TACO 10-Q Quarterly Report Sept. 12, 2017 | Alphaminr
Del Taco Restaurants, Inc.
ALPHAMINR

TACO 10-Q Quarter ended Sept. 12, 2017

Balance Sheet
Cash Flow
Income Statement
Debt
DEL TACO RESTAURANTS, INC.
10-Q 1 tacoq32017.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 12, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to
Commission File Number: 001-36197
DEL TACO RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)
Delaware
46-3340980
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
25521 Commercentre Drive
Lake Forest, California
92630
(Address of principal executive offices)
(Zip Code)
(949) 462-9300
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer
¨
Accelerated filer
x
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
¨
Emerging growth company
x

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ¨ No x
As of October 19, 2017 , there were 38,677,234 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)
September 12, 2017
January 3, 2017
Assets
(Unaudited)
Current assets:
Cash and cash equivalents
$
7,022

$
8,795

Accounts and other receivables, net
3,353

4,141

Inventories
2,642

2,718

Prepaid expenses and other current assets
4,273

4,204

Total current assets
17,290

19,858

Property and equipment, net
146,308

138,320

Goodwill
319,778

320,025

Trademarks
220,300

220,300

Intangible assets, net
22,523

24,782

Other assets, net
3,622

3,872

Total assets
$
729,821

$
727,157

Liabilities and shareholders’ equity
Current liabilities:
Accounts payable
$
20,060

$
16,427

Other accrued liabilities
39,065

36,653

Current portion of capital lease obligations and deemed landlord financing liabilities
1,497

1,588

Total current liabilities
60,622

54,668

Long-term debt, capital lease obligations and deemed landlord financing liabilities, excluding current portion, net
161,968

173,743

Deferred income taxes
93,700

91,273

Other non-current liabilities
31,058

30,140

Total liabilities
347,348

349,824

Commitments and contingencies ( Note 14 )


Shareholders’ equity:
Preferred stock, $0.0001 par value; 1,000,000 shares authorized; no shares issued and outstanding
—

—

Common stock, $0.0001 par value; 400,000,000 shares authorized; 38,677,234 shares issued and outstanding at September 12, 2017; 39,153,503 shares issued and outstanding at January 3, 2017
4

4

Additional paid-in capital
350,873

360,131

Accumulated other comprehensive (loss) income
(99
)
172

Retained earnings
31,695

17,026

Total shareholders’ equity
382,473

377,333

Total liabilities and shareholders’ equity
$
729,821

$
727,157

See accompanying notes to consolidated financial statements.

1

Del Taco Restaurants, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands, except share and per share data)
12 Weeks Ended
36 Weeks Ended
September 12, 2017
September 6, 2016
September 12, 2017
September 6, 2016
Revenue:
Company restaurant sales
$
106,298

$
100,173

$
311,542

$
289,640

Franchise revenue
3,978

3,686

11,494

10,591

Franchise sublease income
712

560

1,878

1,617

Total revenue
110,988

104,419

324,914

301,848

Operating expenses:
Restaurant operating expenses:
Food and paper costs
29,648

27,574

86,336

80,061

Labor and related expenses
33,635

30,748

100,041

90,781

Occupancy and other operating expenses
22,608

20,911

64,243

60,560

General and administrative
8,817

8,566

27,177

25,072

Depreciation and amortization
5,522

5,157

15,903

16,175

Occupancy and other - franchise subleases
654

521

1,738

1,534

Pre-opening costs
354

94

531

222

Restaurant closure charges, net
(16
)
(133
)
(1
)
(121
)
Loss on disposal of assets, net
233

54

524

191

Total operating expenses
101,455

93,492

296,492

274,475

Income from operations
9,533

10,927

28,422

27,373

Other expense
Interest expense
1,628

1,412

4,798

4,289

Transaction-related costs
—

490

—

681

Total other expense
1,628

1,902

4,798

4,970

Income from operations before provision for income taxes
7,905

9,025

23,624

22,403

Provision for income taxes
2,804

4,076

8,955

9,529

Net income
5,101

4,949

14,669

12,874

Other comprehensive loss:
Change in fair value of interest rate cap, net of tax
(35
)
(122
)
(271
)
(122
)
Total other comprehensive loss
(35
)
(122
)
(271
)
(122
)
Comprehensive income
$
5,066

$
4,827

$
14,398

$
12,752

Earnings per share:
Basic
$
0.13

$
0.13

$
0.38

$
0.33

Diluted
$
0.13

$
0.13

$
0.37

$
0.33

Weighted-average shares outstanding
Basic
38,695,099

38,465,064

38,744,963

38,518,431

Diluted
39,839,571

38,688,961

40,016,062

38,682,273

See accompanying notes to consolidated financial statements.

2

Del Taco Restaurants, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
36 Weeks Ended
September 12, 2017
September 6, 2016
Operating activities
Net income
$
14,669

$
12,874

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
15,903

16,175

Amortization of favorable and unfavorable lease assets and liabilities, net
(521
)
(420
)
Amortization of deferred financing costs and debt discount
267

267

Stock-based compensation
3,340

2,630

Deferred income taxes
2,607

6,019

Loss on disposal of assets, net
524

191

Restaurant closure charges
125

(403
)
Changes in operating assets and liabilities:
Accounts and other receivables, net
788

26

Inventories
76

296

Prepaid expenses and other current assets
(69
)
(1,699
)
Other assets
(84
)
—

Accounts payable
3,633

302

Other accrued liabilities
2,319

3,374

Other non-current liabilities
283

(936
)
Net cash provided by operating activities
43,860

38,696

Investing activities
Purchases of property and equipment
(30,122
)
(23,143
)
Proceeds from disposal of property and equipment, net
7,733

5

Purchases of other assets
(705
)
(1,538
)
Proceeds from sale of company-operated restaurants
2,192

—

Net cash used in investing activities
(20,902
)
(24,676
)
Financing activities
Repurchase of common stock and warrants
(10,711
)
(12,169
)
Payment of tax withholding related to restricted stock vesting
(1,923
)
(916
)
Payments on capital leases and deemed landlord financing
(1,133
)
(1,214
)
Proceeds from revolving credit facility
19,000

14,000

Payments on revolving credit facility
(30,000
)
(12,000
)
Payment for interest rate cap
—

(312
)
Proceeds from exercise of stock options
36

—

Net cash used in financing activities
(24,731
)
(12,611
)
(Decrease) increase in cash and cash equivalents
(1,773
)
1,409

Cash and cash equivalents at beginning of period
8,795

10,194

Cash and cash equivalents at end of period
$
7,022

$
11,603

Supplemental cash flow information:
Cash paid during the period for interest
$
4,355

$
4,279

Cash paid during the period for income taxes
4,743

811

Supplemental schedule of non-cash activities:
Accrued property and equipment purchases
$
5,552

$
3,672

Write-offs of accounts receivables
—

72

Change in other asset for fair value of interest rate cap recorded to other comprehensive loss, net of tax
(271
)
(122
)
See accompanying notes to consolidated financial statements

3

Del Taco Restaurants, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
1. Description of Business
Del Taco Restaurants, Inc. (f/k/a Levy Acquisition Corp. (“LAC”)) is a Delaware corporation headquartered in Lake Forest, California. The consolidated financial statements include the accounts of Del Taco Restaurants, Inc. and its wholly owned subsidiaries (collectively, the “Company” or “Del Taco”). The Company develops, franchises, owns, and operates Del Taco quick-service Mexican-American restaurants. At September 12, 2017 , there were 305 company-operated and 253 franchise-operated Del Taco restaurants located in 15 states, including one franchise-operated unit in Guam. At September 6, 2016 , there were 300 company-operated and 246 franchise-operated Del Taco restaurants located in 16 states, including one franchise-operated unit in Guam.
The Company was originally incorporated in Delaware on August 2, 2013 as a special purpose acquisition company, formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or other similar business combination with one or more businesses. On June 30, 2015 (the “Closing Date”), the Company consummated its business combination with Del Taco Holdings, Inc. (“DTH”) pursuant to the agreement and plan of merger dated as of March 12, 2015 by and among LAC, Levy Merger Sub, LLC (“Levy Merger Sub”), LAC’s wholly owned subsidiary, and DTH (the “Merger Agreement”). Under the Merger Agreement, Levy Merger Sub merged with and into DTH, with DTH surviving the merger as a wholly-owned subsidiary of the Company (the “Business Combination” or “Merger”). In connection with the closing of the Business Combination, the Company changed its name from Levy Acquisition Corp. to Del Taco Restaurants, Inc.
2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements included herein have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”). For additional information, these unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended January 3, 2017 ("2016 Form 10-K"). The accounting policies used in preparing these unaudited consolidated financial statements are the same as those described in our 2016 Form 10-K.
The Company’s fiscal year ends on the Tuesday closest to December 31. Fiscal year 2017 is a fifty-two week period ending January 2, 2018 . In a fifty-two week fiscal year, the first, second and third quarters each include twelve weeks of operations and the fourth quarter includes sixteen weeks of operations. Fiscal year 2016 is the fifty-three week period ended January 3, 2017 . In a fifty-three week fiscal year, the first, second and third quarters each include twelve weeks of operations and the fourth quarter includes seventeen weeks of operations. For fiscal year 2017 , the Company’s accompanying financial statements reflect the twelve weeks and thirty-six weeks ended September 12, 2017 . For fiscal year 2016 , the Company’s accompanying financial statements reflect the twelve weeks and thirty-six weeks ended September 6, 2016 .
In the opinion of management, the accompanying consolidated financial statements reflect all adjustments which are necessary for a fair presentation of the consolidated financial position, results of operations and cash flows for the periods presented. The results of operations for such interim periods are not necessarily indicative of results of operations to be expected for the full fiscal year.
Principles of Consolidation
The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly and majority owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.

4

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

Management believes that such estimates have been based on reasonable and supportable assumptions and the resulting estimates are reasonable for use in the preparation of the consolidated financial statements. Actual results could differ from these estimates. The Company’s significant estimates include estimates for impairment of goodwill, intangible assets and property and equipment, valuations provided in business combinations, insurance reserves, restaurant closure reserves, stock-based compensation, contingent liabilities, certain leasing activities and income tax valuation allowances.
Recently Issued Accounting Standards
In August 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities , which amends and simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management activities in the financial statements. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted. The Company is currently evaluating the impact of the standard on its consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 804): Clarifying the Definition of a Business . This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether certain transactions should be accounted for as acquisitions or disposals of assets or businesses. The Company elected as permitted by the standard, to early adopt ASU 2017-01 in the current period. The adoption of ASU 2017-01 did not have a material impact to the Company's consolidated financial statements.
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 new guidance requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with certain practical expedients available. The Company currently believes the guidance will have a material impact on its consolidated financial statements.
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 will adopt this new guidance in fiscal year 2018, and has not yet selected a transition method. The Company does not currently believe the new revenue recognition standard will materially impact the recognition of company restaurant sales or royalty fees from franchisees. Additionally, lease rental revenues are not within the scope of this new guidance. Based on an on-going assessment, the Company expects the adoption of the new guidance to change the timing of the recognition of initial franchise fees, including franchise and development fees, and renewal fees. Currently, these fees are generally recognized upfront upon either the opening of the respective restaurant or when a renewal agreement becomes effective. The Company currently believes the new guidance will generally require these fees to be recognized over the term of the related franchise agreement for the respective restaurant. In addition, the Company anticipates funds contributed by franchisees to the advertising funds managed by the Company, as well as the associated advertising fund expenditures, will be reported on a gross basis, and the advertising fund revenues and expenses may be reported in different periods. The Company is continuing to evaluate the impact the adoption of this new guidance will have on these and other revenue transactions in addition to the impact on accounting policies and related disclosures.
3. Restaurant Closure Charges, Net
At September 12, 2017 and January 3, 2017 , the restaurant closure liability is $2.7 million and $3.1 million , respectively. The details of the restaurant closure activities are discussed below.

5

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

Restaurant Closures and Lease Reserves
The following table represents other restaurant closure liability activity related to restaurant closures prior to 2015 and sublease income shortfalls (in thousands):
Total
Balance at January 3, 2017
$
1,365

Charges for accretion in current period
75

Cash payments
(208
)
Balance at September 12, 2017
$
1,232

The current portion of the restaurant closure liability is $0.3 million at both September 12, 2017 and January 3, 2017 and is included in other accrued liabilities in the consolidated balance sheets. The non-current portion of the restaurant closure liability is $0.9 million and $1.1 million at September 12, 2017 and January 3, 2017 , respectively, and is included in other non-current liabilities in the consolidated balance sheets.
Restaurant Closure and Other Related Charges for 12 Underperforming Restaurants
During the fourth fiscal quarter of 2015, the Company closed 12 company-operated restaurants. During the thirty-six weeks ended September 12, 2017 , the Company recorded accretion expense related to the closures, offset by $0.1 million of sublease income from leases which are treated as deemed landlord financing. A summary of the restaurant closure liability activity, all of which relates to contract termination costs, for these 12 closed restaurants consisted of the following (in thousands):
Total
Balance at January 3, 2017
$
1,773

Charges for accretion in current period
50

Cash payments
(349
)
Balance at September 12, 2017
$
1,474

The current portion of the restaurant closure liability is $0.1 million and $0.6 million at September 12, 2017 and January 3, 2017 , respectively, and is included in other accrued liabilities in the consolidated balance sheets. The non-current portion of the restaurant closure liability is $1.4 million and $1.2 million at September 12, 2017 and January 3, 2017 , respectively, and is included in other non-current liabilities in the consolidated balance sheets.
4. Summary of Refranchising
In connection with the sale of company-operated restaurants to franchisees, the Company typically enters into several agreements, in addition to an asset purchase agreement, with franchisees including franchise and lease agreements. The Company typically sells restaurants’ inventory and equipment and retains ownership or the leasehold interest to the real estate to lease and/or sublease to the franchisee. The Company has determined that its restaurant dispositions usually represent multiple-element arrangements, and as such, the cash consideration received is allocated to the separate elements based on their relative selling price. Cash consideration generally includes up-front consideration for the sale of the restaurants and franchise fees and future cash consideration for royalties and lease payments. The Company considers the future lease payments in allocating the initial cash consideration received. The Company compares the stated rent under the lease and/or sublease agreements with comparable market rents and the Company records favorable or unfavorable lease assets/liabilities with a corresponding offset to the gain or loss on the sale of the company-operated restaurants. The cash consideration per restaurant for franchise fees is consistent with the amounts stated in the related franchise agreements which are charged for separate standalone arrangements. Therefore, the Company recognizes the franchise fees when earned. Future royalty income is also recognized in revenue as earned.
The Company sold five company-operated restaurants to franchisees in the first quarter of 2017 and the following table summarizes the related gain recognized during the thirty-six weeks ended September 12, 2017 (dollars in thousands):

6

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

36 Weeks Ended
September 12, 2017
Company-operated restaurants sold to franchisees
5

Proceeds from the sale of company-operated restaurants
$
2,192

Net assets sold (primarily furniture, fixtures and equipment)
(1,261
)
Goodwill related to the company-operated restaurants sold to franchisees
(247
)
Net unfavorable lease liabilities (a)
(548
)
Other costs
(5
)
Gain on sale of company-operated restaurants (b)
$
131

(a) The Company recorded favorable lease assets of $0.1 million and unfavorable lease liabilities of $0.6 million as a result of subleasing land, buildings and leasehold improvements to franchisees, in connection with the sale of company-operated restaurants.
(b) Included in loss on disposal of assets, net on the consolidated statements of comprehensive income.
5. Goodwill and other Intangible Assets
Goodwill was $319.8 million at September 12, 2017 compared to $320.0 million at January 3, 2017 . The change is due to the sale of company-operated stores as described in more detail in Note 4.
There have been no changes in the carrying amount of trademarks since January 3, 2017 .
The Company’s other intangible assets at September 12, 2017 and January 3, 2017 consisted of the following (in thousands):
September 12, 2017
January 3, 2017
Gross
Carrying
Amount
Accumulated
Amortization
Net
Gross
Carrying
Amount
Accumulated
Amortization
Net
Favorable lease assets
$
14,161

$
(4,282
)
$
9,879

$
14,176

$
(2,996
)
$
11,180

Franchise rights
15,489

(2,970
)
12,519

15,489

(2,038
)
13,451

Reacquired franchise rights
161

(36
)
125

161

(10
)
151

Total amortized other intangible assets
$
29,811

$
(7,288
)
$
22,523

$
29,826

$
(5,044
)
$
24,782


During the thirty-six weeks ended September 12, 2017 , the Company wrote-off $15,000 of favorable lease assets related to the closure of one company-operated restaurant.
6. Debt, Obligations Under Capital Leases and Deemed Landlord Financing Liabilities
The Company’s long-term debt, capital lease obligations and deemed landlord financing liabilities at September 12, 2017 and January 3, 2017 consisted of the following (in thousands):

7

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

September 12, 2017
January 3, 2017
2015 Senior Credit Facility, net of debt discount of $835 and $1,035 and deferred financing costs of $282 and $349 at September 12, 2017 and January 3, 2017, respectively
$
146,883

$
157,616

Total outstanding indebtedness
146,883

157,616

Obligations under capital leases and deemed landlord financing liabilities
16,582

17,715

Total debt
163,465

175,331

Less: amounts due within one year
1,497

1,588

Total amounts due after one year, net
$
161,968

$
173,743

At September 12, 2017 and January 3, 2017 , the Company assessed the amounts recorded under the 2015 Senior Credit Facility and determined that such amounts approximated fair value.
2015 Revolving Credit Facility
On August 4, 2015 , the Company refinanced its existing senior credit facility and entered into a new credit agreement (the “Credit Agreement”). The Credit Agreement, which matures on August 4, 2020 , provides for a $250 million revolving credit facility (the “2015 Senior Credit Facility”).

The Credit Agreement contains certain financial covenants, including the maintenance of a consolidated total lease adjusted leverage ratio and a consolidated fixed charge coverage ratio. The Company was in compliance with the financial covenants as of September 12, 2017 . Substantially all of the assets of the Company are pledged as collateral under the 2015 Senior Credit Facility.
At September 12, 2017 , the weighted-average interest rate on the outstanding balance of the 2015 Senior Credit Facility was 3.0% . At September 12, 2017 , the Company had a total of $83.8 million of availability for additional borrowings under the 2015 Senior Credit Facility as the Company had $148.0 million of outstanding borrowings and letters of credit outstanding of $18.2 million which reduce availability under the 2015 Senior Credit Facility.
7. Derivative Instruments
In June 2016, the Company entered into an interest rate cap agreement that became effective July 1, 2016, to hedge cash flows associated with interest rate fluctuations on variable rate debt, with a termination date of March 31, 2020 ("2016 Interest Rate Cap Agreement"). The 2016 Interest Rate Cap Agreement had an initial notional amount of $70.0 million of the 2015 Senior Credit Facility that effectively converted that portion of the outstanding balance of the 2015 Senior Credit Facility from variable rate debt to capped variable rate debt, resulting in a change in the applicable interest rate from an interest rate of one-month LIBOR plus the applicable margin (as provided by the 2015 Senior Credit Facility) to a capped interest rate of 2.00% plus the applicable margin. During the period from July 1, 2016 through September 12, 2017 , the 2016 Interest Rate Cap Agreement had no hedge ineffectiveness.
2016 Interest Rate Cap Agreement
To ensure the effectiveness of the 2016 Interest Rate Cap Agreement, the Company elected the one-month LIBOR rate option for its variable rate interest payments on term balances equal to or in excess of the applicable notional amount of the interest rate cap agreement as of each reset date. The reset dates and other critical terms on the term loans perfectly match with the interest rate cap reset dates and other critical terms during the twelve weeks ended September 12, 2017 .
As of September 12, 2017 , the Company was hedging forecasted transactions expected to occur through March 31, 2020. Assuming interest rates at September 12, 2017 remain constant, $0.3 million of interest expense related to hedges of these transactions is expected to be reclassified into earnings over the next 30 months. The Company intends to ensure that this hedge remains effective, therefore, approximately $34,000 is expected to be reclassified into interest expense over the next 12 months.

8

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

The effective portion of the 2016 Interest Rate Cap Agreement through September 12, 2017 was included in accumulated other comprehensive income.
8. Fair Value Measurements
The fair values of cash and cash equivalents, accounts receivable, accounts payable and other accrued liabilities approximate their carrying amounts due to their short maturities. The carrying value of the 2015 Senior Credit Facility approximated fair value. The 2016 Interest Rate Cap Agreement is recorded at fair value in the Company’s consolidated balance sheets.
As of September 12, 2017 and January 3, 2017 , the Company held certain assets and liabilities that are required to be measured at fair value on a recurring basis. For both periods, this included a derivative instrument related to interest rates. The Company determined the fair value of the interest rate cap contract based on counterparty quotes, with appropriate adjustments for any significant impact of nonperformance risk of the parties to the interest rate cap contract. Therefore, the Company categorized this interest rate cap contract as Level 2 fair value measurements. The fair value of the 2016 Interest Rate Cap Agreement was $0.1 million and $0.6 million at September 12, 2017 and January 3, 2017 , respectively, and is included in other assets in the consolidated balance sheets.

The Company's assets and liabilities measured at fair value on a recurring basis as of September 12, 2017 and January 3, 2017 were as follows (in thousands):

September 12, 2017 (Unaudited)
Markets for Identical Assets
(Level 1)
Observable Inputs (Level 2)
Unobservable Inputs (Level 3)
2016 Interest Rate Cap Agreement
$
147

$
—

$
147

$
—

Total assets measured at fair value
$
147

$
—

$
147

$
—

January 3, 2017
Markets for Identical Assets (Level 1)
Observable Inputs (Level 2)
Unobservable Inputs (Level 3)
2016 Interest Rate Cap Agreement
$
598

$
—

$
598

$
—

Total assets measured at fair value
$
598

$
—

$
598

$
—

9. Other Accrued Liabilities and Other Non-current Liabilities
A summary of other accrued liabilities follows (in thousands):
September 12, 2017
January 3, 2017
Employee compensation and related items
$
11,983

$
13,783

Accrued insurance
8,213

8,192

Accrued sales tax
4,758

3,916

Accrued advertising
2,173

1,657

Accrued income tax
2,167

562

Accrued real property tax
1,946

1,274

Restaurant closure liability
435

875

Other
7,390

6,394

$
39,065

$
36,653


9

A summary of other non-current liabilities follows (in thousands):
September 12, 2017
January 3, 2017
Unfavorable lease liabilities
$
15,249

$
17,072

Insurance reserves
4,859

4,269

Deferred rent liability
2,389

1,676

Restaurant closure liability
2,271

2,263

Deferred development and initial franchise fees
1,402

1,385

Unearned trade discount, non-current
1,284

1,596

Deferred gift card income
565

1,182

Other
3,039

697

$
31,058

$
30,140

10. Stock-Based Compensation
In connection with the approval of the Business Combination, the Del Taco Restaurants, Inc. 2015 Omnibus Incentive Plan (the “2015 Plan”) was approved by shareholders to offer eligible employees, directors and consultants cash and stock-based incentive awards. Awards under the 2015 Plan are generally not restricted to any specific form or structure and could include, 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 12, 2017 , there were 1,338,236 shares of common stock available for grant under the 2015 Plan.
Stock-Based Compensation Expense
The total compensation expense related to the 2015 Plan was $1.2 million and $1.0 million for the twelve weeks ended September 12, 2017 and September 6, 2016 , respectively, and $3.3 million and $2.6 million for the thirty-six weeks ended September 12, 2017 and September 6, 2016 , respectively.
Restricted Stock Awards
A summary of outstanding and unvested restricted stock activity as of September 12, 2017 and changes during the period from January 3, 2017 through September 12, 2017 are as follows:
Shares
Weighted-Average
Grant Date
Fair Value
Nonvested at January 3, 2017
1,133,822

$
10.40

Granted
529,690

13.62

Vested
(397,727
)
10.60

Forfeited
(175,625
)
10.37

Nonvested at September 12, 2017
1,090,160

$
11.89

During the thirty-six weeks ended September 12, 2017 , the Company made payments of $1.9 million related to tax withholding obligations for the vesting of restricted stock awards in exchange for 140,209 shares withheld. As of September 12, 2017 , there was $11.4 million of unrecognized expense, net of estimated forfeitures, related to restricted stock awards which is expected to be recognized over a weighted-average remaining period of 2.8 years . The fair value of these awards was determined based on the Company’s stock price on the grant date.

10

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

Stock Options
A summary of stock option activity as of September 12, 2017 and changes during the period from January 3, 2017 through September 12, 2017 are as follows:
Options
Weighted Average Exercise Price
Weighted Average Remaining Contractual Term
Aggregate Intrinsic Value
(in years)
(in thousands)
Options outstanding at January 3, 2017
334,500

$
9.94

6.1
$
1,464

Granted
125,000

13.78



Exercised
(3,500
)
10.25



Forfeited/Expired
(10,250
)
9.92



Options outstanding at September 12, 2017
445,750

$
11.02

5.8
$
1,332

Options exercisable at September 12, 2017
130,998

$
10.11

5.2
$
509

Options exercisable and expected to vest at September 12,
2017
417,117

$
10.97

5.8
$
1,265

The aggregate intrinsic value in the table above is the amount by which the current market price of the Company's stock exceeds the exercise price on January 3, 2017 and September 12, 2017 , respectively.
As of September 12, 2017 , there was $1.1 million of unrecognized stock compensation expense, net of estimated forfeitures, related to stock option grants which is expected to be recognized over a weighted-average remaining period of 2.9 years .
11. Shareholders’ Equity
On February 26, 2016, the Company's Board of Directors authorized a share repurchase program covering up to $25.0 million in the aggregate of the Company's common stock and warrants which was effective immediately and expires upon completion of the repurchase program, unless terminated earlier by the Board of Directors. On August 23, 2016, the Company announced that the Board of Directors increased the repurchase program by $25.0 million , to $50.0 million . Purchases under the program may be made in open market or privately negotiated transactions. During the twelve weeks ended September 12, 2017 , the Company repurchased (1) 96,122 shares of common stock for an average price per share of $12.35 for an aggregate cost of approximately $1.2 million , including incremental direct costs to acquire the shares, and (2) 1,186 warrants for an average price per warrant of $3.97 for an aggregate cost of approximately $5,000 , including incremental direct costs to acquire the warrants. During the thirty-six weeks ended September 12, 2017 , the Company repurchased (1) 737,287 shares of common stock for an average price per share of $12.46 for an aggregate cost of approximately $9.2 million , including incremental direct costs to acquire the shares, and (2) 401,186 warrants for an average price per warrant of $3.75 for an aggregate cost of approximately $1.5 million , including incremental direct costs to acquire the warrants. The Company expects to retire the repurchased shares and therefore has accounted for them as constructively retired as of September 12, 2017 . As of September 12, 2017 , there was approximately $24.1 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.
12. Earnings per Share
Basic income per share is calculated by dividing net income attributable to Del Taco’s common shareholders for the period by the weighted average number of common shares outstanding for the period. In computing dilutive income per share, basic income per share is adjusted for the assumed issuance of all applicable potentially dilutive share-based awards, including warrants, restricted stock, common stock options and restricted stock units.

11

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

Below are basic and diluted net income per share for the periods indicated (amounts in thousands except share and per share data):
12 Weeks Ended
36 Weeks Ended
September 12, 2017
September 6, 2016
September 12, 2017
September 6, 2016
Numerator:
Net income
$
5,101

$
4,949

$
14,669

$
12,874

Denominator:
Weighted-average shares outstanding - basic
38,695,099

38,465,064

38,744,963

38,518,431

Dilutive effect of unvested restricted stock
319,624

223,897

430,589

163,842

Dilutive effect of stock options
30,477

—

25,673

—

Dilutive effect of warrants
794,371

—

814,837

—

Weighted-average shares outstanding - diluted
39,839,571

38,688,961

40,016,062

38,682,273

Net income per share - basic
0.13

$
0.13

0.38

$
0.33

Net income per share - diluted
0.13

$
0.13

0.37

$
0.33

Antidilutive stock options, unvested restricted stock awards and warrants excluded from the computations
469,691

10,829,117

188,369

12,126,069

Antidilutive stock options, unvested restricted stock and warrants were excluded from the computation of diluted net income per share due to the assumed proceeds from the award’s exercise or vesting being greater than the average market price of the common shares.
13. Income Taxes
The effective income tax rates were 35.5% and 45.2% for the twelve weeks ended September 12, 2017 and September 6, 2016 , respectively. The provision for income taxes consisted of income tax expense of $2.8 million and $4.1 million for the twelve weeks ended September 12, 2017 and September 6, 2016 , respectively. The effective income tax rates were 37.9% and 42.5% for the thirty-six weeks ended September 12, 2017 and September 6, 2016 , respectively. The provision for income taxes consisted of income tax expense of $9.0 million and $9.5 million for the thirty-six weeks ended September 12, 2017 and September 6, 2016 , respectively.
The income tax expense for the twelve weeks ended September 12, 2017 is driven by the estimated effective income tax rate of 35.5% which primarily consists of statutory federal and state tax rates based on apportioned income, reduced by higher stock compensation expense deductible for tax related to the June 30, 2017 vesting of certain restricted stock awards as compared to the cumulative amount recorded as stock-based compensation expense, as well as federal targeted job credits. The income tax expense for the twelve weeks ended September 6, 2016 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 for the thirty-six weeks ended September 12, 2017 is driven by the estimated effective income tax rate of 37.9% which primarily consists of statutory federal and state tax rates based on apportioned income, reduced by higher stock compensation expense deductible for tax related to the June 30, 2017 vesting of certain restricted stock awards as compared to the cumulative amount recorded as stock-based compensation expense, as well as federal targeted job credits. The income tax expense for the thirty-six weeks ended September 6, 2016 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

12

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

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.
Management believes it is more likely than not that all deferred tax assets will be realized and therefore no valuation allowance as of September 12, 2017 and January 3, 2017 is required.
14. Commitments and Contingencies
The primary claims in the Company’s business are workers’ compensation and general liabilities. These insurance programs are self-insured or high deductible programs with excess coverage that management believes is sufficient to adequately protect the Company. In the opinion of management, adequate provision has been made for all incurred claims up to the self-insured or high deductible limits, including provision for estimated claims incurred but not reported. Because of the uncertainty of the ultimate resolution of outstanding claims, as well as the uncertainty regarding claims incurred but not reported, it is possible that management’s provision for these losses could change materially. However, no estimate can currently be made of the range of additional losses.
Purchasing Commitments
The Company enters into various purchase obligations in the ordinary course of business, generally of short term nature. Those that are binding primarily relate to commitments for food purchases and supplies, amounts owed under contractor and subcontractor agreements, orders submitted for equipment for restaurants under construction, information technology service agreements and marketing initiatives, some of which are related to both company-operated and franchise-operated locations. The Company also has a long-term beverage supply agreement with a major beverage vendor whereby marketing rebates are provided to the Company and its franchisees based upon the volumes of purchases for system-wide restaurants which vary according to demand for beverage syrup. This contract has terms extending into 2021 . The Company’s future estimated cash payments under existing contractual purchase obligations for goods and services as of September 12, 2017 , are approximately $63.5 million . The Company has excluded agreements that are cancelable without penalty.
Litigation
In July 2013, a former Del Taco employee filed a purported class action complaint alleging that Del Taco has failed to pay overtime wages and has not appropriately provided meal breaks and wage statement to its California general managers. On March 4, 2016, the Court denied class certification on the overtime and meal period claims. At that time, the Court granted class certification on the wage statement issue only. On June 23, 2017, the Court filed a tentative ruling granting Del Taco’s motion to decertify the sole remaining class. The parties are in the process of stipulating to decertification of the class and expect the Court to approve the stipulation. 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 12, 2017 .
In March 2014, a former Del Taco employee filed a purported class action complaint alleging that Del Taco has not appropriately provided meal breaks and failed to pay wages to its California hourly employees. Discovery is in process and Del Taco intends to assert all of its defenses to this threatened class action and the individual claims. Del Taco has several defenses to the action that it believes could 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 12, 2017 .

13

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

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

14

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Company's audited consolidated financial statements for the fiscal year ended January 3, 2017, and related notes thereto, along with the related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 13, 2017.
In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks and uncertainties such as the number of restaurants we intend to open, possible stock and warrant repurchases and estimates of our effective tax rates. We use words such as “estimates,” “projected,” “expects,” “anticipates,” “forecasts,” “plans,” “intends,” “believes,” “seeks,” “may,” “will,” “should,” “future,” “propose,” “preliminary,” “guidance” and variations of these words or similar expressions (or the negative versions of such words or expressions) to identify forward-looking statements.  These statements are based on assumptions and information available to us as of the date any such statements are made and are subject to risks and uncertainties.  These risks and uncertainties include, without limitation, consumer demand, our inability to successfully open company-operated or franchise-operated restaurants or establish new markets, competition in our markets, our inability to grow and manage growth profitably, adverse changes in food and supply costs, our inability to access additional capital, changes in applicable laws or regulations, food safety and foodborne illness concerns, our inability to manage existing and to obtain additional franchisees, our inability to attract and retain qualified personnel, our inability to profitably expand into new markets, and the possibility that we may be adversely affected by other economic, business, and/or competitive factors.  Our actual results may differ materially from those anticipated in these forward-looking statements due to these risks and uncertainties, as well as others, including, without limitation, those discussed in Item 1A. Risk Factors in our Annual Report on Form 10-K for our fiscal year ended January 3, 2017. We assume no obligation to update these forward-looking statements.
Fiscal Year
We operate on a 52- or 53-week fiscal year ending on the Tuesday closest to December 31 for financial reporting purposes. Fiscal year 2016 is the 53-week period ended January 3, 2017 (Fiscal 2016). Fiscal year 2017 will be a 52-week period ended January 2, 2018 (Fiscal 2017).
Overview
We are a nationwide operator and franchisor of restaurants featuring fresh and fast cuisine, including both Mexican inspired and American classic dishes. As of September 12, 2017 , we have 558 Del Taco restaurants, a majority of these in the Pacific Southwest. In each of our restaurants, our food is made to order in working kitchens. We serve our customers fresh and high-quality food typical of fast casual restaurants but with the speed, convenience and value associated with traditional quick service restaurants (“QSRs”). With attributes of both a fast casual restaurant and a QSR — a combination we call QSR+ — we occupy a place in the restaurant market distinct from our competitors. With a menu designed to appeal to a wide variety of budgets and tastes and recently updated interior and exterior designs across most of our entire system, we believe that we are poised for growth, operating within the fastest growing segment of the restaurant industry, the limited service restaurant (“LSR”) segment. With an average system check of $7.13 during Fiscal 2016, we offer a compelling value proposition relative to both QSR and fast casual peers.

15

Highlights and Trends
Third Quarter 2017 Highlights
Our third quarter 2017 results and highlights include the following:
•
Total revenues increased 6.3% for the twelve weeks ended September 12, 2017 to $111.0 million compared to $104.4 million for the twelve weeks ended September 6, 2016 primarily due to growth in company-operated and franchise-operated same store sales and additional restaurants open during 2017 compared to 2016. Total revenues increased 7.6% for the thirty-six weeks ended September 12, 2017 to $324.9 million compared to $301.8 million for the thirty-six weeks ended September 6, 2016 primarily due to growth in company-operated and franchise-operated same store sales and additional restaurants open during 2017 compared to 2016.
•
During the twelve weeks ended September 12, 2017 , we opened a total of four new company-operated and franchise-operated restaurants. During the thirty-six weeks ended September 12, 2017 , we opened a total of ten new company-operated and franchise-operated restaurants. During the twelve weeks ended September 6, 2016 , we opened a total of three new company-operated and franchise-operated restaurants. During the thirty-six weeks ended September 6, 2016 , we opened a total of six new company-operated and franchise-operated restaurants.
Same Store Sales
Same store sales growth reflects the change in year-over-year sales for the same store base. We include a restaurant in the same store base in the accounting period following its 18 th full month of operations and exclude restaurant closures. The following table shows the same store sales growth for the twelve and thirty-six weeks ended September 12, 2017 and September 6, 2016 :
12 Weeks Ended
36 Weeks Ended
September 12, 2017
September 6, 2016
September 12, 2017
September 6, 2016
Company-operated same store sales
3.7
%
7.1
%
4.8
%
4.4
%
Franchise-operated same store sales
4.6
%
6.2
%
5.5
%
4.5
%
System-wide same store sales
4.1
%
6.7
%
5.1
%
4.4
%
The increase in company-operated same store sales in the twelve weeks ended September 12, 2017 was driven by an increase in average check size of 4.0% , partially offset by a decrease in traffic of 0.3% compared to the twelve weeks ended September 6, 2016 . The increase in company-operated same store sales in the twelve weeks ended September 6, 2016 was driven by an increase in average check size of 4.8% and an increase in traffic of 2.3% compared to the twelve weeks ended September 8, 2015.
The increase in company-operated same store sales in the thirty-six weeks ended September 12, 2017 was driven by an increase in average check size of 4.3% and an increase in traffic of 0.5% compared to the thirty-six weeks ended September 6, 2016 . The increase in company-operated same store sales in the thirty-six weeks ended September 6, 2016 was driven by an increase in average check size of 5.1% , partially offset by a decrease in traffic of 0.7% compared to the thirty-six weeks ended September 8, 2015.
Restaurant Development
Del Taco restaurant counts at the end of the twelve and thirty-six weeks ended September 12, 2017 and September 6, 2016 , are as follows:

16

12 Weeks Ended
36 Weeks Ended
September 12, 2017
September 6, 2016
September 12, 2017
September 6, 2016
Company-operated restaurant activity:
Beginning of period
304

298

310

297

Openings
2

1

3

3

Closures
(1
)
—

(3
)
(1
)
Purchased from franchisees
—

1

—

1

Sold to franchisees
—

—

(5
)
—

Restaurants at end of period
305


300

305

300

Franchise-operated restaurant activity:
Beginning of period
251

245

241

247

Openings
2

2

7

3

Closures
—

—

—

(3
)
Purchased from Company
—

—

5

—

Sold to Company
—

(1
)
—

(1
)
Restaurants at end of period
253


246

253

246

Total restaurant activity:
Beginning of period
555

543

551

544

Openings
4

3

10

6

Closures
(1
)
—

(3
)
(4
)
Restaurants at end of period
558


546

558

546


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 currently plan to open an estimated 23 to 24 system-wide restaurants in Fiscal 2017. From time to time, we and our franchisees may close restaurants.
Key Performance Indicators

In assessing the performance of our business, management utilizes a variety of financial and performance measures.
These key measures include company restaurant sales, same store sales, company-operated average unit volumes, restaurant contribution and restaurant contribution margin, number of new restaurant openings, EBITDA and Adjusted EBITDA.
Company Restaurant Sales
Company restaurant sales consists of sales of food and beverages in company-operated restaurants net of promotional allowances, employee meals and other discounts. Company restaurant sales in any period is directly influenced by the number of operating weeks in such period, the number of open restaurants, same store sales and per restaurant sales.
Seasonal factors and the timing of holidays cause revenue to fluctuate from quarter to quarter. Revenue per restaurant is typically lower in the first quarter due to reduced January traffic. As a result of seasonality, quarterly and annual results of operations and key performance indicators such as company restaurant sales and same store sales may fluctuate.
Same Store Sales Growth
We regularly monitor company, franchise and total system same store sales. Same store sales growth reflects the change in year-over-year sales for the comparable company, franchise and total system restaurant base. We include a restaurant in the same store base in the accounting period following its 18 th full month of operations and exclude restaurant closures. As of September 12, 2017 and September 6, 2016 , there were 294 and 290 restaurants, respectively, in the comparable company-operated restaurant base. As of September 12, 2017 and September 6, 2016 , there were 240 and 237 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.

17

Company-Operated Average Unit Volumes
We measure company-operated average unit volumes (AUVs) on both a weekly and an annual basis. Weekly AUVs are calculated by dividing the sales from comparable company-operated restaurants over a seven day period from Wednesday to Tuesday by the number of comparable restaurants. Annual AUVs are calculated by dividing sales for the trailing 52-week period for all company-operated restaurants that are in the comparable base by the total number of restaurants in the comparable base for such period. This measurement allows management to assess changes in consumer traffic and spending patterns at our company-operated restaurants and the overall performance of the restaurant base.
Restaurant Contribution and Restaurant Contribution Margin
Restaurant contribution and restaurant contribution margin are neither required by, nor presented in accordance with U.S. GAAP. Restaurant contribution is defined as company restaurant sales less restaurant operating expenses, which are food and paper costs, labor and related expenses and occupancy and other operating expenses. Restaurant contribution margin is defined as restaurant contribution as a percentage of company restaurant sales. Restaurant contribution and restaurant contribution margin are supplemental measures of operating performance of restaurants and the calculations thereof may not be comparable to those reported by other companies. Restaurant contribution and restaurant contribution margin have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of results as reported under U.S. GAAP. Management believes that restaurant contribution and restaurant contribution margin are important tools for investors because they are widely-used metrics within the restaurant industry to evaluate restaurant-level productivity, efficiency and performance. Management uses restaurant contribution and restaurant contribution margin as key performance indicators to evaluate the profitability of incremental sales at Del Taco restaurants, to evaluate restaurant performance across periods and to evaluate restaurant financial performance compared with competitors. See the heading entitled "Management's Use of Non-GAAP Financial Measures" for the reconciliation of restaurant contribution to company restaurant sales.
Number of New Restaurant Openings
The number of restaurant openings reflects the number of new restaurants opened by us and our franchisees during a particular reporting period. Before a new restaurant opens, we and our franchisees incur pre-opening costs, as described below. Some new restaurants open with an initial start-up period of higher than normal sales volumes, which subsequently decrease to stabilized levels. Typically new restaurants experience normal inefficiencies in the form of higher food and paper, labor and other direct operating expenses and, as a result, restaurant contribution margins are generally lower during the start-up period of operation. Typically, the average start-up period after which new company restaurant sales and restaurant operating expenses normalize is approximately 26 to 52 weeks. In new markets, the length of time before average company restaurant sales and restaurant operating expenses for new restaurants stabilize is less predictable and can be longer as a result of limited knowledge of these markets and consumers’ limited awareness of our brand. When we enter new markets, we may be exposed to start-up times that are longer and restaurant contribution margins that are lower than typical historical experience, and these new restaurants may not be profitable and their sales performance may not follow historical patterns.
EBITDA and Adjusted EBITDA
EBITDA represents net income (loss) before interest expense, provision for income taxes, depreciation and amortization. Adjusted EBITDA represents net income (loss) before interest expense, provision for income taxes, depreciation, amortization and items that we do not consider representative of ongoing operating performance, as identified in the reconciliation table under the heading entitled "Management's Use of Non-GAAP Financial Measures."
EBITDA and Adjusted EBITDA as presented in this quarterly report are supplemental measures of performance that are neither required by, nor presented in accordance with U.S. GAAP. EBITDA and Adjusted EBITDA are not measurements of financial performance under U.S. GAAP and should not be considered as alternatives to net income (loss), income from operations or any other performance measures derived in accordance with U.S. GAAP or as alternatives to cash flow from operating activities as a measure of liquidity. In addition, in evaluating EBITDA and Adjusted EBITDA, you should be aware that in the future we may incur expenses or charges such as those added back to calculate EBITDA and Adjusted EBITDA. Our presentation of EBITDA and Adjusted EBITDA should not be construed as an inference that future results will be unaffected by unusual or nonrecurring items.
EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation, or as substitutes for analysis of results as reported under U.S. GAAP. Some of these limitations include but are not limited to:
(i)
they do not reflect cash expenditures, or future requirements for capital expenditures or contractual commitments;

18

(ii)
they do not reflect changes in, or cash requirements for, working capital needs;
(iii)
they do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on debt;
(iv)
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements;
(v)
they do not adjust for all non-cash income or expense items that are reflected in the statements of cash flows;
(vi)
they do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of ongoing operations; and
(vii)
other companies in the industry may calculate these measures differently than we do, limiting their usefulness as comparative measures.
We compensate for these limitations by providing specific information regarding the U.S. GAAP amounts excluded from such non-GAAP financial measures. We further compensate for the limitations in the use of non-GAAP financial measures by presenting comparable U.S. GAAP measures more prominently.
We believe EBITDA and Adjusted EBITDA facilitate operating performance comparisons from period to period by isolating the effects of some items that vary from period to period without any correlation to core operating performance or that vary widely among similar companies. These potential differences may be caused by variations in capital structures (affecting interest expense), tax positions (such as the impact on periods or changes in effective tax rates or net operating losses) and the age and book depreciation of facilities and equipment (affecting relative depreciation expense). We also present EBITDA and Adjusted EBITDA because (i) we believe these measures are frequently used by securities analysts, investors and other interested parties to evaluate companies in their industry, (ii) we believe investors will find these measures useful in assessing our ability to service or incur indebtedness, and (iii) we use EBITDA and Adjusted EBITDA internally as benchmarks to compare performance to that of competitors. See the heading entitled "Management's Use of Non-GAAP Financial Measures" for the reconciliation of EBITDA and Adjusted EBITDA to net income (loss).
Key Financial Definitions
Company Restaurant Sales
Company restaurant sales represents sale of food and beverages in company-operated restaurants, net of promotional allowances, employee meals and other discounts. Company restaurant sales in any period is directly influenced by the number of operating weeks in such period, the number of open restaurants, same store sales performance and per restaurant sales.
Franchise Revenue
Franchise revenue consists of franchise royalty income from the franchisee and, to a lesser extent, renewal fees and franchise fees from franchise owners for new franchise restaurant openings. Franchise fees are recognized when all material obligations have been performed and conditions have been satisfied, typically when operations of a new franchise restaurant have commenced. The fees we collect upon signing a franchise agreement are deferred until operations have commenced.
Franchise Sublease Income
Franchise sublease income consists of rental income received from franchisees related to properties where we have subleased a leasehold interest to the franchisee but remain primarily liable to the landlord.
Food and Paper Costs
Food and paper costs include the direct costs associated with food, beverage and packaging of menu items. The components of food and paper costs are variable in nature, change with sales volume and are impacted by menu mix and are subject to increases or decreases based on fluctuations in commodity costs. Other important factors causing fluctuations in food and paper costs include seasonality, promotional activity and restaurant level management of food and paper waste. Food and paper are a significant expense and can be expected to grow proportionally as company restaurant sales grows.
Labor and Related Expenses
Labor and related expenses include all restaurant-level management and hourly labor costs, including wages, benefits, bonuses, workers’ compensation expense, group health insurance, paid leave and payroll taxes. Like other expense items, we expect

19

labor and related expenses to grow proportionately as company restaurant sales grows. Factors that influence fluctuations in labor and related expenses include minimum wage, paid sick leave and payroll tax legislation, health care and workers compensation costs and the performance of Del Taco restaurants.
Occupancy and Other Operating Expenses
Occupancy and other operating expenses include all other restaurant-level operating expenses, such as rent, utilities, restaurant supplies, repairs and maintenance, credit and debit card processing fees, advertising, insurance, common area maintenance, real estate taxes and other restaurant operating costs.
General and Administrative Expenses
General and administrative expenses are comprised of expenses associated with corporate and regional supervision functions that support the operations of existing restaurants and development of new restaurants, including compensation and benefits, travel expenses, stock-based compensation expenses, legal and professional fees, information systems, corporate office occupancy costs and other related corporate costs. Also included are expenses above the restaurant level, including salaries for field management, such as area and regional managers, and franchise operational support. General and administrative expenses are expected to grow as we grow, including incremental legal, accounting, insurance, investor relations and other expenses that will be incurred as a public company.
Depreciation and Amortization
Depreciation and amortization expenses are periodic non-cash charges that consist of depreciation of fixed assets, including leasehold improvements and equipment, and amortization of various intangible assets primarily including franchise rights.
Occupancy and Other – Franchise Subleases
Occupancy and other – franchise subleases includes rent, property taxes and common area maintenance paid on properties subleased to franchisees where we remain primarily liable to the landlord.
Pre-opening Costs
Pre-opening costs are incurred in connection with opening of new restaurants and incurred prior to opening, including restaurant labor related to the hiring and training of restaurant employees, as well as supplies, occupancy and other operating expenses associated with the opening of new restaurants. Pre-opening costs are expensed as incurred.
Restaurant Closure Charges, Net
Restaurant closure charges, net, consists primarily of the future obligations associated with the closure or net sublease shortfall of a restaurant, including the present value of future lease obligations net of estimated sublease income, if any, accretion of the liability during the reporting period, any positive or negative adjustments to the liability as more information becomes available, sublease income from leases which are treated as deemed landlord financing as well as direct costs related to the restaurant closure.
Loss on Disposal of Assets, Net
Loss on disposal of assets, net includes the loss on disposal of assets related to sales, retirements and replacement or write-off of leasehold improvements, furniture, fixtures or equipment in the ordinary course of business, net of amortization of deferred gains on asset sales associated with sale-leaseback transactions and gains or losses recorded associated with the sale of company-operated stores to franchisees.
Interest Expense
Interest expense consists primarily of interest expense on outstanding debt including capital lease obligations and deemed landlord financing liabilities. Deferred financing costs and debt discount are amortized at cost over the life of the related debt.
Transaction-Related Costs
Transaction-related costs consists of direct costs incurred in connection with the offer to exchange shares of the Company's common stock for each outstanding warrant and the strategic sale process which commenced during 2014 and resulted in a March 2015 stock purchase agreement and the Business Combination (defined in Note 1 to the consolidated financial

20

statements included in this quarterly report on Form 10-Q) consummated pursuant to the Merger Agreement (also defined in Note 1) on June 30, 2015.
Provision for Income Taxes
Provision for income taxes consists of federal and state current and deferred income tax expense.

21

Results of Operations
Comparison of Results of Operations for the Twelve Weeks Ended September 12, 2017 and Twelve Weeks Ended September 6, 2016
The following table presents operating results for the twelve weeks ended September 12, 2017 and twelve weeks ended September 6, 2016 , in absolute terms and expressed as a percentage of total revenue (or company restaurant sales), as compared below:
12 Weeks Ended
September 12, 2017
September 6, 2016
Increase / (Decrease)
(Dollar amounts in thousands)
($)
(%)
($)
(%)
($)
(%)
Statement of Operations Data:
Revenue:
Company restaurant sales
$
106,298

95.8
%
$
100,173

95.9
%
$
6,125

6.1
%
Franchise revenue
3,978

3.6

3,686

3.5

292

7.9

Franchise sublease income
712

0.6

560

0.5

152

27.1

Total revenue
110,988

100.0

104,419

100.0

6,569

6.3

Operating expenses
Restaurant operating expenses:
Food and paper costs
29,648

27.9

(1)
27,574

27.5

(1)
2,074

7.5

Labor and related expenses
33,635

31.6

(1)
30,748

30.7

(1)
2,887

9.4

Occupancy and other operating expenses
22,608

21.3

(1)
20,911

20.9

(1)
1,697

8.1

Total restaurant operating expenses
85,891

80.8

(1)
79,233

79.1

(1)
6,658

8.4

General and administrative
8,817

7.9

8,566

8.2

251

2.9

Depreciation and amortization
5,522

5.0

5,157

4.9

365

7.1

Occupancy and other-franchise subleases
654

0.6

521

0.5

133

25.5

Pre-opening costs
354

0.3

94

0.1

260

*

Restaurant closure charges, net
(16
)
*

(133
)
(0.1
)
117

*

Loss on disposal of assets, net
233

0.2

54

0.1

179

*

Total operating expenses
101,455

91.4

93,492

89.5

7,963

8.5

Income from operations
9,533

8.6

10,927

10.5

(1,394
)
(12.8
)
Other expense
Interest expense
1,628

1.5

1,412

1.4

216

15.3

Transaction-related costs
—

—

490

0.5

(490
)
(100.0
)
Total other expense
1,628

1.5

1,902

1.8

(274
)
(14.4
)
Income from operations before provision for income taxes
7,905

7.1

9,025

8.6

(1,120
)
(12.4
)
Provision for income taxes
2,804

2.5

4,076

3.9

(1,272
)
(31.2
)
Net income
$
5,101

4.6
%
$
4,949

4.7
%
$
152

3.1
%

(1)
As a percentage of company restaurant sales.
*
Immaterial/not meaningful
Company Restaurant Sales
Company restaurant sales increased $6.1 million , or 6.1% , for the twelve weeks ended September 12, 2017 , primarily due to an increase in company-operated same store sales of 3.7% as well as additional restaurants open during 2017 compared to 2016. The growth in company-operated same store sales was primarily the result of an increase in average check size of 4.0% , partially offset by a decrease in traffic of 0.3% compared to the prior period.

22

Franchise Revenue
Franchise revenue increased $0.3 million , or 7.9% , for the twelve weeks ended September 12, 2017 , primarily due to an increase in franchise-operated same store sales of 4.6% , an increase from the net impact of restaurant openings, transfers, and closures since the beginning of the third quarter of 2016.
Franchise Sublease Income
Franchise sublease income increased $0.2 million , or 27.1% , for the twelve weeks ended September 12, 2017 , primarily due to sublease income related to the sale of company-operated stores to franchisees during the first quarter of 2017 in which we retained the leasehold interest to the real estate (see Note 4 of the notes to consolidated financial statements for further discussion).
Food and Paper Costs
Food and paper costs increased $2.1 million , or 7.5% for the twelve weeks ended September 12, 2017 due to an increase in company restaurant sales and commodity cost inflation. As a percentage of company restaurant sales, food and paper costs increased to 27.9% for the twelve weeks ended September 12, 2017 compared to 27.5% for the twelve weeks ended September 6, 2016 . This increase was driven by commodity cost inflation and the impact of unfavorable menu mix, partially offset by modest menu price increases.
Labor and Related Expenses
Labor and related expenses increased $2.9 million , or 9.4% for the twelve weeks ended September 12, 2017 , primarily due to increased labor costs resulting from a California minimum wage increase on January 1, 2017, a Los Angeles minimum wage increase on July 1, 2017, increased paid sick leave expense and an increase in payroll related taxes, partially offset by a reduction in workers compensation expense based on payments and reserves related to underlying claims activity. As a percentage of company restaurant sales, labor and related expenses were 31.6% for the twelve weeks ended September 12, 2017 compared to 30.7% for the twelve weeks ended September 6, 2016 . This percentage increase resulted primarily from the impact of the increased California minimum wage and Los Angeles minimum wage, increased paid sick leave expense and increased payroll tax expense discussed above, partially offset by the impact of modest menu price increases.
Occupancy and Other Operating Expenses
Occupancy and other operating expenses increased $1.7 million , or 8.1% for the twelve weeks ended September 12, 2017 , primarily due to increases in utilities, advertising, repairs, supplies and maintenance expense, rent, insurance and credit and debit card processing fees. As a percentage of company restaurant sales, occupancy and other operating expenses were 21.3% for the twelve weeks ended September 12, 2017 compared to 20.9% for the twelve weeks ended September 6, 2016 . This percentage increase resulted primarily from increased advertising, repairs, supplies and maintenance expense and insurance expense discussed above, partially offset by the impact of same store sales increases that helped to reduce utilities and rent expense as a percentage of company restaurant sales.

General and Administrative Expenses
General and administrative expenses increased $0.3 million , or 2.9% for the twelve weeks ended September 12, 2017 , primarily due to an increase in salaries, stock-based compensation and incremental public company costs to support Sarbanes-Oxley Section 404(b) compliance in 2018, partially offset by a reduction in performance-based management incentive compensation and legal expenses. As a percentage of total revenue, general and administrative expense was 7.9% for the twelve weeks ended September 12, 2017 compared to 8.2% for the twelve weeks ended September 6, 2016 . The decrease as a percent of total revenue was due to a decrease in performance-based management incentive compensation and legal expenses and increased total revenues, partially offset by the increases discussed above.
Depreciation and Amortization
Depreciation and amortization expenses increased $0.4 million , or 7.1% for the twelve weeks ended September 12, 2017 , primarily due to the addition of new assets partially offset by assets that became fully depreciated in the prior fiscal year. As a percentage of total revenue, depreciation and amortization expenses was 5.0% for the twelve weeks ended September 12, 2017 compared to 4.9% for the twelve weeks ended September 6, 2016 .

23

Occupancy and Other – Franchise Sublease
Occupancy and other – franchise sublease was $0.7 million and $0.5 million for the twelve weeks ended September 12, 2017 and September 6, 2016 , respectively. The increase was primarily due to sublease expense related to the sale of company-operated restaurants to franchisees during the first quarter of 2017 (see Note 4 of the notes to consolidated financial statements for further discussion).
Pre-opening Costs
Pre-opening costs were $0.4 million for the twelve weeks ended September 12, 2017 compared to $0.1 million for the twelve weeks ended September 6, 2016 . The increase was due to an increased level of pre-opening activity compared to the prior year.
Restaurant Closure Charges, Net
Restaurant closure charges, net, were $(16,000) for the twelve weeks ended September 12, 2017 compared to $(133,000) for the twelve weeks ended September 6, 2016 . The current quarter activity primarily includes sublease income from leases which are treated as deemed landlord financing, partially offset by accretion expense. The twelve weeks ended September 6, 2016 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.
Loss on Disposal of Assets, Net
Loss on disposal of assets, net was $0.2 million and $0.1 million for the twelve weeks ended September 12, 2017 and September 6, 2016 , respectively. Current year loss was primarily related to the closure of one company-operated restaurant and the disposal and replacement of certain restaurant equipment. Prior year loss was primarily related to the disposal and replacement of certain restaurant equipment.
Interest Expense
Interest expense was $1.6 million and $1.4 million for the twelve weeks ended September 12, 2017 and September 6, 2016 , respectively. The increase is primarily due to an increase in interest rates partially offset by a lower level of debt outstanding during the current year.
Transaction-Related Costs
Transaction-related costs were $0.5 million for the twelve weeks ended September 6, 2016 and primarily consist of direct costs incurred in connection with the offer to exchange shares of the Company's common stock for each outstanding warrant. There were no such transaction-related costs for the twelve weeks ended September 12, 2017 .
Provision for Income Taxes
The effective income tax rates were 35.5% for the twelve weeks ended September 12, 2017 compared to 45.2% for the twelve weeks ended September 6, 2016 . The provision for income taxes consisted of income tax expense of $2.8 million for the twelve weeks ended September 12, 2017 and $4.1 million for the twelve weeks ended September 6, 2016 . The income tax expense related to the twelve weeks ended September 12, 2017 is driven by our estimated annual effective income tax rate which primarily consists of statutory federal and state tax rates based on apportioned income reduced by higher stock compensation expense deductible for tax related to the June 30, 2017 vesting of certain restricted stock awards as compared to the cumulative amount recorded as stock-based compensation expense as well as federal targeted job credits. The income tax expense related to the twelve weeks ended September 6, 2016 is driven by our estimated effective income tax rate which primarily consists of statutory federal and state tax rates based on apportioned income, as well as providing for deferred tax liabilities for the excess of the amount for financial reporting over the tax basis of an investment in a domestic subsidiary. 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.

24

Comparison of Results of Operations for the Thirty-Six Weeks Ended September 12, 2017 and Thirty-Six Weeks Ended September 6, 2016
The following table presents operating results for the thirty-six weeks ended September 12, 2017 and thirty-six weeks ended September 6, 2016 , in absolute terms and expressed as a percentage of total revenue (or company restaurant sales), as compared below:
36 Weeks Ended
September 12, 2017
September 6, 2016
Increase / (Decrease)
(Dollar amounts in thousands)
($)
(%)
($)
(%)
($)
(%)
Statement of Operations Data:
Revenue:
Company restaurant sales
$
311,542

95.9
%
$
289,640

96.0
%
$
21,902

7.6
%
Franchise revenue
11,494

3.5

10,591

3.5

903

8.5

Franchise sublease income
1,878

0.6

1,617

0.5

261

16.1

Total revenue
324,914

100.0

301,848

100.0

23,066

7.6

Operating expenses
Restaurant operating expenses:
Food and paper costs
86,336

27.7

(1)
80,061

27.6

(1)
6,275

7.8

Labor and related expenses
100,041

32.1

(1)
90,781

31.3

(1)
9,260

10.2

Occupancy and other operating expenses
64,243

20.6

(1)
60,560

20.9

(1)
3,683

6.1

Total restaurant operating expenses
250,620

80.4

(1)
231,402

79.9

(1)
19,218

8.3

General and administrative
27,177

8.4

25,072

8.3

2,105

8.4

Depreciation and amortization
15,903

4.9

16,175

5.4

(272
)
(1.7
)
Occupancy and other-franchise subleases
1,738

0.5

1,534

0.5

204

13.3

Pre-opening costs
531

0.2

222

0.1

309

*

Restaurant closure charges, net
(1
)
*

(121
)
*

120

(99.2
)
Loss on disposal of assets, net
524

0.2

191

0.1

333

*

Total operating expenses
296,492

91.3

274,475

90.9

22,017

8.0

Income from operations
28,422

8.7

27,373

9.1

1,049

3.8

Other expense
Interest expense
4,798

1.5

4,289

1.4

509

11.9

Transaction-related costs
—

—

681

0.2

(681
)
(100.0
)
Total other expense
4,798

1.5

4,970

1.6

(172
)
(3.5
)
Income from operations before provision for income taxes
23,624

7.3

22,403

7.4

1,221

5.5

Provision for income taxes
8,955

2.8

9,529

3.2

(574
)
(6.0
)
Net income
$
14,669

4.5
%
$
12,874

4.3
%
$
1,795

13.9
%

(1)
As a percentage of company restaurant sales.
*
Immaterial/not meaningful
Company Restaurant Sales
Company restaurant sales increased $21.9 million , or 7.6% , for the thirty-six weeks ended September 12, 2017 , primarily due to an increase in company-operated same store sales of 4.8% as well as additional restaurants open during 2017 compared to 2016. The growth in company-operated same store sales was primarily the result of an increase in average check size of 4.3% , and an increase in traffic of 0.5% compared to the prior period.

25

Franchise Revenue
Franchise revenue increased $0.9 million , or 8.5% , for the thirty-six weeks ended September 12, 2017 , primarily due to an increase in franchise-operated same store sales of 5.5% , an increase from the net impact of restaurant openings, transfers, and closures since the beginning of the first quarter of 2016, as well as an increase in initial fees.
Franchise Sublease Income
Franchise sublease income increased $0.3 million , or 16.1% , for thirty-six weeks ended September 12, 2017 primarily due to sublease income related to the sale of company-operated stores to franchisees during the first quarter of 2017 in which we retained the leasehold interest to the real estate (see Note 4 of the notes to consolidated financial statements for further discussion).
Food and Paper Costs
Food and paper costs increased $6.3 million , or 7.8% for the thirty-six weeks ended September 12, 2017 due to an increase in company restaurant sales and modest commodity cost inflation. As a percentage of company restaurant sales, food and paper costs increased slightly to 27.7% for the thirty-six weeks ended September 12, 2017 compared to 27.6% for the thirty-six weeks ended September 6, 2016 . This increase was driven by commodity cost inflation and the impact of unfavorable menu mix, partially offset by modest menu price increases.
Labor and Related Expenses
Labor and related expenses increased $9.3 million , or 10.2% for the thirty-six weeks ended September 12, 2017 , primarily due to increased labor costs resulting from a California minimum wage increase on January 1, 2017, a Los Angeles minimum wage increase on July 1, 2017, an increase in payroll related taxes, an increase in workers compensation expense due to higher payments and reserves related to underlying claims activity and increased paid sick leave expense. As a percentage of company restaurant sales, labor and related expenses were 32.1% for the thirty-six weeks ended September 12, 2017 compared to 31.3% for the thirty-six weeks ended September 6, 2016 . This percentage increase resulted primarily from the impact of the increased California minimum wage and Los Angeles minimum wage, increased payroll tax expense, increased workers compensation expense and increased paid sick leave expense discussed above, partially offset by the impact of modest menu price increases and the same store sales increase in traffic which helps to leverage the fixed components of labor costs.
Occupancy and Other Operating Expenses
Occupancy and other operating expenses increased $3.7 million , or 6.1% for the thirty-six weeks ended September 12, 2017 , primarily due to increases in rent and property taxes, advertising, utilities, repairs, supplies and maintenance expense, and credit and debit card processing fees, partially offset by decreases in insurance. As a percentage of company restaurant sales, occupancy and other operating expenses were 20.6% for the thirty-six weeks ended September 12, 2017 compared to 20.9% for the thirty-six weeks ended September 6, 2016 . This overall reduction as a percent of company restaurant sales was primarily due to reduced insurance expense and the timing of advertising expense, as well as same store sales increases which helped to reduce utilities and rent as a percentage of company restaurant sales, partially offset by increased repairs, supplies and maintenance expense as a percent of company restaurant sales.

General and Administrative Expenses
General and administrative expenses increased $2.1 million , or 8.4% for the thirty-six weeks ended September 12, 2017 , primarily due to an increase in salaries, performance-based management incentive compensation, stock-based compensation, travel and incremental public company costs to support Sarbanes-Oxley Section 404(b) compliance in 2018, partially offset by a reduction in legal expenses. As a percentage of total revenue, general and administrative expense was 8.4% for the thirty-six weeks ended September 12, 2017 compared to 8.3% for the thirty-six weeks ended September 6, 2016 . The increase as a percent of total revenue was due to the above mentioned cost increases, partially offset by reduced legal expenses and increased total revenue.

26

Depreciation and Amortization
Depreciation and amortization expenses decreased $0.3 million , or 1.7% for the thirty-six weeks ended September 12, 2017 , primarily due to assets that became fully depreciated in the prior fiscal year partially offset by the addition of new assets. As a percentage of total revenue, depreciation and amortization expenses was 4.9% for the thirty-six weeks ended September 12, 2017 compared to 5.4% for the thirty-six weeks ended September 6, 2016 .
Occupancy and Other – Franchise Sublease
Occupancy and other – franchise sublease was $1.7 million and $1.5 million for the thirty-six weeks ended September 12, 2017 and September 6, 2016 , respectively. The increase of $0.2 million was primarily due to sublease expense related to the sale of company-operated restaurants to franchisees during the first quarter of 2017 in which we retained the leasehold interest to the real estate (see Note 4 of the notes to consolidated financial statements for further discussion).
Pre-opening Costs
Pre-opening costs were $0.5 million for the thirty-six weeks ended September 12, 2017 compared to $0.2 million for the thirty-six weeks ended September 6, 2016 . The increase was due to an increased level of pre-opening activity compared to the prior year.
Restaurant Closure Charges, Net
Restaurant closure charges, net, were $(1,000) for the thirty-six weeks ended September 12, 2017 compared to $(121,000) for the thirty-six weeks ended September 6, 2016 . Current year activity primarily includes sublease income from leases which are treated as deemed landlord financing, offset by accretion expense. The thirty-six weeks ended September 6, 2016 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.
Loss on Disposal of Assets, Net
Loss on disposal of assets, net was $0.5 million and $0.2 million for the thirty-six weeks ended September 12, 2017 and September 6, 2016 , respectively. Current year loss was primarily related to the closure of three company-operated restaurants, a loss on the sale of owned land and building for an existing company-operated restaurant and the replacement of certain leasehold improvements and restaurant equipment, partially offset by net gains recorded associated with the sale of company-operated stores to franchisees (see Note 4 of the notes to consolidated financial statements for further discussion). Prior year loss was primarily related to the closure of one company-operated restaurant and replacement of certain restaurant equipment.
Interest Expense
Interest expense was $4.8 million and $4.3 million for the thirty-six weeks ended September 12, 2017 and September 6, 2016 , respectively. The increase is primarily due to an increase in interest rates.
Transaction-Related Costs
Transaction-related costs were $0.7 million for the thirty-six weeks ended September 6, 2016 and primarily consist of direct costs incurred in connection with 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. There were no such transaction-related costs for the thirty-six weeks ended September 12, 2017 .

27

Provision for Income Taxes
The effective income tax rates were 37.9% for the thirty-six weeks ended September 12, 2017 compared to 42.5% for the thirty-six weeks ended September 6, 2016 . The provision for income taxes consisted of income tax expense of $9.0 million for the thirty-six weeks ended September 12, 2017 and $9.5 million for the thirty-six weeks ended September 6, 2016 . The income tax expense related to the thirty-six weeks ended September 12, 2017 is driven by our estimated annual effective income tax rate which primarily consists of statutory federal and state tax rates based on apportioned income reduced by higher stock compensation expense deductible for tax related to the June 30, 2017 vesting of certain restricted stock awards as compared to the cumulative amount recorded as stock-based compensation expense as well as federal targeted job credits. The income tax expense related to the thirty-six weeks ended September 6, 2016 is driven by our estimated effective income tax rate which primarily consists of statutory federal and state tax rates based on apportioned income, as well as providing for deferred tax liabilities for the excess of the amount for financial reporting over the tax basis of an investment in a domestic subsidiary. 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.
Liquidity and Capital Resources
Potential Impacts of Market Conditions on Capital Resources
In recent years, we have experienced increases in same store sales and restaurant contribution. However, the restaurant industry is highly competitive and uncertainty exists as to the sustainability of these favorable trends.
We believe that expected cash flow from operations, available cash of $7.0 million at September 12, 2017 and available borrowing capacity of $83.8 million at September 12, 2017 will be adequate to fund debt service requirements, operating lease obligations, capital expenditures and working capital obligations for at least the next 12 months. However, the ability to continue to meet these requirements and obligations will depend on, among other things, the ability to achieve anticipated levels of revenue and cash flow and the ability to manage costs and working capital successfully.
Summary of Cash Flows
Our primary sources of liquidity and capital resources have been cash provided from operations, cash and cash equivalents, and our senior secured credit facilities. Our primary requirements for liquidity and capital are new restaurants, existing restaurant capital investments (primarily maintenance and roll-out of equipment related to our strategy to emphasize freshness and speed), investments in infrastructure and information technology, interest payments on debt, lease obligations, income tax payments, purchases under our share and warrant repurchase program and working capital and general corporate needs. The working capital requirements are not significant since customers pay for their purchases in cash or by payment card (credit or debit) at the time of sale. Thus, we are able to sell many inventory items before we have to pay suppliers for such items since we typically have payment terms for our food and paper suppliers. Our company-operated restaurants do not require significant inventories.
The following table presents summary cash flow information for the periods indicated (in thousands).
36 Weeks Ended
September 12, 2017
September 6, 2016
Net cash provided by (used in)
Operating activities
$
43,860

$
38,696

Investing activities
(20,902
)
(24,676
)
Financing activities
(24,731
)
(12,611
)
Net (decrease) increase in cash
$
(1,773
)
$
1,409


28

Cash Flows Provided by Operating Activities
In the thirty-six weeks ended September 12, 2017 , cash flows provided by operating activities were $43.9 million . The cash flows provided by operating activities resulted from net income of $14.7 million , non-cash adjustments for asset depreciation and amortization of $15.7 million , stock-based compensation of $3.3 million , deferred income taxes of $2.6 million , loss on disposal of assets of $0.5 million , restaurant closure charges of $0.1 million and net working capital requirements of $7.0 million .
In the thirty-six weeks ended September 6, 2016 , 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 adjustment 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.
Cash Flows Used in Investing Activities
In the thirty-six weeks ended September 12, 2017 , cash flows used in investing activities were $20.9 million , which were primarily the result of purchase of property and equipment and other assets of $30.8 million , partially offset by proceeds from the disposal of property and equipment of $7.7 million and proceeds from the sale of five company-operated restaurants for $2.2 million . See Note 4 of the notes to consolidated financial statements included elsewhere in this quarterly report on Form 10-Q for more information.
In the thirty-six weeks ended September 6, 2016 , cash flows used in investing activities were $24.7 million, which were primarily the result of the purchase of property and equipment and other assets.
Cash Flows Used in Financing Activities
In the thirty-six weeks ended September 12, 2017 , cash flows used in financing activities were $24.7 million . The cash flows used in financing activities were primarily the result of the repurchase of 737,287 shares of our common stock and 401,186 warrants for an aggregate purchase price of $10.7 million , including incremental direct costs to acquire the shares and warrants, payments of tax withholding of $1.9 million related to restricted stock vesting and payments on capital lease and deemed landlord financing totaling $1.1 million . In addition, during the thirty-six weeks ended September 12, 2017 , we borrowed $19.0 million on the revolving credit facility and made payments of $30.0 million on the revolving credit facility.
In the thirty-six weeks ended September 6, 2016 , 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 approximately 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, we borrowed $14.0 million on the revolving credit facility and made payments of $12.0 million on the revolving credit facility.
Debt and Other Obligations
Senior Credit Facility
On August 4, 2015, we refinanced our existing senior credit facility and entered into the 2015 Senior Credit Facility which matures on August 4, 2020, and provides for a $250 million revolving credit facility. The 2015 Senior Credit Facility contains certain financial covenants, including the maintenance of a consolidated total lease adjusted leverage ratio and a consolidated fixed charge coverage ratio. We were in compliance with the financial covenants as of September 12, 2017 .
The 2015 Senior Credit Facility does not have scheduled principal payments until its maturity on August 4, 2020.
At September 12, 2017 , the weighted-average interest rate on the outstanding balance of the 2015 Senior Credit Facility was 3.0% . As of September 12, 2017 there were $148.0 million of borrowings under the 2015 Senior Credit Facility and letters of credit outstanding of $18.2 million . Unused borrowing capacity at September 12, 2017 was $83.8 million .
Hedging Arrangements

29

In June 2016, we entered into an interest rate cap agreement that became effective July 1, 2016, to hedge cash flows associated with interest rate fluctuations on variable rate debt, with a termination date of March 31, 2020 ("2016 Interest Rate Cap Agreement"). The 2016 Interest Rate Cap Agreement had an initial notional amount of $70.0 million of the 2015 Senior Credit Facility that effectively converted that portion of the outstanding balance of the 2015 Senior Credit Facility from variable rate debt to capped variable rate debt, resulting in a change in the applicable interest rate from an interest rate of one-month LIBOR plus the applicable percentage (as provided by the 2015 Senior Credit Facility) to a capped interest rate of 2.00% plus the applicable percentage.
Stock Repurchase Program
In February 2016, the Board of Directors authorized a share repurchase program under which we may purchase up to $25.0 million in the aggregate of our common stock and warrants, which expires upon completion of the repurchase program, unless terminated earlier by the Board of Directors. On August 23, 2016, we announced that the Board of Directors increased the repurchase program by $25.0 million, to $50.0 million. Purchases under the program may be made in open market or privately negotiated transactions. During the twelve weeks ended September 12, 2017 , we repurchased (1) 96,122 shares of common stock for an average price per share of $12.35 for an aggregate cost of approximately $1.2 million , including incremental direct costs to acquire the shares, and (2) 1,186 warrants for an average price per warrant of $3.97 for an aggregate cost of approximately $5,000 , including incremental direct costs to acquire the warrants. During the thirty-six weeks ended September 12, 2017 , we repurchased (1) 737,287 shares of common stock for an average price per share of $12.46 for an aggregate cost of approximately $9.2 million , including incremental direct costs to acquire the shares, and (2) 401,186 warrants for an average price per warrant of $3.75 for an aggregate cost of approximately $1.5 million , including incremental direct costs to acquire the warrants. As of September 12, 2017 , there was approximately $24.1 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.
Management's Use of Non-GAAP Financial Measures
A reconciliation of company restaurant sales to restaurant contribution is provided below (in thousands):
12 Weeks Ended
36 Weeks Ended
September 12, 2017
September 6, 2016
September 12, 2017
September 6, 2016
Company restaurant sales
$
106,298

$
100,173

$
311,542

$
289,640

Restaurant operating expenses
85,891

79,233

250,620

231,402

Restaurant contribution
$
20,407

$
20,940

$
60,922

$
58,238

Restaurant contribution margin
19.2
%
20.9
%
19.6
%
20.1
%

30

The following table sets forth reconciliations of net income to EBITDA and Adjusted EBITDA (in thousands):
12 Weeks Ended
36 Weeks Ended
September 12, 2017
September 6, 2016
September 12, 2017
September 6, 2016
Net income
$
5,101

$
4,949

$
14,669

$
12,874

Non-GAAP adjustments:
Provision for income taxes
2,804

4,076

8,955

9,529

Interest expense
1,628

1,412

4,798

4,289

Depreciation and amortization
5,522

5,157

15,903

16,175

EBITDA
15,055

15,594

44,325

42,867

Stock-based compensation expense (a)
1,191

1,001

3,340

2,630

Loss on disposal of assets, net (b)
233

54

524

191

Restaurant closure charges, net (c)
(16
)
(133
)
(1
)
(121
)
Amortization of favorable and unfavorable lease assets and liabilities, net (d)
(229
)
(140
)
(521
)
(420
)
Transaction-related costs (e)
—

490

—

681

Pre-opening costs (f)
354

94

531

222

Adjusted EBITDA
$
16,588

$
16,960

$
48,198

$
46,050


(a)
Includes non-cash, stock-based compensation.
(b)
Loss on disposal of assets, net includes the loss or gain on disposal of assets related to sales, retirements and replacement or write-off of leasehold improvements or equipment in the ordinary course of business, net of amortization of deferred gains on asset sales associated with sale-leaseback transactions and gains or losses recorded associated with the sale of company-operated stores to franchisees.
(c)
Includes sublease income from leases which are treated as deemed landlord financing, partially offset by costs related to future obligations associated with the closure or net sublease shortfall of a restaurant.
(d)
Includes amortization of favorable lease assets and unfavorable lease liabilities.
(e)
Includes costs related to the 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 March 2015 stock purchase agreement and the June 2015 Business Combination consummated pursuant to the Merger Agreement.
(f)
Pre-opening costs consist of costs directly associated with the opening of new restaurants and incurred prior to opening, including restaurant labor, supplies, cash and non-cash rent expense and other related pre-opening costs. These are generally incurred over the three to five months prior to opening.

31

Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We are exposed to market risk from changes in interest rates on our senior credit facility, which currently bears interest at variable rates. However, we seek to mitigate our variable interest rate risk on our senior credit facility by entering into an interest rate derivative on a portion of the senior credit facility, as discussed above under “—Liquidity and Capital Resources—Debt and Other Obligations—Hedging Arrangements” As of September 12, 2017 , we had outstanding variable rate borrowings of $148.0 million . A 100 basis point increase in the effective interest rate applied to this borrowing would result in a pre-tax interest expense increase of approximately $1.5 million on an annualized basis, excluding the effect of our existing 2016 Interest Rate Cap Agreement.
Commodity Price Risk
We purchase certain products that are affected by commodity prices and are, therefore, subject to price volatility caused by weather, market conditions, potential cross-border taxes and tariffs and other factors which are not considered predictable or within our control. Although these products are subject to changes in commodity prices, certain purchasing contracts or pricing arrangements used contain risk management techniques designed to minimize price volatility. In many cases, we believe we will be able to address material commodity cost increases by adjusting menu pricing or making other operational adjustments that increase productivity. However, increases in commodity prices, without adjustments to menu prices, could increase restaurant operating costs as a percentage of restaurant sales.
Inflation
Inflation has an impact on food, paper, construction, utility, labor and benefits, rent, general and administrative and other costs, all of which can materially impact operations. We have a substantial number of hourly employees who are paid wage rates at or based on the applicable federal, state or local minimum wage and increases in the minimum wage will increase labor costs.
On July 1, 2014, the State of California (where most of our restaurants are located) increased its minimum wage to $9.00 per hour (from $8.00 per hour), and it increased to $10.00 per hour on January 1, 2016 and $10.50 per hour on January 1, 2017. On March 31, 2016, the California Legislature passed legislation which was designed to raise the statewide minimum wage gradually until it reaches $15.00 per hour in 2022 and it was signed into law on April 4, 2016. Under the new California law, minimum wage increased to $10.50 per hour in 2017, will increase to $11.00 in 2018 and then increase by an additional dollar each calendar year through 2022 when it reaches $15.00 per hour. Based on our current number of restaurants in California, this is expected to impact 370 restaurants in California of which 250 are company-operated and 120 are franchise-operated.
In addition, in September 2015, the Los Angeles County Board of Supervisors approved increases to the minimum wage to $15.00 per hour by 2020 with the first phase of the wage increase to $10.50 effective on July 1, 2016, followed by an increase to $12.00 per hour on July 1, 2017, $13.25 on July 1, 2018, and $14.25 on July 1, 2019 until it reaches $15.00 per hour on July 1, 2020. Also, in June 2016, the Los Angeles City Council approved a sick paid leave ordinance to provide six days of paid sick leave per year, with carry-over of 72 hours, effective July 1, 2016. These local ordinances impacted 25 company-owned restaurants and eight franchise-owned restaurants in the City of Los Angeles and in the unincorporated areas of the County of Los Angeles.
On March 14, 2016, the Pasadena City Council adopted an ordinance to increase Pasadena’s minimum wage. Beginning on July 1, 2016, employers with 26 or more employees must pay a minimum wage of $10.50 per hour to all employees who work at least 2 hours per week within Pasadena’s geographic bounds. The minimum wage increased to $12.00 per hour on July 1, 2017, and will increase to $13.25 per hour on July 1, 2018. This impacted two company-operated restaurants.
On June 7, 2016, San Diego voters voted in favor of an ordinance to increase San Diego's minimum wage rate and allow employees working within the San Diego city limits to earn one hour of paid sick leave for every 30 hours worked. The San Diego City Council certified this minimum wage increase on July 11, 2016 with the increase taking effect on July 11, 2016. Under this ordinance, for any employee who works at least two hours within San Diego city limits, minimum wage increased to $10.50 per hour on July 11, 2016, $11.50 per hour in 2017 and beginning 2019, the minimum wage rate will increase annually to an amount that corresponds to the prior year's increase, if any, in the cost of living. In addition, the ordinance provides up to five days of paid sick leave and allows unused sick leave to be carried over to the following year. This ordinance impacted three company-operated restaurants and two franchise-operated restaurants.
On November 8, 2016, Arizona voters voted in favor to increase the state minimum wage to $10.00 per hour effective January 1, 2017 (from $8.05 per hour) and to allow employees to earn one hour of paid sick leave for every 30 hours worked effective

32

July 1, 2017. The minimum wage will increase to $10.50 per hour in 2018, $11.00 per hour in 2019, and $12.00 per hour in 2020. The law provides up to five days of paid sick leave per year. The new law impacted three company-operated restaurants and 33 franchise-operated restaurants.
Other municipalities may set minimum wages above the applicable federal or state standards. The federal minimum wage has been $7.25 per hour since July 24, 2009. Additional federally-mandated, state-mandated or locally mandated minimum wages may be raised in the future. Furthermore, on July 1, 2015, the Healthy Workplaces, Healthy Families Act of 2014 went into effect for California employees, which provides up to three days of paid sick leave for employees who work more than 30 days within a year.
We may be unable to increase our menu prices in order to pass future increased labor costs on to our customers, in which case our margins would be negatively affected, which could have a material adverse effect on our business, financial condition and results of operations. In addition, if our menu prices are increased to cover increased labor costs, the higher prices could adversely affect sales and thereby reduce our margins and profitability.
Critical Accounting Policies and Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We believe that such estimates have been based on reasonable and supportable assumptions and the resulting estimates are reasonable for use in the preparation of the consolidated financial statements. Actual results could differ from these estimates. Our significant estimates include estimates for impairment of goodwill, intangible assets and property and equipment, insurance reserves, restaurant closure reserves, stock-based compensation, contingent liabilities and income tax valuation allowances.
Accounting policies are an integral part of our financial statements. A thorough understanding of these accounting policies is essential when reviewing our reported results of operations and our financial position. Management believes that the critical accounting policies and estimates involve the most difficult management judgments due to the sensitivity of the methods and assumptions used. For a description of our critical accounting policies, refer to “Critical Accounting Policies and Use of Estimates” in Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year ended January 3, 2017 filed with the SEC on March 13, 2017. There have been no material changes in any of our critical accounting policies during the thirty-six week period ended September 12, 2017 .
Recently Issued Accounting Standards
See Note 2, Basis of Presentation , of the notes to the accompanying unaudited consolidated financial statements, included elsewhere in this quarterly report on Form 10-Q, for a description of the recently issued accounting standards.

33

Item 4. Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our senior management, consisting of our chief executive officer and our chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report (the “Evaluation Date”). Based on that evaluation, the Company’s management, including our chief executive officer and chief financial officer, concluded that as of the Evaluation Date our disclosure controls and procedures were effective.
Our controls and procedures are based on assumptions. Additionally, even effective controls and procedures only provide reasonable assurance of achieving their objectives. Accordingly, we cannot guarantee that our controls and procedures will succeed or be adhered to in all circumstances.
We have evaluated our disclosure controls and procedures with the participation, and under the supervision, of our management, including our chief executive and chief financial officers. Based on this evaluation, our chief executive and chief financial officers have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
No changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the period covered by this report that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.


34

PART II – OTHER INFORMATION
Item 1. Legal Proceedings
See Note 14, Commitments and Contingencies, of the notes to the unaudited consolidated financial statements for a discussion of our legal matters.
Item 1A. Risk Factors
See “Item 1A. Risk Factors” included in the Annual Report on Form 10-K for the fiscal year ended January 3, 2017 filed with the SEC on March 13, 2017 for a discussion of our risk factors. There have been no material changes to our risk factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On March 7, 2016, we announced that our Board of Directors authorized a share repurchase program under which we may purchase up to $25.0 million in the aggregate of our common stock and warrants. On August 23, 2016, we announced the Board of Directors increased the repurchase program by $25.0 million, to $50.0 million. Purchases under the program may be made in open market or privately negotiated transactions and expires upon completion of the program, unless earlier terminated by our Board of Directors. During the twelve weeks ended September 12, 2017 , we repurchased (1) 96,122 shares of common stock for an average price per share of $12.35 for an aggregate cost of approximately $1.2 million , including incremental direct costs to acquire the shares, and (2) 1,186 warrants for an average price per warrant of $3.97 for an aggregate cost of approximately $5,000 , including incremental direct costs to acquire the warrants. During the thirty-six weeks ended September 12, 2017 , we repurchased (1) 737,287 shares of common stock for an average price per share of $12.46 for an aggregate cost of approximately $9.2 million , including incremental direct costs to acquire the shares, and (2) 401,186 warrants for an average price per warrant of $3.75 for an aggregate cost of approximately $1.5 million , including incremental direct costs to acquire the warrants. As of September 12, 2017 , there was approximately $24.1 million remaining under the share repurchase program.
The following table summarizes shares and warrants repurchased during the quarter ended September 12, 2017 . The average price paid per share and warrant in column (b) below does not include the cost of brokerage fees or the incremental direct costs to acquire the shares.
(a)
(b)
(c)
(d)
Total number of
shares/warrants
purchased
Average price paid per
share
Average price paid per warrant
Total number of shares purchased as part of publicly announced programs
Total number of warrants purchased as part of publicly announced programs
Maximum dollar value that may yet be purchased under these programs
Common Stock
Warrants
June 21, 2017 - July 18, 2017
—

—

$
—

$
—

—

—

$
25,261,970

July 19, 2017 - August 15, 2017
96,122

—

$
12.35

$
—

96,122

—

$
24,074,863

August 16, 2017 - September 12, 2017
—

1,186

$
—

$
3.97

—

1,186

$
24,070,155

Total
96,122

1,186

$
12.35

$
3.97

96,122

1,186

$
24,070,155



35

Item 6. Exhibits
Exhibit
No.
Description
31.1
31.2
32.1
32.2
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.

36

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 19, 2017
/s/ John D. Cappasola, Jr.
Name: John D. Cappasola, Jr.
Title: President and Chief Executive Officer
(principal executive officer)
/s/ Steven L. Brake
Name: Steven L. Brake
Title: Executive Vice President and Chief Financial Officer
(principal financial officer)


37
TABLE OF CONTENTS