# Jack in the Box Inc: Form 10-Q for the period ended Jan 22, 2023

- Company: [Jack in the Box Inc](/companies/jack.md) (CIK 807882)
- Form: 10-Q
- Filed: 2023-03-01
- Accepted by EDGAR: Mar 1, 2023, 14:04 ET
- Period: 2023-01-22
- Accession: 0000807882-23-000006
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/807882/000080788223000006/jack-20230122.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/807882/000080788223000006/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-01-22.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Cash and equivalents | at 2023-01-22 | $153.8m | us-gaap:Cash |
| Current assets | at 2023-01-22 | $264.4m | us-gaap:AssetsCurrent |
| Total assets | at 2023-01-22 | $2.91bn | us-gaap:Assets |
| Current liabilities | at 2023-01-22 | $461.3m | us-gaap:LiabilitiesCurrent |
| Shareholders' equity | at 2023-01-22 | −$703.1m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 38,468 characters.

### GENERAL

All comparisons between 2023 and 2022 refer to the 16 weeks (“quarter”) ended January 22, 2023 and January 23, 2022, respectively, unless otherwise indicated.

For an understanding of the significant factors that influenced our performance during 2023 and 2022, our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the condensed consolidated financial statements and related notes included in this Quarterly Report and our Annual Report on Form 10-K for the fiscal year ended October 2, 2022.

Our MD&A consists of the following sections:

- ***Overview —*** a general description of our business.
- ***Results of operations —*** an analysis of our condensed consolidated statements of earnings for the periods presented in our condensed consolidated financial statements.
- ***Liquidity and capital resources —*** an analysis of our cash flows, including capital expenditures, share repurchase activity, dividends, and known trends that may impact liquidity.
- ***Discussion of critical accounting estimates —*** a discussion of accounting policies that require critical judgments and estimates.
- ***New accounting pronouncements —*** a discussion of new accounting pronouncements, dates of implementation and the impact on our consolidated financial position or results of operations, if any.
- ***Cautionary statements regarding forward-looking statements —*** a discussion of the risks and uncertainties that may cause our actual results to differ materially from any forward-looking statements made by management.

We have included in our MD&A certain performance metrics that management uses to assess company performance and which we believe will be useful in analyzing and understanding our results of operations. These metrics include:

- Changes in sales at restaurants open more than one year (“same-store sales”), systemwide sales, franchised restaurant sales, and average unit volumes (“AUVs”). Same-store sales, restaurant sales, and AUVs are presented for franchised restaurants and on a system-wide basis, which includes company and franchise restaurants. Franchise sales represent sales at franchise restaurants and are revenues of our franchisees. We do not record franchise sales as revenues; however, our royalty revenues, marketing fees and percentage rent revenues are calculated based on a percentage of franchise sales. We believe franchise and system same-store sales, franchised and system restaurant sales, and AUV information are useful to investors as they have a direct effect on the Company’s profitability.
- Adjusted EBITDA represents net earnings on a generally accepted accounting principles (“GAAP”) basis excluding income taxes, interest expense, net, gains on the sale of company-operated restaurants, other operating expenses, net, depreciation and amortization, amortization of favorable and unfavorable leases and subleases, net, and amortization of tenant improvement allowances and incentives. We are presenting Adjusted EBITDA because we believe that it provides a meaningful supplement to net earnings of the Company's core business operating results, as well as a comparison to those of other similar companies. Management believes that Adjusted EBITDA, when viewed with the Company's results of operations in accordance with GAAP and the accompanying reconciliations within MD&A, provides useful information about operating performance and period-over-period change, and provides additional information that is useful for evaluating the operating performance of the Company's core business without regard to potential distortions. Additionally, management believes that Adjusted EBITDA permits investors to gain an understanding of the factors and trends affecting our ongoing cash earnings, from which capital investments are made and debt is serviced.

Same-store sales, systemwide sales, franchised restaurant sales, AUVs, and Adjusted EBITDA are not measurements determined in accordance with GAAP and should not be considered in isolation, or as an alternative to earnings from operations, or other similarly titled measures of other companies.

### OVERVIEW

### Our Business

Founded in 1951, Jack in the Box Inc. (the “Company”) operates and franchises Jack in the Box® and Del Taco quick-service restaurants. As of January 22, 2023, we operated and franchised 2,186 Jack in the Box quick-service restaurants, primarily in the western and southern United States, including one in Guam, and 592 Del Taco quick-service restaurants across 16 states, including one in Guam.

We derive revenue from retail sales at company-operated restaurants and rental revenue, royalties (based upon a percent of sales), franchise fees and contributions for advertising and other services from franchisees.

### RESULTS OF OPERATIONS

The following table summarizes changes in same-store sales for Jack in the Box company-operated, franchised, and system restaurants:

| Jack in the Box: | Sixteen Weeks Ended January 22, 2023 | January 23, 2022 |
| --- | ---: | ---: |
| Company | 12.6% | (0.3)% |
| Franchise | 7.4% | 1.4% |
| System | 7.8% | 1.2% |

The following table summarizes changes in the number and mix of Jack in the Box company and franchise restaurants:

| Jack in the Box: | 2023 Company | Franchise | Total | 2022 Company | Franchise | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Beginning of year | 146 | 2,035 | 2,181 | 163 | 2,055 | 2,218 |
| New | — | 6 | 6 | — | 2 | 2 |
| Acquired from franchisees | — | — | — | 4 | (4) | — |
| Refranchised | (5) | 5 | — | — | — | — |
| Closed | (1) | — | (1) | (2) | (10) | (12) |
| End of period | 140 | 2,046 | 2,186 | 165 | 2,043 | 2,208 |
| % of system | 6% | 94% | 100% | 7% | 93% | 100% |

The following table summarizes restaurant sales for Jack in the Box company-operated, franchised, and systemwide sales (*in thousands):*

| Jack in the Box: | Sixteen Weeks Ended January 22, 2023 | January 23, 2022 |
| --- | ---: | ---: |
| Company-operated restaurant sales | $126,142 | $120,056 |
| Franchised restaurant sales (1) | 1,208,983 | 1,117,676 |
| Systemwide sales (1) | $1,335,125 | $1,237,732 |

(1) Franchised restaurant sales represent sales at franchised restaurants and are revenues of our franchisees. System sales include company and franchised restaurant sales. We do not record franchised sales as revenues; however, our royalty revenues, marketing fees and percentage rent revenues are calculated based on a percentage of franchised sales. We believe franchised and system restaurant sales information is useful to investors as they have a direct effect on the Company's profitability.

Below is a reconciliation of Non-GAAP Adjusted EBITDA to the most directly comparable GAAP measure, net earnings (*in thousands):*

| Consolidated: | Sixteen Weeks Ended January 22, 2023 | January 23, 2022 |
| --- | ---: | ---: |
| Net earnings - GAAP | $53,254 | $39,270 |
| Income tax expense | 19,385 | 14,190 |
| Interest expense, net | 26,148 | 20,187 |
| Gains on the sale of company-operated restaurants | (3,825) | (48) |
| Other operating (income) expenses, net | (5,501) | 3,843 |
| Depreciation and amortization | 19,402 | 12,496 |
| Amortization of favorable and unfavorable leases and subleases, net | 541 | — |
| Amortization of franchise tenant improvement allowances and incentives | 1,215 | 1,234 |
| Adjusted EBITDA - Non-GAAP | $110,619 | $91,172 |

### Jack in the Box Brand

#### Company Restaurant Operations

The following table presents company restaurant sales and costs as a percentage of the related sales *(dollars in thousands):*

|  | Sixteen Weeks Ended January 22, 2023 |  | January 23, 2022 |  |
| --- | ---: | ---: | ---: | ---: |
| Company restaurant sales | $126,142 |  | $120,056 |  |
| Company restaurant costs: |  |  |  |  |
| Food and packaging | $41,326 | 32.8% | $37,537 | 31.3% |
| Payroll and employee benefits | $39,438 | 31.3% | $39,725 | 33.1% |
| Occupancy and other | $20,377 | 16.2% | $20,877 | 17.4% |

Company restaurant sales increased $6.1 million or 5.1% compared to the prior year, primarily due to average check and traffic growth, partially offset by a decline in the number of company-operated restaurants. The following table presents the approximate impact of these items on company restaurant sales (*in millions):*

|  | Sixteen Weeks Ended January 22, 2023 |
| --- | ---: |
| AUV increase | $14.0 |
| Decrease in the average number of restaurants | (7.9) |
| Total change in company restaurant sales | $6.1 |

Same-store sales at company-operated restaurants increased 12.6% compared to a year ago. The following table summarizes the change versus a year ago:

|  | Sixteen Weeks Ended January 22, 2023 |
| --- | ---: |
| Average check (1) | 7.7% |
| Transactions | 4.9% |
| Change in same-store sales | 12.6% |

(1) Includes price increases of approximately 10.3% compared to the prior year.

Food and packaging costs as a percentage of company restaurant sales increased 1.5% compared to the prior year primarily due to higher commodity costs and unfavorable menu item mix, partially offset by an increase in menu pricing.

Commodity costs increased by approximately 15.5% compared to the prior year. The inflation we have experienced is across nearly all categories with the greatest impact seen in produce, sauce and potatoes. For fiscal 2023, we expect annual commodity cost inflation to be up 9% to 11% compared with fiscal 2022.

Payroll and employee benefit costs as a percentage of company restaurant sales decreased 1.8% compared to the prior year primarily due to higher average restaurant sales as a result of a change in restaurant mix and menu price increases, as well as a reduction in workers’ compensation and group insurance. Labor inflation was approximately 9.9% for the current fiscal year. For fiscal 2023, we expect annual wage inflation to be up 3% to 6% compared with fiscal 2022.

Occupancy and other costs, as a percentage of company restaurant sales, decreased 1.2% compared to the prior year primarily due to higher average restaurant sales as a result of a change in restaurant mix and menu price increases, partially offset by higher utilities costs as well as maintenance and repair costs compared with fiscal 2022.

#### Jack in the Box Franchise Operations

The following table presents franchise revenues and costs in each period and other information we believe is useful in analyzing the change in franchise operating results (*dollars in thousands):*

|  | Sixteen Weeks Ended January 22, 2023 |  | January 23, 2022 |
| --- | ---: | ---: | ---: |
| Franchise rental revenues | $106,096 |  | $103,099 |
| Royalties | 67,569 |  | 57,648 |
| Franchise fees and other | 1,797 |  | 3,107 |
| Franchise royalties and other | 69,366 |  | 60,755 |
| Franchise contributions for advertising and other services | 65,313 |  | 60,801 |
| Total franchise revenues | $240,775 |  | $224,655 |
| Franchise occupancy expenses | $64,555 |  | $63,983 |
| Franchise support and other costs | 1,416 |  | 3,911 |
| Franchise advertising and other services expenses | 67,958 |  | 63,308 |
| Total franchise costs | $133,929 |  | $131,202 |
| Franchise costs as a percentage of total franchise revenues | 55.6% |  | 58.4% |
| Average number of franchise restaurants | 2,033 |  | 2,039 |
| % decrease | (0.3)% |  |  |
| Franchised restaurant sales | $1,208,983 |  | $1,117,676 |
| Franchised restaurant AUVs | $595 |  | $548 |
| Royalties as a percentage of total franchised restaurant sales | 5.6% | (1) | 5.2% |

(1) Excluding the impact of the $7.3 million termination fee discussed below, royalties as a percentage of total franchised restaurant sales would be 5.0% for the sixteen weeks ended January 22, 2023.

Franchise rental revenues increased $3.0 million, or 2.9% compared to the prior year primarily due to higher percentage rent of $2.4 million driven by higher franchise restaurant sales.

Franchise royalties and other increased $8.6 million, or 14.2% compared to the prior year primarily due to a $7.3 million termination fee paid by a franchise operator who sold his restaurants to a new franchisee, as well as higher royalties driven by higher franchise restaurant sales. Refer to Note 2, *Revenue*, of the notes to the condensed consolidated financial statements for additional information related to the $7.3 million termination fee.

Franchise contributions for advertising and other services revenues increased $4.5 million, or 7.4% compared to the prior year primarily driven by higher franchise restaurant sales.

Franchise occupancy expenses, primarily rent, increased $0.6 million, or 0.9% compared to the prior year primarily due to rent increases, partially offset by lower real estate taxes.

Franchise support and other costs decreased $2.5 million compared to the prior year primarily due to a decrease in franchisee bad debt expense.

Franchise advertising and other service expenses increased $4.7 million, or 7.3% compared to the prior year primarily driven by higher franchise sales.

### Del Taco Brand

As of January 22, 2023, there were 273 company-operated and 319 franchise-operated Del Taco restaurants. System same-store sales increased 3.0% and total revenues and segment operating profit were $160.2 million and $12.1 million, respectively, during the quarter.

### Company-Wide Results

### Depreciation and Amortization

Depreciation and amortization increased $6.9 million compared to the prior year primarily due to the acquisition of Del Taco, contributing an additional $8.4 million of depreciation; more than offsetting lower Jack in the Box depreciation as a result of certain franchise buildings becoming fully depreciated.

### Selling, General and Administrative (“SG&A”) Expenses

The following table presents the change in SG&A expenses compared with the prior year (*in thousands):*

|  | Increase/(Decrease) Sixteen Weeks Ended January 22, 2023 |
| --- | ---: |
| Advertising | $6,086 |
| Incentive compensation (including share-based compensation and related payroll taxes) | 5,381 |
| Cash surrender value of COLI policies, net | (6,168) |
| Litigation matters | 5,987 |
| Other | 13,827 |
|  | $25,113 |

Advertising costs represent company contributions to our marketing funds and are generally determined as a percentage of company-operated restaurant sales. Advertising costs increased $6.1 million compared to the prior year primarily due to the acquisition of Del Taco which resulted in higher advertising costs of $5.8 million.

Incentive compensation increased $5.4 million compared to the prior year primarily due to a $2.9 million increase in the annual incentives mainly as a result of higher achievement levels compared to the prior year, as well as a $2.5 million increase in share-based compensation mainly from the timing of annual grants compared to the prior year.

The cash surrender value of our company-owned life insurance (“COLI”) policies, net of changes in our non-qualified deferred compensation obligation supported by these policies, are subject to market fluctuations. The changes in market values had a positive impact of $6.2 million versus the prior year.

Litigation matters increased $6.0 million primarily related to the J&D Restaurant Group litigation. Refer to Note 14, *Commitments and Contingencies*, of the notes to the condensed consolidated financial statements for additional information.

The increase in other is primarily due to the acquisition of Del Taco in the prior year which resulted in an increase of additional general and administrative costs of $12.0 million.

### Other Operating Expenses, Net

Other operating expenses, net is comprised of the following (*in thousands):*

|  | Sixteen Weeks Ended January 22, 2023 | January 23, 2022 |
| --- | ---: | ---: |
| Acquisition, integration, and restructuring costs | $1,651 | $3,013 |
| Costs of closed restaurants and other | 2,589 | 1,072 |
| Accelerated depreciation | 268 | 375 |
| Gains on disposition of property and equipment, net | (10,009) | (617) |
|  | $(5,501) | $3,843 |

Other operating expenses, net decreased $9.3 million compared to the prior year, primarily due to $9.5 million of gains recognized in the current year from the sale of Jack in the Box restaurant properties to franchisees who were leasing the properties from us prior to the sale.

### Gains on the Sale of Company-Operated Restaurants

In fiscal 2023, the Company sold five Jack in the Box company-operated restaurants and 16 Del Taco company-operated restaurants to franchisees and recognized a net gain of $3.8 million. Refer to Note 4, *Summary of Refranchisings and Franchise Acquisitions*, of the notes to the condensed consolidated financial statements for additional information regarding these transactions. In fiscal 2022, no company-operated restaurants were sold to franchisees. Amounts included in “Gains on the sale of company-operated restaurants” in 2022 related to additional proceeds received in connection with the extension of franchise and lease agreements form the sale of restaurants in prior years.

### Interest Expense, Net

Interest expense, net is comprised of the following (*in thousands):*

|  | Sixteen Weeks Ended January 22, 2023 | January 23, 2022 |
| --- | ---: | ---: |
| Interest expense | $26,537 | $20,273 |
| Interest income | (389) | (86) |
| Interest expense, net | $26,148 | $20,187 |

Interest expense, net increased $6.0 million compared to the prior year primarily due to higher average borrowings resulting in higher interest expense of $7.3 million, partially offset by lower average borrowing rates.

### Income Tax Expense

The income tax provisions reflect year-to-date effective tax rate of 26.7%, compared with 26.5% in fiscal year 2022. The major components of the increase in tax rate were non-deductible goodwill decrements in the current year offset by non-taxable gains in the current year versus non-deductible losses in the prior year from the market performance of insurance products used to fund certain non-qualified retirement plans.

### LIQUIDITY AND CAPITAL RESOURCES

### General

Our primary sources of liquidity and capital resources are cash flows from operations and borrowings available under our securitized financing facility. Our cash requirements consist principally of working capital, general corporate needs, capital expenditures, income tax payments, debt service requirements, franchise tenant improvement allowance and incentive distributions, dividend payments, and obligations related to our benefit plans. We generally reinvest available cash flows from operations to invest in our business, service our debt obligations, pay dividends and repurchase shares of our common stock.

Our primary sources of short-term and long-term liquidity are expected to be cash flows from operations and available borrowings under our credit facilities. As of January 22, 2023, the Company had $181.6 million of cash and restricted cash on its consolidated balance sheet and available borrowings of $122.0 million under our $150.0 million Variable Funding Notes and our $75.0 million revolving credit facility. The Company continually assesses the optimal sources and uses of cash for our business. Since closing the Del Taco acquisition, we have undertaken a process to review our balance sheet for any undervalued assets, and pursue opportunities for capital sources, including the sale of our owned Jack in the Box properties, and refranchising, primarily for Del Taco in the near term.

Based upon current levels of operations and anticipated growth, we expect that cash flows from operations, combined with our securitized financing facility and revolving credit facility, will be sufficient to meet our capital expenditure, working capital and debt service requirements for at least the next twelve months and the foreseeable future.

### Cash Flows

The table below summarizes our cash flows from continuing operations (*in thousands):*

| Total cash provided by (used in): | Sixteen Weeks Ended January 22, 2023 | January 23, 2022 |
| --- | ---: | ---: |
| Operating activities | $62,472 | $34,051 |
| Investing activities | 15,684 | (6,837) |
| Financing activities | (32,578) | (12,316) |
| Net cash flows | $45,578 | $14,898 |

**Operating Activities.** Operating cash flows increased $28.4 million compared with a year ago, primarily due to a favorable change in working capital of $22.7 million as a result of the timing of minimum rent collections, lower bonus payments and timing of media payments, partially offset by timing of minimum rent payments.

***Pension and post-retirement contributions —*** Our policy is to fund our pension plans at or above the minimum required by law. As of January 1, 2022, the date of our last actuarial funding valuation, there was no minimum contribution funding requirement for our qualified pension plan. In 2023, we contributed $1.7 million to our non-qualified pension plan and post-retirement plans.

**Investing Activities**. Cash flows from investing activities increased by $22.5 million compared with a year ago, primarily due to higher proceeds from the sale of property and equipment of $19.9 million, which resulted from the sale of Jack in the Box restaurant properties to franchisees and $10.0 million received in the current year related to a prior year transaction, as well as higher proceeds from the sale of company-operated restaurants of $17.6 million, partially offset by higher purchases of property and equipment of $14.6 million.

***Capital Expenditures —*** The composition of capital expenditures in each period follows (*in thousands):*

| Restaurants: | Sixteen Weeks Ended January 22, 2023 | January 23, 2022 |
| --- | ---: | ---: |
| Remodel / refresh programs | $3,473 | $921 |
| Restaurant facility expenditures | 9,046 | 4,374 |
| Purchases of assets intended for sale and leaseback | 3,497 | 1,877 |
| Restaurant information technology | 5,906 | 968 |
|  | 21,922 | 8,140 |
| **Corporate Services:** |  |  |
| Information technology | 1,877 | 52 |
| Corporate facilities | 229 | 1,209 |
|  | 2,106 | 1,261 |
| Total capital expenditures | $24,028 | $9,401 |

25

***Sale of Company-Operated Restaurants —*** We have continued to expand franchise ownership primarily through the sale of company-operated restaurants to franchisees. The following table details proceeds received in connection with our refranchising activities in each period (*dollars in thousands):*

|  | Sixteen Weeks Ended January 22, 2023 | January 23, 2022 |
| --- | ---: | ---: |
| Number of Jack in the Box restaurants sold to franchisees | 5 | — |
| Number of Del Taco restaurants sold to franchisees | 16 | — |
| Total proceeds | $17,609 | $48 |

In the first quarter of fiscal 2023, proceeds include $0.2 million related to prior year refranchising transactions. Proceeds in the first quarter of fiscal 2022 were received in connection with the extension of franchise and lease agreements from the sale of restaurants in prior years.

**Financing Activities**. Cash flows used in financing activities increased by $20.3 million compared with a year ago, primarily as a result of share repurchases of $15.0 million.

***Repurchases of common stock —*** The Company repurchased 0.2 million shares of its common stock in the first quarter of fiscal 2023 for an aggregate cost of $15.0 million. As of January 22, 2023, there was $160.0 million remaining under share repurchase programs authorized by the Board of Directors which expire in November 2023.

***Dividends —*** During the first quarter of 2023, the Board of Directors declared a cash dividend of $0.44 per common share totaling $9.2 million. On February 24, 2023, the Board of Directors declared a cash dividend of $0.44 per common share, to be paid on March 28, 2023, to shareholders of record as of the close of business on March 15, 2023.

***Securitized Refinancing Transaction —*** On February 11, 2022, the Company completed the sale of $550.0 million of its Series 2022-1 3.445% Fixed Rate Senior Secured Notes, Class A-2-I (the “Class A-2-I Notes”) and $550.0 million of its Series 2022-1 4.136% Fixed Rate Senior Secured Notes, Class A-2-II (the “Class A-2-II Notes” and, together with the Class A-2-I Notes, the “2022 Notes”). Interest payments on the 2022 Notes are payable on a quarterly basis. The anticipated repayment dates of the 2022 Class A-2-I Notes and the Class A-2-II Notes will be February 2027 and February 2032, respectively, unless earlier prepaid to the extent permitted under the indenture that governs the 2022 Notes. The anticipated repayment dates of the existing 2019-1 Class A-2-II Notes and the Class A-2-III Notes are August 2026 and August 2029, respectively.

The Company also entered into a revolving financing facility of Series 2022-1 Variable Funding Senior Secured Notes (the “Variable Funding Notes”), which permits borrowings up to a maximum of $150.0 million, subject to certain borrowing conditions, a portion of which may be used to issue letters of credit. As of January 22, 2023, we had outstanding borrowings of $50.0 million and available borrowing capacity of $60.0 million under our Variable Funding Notes, net of letters of credits issued of $40.0 million.

The 2022 Notes were issued in a privately placed securitization transaction pursuant to which certain of the Company’s revenue-generating assets, consisting principally of franchise-related agreements, real estate assets, and intellectual property and license agreements for the use of intellectual property, are held by the Master Issuer and certain other limited-purpose, bankruptcy remote, wholly owned indirect subsidiaries of the Company that act as Guarantors of the Notes and that have pledged substantially all of their assets, excluding certain real estate assets and subject to certain limitations, to secure the Notes. The 2022 Notes are subject to the same covenants and restrictions as the Series 2019-1 Notes.

The quarterly principal payment on the Class A-2 Notes may be suspended when the specified leverage ratio, which is a measure of outstanding debt to earnings before interest, taxes, depreciation, and amortization, adjusted for certain items (as defined in the Indenture), is less than or equal to 5.0x. Exceeding the leverage ratio of 5.0x does not violate any covenant related to the Class A-2 Notes. Subsequent to closing the issuance of the 2022 Notes, the Company has had a leverage ratio of greater than 5.0x and, accordingly, the Company resumed making the scheduled amortization payments on its 2022 Notes and Series 2019-1 Notes beginning in the second quarter of 2022.

***Restricted cash —*** In accordance with the terms of the Indenture, certain cash accounts have been established with the Indenture trustee for the benefit of the note holders and are restricted in their use. As of January 22, 2023, the Company had restricted cash of $27.8 million, which primarily represented cash collections and cash reserves held by the trustee to be used for payments of interest and commitment fees required for the Class A-1 and A-2 Notes.

***Covenants and restrictions —*** The Notes are subject to a series of covenants and restrictions customary for transactions of this type, including (i) that the Master Issuer maintains specified reserve accounts to be used to make required payments in respect of the Notes, (ii) provisions relating to optional and mandatory prepayments and the related payment of specified amounts, including specified make-whole payments in the case of the Class A-2 Notes under certain circumstances, (iii) certain indemnification payments in the event, among other things, the assets pledged as collateral for the Notes are in stated ways defective or ineffective and (iv) covenants relating to recordkeeping, access to information and similar matters. The Notes are also subject to customary rapid amortization events provided for in the Indenture, including events tied to failure to maintain stated debt service coverage ratios, the sum of gross sales for specified restaurants being below certain levels on certain measurement dates, certain manager termination events, an event of default, and the failure to repay or refinance the Class A-2 Notes on the applicable scheduled maturity date. The Notes are also subject to certain customary events of default, including events relating to non-payment of required interest, principal, or other amounts due on or with respect to the Notes, failure to comply with covenants within certain time frames, certain bankruptcy events, breaches of specified representations and warranties, failure of security interests to be effective, and certain judgments. As of January 22, 2023, we were in compliance with all of our debt covenant requirements and were not subject to any rapid amortization events.

***Revolving credit facility —*** In connection with the Del Taco acquisition, Del Taco’s existing debt of $115.2 million related to a Syndicated Credit Facility dated August 5, 2015, was repaid and extinguished on the Closing Date. On the Closing Date, Del Taco entered into a new syndicated credit facility with an aggregate principal amount of up to $75.0 million, maturing on March 7, 2023. The revolving credit facility, as amended, includes a limit of $20.0 million for letters of credit. As of January 22, 2023, we had no outstanding borrowings and available borrowing capacity of $61.9 million under the facility, net of letters of credit of $13.1 million.

### DISCUSSION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Critical accounting policies and estimates are those that we believe are most important for the portrayal of the Company’s financial condition and results, and that require management’s most subjective and complex judgments. Judgments and uncertainties regarding the application of these policies may result in materially different amounts being reported under various conditions or using different assumptions. There have been no material changes to the critical accounting policies and estimates previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended October 2, 2022.

### NEW ACCOUNTING PRONOUNCEMENTS

Refer to Note 1, *Basis of Presentation*, of the notes to condensed consolidated financial statements.

### CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of the federal securities laws, including further impacts that COVID-19 pandemic may have on our future operations. Any statements contained herein that are not historical facts may be deemed to be forward-looking statements. Forward-looking statements may be identified by words such as “anticipate,” “assume,” “believe,” “estimate,” “expect,” “forecast,” “goals,” “guidance,” “intend,” “plan,” “project,” “may,” “will,” “would”, “should” and similar expressions. These statements are based on management’s current expectations, estimates, forecasts and projections about our business and the industry in which we operate. These estimates and assumptions involve known and unknown risks, uncertainties, and other factors that are in some cases beyond our control. Factors that may cause our actual results to differ materially from any forward-looking statements include, but are not limited to:

- The COVID-19 pandemic has disrupted and may continue to disrupt our business, which has affected and could continue to materially affect our operations, financial condition, and results of operations for an extended period of time.
- Changes in the availability of and the cost of labor could adversely affect our business.
- Changes in consumer confidence and declines in general economic conditions could negatively impact our financial results.
- Increases in food and commodity costs could decrease our profit margins or result in a modified menu, which could adversely affect our financial results.
- Failure to receive scheduled deliveries of high-quality food ingredients and other supplies could harm our operations and reputation.
- Inability to attract, train and retain top-performing personnel could adversely impact our financial results or business.
- Our business could be adversely affected by increased labor costs.
- Unionization activities or labor disputes may disrupt our operations and affect our profitability.
- Our insurance may not provide adequate levels of coverage against claims.
- We face significant competition in the food service industry and our inability to compete may adversely affect our business.
- Changes in demographic trends and in customer tastes and preferences could cause sales and the royalties we receive from franchisees to decline.
- Negative publicity relating to our business or industry could adversely impact our reputation.
- We may not have the same resources as our competitors for marketing, advertising and promotion.
- We may be adversely impacted by severe weather conditions, natural disasters, terrorist acts or civil unrest that could result in property damage, injury to employees and staff, and lost restaurant sales.
- Food safety and food-borne illness concerns may have an adverse effect on our business by reducing demand and increasing costs.
- We may not achieve our development goals.
- Our business and Del Taco’s business may not be integrated successfully, or such integration may be more difficult, time consuming, or costly than expected. Operating costs, customer loss, and business disruptions, including difficulties maintaining relationships with employees, customers, suppliers or vendors, may be greater than expected.
- Our highly franchised business model presents a number of risks, and the failure of our franchisees to operate successful and profitable restaurants could negatively impact our business.
- We are subject to financial and regulatory risks associated with our owned and leased properties and real estate development projects.
- We have a limited number of suppliers for our major products and rely on a distribution network with a limited number of distribution partners for the majority of our national distribution program. If our suppliers or distributors are unable to fulfill their obligations under their contracts, it could harm our operations.
- Increasing regulatory and legal complexity may adversely affect restaurant operations and our financial results.
- Governmental regulation may adversely affect our existing and future operations and results, including by harming our ability to profitably operate our restaurants.
- The proliferation of federal, state, and local regulations increases our compliance risks, which in turn could adversely affect our business.
- Legislation and regulations regarding our products and ingredients, including the nutritional content of our products, could impact customer preferences and negatively impact our financial results.
- We may not be able to adequately protect our intellectual property, which could harm the value of our brand and adversely affect our business.
- We are subject to increasing legal complexity and may be subject to claims or lawsuits that are costly to defend and could result in our payment of substantial damages or settlement costs.
- If we fail to maintain an effective system of internal controls, we may not be able to accurately determine our financial results or prevent fraud. As a result, the Company’s stockholders could lose confidence in our financial results, which would harm our business and the value of the Company’s common shares.
- Changes in tax laws, interpretations of existing tax law, or adverse determinations by tax authorities could adversely affect our income tax expense and income tax payments.
- We may be subject to risk associated with disagreements with key stakeholders, such as franchisees.
- Actions of activist stockholders could cause us to incur substantial costs, divert management’s attention and resources, and have an adverse effect on our business.
- We are subject to the risk of cybersecurity breaches, intrusions, data loss, or other data security incidents.
- We are subject to risks associated with our increasing dependence on digital commerce platforms and technologies to maintain and grow sales, and we cannot predict the impact that these digital commerce platforms and technologies, other new or improved technologies or alternative methods of delivery may have on consumer behavior and our financial results.
- We are dependent on information technology and digital service providers and any material failure, misuse or interruption of our computer systems, supporting infrastructure, consumer-facing digital capabilities or social media platforms could adversely affect our business.
- The securitized debt instruments issued by certain of our wholly-owned subsidiaries have restrictive terms, and any failure to comply with such terms could result in default, which could harm the value of our brand and adversely affect our business.
- We have a significant amount of debt outstanding. Such indebtedness, along with the other contractual commitments of our Company or its subsidiaries, could adversely affect our business, financial condition and results of operations, as well as the ability of certain of our subsidiaries to meet debt payment obligations.
- The securitization transaction documents impose certain restrictions on our activities or the activities of our subsidiaries, and the failure to comply with such restrictions could adversely affect our business.

These and other factors are identified and described in more detail in our filings with the Securities and Exchange Commission, including, but not limited to: the “Discussion of Critical Accounting Estimates,” and other sections in this Form 10-Q and the “Risk Factors” section of our most recent Annual Report on Form 10-K for the fiscal year ended October 2, 2022 (“Form 10-K”). These documents may be read free of charge on the SEC’s website at www.sec.gov. Potential investors are urged to consider these factors, more fully described in our Form 10-K, carefully in evaluating any forward-looking statements, and are cautioned not to place undue reliance on the forward-looking statements. All forward-looking statements are made only as of the date issued, and we do not undertake any obligation to update any forward-looking statements.

## Market risk

As filed, 252 characters.

There have been no material changes in our quantitative and qualitative market risks set forth in Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended October 2, 2022.

## Controls and procedures

As filed, 1,016 characters.

### Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Based on an evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, as amended), as of the end of the Company’s quarter ended January 22, 2023, the Company’s Chief Executive Officer and Chief Financial Officer (its principal executive officer and principal financial officer, respectively) have concluded that the Company’s disclosure controls and procedures were effective.

### Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended January 22, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

There is no information required to be reported for any items under Part II, except as follows:

## Risk factors

As filed, 1,071 characters.

When evaluating our business and our prospects, you should consider the risks and uncertainties described under Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended October 2, 2022, which we filed with the SEC on November 22, 2022, as updated in this Item 1A. You should also consider the risks and uncertainties discussed under the heading “Cautionary Statements Regarding Forward-Looking Statements” in Item 2 of this Quarterly Report on Form 10-Q. You should also refer to the other information set forth in this Quarterly Report and in our Annual Report on Form 10-K for the fiscal year ended October 2, 2022, including our financial statements and the related notes. These risks and uncertainties are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also impair our business operations. If any of the risks or uncertainties actually occur, our business and financial results could be harmed. In that case, the market price of our common stock could decline.

Filed Mar 1, 2023.
Source: SEC EDGAR, the filing index for accession 0000807882-23-000006. Last ingested by Listed: Oct 24, 2026, 14:57 ET. No prices; not investment advice.