week period ended December 29, 2015 (Fiscal 2015). Fiscal year 2016 will be a 53-week period ended January 3, 2017 (Fiscal 2016).
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 September 6, 2016 (Successor), there were 546 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+

20

— 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 check of $6.79 during Fiscal 2015, we offer a compelling value proposition relative to both QSR and fast casual peers.

21

Highlights and Trends
Third Quarter 2016 Highlights
Our third quarter 2016 results and highlights include the following:
•
Total revenues increased 5.9% for the twelve weeks ended September 6, 2016 (Successor) to $104.4 million compared to $98.6 million for the combined twelve weeks ended September 8, 2015 primarily due to growth in company-operated and franchise-operated same store sales. Total revenues increased 3.9% for the thirty-six weeks ended September 6, 2016 (Successor) to $301.8 million compared to $290.6 million for the combined thirty-six weeks ended September 8, 2015 primarily due to growth in company-operated and franchise-operated same store sales.
•
During the twelve weeks and thirty-six weeks ended September 6, 2016 (Successor), we opened three and six new company-operated and franchise-operated restaurants, respectively. During the twelve weeks and thirty-six weeks ended September 8, 2015 , we opened one and three new company-operated and franchise-operated restaurants, respectively.
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 18 th full month of operations and exclude restaurant closures. The following table shows the same store sales growth for the twelve weeks and thirty-six weeks ended September 6, 2016 (Successor) and September 8, 2015 :
12 Weeks Ended
36 Weeks Ended
September 6, 2016
September 8, 2015
September 6, 2016
September 8, 2015
Company-operated same store sales
7.1
%
5.4
%
4.4
%
6.4
%
Franchised restaurants same store sales
6.2
%
5.8
%
4.5
%
6.5
%
System-wide same store sales
6.7
%
5.6
%
4.4
%
6.4
%
Restaurant Development
Del Taco restaurant counts at the end of the twelve weeks and thirty-six weeks ended September 6, 2016 (Successor) and September 8, 2015 , are as follows:
12 Weeks Ended
36 Weeks Ended
September 6, 2016
September 8, 2015
September 6, 2016
September 8, 2015
Company-operated restaurant activity:
Beginning of period
298

306

297

304

Openings
1

1

3

3

Closures
—

(1
)
(1
)
(1
)
Purchased from franchisee
1

—

1

—

Restaurants at end of period
300


306

300

306

Franchised restaurant activity:
Beginning of period
245

241

247

243

Openings
2

—

3

—

Closures
—

—

(3
)
(2
)
Restaurants sold to Company
(1
)
—

(1
)
—

Restaurants at end of period
246


241

246

241

Total restaurant activity:
Beginning of period
543

547

544

547

Openings
3

1

6

3

Closures
—

(1
)
(4
)
(3
)
Restaurants at end of period
546


547

546

547



22

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 14 system-wide restaurants in Fiscal 2016 including six restaurants that have opened through September 6, 2016 (Successor).
Restaurant Re-Imaging
We and our franchisees commenced the Ambience Shake Up (ASU) re-imaging program in 2012 and, as of September 6, 2016 (Successor), a total of 513 restaurants feature our current image through a re-image or new prototype design, including all 300 restaurants that are company-operated. We expect substantially all of our restaurant system to feature the current image by the end of 2016. The ASU remodeling program involved a use of cash and impacted net property and depreciation line items on our consolidated balance sheets and statements of comprehensive income (loss), among others. The cost of the ASU restaurant remodels varied depending on the scope of work required, but on average the company-operated investment was $45,000 per restaurant. We believe the ASU remodeling program is an important element of our strategy that has led to higher system restaurant sales and a strengthened brand.
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 18 th full month of operations and exclude restaurant closures. As of September 6, 2016 (Successor) and September 8, 2015 (Successor), there were 290 and 299 restaurants, respectively, in the comparable company-operated restaurant base. As of September 6, 2016 (Successor) and September 8, 2015 (Successor), there were 237 and 236 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.
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

23

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, note 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 should not be considered 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;
(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 Del Taco considers not to be indicative of ongoing operations; and
(vii)
other companies in the industry may calculate these measures differently than Del Taco does, limiting their usefulness as comparative measures.

24

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 our 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 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 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,

25

travel expenses, stock-based compensation expenses, legal and professional expenses, 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 and property taxes 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 and any positive or negative adjustments to the liability as more information becomes available as well as direct costs related to the restaurant closure.
Loss on Disposal of Assets
Loss on disposal of assets includes the loss on disposal of assets related to retirements and replacement or write-off of leasehold improvements, furniture, fixtures or equipment in the ordinary course of business, net of the amortization of gains on asset sales associated with sale-leaseback transactions that do not qualify for sale-leaseback accounting treatment and gains from disposal of assets related to eminent domain.
Interest Expense
Interest expense consists primarily of interest expense on outstanding debt. 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 offer to exchange shares of the Company's common stock for each outstanding Company warrant and the strategic sale process which commenced during 2014 and resulted in the Stock Purchase Agreement with the Levy Newco Parties in March 2015 and the Business Combination consummated pursuant to the Merger Agreement on June 30, 2015.
Debt Modification Costs
In March 2015, DTH refinanced its existing debt (the "March 2015 Refinance") by amending the senior credit facility (the "2013 Senior Credit Facility") and incurred lender and third party costs which were capitalized on the balance sheet and certain third party costs were expensed.
In August 2015, Del Taco refinanced its 2013 Senior Credit Facility (the "August 2015 Refinance) by entering into a new senior credit agreement (the "2015 Senior Credit Facility") and incurred lender and third party costs which were all capitalized on the balance sheet.

26

Change in Fair Value of Warrant Liability
Change in fair value of warrant liability represents the non-cash adjustment to record the warrant liability to its determined fair market value.
Provision for Income Taxes
Provision for income taxes consists of federal and state current and deferred income tax expense.

27

Results of Operations
Comparison of Results of Operations for the Twelve Weeks Ended September 6, 2016 (Successor), Ten Weeks Ended September 8, 2015 (Successor) and Two Weeks Ended June 30, 2015 (Predecessor)
The following table presents operating results for the twelve weeks ended September 6, 2016 (Successor), ten weeks ended September 8, 2015 (Successor) and two weeks ended June 30, 2015 (Predecessor), in absolute terms and expressed as a percentage of total revenue (or company restaurant sales), as compared below:
Successor
Predecessor
12 Weeks Ended
September 6, 2016
10 Weeks Ended
September 8, 2015
2 Weeks Ended
June 30, 2015
(Dollar amounts in thousands)
($)
(%)
($)
(%)
($)
(%)
Statement of Operations Data:
Revenue:
Company restaurant sales
$
100,173

95.9
%
$
78,874

96.1
%
$
15,891

96.1
%
Franchise revenue
3,686

3.5

2,694

3.3

546

3.3

Franchise sublease income
560

0.5

467

0.6

95

0.6

Total Revenue
104,419

100.0

82,035

100.0

16,532

100.0

Operating expenses
Restaurant operating expenses:
Food and paper costs
27,574

27.5

(1)
22,567

28.6

(1)
4,607

29.0

(1)
Labor and related expenses
30,748

30.7

(1)
23,512

29.8

(1)
4,712

29.7

(1)
Occupancy and other operating expenses
20,911

20.9

(1)
17,024

21.6

(1)
3,653

23.0

(1)
Total restaurant operating expenses
79,233

79.1

(1)
63,103

80.0

(1)
12,972

81.6

(1)
General and administrative
8,566

8.2

5,824

7.1

1,004

6.1

Depreciation and amortization
5,157

4.9

4,147

5.1

664

4.0

Occupancy and other-franchise subleases
521

0.5

437

0.5

87

0.5

Pre-opening costs
94

0.1

41

*

28

0.2

Restaurant closure charges, net
(133
)
(0.1
)
19

*

—

—

Loss on disposal of assets
54

0.1

1

*

84

0.5

Total operating expenses
93,492

89.5

73,572

89.7

14,839

89.8

Income from operations
10,927

10.5

8,463

10.3

1,693

10.2

Other expenses:
Interest expense
1,412

1.4

1,725

2.1

664

4.0

Transaction-related costs
490

0.5

11,978

14.6

61

0.4

Debt modification costs
—

—

78

0.1

1

*

Total other expenses
1,902

1.8

13,781

16.8

726

4.4

Income (loss) from operations before provision for income taxes
9,025

8.6

(5,318
)
(6.5
)
967

5.8

Provision (benefit) for income taxes
4,076

3.9

(3,132
)
(3.8
)
(1,449
)
(8.8
)
Net income (loss)
$
4,949

4.7
%
$
(2,186
)
(2.7
)%
$
2,416

14.6
%

(1)
As a percentage of company restaurant sales.
*
Immaterial/not meaningful







28

Combined Financial Data:
Successor
Predecessor
Combined
12 Weeks Ended
September 6, 2016
10 Weeks Ended
September 8, 2015
2 Weeks Ended
June 30, 2015
12 Weeks Ended
September 8, 2015
Increase/
(Decrease)
(Dollar amounts in thousands)
($)
(%)
($)
($)
($)
(%)
($)
(%)
Revenue:
Company restaurant sales
$
100,173

95.9
%
$
78,874

$
15,891

$
94,765

96.1
%
$
5,408

5.7
%
Franchise revenue
3,686

3.5

2,694

546

3,240

3.3

446

13.8

Franchise sublease income
560

0.5

467

95

562

0.6

(2
)
(0.4
)
Total Revenue
104,419

100.0

82,035

16,532

98,567

100.0

5,852

5.9

Operating expenses
Restaurant operating expenses:
Food and paper costs
27,574

27.5

(1)
22,567

4,607

27,174

28.7

(1)
400

1.5

Labor and related expenses
30,748

30.7

(1)
23,512

4,712

28,224

29.8

(1)
2,524

8.9

General and administrative
8,566

8.2

5,824

1,004

6,828

6.9

1,738

25.5

Occupancy and other-franchise subleases
521

0.5

437

87

524

0.5

(3
)
(0.6
)
Pre-opening costs
94

0.1

41

28

69

0.1

25

36.2

Restaurant closure charges, net
(133
)
(0.1
)
19

—

19

*

(152
)
*

Loss on disposal of assets
54

0.1

1

84

85

0.1

(31
)
(36.5
)
(1)
As a percentage of company restaurant sales.
*
Immaterial/not meaningful
Company Restaurant Sales
Company restaurant sales increased $5.4 million , or 5.7% , for the twelve weeks ended September 6, 2016 (Successor), primarily due to an increase in company-operated same store sales of $6.4 million, or 7.1% , offset by a decrease of $1.0 million from the net impact of restaurant openings, transfers and closures since the beginning of the third quarter of 2015. The growth in company-operated same store sales was primarily the result of an increase in average check size of 4.8% , and an increase in traffic of 2.3% compared to the prior period.
Franchise Revenue
Franchise revenue increased $0.4 million , or 13.8% , for the twelve weeks ended September 6, 2016 (Successor), primarily due to an increase in franchised same store sales of 6.2% and additional franchised restaurants compared to the third quarter of 2015, as well as an increase in initial fees during the third quarter of 2016.
Franchise Sublease Income
Franchise sublease income remained substantially the same for both the twelve weeks ended September 6, 2016 (Successor) and the combined twelve weeks ended September 8, 2015 .
Food and Paper Costs
Food and paper costs increased $0.4 million , or 1.5% for the twelve weeks ended September 6, 2016 (Successor). As a percentage of company restaurant sales, food and paper costs declined to 27.5% for the twelve weeks ended September 6, 2016

29

(Successor) compared to 28.7% for the combined twelve weeks ended September 8, 2015 . This reduction was driven by the impact of menu price increases and a reduction in commodity costs.
Labor and Related Expenses
Labor and related expenses increased $2.5 million , or 8.9% for the twelve weeks ended September 6, 2016 (Successor), primarily due to increased labor costs resulting from a California minimum wage increase on January 1, 2016, the impact from new paid sick leave requirements that began July 1, 2015 in California 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 30.7% for the twelve weeks ended September 6, 2016 (Successor) compared to 29.8% for the combined twelve weeks ended September 8, 2015 . This percentage increase resulted primarily from the impact of the increased California minimum wage, new sick leave requirements and increased workers compensation expense discussed above, partially offset by the impact of menu price increases.
Occupancy and Other Operating Expenses
Occupancy and other operating expenses were $20.9 million for the twelve weeks ended September 6, 2016 (Successor) compared to $17.0 million for the ten weeks ended September 8, 2015 (Successor) and $3.7 million for the two weeks ended June 30, 2015 (Predecessor). As a percentage of company restaurant sales, occupancy and other operating expenses were 20.9% for the twelve weeks ended September 6, 2016 (Successor) compared to 21.6% for the ten weeks ended September 8, 2015 (Successor) and 23.0% for the two weeks ended June 30, 2015 (Predecessor). This overall reduction as a percent of company restaurant sales was primarily due to same store sales increases which helped to leverage the fixed components of occupancy and other operating expenses, including a reduction in rent, utilities and insurance as a percent of company restaurant sales, partially offset by advertising and credit card fees as a percent of company restaurant sales.

General and Administrative Expenses
General and administrative expenses increased $1.7 million , or 25.5% , for the twelve weeks ended September 6, 2016 (Successor), primarily due to an increase in stock-based compensation, legal expenses, public company costs, compensation and management incentive compensation based on performance. As a percentage of total revenue, general and administrative expense was 8.2% for the twelve weeks ended September 6, 2016 (Successor) compared to 6.9% for the combined twelve weeks ended September 8, 2015 . 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 were $5.2 million , for the twelve weeks ended September 6, 2016 (Successor), compared to $4.1 million for the ten weeks ended September 8, 2015 (Successor) and $0.7 million for the two weeks ended June 30, 2015 (Predecessor), primarily due to the addition of new assets and $0.1 million of incremental depreciation and amortization expense resulting from adjusting property and equipment and identifiable intangible assets to fair value in acquisition accounting for the Business Combination. As a percentage of total revenue, depreciation and amortization expenses was 4.9% for the twelve weeks ended September 6, 2016 (Successor), compared to 5.1% for the ten weeks ended September 8, 2015 (Successor) and 4.0% for the two weeks ended June 30, 2015 (Predecessor).
Occupancy and Other – Franchise Sublease
Occupancy and other – franchise sublease was $0.5 million for both the twelve weeks ended September 6, 2016 (Successor) and the combined twelve weeks ended September 8, 2015 .
Pre-opening Costs
Pre-opening costs were $0.1 million for both the twelve weeks ended September 6, 2016 (Successor) and the combined twelve weeks ended September 8, 2015 .

30

Restaurant Closure Charges, net
Restaurant closure charges, net, were $(133,000) for the twelve weeks ended September 6, 2016 (Successor) compared to $19,000 for the combined twelve weeks ended September 8, 2015 . The current quarter activity primarily includes an adjustment to decrease the lease termination liability for one closed restaurant due to a change in estimate, accretion expense and other incremental charges related to the 12 underperforming restaurants we closed during the fourth fiscal quarter of 2015. The combined twelve weeks ended September 8, 2015 includes accretion expense for the lease termination liability for previously closed restaurants.
Loss on Disposal of Assets
Loss on disposal of assets was $0.1 million for both the twelve weeks ended September 6, 2016 (Successor) and the combined twelve weeks ended September 8, 2015 . Current year loss was related to the replacement of certain restaurant equipment. Prior year loss was primarily related to the closure of one company restaurant and the replacement of restaurant and other equipment.
Interest Expense
Interest expense was $1.4 million for the twelve weeks ended September 6, 2016 (Successor), compared to $1.7 million for the ten weeks ended September 8, 2015 (Successor) and $0.7 million for the two weeks ended June 30, 2015 (Predecessor). The decrease in interest expense for the twelve weeks ended September 6, 2016 (Successor) is primarily due to the debt refinancing that occurred in August 2015 which replaced the existing term loan with a revolving credit facility with a significantly lower interest rate and the $68.6 million reduction to the 2013 Senior Credit Facility in June 2015.
Transaction-Related Costs
Transaction-related costs were $0.5 million for the twelve weeks ended September 6, 2016 (Successor), compared to $12.0 million for the ten weeks ended September 8, 2015 (Successor) and $0.1 million for the two weeks ended June 30, 2015 (Predecessor). Current year transaction-related costs primarily consist of direct costs incurred in connection with the offer to exchange shares of the Company's common stock for each outstanding Company warrant (see Note 11 to the unaudited consolidated financial statements). Prior year transaction-related costs primarily consist of direct costs incurred in connection with the Business Combination which closed on June 30, 2015 (see Note 3 to the unaudited consolidated financial statements).
Debt Modification Costs
Debt modification costs totaled $78,000 for the ten weeks ended September 8, 2015 (Successor) and $1,000 for the two weeks ended June 30, 2015 (Predecessor). These costs related to the August 2015 Refinance. There were no such debt modification costs for the twelve weeks ended September 6, 2016 (Successor).
Provision for Income Taxes
The effective income tax rates were 45.2% for the twelve weeks ended September 6, 2016 (Successor) compared to 58.9% for the ten weeks ended September 8, 2015 (Successor) and (149.8)% for the two weeks ended June 30, 2015 (Predecessor). The provision for income taxes consisted of income tax (benefit) expense of $4.1 million for the twelve weeks ended September 6, 2016 (Successor) and $(3.1) million for the ten weeks ended September 8, 2015 (Successor) and $(1.4) million two weeks ended June 30, 2015 (Predecessor). The income tax expense related to the twelve weeks ended September 6, 2016 (Successor) is driven by our estimated effective income tax rate of 45.2% 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. In addition, the effective rate is also driven by transaction-related costs incurred in connection with the warrant tender offer which are not deductible for taxes as well as lower stock compensation expense deductible for tax related to the June 30, 2016 vesting of certain restricted stock awards as compared to the cumulative amount recorded as stock-based compensation expense, partially offset by federal targeted job credits. The income tax expense related to the ten weeks ended September 8, 2015 (Successor) and the two weeks ended June 30, 2015 (Predecessor) primarily related to the increase in deferred tax liabilities for indefinite-lived assets and the related effect of maintaining a full valuation allowance against certain of deferred tax assets as of September 8, 2015 (Successor).

31

As part of purchase accounting, we were required to record all of DTH’s acquired assets and liabilities at their acquisition date fair value, including deferred income taxes. We considered the weight of both positive and negative evidence and concluded that it is more likely than not that net deferred tax assets will be realized and that no valuation allowance was required as of the date of acquisition. As a result, we established deferred tax assets as well as deferred tax liabilities related to indefinite-lived intangibles through the purchase price allocation (see note 3 to the unaudited condensed consolidated financial statements). In addition, after considering the Business Combination, the projected post-combination results and all available evidence, we released $1.9 million of valuation allowance through income tax benefit in accordance with ASC 805-740-30-3 during the ten week period ended September 8, 2015 (Successor).

32

Comparison of Results of Operations for the Thirty-Six Weeks Ended September 6, 2016 (Successor), Ten Weeks Ended September 8, 2015 (Successor) and Twenty-Six Weeks Ended June 30, 2015 (Predecessor)
The following table presents operating results for the thirty-six weeks ended September 6, 2016 (Successor), ten weeks ended September 8, 2015 (Successor) and twenty-six weeks ended June 30, 2015 (Predecessor), in absolute terms and expressed as a percentage of total revenue (or company restaurant sales), as compared below:
Successor
Predecessor
36 Weeks Ended
September 6, 2016
10 Weeks Ended
September 8, 2015
26 Weeks Ended
June 30, 2015
(Dollar amounts in thousands)
($)
(%)
($)
(%)
($)
(%)
Statement of Operations Data:
Revenue:
Company restaurant sales
$
289,640

96.0
%
$
78,874

96.1
%
$
200,676

96.2
%
Franchise revenue
10,591

3.5

2,694

3.3

6,693

3.2

Franchise sublease income
1,617

0.5

467

0.6

1,183

0.6

Total Revenue
301,848

100.0

82,035

100.0

208,552

100.0

Operating expenses
Restaurant operating expenses:
Food and paper costs
80,061

27.6

(1)
22,567

28.6

(1)
57,447

28.6

(1)
Labor and related expenses
90,781

31.3

(1)
23,512

29.8

(1)
61,120

30.5

(1)
Occupancy and other operating expenses
60,560

20.9

(1)
17,024

21.6

(1)
43,611

21.7

(1)
Total restaurant operating expenses
231,402

79.9

(1)
63,103

80.0

(1)
162,178

80.8

(1)
General and administrative
25,072

8.3

5,824

7.1

14,850

7.1

Depreciation and amortization
16,175

5.4

4,147

5.1

8,252

4.0

Occupancy and other-franchise subleases
1,534

0.5

437

0.5

1,109

0.5

Pre-opening costs
222

0.1

41

*

276

0.1

Restaurant closure charges, net
(121
)
*

19

*

94

*

Loss on disposal of assets
191

0.1

1

*

99

*

Total operating expenses
274,475

90.9

73,572

89.7

186,858

89.6

Income from operations
27,373

9.1

8,463

10.3

21,694

10.4

Other expenses:
Interest expense
4,289

1.4

1,725

2.1

11,491

5.5

Transaction-related costs
681

0.2

11,978

14.6

7,255

3.5

Debt modification costs
—

—

78

0.1

139

0.1

Change in fair value of warrant liability
—

—

—

—

(35
)
*

Total other expenses
4,970

1.6

13,781

16.8

18,850

9.0

Income (loss) from operations before provision for income taxes
22,403

7.4

(5,318
)
(6.5
)
2,844

1.4

Provision (benefit) for income taxes
9,529

3.2

(3,132
)
(3.8
)
740

0.4

Net income (loss)
$
12,874

4.3

$
(2,186
)
(2.7
)
$
2,104

1.0


(1)
As a percentage of company restaurant sales.
*
Immaterial/not meaningful


33

Combined Financial Data:
Successor
Predecessor
Combined
36 Weeks Ended
September 6, 2016
10 Weeks Ended
September 8, 2015
26 Weeks Ended
June 30, 2015
36 Weeks Ended
September 8, 2015
Increase/
(Decrease)
(Dollar amounts in thousands)
($)
(%)
($)
($)
($)
(%)
($)
(%)
Revenue:
Company restaurant sales
$
289,640

96.0
$
78,874

$
200,676

$
279,550

96.2
$
10,090

3.6

Franchise revenue
10,591

3.5
2,694

6,693

9,387

3.2
1,204

12.8

Franchise sublease income
1,617

0.5
467

1,183

1,650

0.6
(33
)
(2.0
)
Total Revenue
301,848

100.0
82,035

208,552

290,587

100.0
11,261

3.9

Operating expenses
Restaurant operating expenses:
Food and paper costs
80,061

27.6
(1)
22,567

57,447

80,014

28.6
(1)
47

0.1

Labor and related expenses
90,781

31.3
(1)
23,512

61,120

84,632

30.3
(1)
6,149

7.3

General and administrative
25,072

8.3
5,824

14,850

20,674

7.1
4,398

21.3

Occupancy and other-franchise subleases
1,534

0.5
437

1,109

1,546

0.5
(12
)
(0.8
)
Pre-opening costs
222

0.1
41

276

317

0.1
(95
)
(30.0
)
Restaurant closure charges, net
(121
)
*
19

94

113

*
(234
)
*

Loss on disposal of assets
191

0.1
1

99

100

*
91

91.0

(1)
As a percentage of company restaurant sales.
*
Immaterial/not meaningful
Company Restaurant Sales
Company restaurant sales increased $10.1 million , or 3.6% , for the thirty-six weeks ended September 6, 2016 (Successor), primarily due to an increase in company-operated same store sales of $11.7 million, or 4.4% offset by a decrease of $1.6 million from the net impact of restaurant openings, transfers and closures since the beginning of the first quarter of 2015. The growth in company-operated same store sales was primarily the result of an increase in average check size of 5.1% , partially offset by a decrease in traffic of 0.7% compared to the prior period.
Franchise Revenue
Franchise revenue increased $1.2 million , or 12.8% , for the thirty-six weeks ended September 6, 2016 (Successor), primarily due to an increase in franchised same store sales of 4.5% and additional franchised restaurants compared to the beginning of the first quarter of 2015, as well as an increase in initial fees during the thirty-six weeks ended September 6, 2016 (Successor).
Franchise Sublease Income
Franchise sublease income remained substantially the same for both the thirty-six weeks ended September 6, 2016 (Successor) and the combined thirty-six weeks ended September 8, 2015 .
Food and Paper Costs
Food and paper costs remained substantially the same for both the thirty-six weeks ended September 6, 2016 (Successor) and the combined thirty-six weeks ended September 8, 2015 . As a percentage of company restaurant sales, food and paper costs

34

declined to 27.6% for the thirty-six weeks ended September 6, 2016 (Successor) compared to 28.6% for the combined thirty-six weeks ended September 8, 2015 . This reduction was driven by the impact of menu price increases and a reduction in commodity costs.
Labor and Related Expenses
Labor and related expenses increased $6.1 million , or 7.3% for the thirty-six weeks ended September 6, 2016 (Successor), primarily due to increased labor costs resulting from a California minimum wage increase on January 1, 2016, the impact from new paid sick leave requirements that began July 1, 2015 in California and an increase in workers compensation expense due to higher payments and reserves related to underlying claim activity. As a percentage of company restaurant sales, labor and related expenses were 31.3% for the thirty-six weeks ended September 6, 2016 (Successor) compared to 30.3% for the combined thirty-six weeks ended September 8, 2015 . This percentage increase resulted primarily from the impact of the increased California minimum wage, new sick leave requirements and increased workers compensation expense discussed above, partially offset by the impact of menu price increases.
Occupancy and Other Operating Expenses
Occupancy and other operating expenses were $60.6 million for the thirty-six weeks ended September 6, 2016 (Successor) compared to $17.0 million for the ten weeks ended September 8, 2015 (Successor) and $43.6 million for the twenty-six weeks ended June 30, 2015 (Predecessor). As a percentage of company restaurant sales, occupancy and other operating expenses were 20.9% for the thirty-six weeks ended September 6, 2016 (Successor) compared to 21.6% for the ten weeks ended September 8, 2015 (Successor) and 21.7% for the twenty-six weeks ended June 30, 2015 (Predecessor). This overall reduction as a percent of company restaurant sales was primarily due to same store sales increases which helped to leverage the fixed components of occupancy and other operating expenses, including a reduction in rent, utilities, and repairs and maintenance as a percent of company restaurant sales, partially offset by advertising and credit card fees as a percent of company restaurant sales.

General and Administrative Expenses
General and administrative expenses increased $4.4 million or 21.3% , for the thirty-six weeks ended September 6, 2016 (Successor), primarily due to an increase in stock-based compensation, compensation, legal expenses, and public company costs, partially offset by a decrease in performance-based incentive compensation. As a percentage of total revenue, general and administrative expense was 8.3% for the thirty-six weeks ended September 6, 2016 (Successor) compared to 7.1% for the combined thirty-six weeks ended September 8, 2015 . 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 were $16.2 million for the thirty-six weeks ended September 6, 2016 (Successor), compared to $4.1 million for the ten weeks ended September 8, 2015 (Successor) and $8.3 million for the twenty-six weeks ended June 30, 2015 (Predecessor). The increase is primarily due to the addition of new assets and $1.7 million of incremental depreciation and amortization expense resulting from adjusting property and equipment and identifiable intangible assets to fair value in acquisition accounting for the Business Combination. As a percentage of total revenue, depreciation and amortization expenses was 5.4% for the thirty-six weeks ended September 6, 2016 (Successor), compared to 5.1% for the ten weeks ended September 8, 2015 (Successor) and 4.0% for the twenty-six weeks ended June 30, 2015 (Predecessor). The increase as a percent of total revenue for the thirty-six weeks ended September 6, 2016 (Successor) is primarily the result of the incremental depreciation and amortization expense discussed above.
Occupancy and Other – Franchise Sublease
Occupancy and other – franchise sublease was $1.5 million for both the thirty-six weeks ended September 6, 2016 (Successor) and the combined thirty-six weeks ended September 8, 2015 .
Pre-opening Costs
Pre-opening costs were $0.2 million for the thirty-six weeks ended September 6, 2016 (Successor) compared to $0.3 million for the combined thirty-six weeks ended September 8, 2015 .

35

Restaurant Closure Charges, net
Restaurant closure charges, net, were $(0.1) million for the thirty-six weeks ended September 6, 2016 (Successor) compared to $0.1 million for the combined thirty-six weeks ended September 8, 2015 . The current year activity includes net adjustments to decrease the lease termination liability due to changes in estimates, partially offset by accretion expense and other incremental charges related to the 12 underperforming restaurants we closed during the fourth fiscal quarter of 2015. The combined thirty-six weeks ended September 8, 2015 includes accretion expense for the lease termination liability for previously closed restaurants and an adjustment to increase the lease termination liability for one closed restaurant.
Loss on Disposal of Assets
Loss on disposal of assets was $0.2 million for the thirty-six weeks ended September 6, 2016 (Successor) compared to $0.1 million for the combined thirty-six weeks ended September 8, 2015 . Current year loss was related to the closure of one company restaurant and the replacement of certain restaurant equipment. Prior year loss was primarily related to the closure of one company restaurant and the replacement of restaurant and other equipment.
Interest Expense
Interest expense was $4.3 million for the thirty-six weeks ended September 6, 2016 (Successor), compared to $1.7 million for the ten weeks ended September 8, 2015 (Successor) and $11.5 million for the twenty-six weeks ended June 30, 2015 (Predecessor). The decrease in interest expense for the thirty-six weeks ended September 6, 2016 (Successor) is primarily due to the debt refinancing that occurred in August 2015 which replaced the existing term loan with a revolving credit facility with a significantly lower interest rate, the $68.6 million reduction to the 2013 Senior Credit Facility in June 2015, and the full repayment of DTH's subordinated notes in March 2015.
Transaction-Related Costs
Transaction-related costs were $0.7 million for the thirty-six weeks ended September 6, 2016 (Successor), compared to $12.0 million for the ten weeks ended September 8, 2015 (Successor) and $7.3 million for the twenty-six weeks ended June 30, 2015 (Predecessor). Current year transaction-related costs primarily consist of direct costs incurred in connection with the offer to exchange shares of the Company's common stock for each outstanding Company warrant and direct costs incurred in connection with the Business Combination which closed on June 30, 2015 (see Note 11 and Note 3, respectively, to the unaudited consolidated financial statements). Prior year transaction-related costs primarily consist of direct costs incurred in connection with the Business Combination which closed on June 30, 2015 (see Note 3 to the unaudited consolidated financial statements).
Debt Modification Costs
Debt modification costs totaled $0.1 million for the ten weeks ended September 8, 2015 (Successor) and related to the August 2015 Refinance. Debt modification costs totals $0.1 million for the twenty-six weeks ended June 30, 2015 (Predecessor) and related to the March 2015 Refinance. There were no such debt modification costs for the thirty-six weeks ended September 6, 2016 (Successor).
Change in Fair Value of Warrant Liability
Change in fair value of warrant liability was $35,000 for the twenty-six weeks ended June 30, 2015 (Predecessor). The warrant liability was reclassified to equity on March 20, 2015 in connection with the Initial Investment discussed in Note 3 to the unaudited consolidated financial statements. There was no such change in fair value of warrant liability for the thirty-six weeks ended September 6, 2016 (Successor) and the ten weeks ended September 8, 2015 (Successor).

36

Provision for Income Taxes
The effective income tax rates were 42.5% for the thirty-six weeks ended September 6, 2016 (Successor) compared to 58.9% for the ten weeks ended September 8, 2015 (Successor) and 26.0% for the twenty-six weeks ended June 30, 2015 (Predecessor). The provision for income taxes consisted of income tax (benefit) expense of $9.5 million for the thirty-six weeks ended September 6, 2016 (Successor), $(3.1) million for the ten weeks ended September 8, 2015 (Successor) and $0.7 million for the twenty-six weeks ended June 30, 2015 (Predecessor). The income tax expense related to the thirty-six weeks ended September 6, 2016 (Successor) is driven by our estimated effective income tax rate of 42.5% 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. In addition, the effective rate is also driven by transaction-related costs incurred in connection with the warrant tender offer which are not deductible for taxes as well as lower stock compensation expense deductible for tax related to the June 30, 2016 vesting of certain restricted stock awards as compared to the cumulative amount recorded as stock-based compensation expense, partially offset by federal targeted job credits. The income tax expense related to the ten weeks ended September 8, 2015 (Successor) and twenty-six weeks ended June 30, 2015 (Predecessor) primarily related to the increase in deferred tax liabilities for indefinite-lived assets and the related effect of maintaining a full valuation allowance against certain of deferred tax assets as of September 8, 2015 (Successor).
As part of purchase accounting, we were required to record all of DTH’s acquired assets and liabilities at their acquisition date fair value, including deferred income taxes. We considered the weight of both positive and negative evidence and concluded that it is more likely than not that net deferred tax assets will be realized and that no valuation allowance was required as of the date of acquisition. As a result, we established deferred tax assets as well as deferred tax liabilities related to indefinite-lived intangibles through the purchase price allocation (see note 3 to the unaudited condensed consolidated financial statements). In addition, after considering the Business Combination, the projected post-combination results and all available evidence, we released $1.9 million of valuation allowance through income tax benefit in accordance with ASC 805-740-30-3 during the ten week period ended September 8, 2015 (Successor).
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 margin. However, the restaurant industry continues to be challenged and uncertainty exists as to the sustainability of these favorable trends.
We believe that expected cash flow from operations, available cash of $11.6 million at September 6, 2016 (Successor) and available borrowing capacity of $75.0 million at September 6, 2016 (Successor) 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. The Company restaurants do not require significant inventories.

37

The following table presents summary cash flow information for the periods indicated (in thousands).
Successor
Predecessor
36 Weeks Ended
September 6, 2016
10 Weeks Ended
September 8, 2015
26 Weeks Ended
June 30, 2015
Net cash provided by (used in)
Operating activities
$
38,696

$
(1,839
)
$
10,083

Investing activities
(24,676
)
52,142

(15,284
)
Financing activities
(12,611
)
(43,129
)
1,820

Net increase (decrease) in cash
$
1,409

$
7,174

$
(3,381
)
Cash Flows Provided by (Used in) Operating Activities
In the thirty-six weeks ended September 6, 2016 (Successor), cash flows provided by operating activities were $38.7 million . The cash flows provided by operating activities resulted from net income of $12.9 million , non-cash adjustments for asset depreciation and amortization of $16.0 million , deferred income taxes of $6.0 million , stock-based compensation of $2.6 million , net working capital requirements of $1.4 million and loss on disposal of assets of $0.2 million , partially offset by restaurant closures charges of $0.4 million .
In the ten weeks ended September 8, 2015 (Successor), cash flows used in operating activities were $1.8 million . The cash flows used in operating activities resulted from net loss of $2.2 million and changes in net working capital requirements totaling $(4.0) million, which includes cash outflows of $4.3 million related to transaction expenses previously expensed by LAC and not reported with DTH’s predecessor condensed consolidated statements of comprehensive income (loss), partially offset by non-cash adjustments for asset depreciation and amortization of $4.2 million, debt modification costs of $0.1 million and stock-based compensation of $0.1 million.
In the twenty-six weeks ended June 30, 2015 (Predecessor), cash flows provided by operating activities were $10.1 million . The cash flows used in operating activities resulted from net income of $2.1 million , non-cash adjustments for asset depreciation and amortization of $9.2 million , deferred income taxes of $0.6 million, stock-based compensation of $0.5 million and other non-cash adjustments totaling $0.2 million, partially offset by changes in net working capital requirements totaling $2.5 million .
Cash Flows (Used in) Provided by Investing Activities
In the thirty-six weeks ended September 6, 2016 (Successor), cash flows used in investing activities were $24.7 million , which were primarily the result of purchase of property and equipment and other assets.
In the ten weeks ended September 8, 2015 (Successor), cash flows provided by investing activities were $52.1 million. The cash flows used in investing activities were primarily the result of proceeds from the Company’s trust account of $149.9 million, partially offset by $89.8 million for the Business Combination with DTH and purchase of property and equipment and other assets totaling $8.0 million.
In the twenty-six weeks ended June 30, 2015 (Predecessor), cash flows used in investing activities were $15.3 million , which were primarily the result of purchase of property and equipment and other assets.
Cash Flows (Used in) Provided by Financing Activities
In the thirty-six weeks ended September 6, 2016 (Successor), cash flows used in financing activities were $12.6 million . The cash flows used in financing activities were primarily the result of the repurchase of 1,134,790 shares of our common stock and 476,806 warrants for an aggregate purchase price of $12.2 million , including incremental direct costs to acquire the shares, payments on capital lease and deemed landlord financing totaling $1.2 million , payments of tax withholding of $0.9 million related to restricted stock vesting and payment for interest rate cap of $0.3 million . During the thirty-six weeks ended September 6, 2016 (Successor), we borrowed $14.0 million on the revolving credit facility and made payments of $12.0 million on the revolving credit facility.

38

In the ten weeks ended September 8, 2015 (Successor), cash flows used in financing activities were $43.1 million. The cash flows used in financing activities were primarily the result of the full repayment of the 2013 Senior Credit Facility of $227.1 million, payments on revolving credit facilities capital lease and deemed landlord financing and debt issue costs in aggregate of $7.8 million as well as repayment of note payable of $0.5 million and payment of deferred underwriter compensation of $5.3 million both of which were accrued on LAC’s balance sheet at June 16, 2015, partially offset by net proceeds from the 2015 Senior Credit Facility of $162.6 million and proceeds of $35.0 million from the issuance of common stock.
In the twenty-six weeks ended June 30, 2015 (Predecessor), cash flows provided by financing activities were $1.8 million . The cash flows provided by financing activities were primarily the result of proceeds from the issuance of common stock of $91.2 million and proceeds from the 2013 Senior Credit Facility term loan and revolving credit facility of $33.6 million, partially offset by the full repayment of the subordinate notes of $108.1 million , payment of tax withholding related to option of exercises and distribution of restricted stock units of $7.5 million , payments on the 2013 Senior Credit facility revolving credit facility of $6.0 million and payments on capital lease obligations, deemed landlord financing and debt issue costs of $1.4 million .
Debt and Other Obligations
Senior Credit Facility
On April 1, 2013, DTH entered into the 2013 Senior Credit Facility in the amount of $215 million consisting of a $175.0 million term loan and $40.0 million revolving credit facility revolver with maturity dates of October 1, 2018 and April 1, 2018, respectively. On April 21, 2014, DTH amended the 2013 Senior Credit Facility whereby the then outstanding balance of the term loan was increased by $62.0 million to $220.0 million and the revolving credit facility remained at $40 million. The amended term loan bore interest at LIBOR (not to be less than 1.00%) plus a margin of 4.50%. On March 20, 2015, DTH increased the borrowings on its 2013 Senior Credit Facility by $25.1 million and borrowed $10.0 million under the revolving credit facility. In addition, on March 12, 2015, DTH satisfied the rating condition in its 2013 Senior Credit Facility resulting in a decrease in interest rates to LIBOR (not to be less than 1.00%) plus a margin of 4.25% as of March 25, 2015. On June 30, 2015, DTH used $68.6 million of the proceeds from the Business Combination to pay down borrowings under the 2013 Senior Credit Facility.
On August 4, 2015, we refinanced our existing 2013 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. We borrowed $164 million under the 2015 Senior Credit Facility to repay all of existing indebtedness under our existing 2013 Senior Credit Facility and to pay costs associated with the financing. At the time of termination, $162.5 million of term loan borrowings were outstanding under the 2013 Senior Credit Facility and $17.6 million revolver capacity that was utilized to support outstanding letters of credit.
At our option, loans under the 2015 Senior Credit Facility may bear interest at a base rate or LIBOR, plus a margin determined in accordance with a consolidated total lease adjusted leverage ratio-based pricing grid. The base rate is calculated as the highest of (a) the Federal Funds Rate plus 1/2 of 1%, (b) the prime rate of Bank of America, and (c) LIBOR plus 1.00%. For LIBOR loans, the margin is in the range of 1.50% to 2.50%, and for base rate loans the margin is in the range of 0.50% and 1.50%. The margin was initially set at 2.00% for LIBOR loans and at 1.00% for base rate loans until delivery of financial statements and a compliance certificate for the fourth fiscal quarter ending after the closing date of the 2015 Senior Credit Facility. Following delivery of financial statements and a compliance certificate for the fourth fiscal quarter ending December 29, 2015 (Successor), the applicable margin decreased 0.25% for both LIBOR loans and base rate loans on March 18, 2016.
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 September 6, 2016 (Successor).
The 2015 Senior Credit Facility does not have scheduled principal payments until its maturity on August 4, 2020.
At September 6, 2016 (Successor), the weighted-average interest rate on the outstanding balance of the 2015 Senior Credit Facility was 2.3% . As of September 6, 2016 (Successor) there were $156.0 million of borrowings under the 2015 Senior Credit Facility and letters of credit outstanding of $19.0 million . Unused borrowing capacity at September 6, 2016 (Successor) was $75.0 million .

39

Subordinated Notes
In connection with DTH's May 2010 restructuring, wholly owned subsidiaries of DTH issued subordinated notes in the aggregate principal amount of $150.0 million which had an interest rate of 13.0%, with interest accrued to principal. The outstanding balance of $111.2 million on these subordinated notes was paid in full on March 20, 2015.
Hedging Arrangements
Effective June 30, 2013, DTH entered into an interest rate cap agreement with a three-year term with a fixed notional amount of $87.5 million of the Term Loan that effectively converted that portion of the loan outstanding under the 2013 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 three-month LIBOR plus the applicable percentage (as provided by the 2013 Senior Credit Facility) to a capped interest rate of 1.00% to 2.25% plus the applicable percentage.
DTH was hedging forecasted transactions expected to occur through June 30, 2016. As of the July 1, 2015 reset date, however, DTH 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, and as a result, this hedge became ineffective. Therefore, after July 1, 2015, any changes in fair value was recorded through interest expense. There were no changes in fair value for the interest rate cap from July 1, 2015 through June 30, 2016.
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.
Off-Balance Sheet and Other Arrangements
At September 6, 2016 (Successor), we had a $250.0 million revolving credit facility under the 2015 Senior Credit Facility of which $19.0 million was reserved for outstanding letters of credit and $75.0 million was unused and available for borrowings. We did not have any other material off-balance sheet arrangements, except for restaurant operating leases entered into in the normal course of business.
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. 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 September 6, 2016 (Successor), we repurchased (1) 505,808 shares for an average price per share of $9.45 for an aggregate cost of approximately $4.8 million , and (2) 235,000 warrants for an average price per warrant of $1.85 for an aggregate cost of approximately $0.4 million , including incremental direct costs to acquire the shares and warrants. During the thirty-six weeks ended September 6, 2016 (Successor), we repurchased (1) 1,134,790 shares of common stock for an average price per share of $9.78 for an aggregate cost of approximately $11.2 million , and (2) 476,806 warrants for an average price per warrant of $2.11 for an aggregate cost of approximately $1.0 million , including incremental direct costs to acquire the shares and warrants. As of September 6, 2016 (Successor), there was approximately $37.9 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.
Exchange Offer
On July 11, 2016, we commenced an offer to exchange 0.2780 shares of our common stock for each outstanding warrant exercisable for shares at an exercise price of $11.50 per share (approximately one share for every 3.6 warrants tendered), up to a maximum of 6,750,000 warrants, which amount was subsequently increased to 7,750,000 warrants. The offer to exchange expired on August 8, 2016. A total of 5,516,243 warrants were tendered in the exchange offer. All of our directors and executive officers who control or beneficially owned warrants participated in the offer and in aggregate tendered 1,501,800 of their warrants. We accepted for exchange all such warrants and issued an aggregate of 1,533,542 shares in exchange for the warrants

40

tendered, representing approximately 4% of the shares outstanding after such issuance. After completion of the offer to exchange, 6,646,574 warrants remained outstanding. The warrants will expire on June 30, 2020, unless sooner exercised or redeemed by us in accordance with the terms of the warrants.
Management's Use of Non-GAAP Financial Measures
A reconciliation of company restaurant sales to restaurant contribution is provided below (in thousands):
Successor
Predecessor
12 Weeks Ended
September 6, 2016
10 Weeks Ended
September 8, 2015
2 Weeks Ended
June 30, 2015
Company restaurant sales
$
100,173

$
78,874

$
15,891

Restaurant operating expenses
79,233

63,103

12,972

Restaurant contribution
$
20,940

$
15,771

$
2,919

Restaurant contribution margin
20.9
%
20.0
%
18.4
%
Successor
Predecessor
36 Weeks Ended
September 6, 2016
10 Weeks Ended
September 8, 2015
26 Weeks Ended
June 30, 2015
Company restaurant sales
$
289,640

$
78,874

$
200,676

Restaurant operating expenses
231,402

63,103

162,178

Restaurant contribution
$
58,238

$
15,771

$
38,498

Restaurant contribution margin
20.1
%
20.0
%
19.2
%

41

The following table sets forth reconciliations of net income (loss) to EBITDA and Adjusted EBITDA (in thousands):
Successor
Predecessor
12 Weeks Ended
September 6, 2016
10 Weeks Ended
September 8, 2015
2 Weeks Ended
June 30, 2015
Net income (loss)
$
4,949

$
(2,186
)
$
2,416

Non-GAAP adjustments:
Provision (benefit) for income taxes
4,076

(3,132
)
(1,449
)
Interest expense
1,412

1,725

664

Depreciation and amortization
5,157

4,289

659

EBITDA
15,594

696

2,290

Stock-based compensation expense (a)
1,001

146

—

Loss on disposal of assets (b)
54

1

84

Restaurant closure charges, net (c)
(133
)
19

—

Amortization of favorable and unfavorable lease assets and liabilities, net (d)
(140
)
(142
)
5

Debt modification costs (e)
—

78

1

Transaction-related costs (f)
490

11,978

61

Pre-opening costs (h)
94

41

28

Adjusted EBITDA
$
16,960

$
12,817

$
2,469

Successor
Predecessor
36 Weeks Ended
September 6, 2016
10 Weeks Ended
September 8, 2015
26 Weeks Ended
June 30, 2015
Net income (loss)
$
12,874

$
(2,186
)
$
2,104

Non-GAAP adjustments:
Provision (benefit) for income taxes
9,529

(3,132
)
740

Interest expense
4,289

1,725

11,491

Depreciation and amortization
16,175

4,289

8,249

EBITDA
42,867

696

22,584

Stock-based compensation expense (a)
2,630

146

532

Loss on disposal of assets (b)
191

1

99

Restaurant closure charges, net (c)
(121
)
19

94

Amortization of favorable and unfavorable lease assets and liabilities, net (d)
(420
)
(142
)
3

Debt modification costs (e)
—

78

139

Transaction-related costs (f)
681

11,978

7,255

Change in fair value of warrant liability (g)
—

—

(35
)
Pre-opening costs (h)
222

41

276

Adjusted EBITDA
$
46,050

$
12,817

$
30,947


(a)
Includes non-cash, stock-based compensation.
(b)
Loss on disposal of assets includes the loss on disposal of assets related to retirements and replacement or write-off of leasehold improvements or equipment.
(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 associated with debt refinancing transaction in August 2015 and March 2015.
(f)
Includes costs related to the offer to exchange the Company's common stock for each outstanding Company warrant and the strategic sale process which commenced during 2014 and resulted in the Stock Purchase Agreement with the Levy Newco Parties and the Business Combination consummated pursuant to the Merger Agreement.
(g)
Relates to fair value adjustments to the warrants to purchase shares of common stock of DTH that had been issued to certain of DTH’s equity shareholders, all of which were exchanged for shares of common stock of DTH on March 20, 2015.

42

(h)
Pre-opening costs consist of costs directly associated with the opening of new restaurants and incurred prior to opening, including restaurant labor, supplies, rent expense and other related pre-opening costs. These are generally incurred over the three to five months prior to opening.
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. As of September 6, 2016 (Successor), we had outstanding variable rate borrowings of $156.0 million . A 1.00% increase in the effective interest rate applied to this borrowing would result in a pre-tax interest expense increase of $1.6 million on an annualized basis.
We manage interest rate risk through normal operating and financing activities and, when determined appropriate, through the use of derivative financial instruments.
To mitigate exposure to fluctuations in interest rates, we entered into an interest rate cap agreement as discussed above under “—Liquidity and Capital Resources—Debt and Other Obligations—Hedging Arrangements” above.
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 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. From July 1, 2014 to December 31, 2015, the State of California (where a majority of company-operated restaurants are located) had a minimum wage of $9.00 per hour. From January 1, 2008 to June 30, 2014, California minimum wage had been $8.00 per hour. The California minimum wage increased to $10.00 per hour on January 1, 2016.
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.
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. Also, in June 2016, the Los Angeles City Council approved a paid sick leave ordinance to provide six days of paid sick leave per year, with carry-over of 72 hours, effective July 1, 2016. These ordinances impacted 24 company-operated restaurants and eight franchise-operated 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 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 would increase to $10.50 per hour in 2017, $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 367 restaurants in California of which 246 are company-operated and 121 are franchised-operated.

43

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 four company-operated restaurants and one franchise-operated restaurant.
In general, we have been able to substantially offset cost increases resulting from inflation by increasing menu prices, managing menu mix, improving productivity or through other adjustments. We may or may not be able to offset cost increases in the future.
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, valuations provided by business combinations, insurance reserves, restaurant closure reserves, stock-based compensation, contingent liabilities, certain leasing activities 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 December 29, 2015 (Successor) filed with the SEC on March 8, 2016. There have been no material changes in any of our critical accounting policies during the twelve week period ended September 6, 2016 (Successor).
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.

44

Item 4. Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Our management establishes and maintains disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) to ensure that the information we disclose under the Securities Exchange Act of 1934 is properly and timely reported. We provide this information to our chief executive and chief financial officers as appropriate to allow for timely decisions.
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 change in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) occurred during the period covered by this report that has affected or is reasonably likely to affect materially our internal control over financial reporting.


45

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 December 29, 2015 (Successor) filed with the SEC on March 8, 2016 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 and thirty-six weeks ended September 6, 2016 (Successor), we repurchased respectively 505,808 and 1,134,790 common stock shares in open market transactions under the share repurchase program for an average price per share of $9.45 and $9.78 for an aggregate cost of approximately $4.8 million and $11.2 million including incremental direct costs to acquire the shares. During both the twelve and thirty-six weeks ended September 6, 2016 , we repurchased respectively 235,000 and 476,806 warrants in open market transactions and privately negotiated transactions under the share repurchase program for an average price per share of $1.85 and $2.11 for an aggregate cost of approximately $0.4 million and $1.0 million including incremental direct costs to acquire the warrants. As of September 6, 2016 (Successor), there was approximately $37.9 million remaining under the share repurchase program.
The following table summarizes shares and warrants repurchased during the quarter ended September 6, 2016 (Successor). 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
June 15, 2016 - July 12, 2016
361,573

235,000

$
8.79

$
1.85

990,555

476,806

$
14,500,460

July 13, 2016 - August 9, 2016
—

—

$
—

$
—

990,555

476,806

$
14,500,460

August 10, 2016 - September 6, 2016
144,235

—

$
11.11

$
—

1,134,790

476,806

$
37,898,009

Total
505,808

235,000

$
9.45

$
1.85




46

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.

47

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: October 17, 2016
/s/ Paul J.B. Murphy III
Name: Paul J.B. Murphy III
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)


48
TABLE OF CONTENTS