Jack in the Box Inc: Form 10-Q for the period ended Jul 7, 2024

GENERAL

The Company’s fiscal year is 52 or 53 weeks ending the Sunday closest to September 30. In fiscal 2023, Del Taco operated on a fiscal year ending the Tuesday closest to September 30. Beginning fiscal 2024, Del Taco’s fiscal year shifted to align with Jack in the Box. As a result, Del Taco’s fiscal 2024 results include two fewer days. Fiscal years 2024 and 2023 include 52 weeks. Our first quarter includes 16 weeks and all other quarters include 12 weeks. All comparisons between 2024 and 2023 refer to the 12 weeks (“quarter”) and 40 weeks (“year-to-date”) ended July 7, 2024 and July 9, 2023, respectively, unless otherwise indicated.

For an understanding of the significant factors that influenced our performance during 2024 and 2023, 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 1, 2023.

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.

Same-store sales, systemwide sales, franchised restaurant sales, and AUVs 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 July 7, 2024, we operated and franchised 2,195 Jack in the Box quick-service restaurants, primarily in the western and southern United States, including two in Guam, and 597 Del Taco quick-service restaurants across 17 states.

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 tables summarize changes in same-store sales for Jack in the Box and Del Taco company-operated, franchised, and system restaurants:

The following tables summarize year-to-date changes in the number and mix of company and franchise restaurants for our two brands:

22

The following tables summarize restaurant sales for company-operated, franchised, and systemwide sales for our two brands (in thousands):

(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.

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):

Company restaurant sales increased $3.5 million, or 3.7% in the quarter and $12.9 million, or 4.0% year-to-date compared to the prior year. The following table presents the approximate impact of changes in AUVs and the number of restaurants on company restaurant sales for each respective period (in millions):

23

Same-store sales at company-operated restaurants increased 0.1% in the quarter and 0.6% year-to-date compared to a year ago. The following table summarizes the change versus a year ago:

(1) Includes price increases of approximately 8.4% in the quarter and 7.6% year-to-date.

Food and packaging costs as a percentage of company restaurant sales decreased 2.2% in the quarter and 2.6% year-to-date compared to the prior year primarily due to commodity deflation and menu price increases, partially offset by unfavorable menu item mix.

Commodity deflation was 0.5% in the quarter and 1.5% year-to-date. The greatest impacts were seen in poultry and beef in the quarter, and beef, produce and poultry, on a year-to-date basis.

Payroll and employee benefit costs as a percentage of company restaurant sales increased 2.0% in the quarter and 0.4% year-to-date compared to the prior year. During the quarter and on a year-to-date basis, increases in wage inflation and group insurance were offset by decreases in incentive compensation. Labor inflation was approximately 14.9% in the quarter and 6.9% year-to-date for the current year.

Occupancy and other costs, as a percentage of company restaurant sales, increased 0.9% in the quarter and 0.4% year-to-date compared to the prior year. For the quarter, these increases were primarily due to higher utilities and insurance costs. For the year-to-date period, these increases were primarily due to higher security costs, other operating costs, partially offset by lower maintenance and repair costs.

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):

(1) Excluding the impact of the $7.3 million termination fee in the first quarter of 2023 royalties as a percentage of total franchised restaurant sales would be 5.0%.

Franchise rental revenues decreased $1.1 million, or 1.3% in the quarter and $2.9 million, or 1.1% year-to-date, compared to the prior year primarily due to lower percentage rent of $2.7 million in the quarter and $6.2 million year-to-date, respectively, driven by lower franchise restaurant sales. These decreases were partially offset by increases in minimum rent of $0.9 million and $2.7 million, in the respective periods, as well as an increase of $1.3 million and $1.3 million, related to lease terminations, respectively.

Franchise royalties and other decreased $0.9 million, or 1.9% in the quarter and $7.5 million, or 4.5% year-to-date. In the quarter, the decrease was primarily due to lower royalty income of $0.9 million driven by lower sales. The year-to-date decrease was primarily due to a $7.3 million termination fee paid in the prior year by a franchise operator to sell his restaurants to a new franchisee, partially offset by an increase in franchise early termination fees in the current year. Refer also to Note 2, Revenue, in the notes to the condensed consolidated financial statements for additional information.

Franchise contributions for advertising and other services revenues increased $0.1 million, or 0.1% in the quarter and $1.9 million, or 1.2% year-to-date, as compared to the prior year. The increase in the quarter is primarily due to an increase in digital and technology fees of $0.9 million offset by lower marketing contribution of $0.9 million, driven by lower franchise restaurant sales. On a year-to-date basis, the increase is primarily due to the increase in digital and technology fees of $2.7 million offset by lower marketing contribution of $1.1 million.

Franchise occupancy expenses, primarily rent, increased less than $0.1 million, or 0.1% in the quarter and $1.5 million, or 0.9% year-to-date compared to the prior year primarily due to an increase in operating lease costs in the current year.

Franchise support and other costs decreased $0.6 million, or 17.9% in the quarter, and increased $2.3 million, or 32.7% year-to-date compared to the prior year. Year-to-date, the increase is primarily due to the rollover of a bad debt reversal in the prior year.

Franchise advertising and other service expenses decreased $0.7 million, or 1.3% in the quarter and was essentially flat year-to-date compared to the prior year. In the quarter, the decrease is primarily driven by lower franchise marketing expense due to lower sales, partially offset by higher costs for digital processing fees. On a year-to-date basis, the decrease from lower sales driving lower marketing expenses was offset by higher franchise IT revenue costs as well as higher costs for digital processing fees.

Del Taco Brand

Company Restaurant Operations

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

Company restaurant sales decreased $35.6 million or 35.0% in the quarter and $126.6 million or 35.9% year-to-date compared to the prior year. These decreases were primarily due to the refranchising of 58 company-operated restaurants and the closing of 10 company-operated restaurants since the third quarter of 2023 and decreases in same store sales, for both the quarter and year-to-date compared to the prior year. The following table presents the approximate impact of changes in AUVs and the number of restaurants on company restaurant sales for each respective period on company restaurant sales (in millions):

Same-store sales at company-operated restaurants decreased 3.5% in the quarter and decreased 0.9% year-to-date compared to a year ago. The following table summarizes the change versus a year ago:

(1) Includes price increases of approximately 8.0% in the quarter and 7.0% year-to-date.

Food and packaging costs as a percentage of company restaurant sales decreased 2.1% in the quarter and 1.6% year-to-date, compared to the prior year primarily due to menu price increases and the change in mix of restaurants resulting from company restaurant refranchising, partially offset by commodity inflation.

Commodity costs inflation was 0.2% in the quarter and deflation of 0.5% year-to-date. The greatest impact on the quarter inflation was seen in produce and dairy, and the greatest impact on the year-to-date deflation was in cheese and pork.

Payroll and employee benefit costs as a percentage of company restaurant sales increased 4.6% in the quarter and 2.2% year-to-date, compared to the prior year primarily due to labor inflation, which was 17.7% in the quarter and 7.9% year-to-date.

Occupancy and other costs as a percentage of company restaurant sales increased 1.6% in the quarter and 1.1% year-to-date, compared to the prior year primarily due to higher utilities and increased information technology costs.

Del Taco 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):

Franchise rental revenues increased $4.0 million, or 134.2%, in the quarter and $12.5 million, or 149.9% year-to-date, compared to the prior year. The increase is primarily due to higher rental income resulting from new subleases related to the 58 restaurants refranchised since the third quarter of 2023.

Franchise royalties and other increased $1.3 million, or 20.3%, in the quarter and $5.9 million, or 30.6% year-to-date, compared to the prior year primarily due to royalties from the higher franchise restaurant sales resulting from the 58 restaurants refranchised and the 17 franchise-operated restaurants opened since the third quarter of 2023.

Franchise contributions for advertising and other services revenues increased $1.0 million, or 17.2%, in the quarter and $6.1 million, or 34.8% year-to-date, compared to the prior year primarily due to higher marketing contributions related to higher franchise restaurant sales resulting from the 58 restaurants refranchised and the 17 franchise-operated restaurants opened since the third quarter of 2023.

Franchise occupancy expenses, primarily rent, increased $4.0 million, or 137.6%, in the quarter and $12.4 million, or 150.5% year-to-date, compared to the prior year primarily due to higher rent related to franchise subleases for the 58 restaurants refranchised since the third quarter of 2023.

Franchise support and other costs increased $0.4 million, or 73.4%, in the quarter and $2.0 million, or 127.8% year-to-date, compared to the prior year primarily due to higher franchise development support costs in each period, as well as additional overhead costs on a year-to-date basis.

Franchise advertising and other service expenses increased $1.6 million, or 26.2%, in the quarter and $7.4 million, or 40.5% year-to-date, compared to the prior year primarily due to higher franchise restaurant sales resulting from the 58 restaurants refranchised and the 17 franchise-operated restaurants opened since the third quarter of 2023.

Company-Wide Results

Depreciation and Amortization

Depreciation and amortization for the quarter ended July 7, 2024 decreased $0.6 million in the quarter and $2.3 million year-to-date compared to the prior year period. The decreases in depreciation are primarily due to the refranchising of Del Taco restaurants since the prior year, as well as certain Jack in the Box franchise assets becoming fully depreciated. These decreases were partially offset by increases for new technology assets and new company restaurant openings.

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

The following table presents the amounts for SG&A expenses in each period (in thousands):

Advertising costs represent company contributions to our marketing funds and are generally determined as a percentage of company-operated restaurant sales. Advertising costs decreased $0.7 million in the quarter and $3.9 million on a year-to-date basis as compared to the prior year, primarily due to a decrease in company-operated restaurant sales in the current year which was driven by Del Taco refranchising.

Share-based compensation increased by $0.3 million in the quarter and $3.0 million on a year-to-date basis as compared to the prior year, primarily due to additional restricted stock unit awards, partially offset by lower performance-based equity awards due to lower performance metrics.

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 favorable impact of $2.6 million in the quarter and $2.1 million on a year-to-date basis, compared to the prior year.

Litigation matters increased $0.2 million in the quarter and decreased $4.0 million on a year-to-date basis as compared to the prior year primarily due to the timing of litigation developments in each period, respectively. Refer to Note 14, Commitments and Contingencies, in the condensed consolidated financial statements for additional information related to the legal matters.

Insurance decreased $2.9 million in the quarter, as well as on a year-to-date basis, as compared to the prior year primarily due to the positive development factors related to workers compensation and general liability claims in each period, respectively.

Goodwill Impairment Charges

As of the June 9, 2024 testing date, the balance of the Del Taco reporting unit goodwill was $194.0 million. During the third quarter of 2024, the Company identified triggering events that indicated the goodwill allocated to the Del Taco reporting unit might be impaired. The triggering events related to i) a recent negative trend in Del Taco same store sales, ii) lower margins due in part to lower sales and wage increases required in California effective April 1, 2024 under AB 1228, iii) unfavorable changes in the economic environment specifically impacting our industry, including inflation and interest rates, and iv) a sustained lower share price. As a result, the Company performed a quantitative test over the Del Taco reporting unit, noting that the fair value of the reporting unit was less than the carrying value, which resulted in an impairment of goodwill of $162.6 million.

Other Operating Expenses (Income), Net

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

Other operating expenses (income), net decreased $2.0 million in the quarter and increased $11.2 million on a year-to-date basis, as compared to the prior year. For the quarter, the decrease was primarily due to $4.4 million of impairment charges recognized for Del Taco restaurants in the prior year, partially offset by an increase of $2.0 million in connection with consulting fees for strategic initiatives in the current year.

For the year-to-date period, the increase of $11.2 million was due to $9.5 million of gains recognized in the prior year from a sale of Jack in the Box restaurant properties to franchisees who were leasing the properties from us prior to the sale, as well as an increase of $9.3 million of consulting fees for strategic initiatives in the current year. These increases were partially offset by $4.4 million of impairment charges recognized for Del Taco restaurants last year, the $2.4 million purchase gain related to the acquisition of 9 Del Taco restaurants in the current year, as well as a $2.2 million decrease in costs of closed restaurants.

Gains and Losses on the Sale of Company-Operated Restaurants

For the fiscal 2024 year-to-date period, the Company sold 13 Del Taco company-operated restaurants to franchisees, for which the Company recognized a net loss on the sale of company-operated restaurants of $1.4 million.

For the fiscal 2023 year-to-date period, the Company sold five Jack in the Box company-operated restaurants and 66 Del Taco company-operated restaurants to franchisees, for which the Company recognized a net gain on the sale of company-operated restaurants of $10.3 million.

Refer to Note 3, Summary of Refranchisings and Assets Held for Sale, of the notes to the condensed consolidated financial statements for additional information regarding these transactions.

Interest Expense, Net

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

Interest expense, net, decreased $0.3 million in the quarter and $2.7 million year-to-date primarily due to lower average borrowings, as well as lower average interest rates, resulting in a decrease of $0.3 million and $2.1 million, respectively, in interest expense compared to the prior year. Additionally, there was an increase in interest income of $0.5 million year-to-date due to higher investment balances compared to fiscal year 2023.

Income Tax Expense

Under GAAP, the Company ordinarily calculates its provision for income taxes at the end of each interim reporting period by computing an estimated annual effective tax rate adjusted for tax items that are discrete to each period. For the third quarter of fiscal year 2024, the company calculated its interim tax provision based on actual year-to-date results because small changes in forecasted pre-tax book income led to large differences in the estimated annual effective tax rate.

For the third quarter and year-to-date of fiscal year 2024, the Company recorded income tax provisions of $0.1 million and $23.3 million, respectively, resulting in effective tax rates of negative 0.1% and negative 66.0%, respectively. The effective tax rates for such periods differed from the U.S. statutory tax rate primarily due to the impairment of non-deductible goodwill partially offset by the reversal of state deferred tax liabilities on basis difference of investments in subsidiaries and non-taxable gains from the market performance of insurance products used to fund certain non-qualified retirement plans.

For the third quarter and year-to-date of fiscal year 2023, the Company recorded income tax provisions of $14.1 million and $47.7 million, respectively, resulting in effective tax rates of 32.6% and 30.4%, respectively. The effective tax rates for such periods differed from the U.S. statutory tax rate primarily due to the impact of estimated disposals of non-deductible goodwill attributable to refranchising transactions partially offset by non-taxable gains from the market performance of insurance products used to fund certain non-qualified retirement plans.

LIQUIDITY AND CAPITAL RESOURCES

General

Our primary sources of short-term and long-term liquidity and capital resources are cash flows from operations and borrowings available under our credit facilities. 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 use available cash flows from operations to invest in our business, service our debt obligations, pay dividends and repurchase shares of our common stock.

As of July 7, 2024, the Company had $50.8 million of cash and restricted cash on its consolidated balance sheet and available borrowings of $175.5 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. We 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):

Operating Activities. Operating cash flows decreased $142.8 million compared with a year ago. This is primarily due to an unfavorable change in working capital of $138.0 million, as well as lower net income, when adjusted for non-cash items, of $4.8 million. The change in working capital is primarily a result of the decrease of $58.2 million of income tax liabilities (of which $50.3 million was a payment deferred from 2023 in connection with the Southern California winter storm disaster area declaration), a decrease in accrued legal of $29.8 million (of which $25.5 million is due to the final payment of the Torrez litigation), a decrease in the advertising accruals of $14.9 million due to timing, and a decrease in payroll and related taxes accrual of $13.6 million due to company-operated restaurant refranchising activity.

Investing Activities. Cash flows from investing activities decreased by $93.8 million compared with a year ago primarily due to higher purchases of property and equipment of $29.1 million in the current year, lower proceeds from the sale of Jack in the Box restaurant properties to franchisees of $14.3 million in the current year, and lower proceeds from the sale of company-operated restaurants of $49.7 million.

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

The increase in restaurant facility expenditures includes amounts spent on capital maintenance and other operational initiatives. The increase for the purchases of assets intended for sale includes amounts spent on exercising our right of first refusal to purchase land and building which we intend to sell to franchisees and/or sell and leaseback. The increase for corporate information technology includes spending in connection with our new enterprise resource planning system and digital workflow platform.

Sale of Company-Operated Restaurants — The following table details proceeds received in connection with our refranchising activities in each period (dollars in thousands).

For further information, see Note 3, Summary of Refranchisings and Assets Held for Sale, in the notes to the condensed consolidated financial statements.

Financing Activities. Cash flows from financing activities decreased by $55.5 million compared with a year ago. The change is primarily due to the $50.0 million repayment in the prior year on the Variable Funding Notes and the $5.4 million decrease in stock repurchases in the current year versus the prior year.

Repurchases of common stock — The Company repurchased 0.8 million shares of its common stock in fiscal 2024 for an aggregate cost of $55.4 million. As of July 7, 2024, there was $195.0 million remaining under share repurchase programs authorized by the Board of Directors which do not expire.

Dividends — Up through July 7, 2024, the Board of Directors declared three cash dividends of $0.44 per common share totaling $25.8 million.

On August 2, 2024, the Board of Directors declared a cash dividend of $0.44 per share, to be paid on September 19, 2024, to shareholders of record as of the close of business on August 30, 2024.

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 July 7, 2024, we did not have any outstanding borrowings and had available borrowing capacity of $100.5 million under our Variable Funding Notes, net of letters of credits issued of $49.5 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 July 7, 2024, the Company had restricted cash of $29.1 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 July 7, 2024, 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 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, which was extended and now matures on February 28, 2025. The revolving credit facility, as amended, includes a limit of $20.0 million for letters of credit, all of which were cancelled as of October 1, 2023. As of July 7, 2024, we had no outstanding borrowings and available borrowing capacity of $75.0 million under the facility.

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 1, 2023.

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. 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:

• 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.
• 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.

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 1, 2023 (“Form 10-K”). These documents may be read free of charge on the SEC’s website at www.sec.gov (http://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.

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 1, 2023.

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 July 7, 2024, 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

During the quarter ended July 7, 2024, we implemented a new enterprise resource planning (“ERP”) system. The new ERP system replaced legacy systems in which a significant portion of our business transactions originated, were processed, or were recorded. Additionally, we converted certain boundary applications for Del Taco so that they would interface with the new ERP system. The new ERP system is intended to provide us with enhanced transactional processing, security and management tools and is an important component of our system of disclosure controls and procedures.

There have been no other changes in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended July 7, 2024 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:

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 1, 2023, which we filed with the SEC on November 21, 2023, 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 1, 2023, 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.