What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2021-03-15 compared with 2020-03-06 · 497 added, 459 removed, 850 unchanged (53% of the section changed)

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We have audited the accompanying consolidated balance sheets of El Pollo Loco Holdings, Inc.

(the “Company”) as of December 25, 2019 and December 26, 2018 , the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 25, 2019 , and the related notes (collectively referred to as the "consolidated financial statements").

(the “Company”) as of December 30, 2020 and December 25, 2019, the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 30, 2020, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 30, 2020 and December 25, 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 30, 2020, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 30, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 15, 2021 expressed an unqualified opinion thereon.

Change in Accounting Method Related to Leases and Revenue

Change in Accounting Method Related to Leases

As discussed in Notes 2 and 5 to the consolidated financial statements, the Company has changed its method of accounting for leases in 2019 due to the adoption of Accounting Standards Codification (“ASC”) 842 - Leases.

As discussed in Notes 2 and 15 to the consolidated financial statements, the Company has changed its method of accounting for revenues in 2018 due to the adoption of ASC 606 - Revenue from Contracts with Customers.

Basis for Opinion

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Impairment of Restaurant Property and Equipment

As discussed in Notes 2 and 3 to the consolidated financial statements, the Company reviews its long-lived assets related to restaurants held and used in the business, including property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

For certain restaurants, indicators of impairment of the related property and equipment were present.

As such, for these restaurants, management compared the projected undiscounted cash flow to the carrying value, concluding that their carrying values were not recoverable.

To determine the loss for impairment, the Company was required to estimate the fair value of certain restaurants.

Total property and equipment, net of accumulated depreciation was $79.6 million as of December 30, 2020.

For the year ended December 30, 2020, the Company recorded an impairment loss of $3.0 million on restaurant property and equipment.

We identified the Company’s evaluation of impairment of restaurant property and equipment as a critical audit matter.

The undiscounted future cash flows used in the Company's restaurant property and equipment impairment analysis requires management to develop estimates and assumptions about future revenue transaction growth rates, pricing changes, and restaurant operating margins, which are made more uncertain by the significant and evolving impact of COVID-19 on the Company’s business.

For those restaurants where the carrying value of the related property and equipment were not deemed recoverable, management estimated the fair value of the assets.

Auditing these significant judgments and assumptions involved especially challenging auditor judgment and increased effort in performing procedures.

The primary procedures we performed to address this critical audit matter included:

● Evaluating the completeness and accuracy of data used in the projected undiscounted cash flow models, including recalculating the projected undiscounted cash flows for selected restaurants.

● Evaluating the reasonableness of management’s assumptions over the future revenue transaction growth rates, pricing changes, and restaurant operating margin assumptions for select restaurants by (i) comparing them to historical information for both company-owned and franchised restaurants in the same market, (ii) comparing them to recent trends by restaurant, considering the changes in the Company’s business model and uncertainties related to the COVID-19 pandemic, and (iii) comparing them to restaurant industry revenue growth rates based on market data to determine if contradictory evidence existed.

● Evaluating the reasonableness of management’s estimate of the fair value of the assets by comparing the market participant assumptions, including the discount rate applied to the estimated cash flows, to current market data and industry information on the recovery outlook for the restaurant industry.

Impairment of Right of Use Assets for Closed Restaurant Locations

As discussed in Notes 2 and 5 to the consolidated financial statements, the Company reviews its long-lived assets related to restaurants held and used in the business, including right of use (“ROU”) assets, for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable, for example, if the leased location has been closed or subleased and future estimated sublease income is less than current lease payments.

For some leases, indicators of impairment of operating lease ROU assets were present.

As such, for these leases, management compared the projected undiscounted cash flow models to the respective carrying values, concluding that the carrying values were not recoverable.

This required the Company to estimate the fair value of the ROU assets for these leases in order to measure the amount of impairment expense.

Total operating lease ROU assets, net related to closed or subleased restaurant locations was $27.7 million as of December 30, 2020.

For the year ended December 30, 2020, the Company has recorded an impairment loss of $0.5 million on operating lease ROU assets.

We identified the Company’s evaluation of impairment of ROU assets for closed restaurant locations as a critical audit matter.

The projected undiscounted cash flow models used in the Company's operating lease ROU asset impairment analysis for closed restaurant locations requires management to make subjective estimates and assumptions about the current market lease-up period and sublease rental rates.

Auditing these significant judgments and assumptions involved especially challenging auditor judgment and increased effort in performing procedures, including the involvement of individuals with specialized skills and knowledge.

The primary procedures we performed to address this critical audit matter included:

● Evaluating the completeness and accuracy of data used in the projected undiscounted cash flow models (i.e.

the lease-up period and future sublease income), including recalculating the projected undiscounted cash flows for closed restaurant locations.

● Evaluating the reasonableness of Management’s assumptions about current market conditions such as the lease-up period and sublease rental rates by (i) comparing them to comparable properties and available market data, and (ii) evidence obtained in the audit to consider whether new or contradictory information existed.

● Utilizing personnel with specialized knowledge and skill in valuation to assess the reasonableness of the lease-up period and market assumptions by independently developing an expectation using publicly available market data and industry trends.

/s/ BDO USA, LLP

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(Amounts in thousands, except share data)

December 25, 2019

December 26, 2018

Current assets:

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Property and equipment, net

Property held under finance lease, net

Property held under operating leases, net (ROU Asset)

Trademarks, net

Other intangible assets, net

Property and equipment held under finance lease, net

Property and equipment held under operating leases, net ("ROU asset")

Deferred tax assets

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Accounts payable

Accrued salaries and benefits

Accrued salaries and vacation

Accrued insurance

Accrued income taxes payable

Accrued interest

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Deferred taxes

Other intangible liabilities, net

Income tax receivable agreement payable, net of current portion

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Preferred stock, $ 0.01 par value, 100,000,000 shares authorized;

none issued or

none issued or outstanding

Common stock, $ 0.01 par value, 200,000,000 shares authorized;

35,126,582 and

39,009,451 shares issued and outstanding as of December 25, 2019 and December 26, 2018, respectively

36,423,505 and 35,126,582 shares issued and outstanding as of December 30, 2020 and December 25, 2019, respectively

Additional paid-in-capital

Accumulated deficit

Accumulated other comprehensive income

Accumulated other comprehensive (loss) income

Total stockholders’ equity

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(Amounts in thousands, except share data)

For the Years Ended

For the Fiscal Years Ended

December 30, 2020

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Cost of operations

Food and paper costs

Food and paper cost

Labor and related expenses

Occupancy and other operating expenses

Gain on recovery of insurance proceeds, lost profits

Company restaurant expenses

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Loss on disposal of assets

Recovery of securities lawsuits related legal expenses

Recovery of securities lawsuits related legal expenses and other insurance claims

Impairment and closed-store reserves

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Income tax receivable agreement expense (income)

Income (loss) before provision (benefit) for income

Income (loss) before provision (benefit) for income taxes

Provision (benefit) for income taxes

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(Amounts in thousands)

December 25, 2019

December 26, 2018

December 27, 2017

For the Fiscal Years Ended

Net income (loss)

Other comprehensive income (loss)

Other comprehensive (loss) income

Changes in derivative instruments

Unrealized gains arising during the period from interest rate swap

Reclassifications of gains into net income

Other comprehensive income, net of taxes

Unrealized net (losses) gains arising during the period from interest rate swap

Reclassifications of losses (gains) into net income

Income tax benefit (expense)

Other comprehensive (loss) income, net of taxes

Comprehensive income (loss)

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(Amounts in thousands, except share data)

Paid-in Capital

Accumulated Deficit

Accumulated Other Comprehensive Income

Stockholders’ Equity

Comprehensive

Stockholders’

Income (Loss)

Balance, December 28, 2017

Cumulative effect of accounting change (see Note 2)

Stock-based compensation

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Issuance of common stock upon exercise of stock options

Shares repurchased for employee tax withholdings

Repurchase of common stock

Balance, December 26, 2018

Cumulative effect of accounting change (see Note 2)

Stock-based compensation

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Repurchase of common stock

( 4,395,604 )

Other comprehensive income, net of income tax

Balance, December 25, 2019

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Shares repurchased for employee tax withholdings

Repurchase of common stock

Other comprehensive income, net of income tax

Forfeiture of common stock related to restricted shares

Other comprehensive loss, net of income tax

Balance, December 30, 2020

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(Amounts in thousands)

For the Years Ended

December 25, 2019

December 26, 2018

December 27, 2017

For the Fiscal Years Ended

Cash flows from operating activities:

Net income (loss)

Adjustments to reconcile changes in net income (loss) to net cash provided by operating activities:

Adjustments to reconcile net income (loss) to net cash flows provided by operating activities:

Depreciation and amortization

Bad debt expense

Stock-based compensation expense

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Loss on disposal of assets

Impairment of property, equipment and ROU Asset

Closed-store reserves

Impairment of property and equipment

Closed-store reserve expense

Amortization of deferred financing costs

Amortization of other intangible assets, net

Amortization of favorable and unfavorable leases, net

Deferred income taxes, net

Changes in operating assets and liabilities:

Accounts and other receivables, net

Accounts and other receivables

Prepaid expenses and other current assets

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Accounts payable

Accrued salaries and benefits

Accrued salaries and vacation

Accrued insurance

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Other accrued expenses and liabilities

Restricted cash

Net cash flows provided by operating activities

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Increase (decrease) in cash and cash equivalents

Cash and cash equivalents, beginning of year

Cash and cash equivalents, end of year

December 25, 2019

December 26, 2018

December 27, 2017

Cash and cash equivalents, beginning of period

Cash and cash equivalents, end of period

For the Fiscal Years Ended

Supplemental cash flow information

Cash paid for interest, net of capitalized interest

Cash paid during the year for income taxes, net

Non-cash investing and financing activity

Cash paid during the period for interest

Cash paid during the period for income taxes

Unpaid purchases of property and equipment

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(“EPL”), which develops, franchises, licenses and operates quick-service restaurants under the name El Pollo Loco ®.

The restaurants, which are located principally in California but also in Arizona, Nevada, Texas, Utah and Louisiana, specialize in fire-grilling citrus-marinated chicken in a wide variety of contemporary Mexican and LA-inspired entrees, including specialty chicken burritos, chicken quesadillas, chicken tostada salads, chicken tortilla soup, variations on our Pollo Bowl®, Pollo Salads and our Under 500 Calorie entrees.

At December 30, 2020, the Company operated 196 ( 143 in the greater Los Angeles area) and franchised 283 ( 136 in the greater Los Angeles area) El Pollo Loco restaurants.

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Holdings and Holdings’ direct subsidiary, EPL Intermediate, Inc.

(“Intermediate”), guarantee EPL’s 2018 Revolver (see Note 6) on a full and unconditional basis and Intermediate has no subsidiaries other than EPL.

(“Intermediate”), guarantee EPL’s 2018 Revolver (see Note 6, “Long-Term Debt”) on a full and unconditional basis and Intermediate has no subsidiaries other than EPL.

EPL is a separate and distinct legal entity, and has no obligation to make funds available to Intermediate.

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All significant revenues relate to retail sales of food and beverages through either company or franchised restaurants.

On August 2, 2018, the Company announced that the Board of Directors had authorized a stock repurchase program.

The Company entered into a stock repurchase plan on August 28, 2018 (the “2018 Stock Repurchase Plan”), which allowed for the repurchase of up to $20.0 million of the Company's common stock.

The 2018 Stock Repurchase Plan commenced on November 6, 2018 and terminated on June 26, 2019.

On April 30, 2019, as part of the Company’s focus on stockholder returns, the Board of Directors approved a new stock repurchase program.

The Company entered into a stock repurchase plan on May 17, 2019 (the “2019 Stock Repurchase Plan”), which allowed for the repurchase up to $30.0 million of the Company's common stock.

The 2019 Stock Repurchase Plan commenced on June 27, 2019, and was exhausted on September 26, 2019 .

Under the 2019 Stock Repurchase Plan, the Company was permitted to repurchase its common stock from time to time, in amounts and at prices that the Company deemed appropriate, subject to market conditions and other considerations.

The Company’s repurchases were executed using open market purchases, including pursuant to Rule 10b5-1 trading plans, and/or through privately negotiated transactions.

For the year ended December 25, 2019 , the Company repurchased 1,558,836 and 2,836,768 shares of common stock under the 2018 Stock Repurchase Plan and the 2019 Stock Repurchase Plan, respectively, executed using open market purchases, for total consideration of approximately $18.4 million and $30.0 million , respectively.

The common stock repurchased under both the 2018 Stock Repurchase Plan and the 2019 Stock Repurchase Plan was retired upon repurchase.

For the year ended December 26, 2018 , the Company repurchased 66,409 shares of common stock under the 2018 Stock Repurchase Plan for total considerations of approximately $1.0 million .

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company’s principal liquidity and capital requirements are new restaurants, existing restaurant capital investments (remodel and maintenance), interest payments on our debt, lease obligations and working capital and general corporate needs.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The Company’s principal liquidity and capital requirements are new restaurants, existing restaurant capital investments (remodel and maintenance), interest payments on its debt, lease obligations and working capital and general corporate needs.

At December 30, 2020, the Company’s total debt was $ 62.8 million.

The Company’s ability to make payments on its indebtedness and to fund planned capital expenditures depends on available cash and its ability to generate adequate cash flows in the future, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond the Company’s control.

Based on current operations, the Company believes that its cash flows from operations, available cash of $8.1 million at December 25, 2019 , and available borrowings under the 2018 Revolver (See "Note 6.

Long-Term Debt") will be adequate to meet the Company’s liquidity needs for the next twelve months from the issuance of the consolidated financial statements.

Based on current operations, the Company believes that its cash flows from operations, available cash of $ 13.2 million at December 30, 2020, and available borrowings under the 2018 Revolver (See Note 6 “Long-Term Debt”) will be adequate to meet the Company’s liquidity needs for the next twelve months from the issuance of the consolidated financial statements.

However, depending on the severity and longevity of the COVID-19 pandemic and the extent and duration of any economic downturn, the Company’s financial performance and liquidity could be further impacted and could impact the Company’s ability to meet certain covenants required in its 2018 Credit Agreement (as defined in Note 6), specifically the lease-adjusted coverage ratio and fixed-charge coverage ratio.

Basis of Presentation

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In a 52-week fiscal year, each quarter includes 13 weeks of operations.

In a 53-week fiscal year, the first, second and third quarters each include 13 weeks of operations and the fourth quarter includes 14 weeks of operations.

In a 53-week fiscal year, the first, second and third quarters

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

each include 13 weeks of operations and the fourth quarter includes 14 weeks of operations.

Approximately every six or seven years a 53-week fiscal year occurs.

Fiscal 2019 and 2018 were 52-week fiscal years.

Fiscal 2020 was a 53-week fiscal year.

53-week years may cause revenues, expenses, and other results of operations to be higher due to the additional week of operations.

2020 will be a 53-week fiscal year.

Principles of Consolidation

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Actual results could materially differ from those estimates.

The Company’s significant estimates include estimates for impairment of goodwill, intangible assets and property and equipment, insurance reserves, lease accounting matters, stock-based compensation, TRA liability, contingent liabilities and income tax valuation allowances.

The Company’s significant estimates include estimates for impairment of goodwill, intangible assets and property and equipment, insurance reserves, lease accounting matters, stock-based compensation, tax receivable agreement (the “TRA”) liability, contingent liabilities and income tax valuation allowances.

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China ("COVID-19") and the risks to the international community as the virus spreads globally beyond its point of origin.

On March 11, 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.

The COVID-19 pandemic has significantly disrupted consumer demand, as well as the Company’s restaurant operations.

Following the pandemic declaration in March 2020, federal, state and local governments began to respond to the public health crisis by requiring social distancing, "stay at home"

directives, and restaurant restrictions - including government-mandated dining room closures - that limited business to off-premise services only (take-out, drive-thru and delivery).

Historically, approximately 20 % of the Company’s sales are associated with dine-in service.

Many state and local governments continue to implement certain restrictions to try and contain the spread of the virus.

As of December 30, 2020 most of the Company’s markets outside of California have dining rooms open at a limited capacity, while the majority of the Company’s restaurants in California are continuing to operate on a take-away, mobile pick-up and delivery basis, as well as maintaining drive-thru operations where available, in order to comply with the government mandates.

Additionally, the Los Angeles market was heavily impacted by a spike in COVID-19 cases near the end of fiscal 2020.

Due to the Company’s high concentration in this market the Company was disproportionately impacted by this spike.

Due to the impact of the COVID-19 pandemic, during the year ended December 30, 2020, the Company temporarily closed 154 restaurants, of which all but seven have reopened as of December 30, 2020.

Similarly, during the year ended December 30, 2020, the Company’s franchisees temporarily closed 69 restaurants, of which all but three have reopened as of December 30, 2020.

For both franchise- and company-operated restaurants, this represents total closures and may include more than one closure for the same restaurant.

These closures typically lasted from one to three days .

As of December 30, 2020, the Company had not permanently closed any restaurants due to the COVID-19 pandemic.

During fiscal 2020, the Company incurred $ 4.9 million in COVID-19 related expenses, primarily due to leaves of absence and overtime pay.

The full impact of the COVID-19 outbreak continues to evolve as of the date of this report.

Management has taken precautionary actions, such as initially drawing on its 2018 Revolver, which has since been paid down (see Note 6 “Long-Term Debt”), temporarily suspending all but essential capital spending and share repurchase activity, reevaluating essential support center general and administrative expenses and fine-tuning its restaurant labor model based on indoor dining room restrictions, limited dining room capacity in restaurants located in geographies where indoor dining is

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

permitted, dining room closures and fluctuating sales volumes.

Additionally, management delayed making April, May and June rent payments on the majority of its leased properties and has reached agreements for rent abatement and/or deferment with the Company’s landlords for those properties.

See Note 7 “Other Accrued Expenses and Current Liabilities” and Note 8 “Other Noncurrent Liabilities” for details of these balances.

For the franchisees, the Company deferred 50 % of their April royalties until July 1, 2020, when such royalties began to be repaid in even monthly installments over the remainder of fiscal 2020.

As of December 30, 2020, all deferred royalty balances have been repaid.

In addition, the Company deferred 100 % of the franchisees’ 2020 remodel and new restaurant build requirements until the beginning of 2021.

Management is continually evaluating the impact of the global crisis on its financial condition, liquidity, operations, suppliers, industry, and workforce and will take additional actions as necessary.

The disruption in operations led to the Company considering the impact of the COVID-19 pandemic on its liquidity, debt covenant compliance, and recoverability of long-lived and ROU assets, goodwill and intangible assets, among others.

If these disruptions to the Company’s operations from the COVID-19 pandemic continue or worsen, they may have a material negative impact on the Company’s consolidated financial condition, future results of operations and liquidity.

The extent of such negative impact will depend, in part, on the longevity and severity of the COVID-19 pandemic, including the severity and transmission rates of COVID-19 variants, resurgences of COVID-19 that may continue to occur, the availability, distribution and efficacy of COVID-19 vaccines and how quickly and to what extent normal economic and operating conditions improve.

Due to the rapid development and fluidity of this situation, the Company cannot determine the ultimate impact that the COVID-19 pandemic will have on the Company’s consolidated financial condition, liquidity, and future results of operations, and therefore any prediction as to the ultimate materiality of the adverse impact on the Company’s consolidated financial condition, liquidity, and future results of operations is uncertain.

Cash and Cash Equivalents

The Company considers all highly-liquid instruments with a maturity of three months or less at the date of purchase to be cash equivalents.

The Company considers all liquid instruments with a maturity of three months or less at the date of purchase to be cash equivalents.

Subsequent Events

Subsequent to December 25, 2019 , the Company made a $10.0 million borrowing, net, on the 2018 Revolver, primarily to fund payment of a $16.3 million legal settlement, which was made on February 28, 2020 and previously accrued for during fiscal 2018.

See Note 13 for further details regarding the settlement payments.

Subsequent to December 30, 2020, the Company elected to pay down $ 7.0 million of outstanding borrowings on its 2018 Revolver.

As of March 15, 2021, the Company had $ 55.8 million in outstanding borrowings under the 2018 Revolver and $ 85.8 million in borrowing availability.

Further, the Company increased the borrowing capacity on its letter of credit by $ 1.6 million totaling $ 9.9 million as of March 15, 2021.

The Company evaluated subsequent events that have occurred after December 30, 2020, and determined that there were no other events or transactions occurring during this reporting period that require recognition or disclosure in the consolidated financial statements.

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The Company has never experienced any losses related to these balances.

The Company had one supplier for which amounts due at December 25, 2019 totaled 11.7% of the Company’s accounts payable.

The Company had two suppliers for which amounts due at December 30, 2020 totaled 24.2 % and 11.4 % of the Company’s accounts payable.

As of December 25, 2019, the Company had one supplier for which amounts due totaled 11.7 % of the Company’s accounts payable.

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In fiscal 2020, 2019 and 2018, Company-operated and franchised restaurants in the greater Los Angeles area generated, in the aggregate, approximately 71.3 %, 70.5 %, and 69.2 %, respectively, of total revenue.

one franchisee accounted for 10% of total

One franchisee accounted for 11.5 % of total accounts receivable as of December 30, 2020, and one franchisee accounted for 10 % of total accounts receivable as of December 25, 2019.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

accounts receivable as of December 25, 2019 , and two franchisees accounted for 40% of total accounts receivable as of December 26, 2018 .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Management believes the loss of the significant supplier or franchisee could have a material adverse effect on the Company’s consolidated results of operations and financial condition.

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The need for an allowance for doubtful accounts is reviewed on a specific identification basis and takes into consideration past due balances and the financial strength of the obligor.

Bad debt expense was immaterial for the years ended December 25, 2019 , December 26, 2018 , and December 27, 2017 .

Bad debt expense was $ 0.2 million for the year ended December 30, 2020.

There was no bad debt expense for the years ended December 25, 2019 and December 26, 2018.

Inventories consist principally of food, beverages and supplies and are valued at the lower of average cost or net realizable value.

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Other equipment

Property/equipment held under finance leases

Shorter of useful life or lease term

Leasehold improvements

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These costs are included in property and amortized over the shorter of the life of the related buildings and leasehold improvements or the lease term.

Costs related to abandoned sites and other site selection costs that cannot be identified with specific restaurants are charged to general and administrative expenses in the accompanying consolidated statements of operations, and were $0.1 million , $0.3 million and $0.5 million for the years ended December 25, 2019 , December 26, 2018 , and December 27, 2017 , respectively.

Costs related to abandoned sites and other site selection costs that cannot be identified with specific restaurants are charged to general and administrative expenses in the accompanying consolidated statements of operations, and were less than $ 0.1 million for each of the years ended December 30, 2020 and December 25, 2019, and $ 0.3 million for the year ended December 26, 2018.

The Company capitalized internal costs related to site selection and construction activities of $ 1.0 million, $ 1.1 million and $ 1.3 million for the years ended December 30, 2020, December 25, 2019, and December 26, 2018, respectively.

Capitalized internal interest costs related to site selection and construction activities were $0.1 million , $0.2 million and $0.2 million for the years ended December 25, 2019 , December 26, 2018 , and December 27, 2017 , respectively.

Capitalized internal interest costs related to site selection and construction activities were less than $ 0.1 million, $ 0.1 million and $ 0.2 million for the years ended December 30, 2020, December 25, 2019, and December 26, 2018, respectively.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Impairment of Long-Lived and ROU Assets

The Company reviews its long-lived and right-of-use assets (“ROU assets”) for impairment on a restaurant-by-restaurant basis whenever events or changes in circumstances indicate that the carrying value of certain long-lived and ROU assets may not be recoverable.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

threshold or if consistent levels of undiscounted cash flows for the remaining lease period are less than the carrying value of the restaurant’s assets.

Additionally, the Company considers a triggering event related to ROU assets, to have occurred related to a specific lease if the location has been subleased and future estimated sublease income is less than current lease payments.

The Company considers a triggering event, related to long-lived assets or ROU assets in a net asset position, to have occurred related to a specific restaurant if the restaurant’s cash flows for the last twelve months are less than a minimum threshold or if consistent levels of undiscounted cash flows for the remaining lease period are less than the carrying value of the restaurant’s assets.

Additionally, the Company considers a triggering event related to ROU assets, to have occurred related to a specific lease if the location has been closed or subleased and future estimated sublease income is less than current lease payments.

As of December 30, 2020 and December 25, 2019, ROU assets related to closed or subleased restaurant locations totaled $ 27.7 million and $ 31.8 million, respectively.

If the Company concludes that the carrying value of certain long-lived and ROU assets will not be recovered based on expected undiscounted future cash flows, an impairment loss is recorded to reduce the long-lived or ROU assets to their estimated fair value.

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If actual performance does not achieve the projections, or if the assumptions used change in the future, the Company may be required to recognize impairment charges in future periods, and such charges could be material.

Based on the results of this analysis, the Company recorded non-cash impairment charges of $3.6 million for the year ended December 25, 2019 , primarily related to the carrying value of the ROU assets of four restaurants sold to franchisees and one restaurant closed during fiscal 2019, and the long-lived assets of one restaurant in California.

The Company determined that triggering events, primarily related to the impact of the COVID-19 pandemic, occurred for certain stores during the year ended December 30, 2020 that required an impairment review of the Company’s long-lived and ROU assets.

Based on the results of this analysis, the Company recorded non-cash impairment charges of $ 3.5 million for the year ended December 30, 2020, primarily related to the carrying value o f the ROU assets of one restaurant in Texas and the long-lived assets of four restaurants in California.

In fiscal 2019, the Company recorded non-cash impairment charges of $ 3.6 million primarily related to the carrying value of the ROU assets of four restaurants sold to franchisees and one restaurant closed during fiscal 2019, and the long-lived assets of one restaurant in California.

In fiscal 2018, the Company recorded a non-cash impairment charge of $ 5.1 million, primarily related to the carrying value of four restaurants in Arizona, California and Texas, including a restaurant in Texas that opened in early 2018.

In fiscal 2017 , the Company recorded a non-cash impairment charge of $32.6 million , primarily related to the carrying value of the assets of 23 restaurants in Arizona, California and Texas.

The impairment expense for fiscal 2017 includes an impairment expense of $27.7 million , representing the entire value of capitalized assets of all of the company-operated restaurants in Texas, net of previously recorded depreciation.

Factors which led to the impairment of the Texas restaurants included operating results, which indicated that the restaurants did not achieve the sales volumes required to generate positive cash flows or improve profitability in the Texas market, along with the related future cash flow assumptions, including comparable sales rate growth and restaurant operating costs, over the remaining lease terms and the age of the restaurants in Texas.

The restaurants in Texas began opening in late 2014, causing a higher net book value at the time of impairment testing, and increased difficulty projecting results for newer restaurants in newer markets.

Given the difficulty in projecting results for newer restaurants in newer markets, we are also monitoring the recoverability of the carrying value of the assets of several other restaurants on an ongoing basis.

For these restaurants, if expected performance improvements are not realized, an impairment charge may be recognized in future periods, and such charge could be material.

Given the inherent uncertainty in projecting results for newer restaurants in newer markets, as well as the impact of the COVID-19 pandemic, the Company is monitoring the recoverability of the carrying value of the assets of several restaurants on an ongoing basis.

For these restaurants, if expected performance is not realized, an impairment charge may be recognized in future periods, and such charge could be material.

Closed-Store Reserves

Prior to the adoption of Topic 842 “Leases,” when the Company closed a restaurant, it reviewed the future minimum lease payments and related ancillary costs from the date of the restaurant closure to the end of the remaining lease term and recorded a lease charge for the lease liabilities to be incurred, net of any estimated sublease recoveries.

Prior to the adoption of Accounting Standards Codification ASC Topic 842 “Leases” (“Topic 842”), when the Company closed a restaurant, it reviewed the future minimum lease payments and related ancillary costs from the date of the restaurant closure to the end of the remaining lease term and recorded a lease charge for the lease liabilities to be incurred, net of any estimated sublease recoveries.

The estimates of future closed-store reserves were re-evaluated and adjusted each period based on information available as of the period.

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These closures resulted in closed-store reserve expenses of $ 4.5 million during fiscal 2018.

During fiscal 2017, the Company closed four restaurants in Texas, one of which was fully impaired during the fourth quarter of 2016, one of which was impaired during the third quarter of 2016 and the other two were impaired in fiscal 2017.

Additionally, the Company closed one restaurant in Arizona, which was fully impaired in the third quarter of 2016.

These closures resulted in closed-store reserve expenses of $1.1 million during fiscal 2017.

Subsequent to the adoption of Topic 842, the Company no longer recognizes a closed-store reserve when the Company closes a restaurant, as there is already a lease liability on its books related to the future lease payments.

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The remaining value of the ROU Asset is amortized on a straight-line basis, with the expense recognized in closed-store reserve expense.

During fiscal 2019 , the Company closed two restaurants in California and two in Texas and recognized $1.3 million of closed-store reserve expense for the fiscal year ended 2019 .

Additionally, any property tax and common area maintenance ("CAM") payments relating to closed restaurants are included within closed-store expense.

During fiscal 2020, the Company recognized $ 1.2 million of closed-store reserve expense related to the amortization of ROU assets, property taxes and CAM payments for its closed locations.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During fiscal 2019, the Company closed two restaurants in California and two in Texas and recognized $ 1.3 million of closed-store reserve expense, primarily related to the amortization of ROU assets, property taxes and CAM payments for its closed locations.

Goodwill and Indefinite-Lived Intangible Assets

In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No.

2017-04, "Intangibles—Goodwill and Other (Topic 350):

Simplifying the Test for Goodwill Impairment," ("ASU 2017-04"), simplifying the manner in which an entity is required to test for goodwill impairment by eliminating Step 2 from the goodwill impairment test.

The Company adopted ASU 2017-04 in the fourth quarter of 2018.

The Company’s indefinite-lived intangible assets consist of trademarks.

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Goodwill resulted from the Acquisition and from the acquisition of certain franchise locations.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Upon the sale of a restaurant, the Company evaluates whether there is a decrement of goodwill.

The amount of goodwill included in the cost basis of the asset sold is determined based on the relative fair value of the portion of the reporting unit disposed of compared to the fair value of the reporting unit retained.

The Company determined there was no decrement of goodwill related to the disposition of restaurants in fiscal 2019.

The Company determined there was no decrement of goodwill related to the disposition of restaurants in fiscal 2020, 2019 and 2018.

The Company performs annual impairment tests for goodwill during the fourth fiscal quarter of each year, or more frequently if impairment indicators arise.

The Company reviews goodwill for impairment utilizing either a qualitative assessment or by comparing the fair value of a reporting unit with its carrying amount.

The Company reviews goodwill for impairment utilizing either a qualitative assessment or a fair value test by comparing the fair value of a reporting unit with its carrying amount.

If the Company decides that it is appropriate to perform a qualitative assessment and concludes that the fair value of a reporting unit more likely than not exceeds its carrying value, no further evaluation is necessary.

If an impairment test is performed which determines the carrying amount of a reporting unit is greater than its fair value, an impairment charge will be recognized for the amount by which the carrying amount of a reporting unit is greater than its fair value, up to the amount of its allocated goodwill.

If the Company performs the fair value test, the Company will compare the fair value of a reporting unit with its carrying amount, including goodwill.

If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired.

If the carrying amount of a reporting unit exceeds its fair value, the Company will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value;

however, the loss recognized cannot exceed the total amount of goodwill allocated to that reporting unit.

The Company performs annual impairment tests for indefinite-lived intangible assets during the fourth fiscal quarter of each year, or more frequently if impairment indicators arise.

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These assumptions are subject to change as a result of changing economic and competitive conditions.

Although the Company recognized expense related to the impairment of assets of one restaurant and ROU assets of four restaurants during the year ended December 25, 2019 , upon completion of the qualitative assessment, the Company did not identify any indicators of potential impairment for its goodwill or indefinite-lived intangible assets.

Furthermore, the Company did not identify any indicators of potential impairment during the years ended December 26, 2018 or December 27, 2017 , and thus no impairment was recorded.

Other Intangibles, Net—Definite Lived

Definite lived intangible assets and liabilities consist of the value allocated to the Company’s favorable and unfavorable leasehold interests that resulted from the Acquisition.

Favorable leasehold interest represents the asset in excess of the approximate fair market value of the leases assumed as of November 17, 2005, the date of the Acquisition.

The amount is being reduced over the remaining life of the leases.

This amount is shown as other intangible assets, net, on the accompanying consolidated balance sheets.

Unfavorable leasehold interest liability represents the liability in excess of the approximate fair market value of the leases assumed as of November 17, 2005, the date of the Acquisition.

The amount is being reduced over the remaining life of the leases.

This amount is shown as other intangible liabilities, net, on the accompanying consolidated balance sheets.

Upon the Company's adoption of the new lease guidance in the first quarter of 2019, the Company's favorable and unfavorable leasehold improvements are now included as part of the ROU asset.

Leases" for more information.

Due to the recent impact of the COVID-19 pandemic to the Company’s business and the global economy, including but not limited to the volatility of the Company’s stock price as well as that of its competitors and the challenging environment for the restaurant industry generally, the Company determined that there were indicators of potential impairment of its goodwill and indefinite-lived intangible assets during fiscal 2020.

As such, the Company performed an impairment assessment for both goodwill and indefinite-lived intangible assets and concluded that the fair value of these assets substantially exceeded their carrying values.

Accordingly, the Company did not record any impairment to its goodwill or indefinite-lived intangible assets during the year ended December 30, 2020.

T he ultimate severity and longevity of the COVID-19 pandemic and the extent and duration of any economic downturn is unknown, and therefore, it is possible that impairments could be identified in future periods, and such amounts could be material.

Deferred Financing Costs

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Transaction costs of $ 0.8 million were incurred in connection with the July 13, 2018 refinancing and were capitalized during fiscal 2018.

Included in other assets are deferred financing costs (net of accumulated amortization), related to the revolver, of $0.8 million and $1.1 million as of December 25, 2019 and December 26, 2018 , respectively.

Included in other assets are deferred financing costs (net of accumulated amortization), related to the revolver, of $ 0.6 million and $ 0.8 million as of December 30, 2020 and

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 25, 2019, respectively.

Amortization expense for deferred financing costs was approximately $ 0.3 million for each of the three years ended December 30, 2020, December 25, 2019, and December 26, 2018, and is reflected as a component of interest expense in the accompanying consolidated statements of operations.

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At December 30, 2020 and December 25, 2019, the Company had accrued $ 10.4 million and $ 9.4 million, respectively, and such amounts are reflected as accrued insurance in the accompanying consolidated balance sheets.

The expense for such reserves for the years ended December 25, 2019 , December 26, 2018

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

and December 27, 2017 , totaled $9.6 million , $8.0 million , and $6.8 million , respectively.

The expense for such reserves for the years ended December 30, 2020, December 25, 2019 and December 26, 2018, totaled $ 8.4 million, $ 9.6 million, and $ 8.0 million, respectively.

These amounts are included in labor and related expenses and general and administrative expenses on the accompanying consolidated statements of operations.

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Promotional allowances amounted to approximately $ 7.5 million, $ 8.0 million and $ 8.8 million during the years ended December 30, 2020, December 25, 2019, and December 26, 2018, respectively.

The Company offers a loyalty rewards program, which awards a customer one point for every $1 spent.

When 100 points are accumulated a $10 reward to be used on future purchases is earned.

The Company offers a loyalty rewards program, which awards a customer points for dollars spent.

Customers earn points for each dollar spent and, as of August 4, 2020, 50 points can be redeemed for a $ 5 reward to be used for a future purchase.

Prior to August 4, 2020, 100 points could be redeemed for a $ 10 reward.

If a customer does not earn or use points within a one-year period, their account is deactivated and all points expire.

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When a customer is part of the rewards program, the obligation to provide future discounts related to points earned is considered a separate performance obligation, to which a portion of the transaction price is allocated.

The performance obligation related to loyalty points is deemed to have been satisfied, and the amount deferred in the balance sheet is recognized as revenue, when the points are transferred to a $10 reward and redeemed, the points or reward expire, or the likelihood of redemption is remote.

A portion of the transaction price is allocated to loyalty points, if necessary, on a pro-rata basis, based on stand-alone selling price, as determined by menu pricing and loyalty point terms.

The performance obligation related to loyalty points is deemed to have been satisfied, and the amount deferred in the balance sheet is recognized as revenue, when the points are transferred to a reward and redeemed, the reward or points have expired, or the likelihood of redemption is remote.

A portion of the transaction price is allocated to loyalty points, if necessary, on a pro-rata basis, based on stand-alone selling price, as determined by menu pricing and loyalty points terms.

As of December 30, 2020 and December 25, 2019, the revenue allocated to loyalty points that have not been redeemed are $ 0.9 million and $ 1.1 million, respectively, which are reflected in the Company’s accompanying consolidated balance sheets within other accrued expenses and current liabilities.

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Unredeemed gift card balances are deferred and recorded as other accrued expenses on the accompanying consolidated balance sheets.

The Company adopted Accounting Standards Codification ("ASC") Topic 606 - Revenue from Contracts with Customers ("Topic 606") on December 28, 2017.

As a result, the Company has changed its accounting policy for revenue recognition as detailed below.

The Company generates a substantial amount of its revenues from company-operated restaurants.

This revenue stream was not impacted by the adoption of Topic 606.

The Company applied Topic 606 using the modified retrospective method by recognizing the cumulative effect of initially applying Topic 606 as an adjustment to the opening balance of equity at December 28, 2017.

The cumulative catch-up adjustment recorded to accumulated deficit was approximately $ 3.5 million, net of taxes, related to franchise and development fees.

The adoption of this guidance did not have a material change on revenue from Company-operated restaurant revenue, gift cards or the Company's loyalty program.

The fiscal year 2017 comparative information has not been adjusted and continues to be reported under Topic 605.

The details of the significant changes and quantitative impact of the changes are set out below and in "Note 15.

Revenue from Contracts with Customers."

Franchise Revenue

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Rental income for subleases to franchisees are outside of the scope of the revenue standard and are within the scope of lease guidance.

Under Topic 842, sublease income is recorded on a gross basis within the consolidated statements of operations.

Franchise royalties are based upon a percentage of net sales of the franchisee and were previously recorded as income as such sales are earned by the franchisees, which does not change with the adoption of Topic 606.

For franchise and development agreement fees, the Company's previous accounting policy was to recognize initial franchise fees, development fees, and franchise agreement renewals when all material obligations had been performed and conditions had been satisfied, typically when operations of the franchised restaurant had commenced.

In accordance with the new guidance, the initial franchise services, or exclusivity of the development agreements, are not distinct from the continuing rights or services offered during the term of the franchise agreement and are, therefore, treated as a single performance obligation.

Under Topic 842, sublease income is recorded on a gross basis within the consolidated

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

statements of operations.

Franchise royalties are based upon a percentage of net sales of the franchisee and are recorded as income as such sales are earned by the franchisees.

For franchise and development agreement fees, the initial franchise services, or exclusivity of the development agreements, are not distinct from the continuing rights or services offered during the term of the franchise agreement and are, therefore, treated as a single performance obligation.

As such, initial franchise and development fees received, and subsequent renewal fees, are recognized over the franchise or renewal term, which is typically twenty years .

As of December 30, 2020, the Company had executed development agreements that represent commitments to open 48 franchised restaurants at various dates through 2028.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

This revenue stream is made up of the following performance obligations:

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The fixed fee, as determined by the signed development and/or franchise agreement, is due at the time the development agreement is entered into, and/or when the franchise agreement is signed, and does not include a finance component.

The sales-based royalty fee and sales-based advertising fee are considered variable consideration and will continue to be recognized as revenue as such sales are earned by the franchisees.

The sales-based royalty fee and sales-based advertising fee are considered variable consideration and are recognized as revenue as such sales are earned by the franchisees.

Both sales-based fees qualify under the royalty constraint exception, and do not require an estimate of future transaction price.

Additionally, the Company is utilizing the practical expedient regarding disclosure of the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied for sales-based royalties.

Additionally, the Company is utilizing the practical expedient available under ASC Topic 606, “Revenue from Contracts with Customers” (“Topic 606”) regarding disclosure of the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied for sales-based royalties.

In certain franchise agreements, the Company offers a discounted renewal to incentivize future renewals after the end of the initial franchise term.

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Franchise Advertising Fee Revenue

The Company's previous accounting policy was to recognize advertising funded by franchisees on a net basis in the consolidated statements of operations, and as a liability within the consolidated balance sheets.

Under the new guidance, the Company presents advertising contributions received from franchisees as franchise advertising fee revenue and records all expenses of the advertising fund within franchise expenses, resulting in an increase in revenues and expenses on the consolidated statements of operations, with no change to the consolidated balance sheets.

The Company presents advertising contributions received from franchisees as franchise advertising fee revenue and records all expenses of the advertising fund within franchise expenses.

Advertising Costs

Advertising expense is recorded as the obligation to contribute to the advertising fund is accrued, generally when the associated revenue is recognized.

Advertising expense, which is a component of occupancy and other operating expenses, was $16.1 million for both years ended December 25, 2019 and December 26, 2018 and $15.5 million for the year ended December 27, 2017 , and is in addition to $22.4 million , $21.2 million and $20.5 million , respectively, funded by the franchisees’ advertising fees.

Advertising expense is recorded as the obligation to contribute to the advertising fund and is accrued, generally when the associated revenue is recognized.

Advertising expense, which is a component of occupancy and other operating expenses, was $ 15.3 million for the year ended December 30, 2020 and $ 16.1 million for both years ended

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 25, 2019 and December 26, 2018, and is in addition to $ 22.6 million, $ 22.4 million and $ 21.2 million, respectively, funded by the franchisees’ advertising fees.

Franchisees pay a monthly fee to the Company that ranges from 4 % to 5 % of their restaurants’ net sales as reimbursement for advertising, public relations and promotional services the Company provides, which is included within franchise advertising fee revenue.

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Preopening Costs

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Preopening costs incurred in connection with the opening of new restaurants are expensed as incurred.

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Buildings and facilities leased from others are primarily for restaurants and support facilities.

Restaurants are operated under lease arrangements that generally provide for a fixed base rent and, in some instances, contingent rent based on a percentage of gross operating profit or net revenues in excess of a defined amount.

Initial terms of land and restaurant building leases generally have terms of 20 years , exclusive of options to renew.

ROU assets and operating and finance lease liabilities are recognized at the lease commencement date, which is the date the Company takes possession of the property.

Operating and finance lease liabilities represent the present value of lease payments not yet paid.

ROU assets represent our right to use an underlying asset and are based upon the operating and finance lease liabilities adjusted for prepayments or accrued lease payments, lease incentives, and impairment of ROU assets.

To determine the present value of lease payments not yet paid, the Company estimates incremental borrowing rates corresponding to the lease term including reasonably certain renewal periods.

The Company’s leases generally have escalating rents over the term of the lease, and are recorded on a straight-line basis over the expected lease term.

Additionally, tenant incentives used to fund leasehold improvements are recognized when earned and reduce the right-of-use asset related to the lease.

These are amortized through the operating lease asset as reductions of expense over the lease term.

Operating and finance lease liabilities that are based on an index or rate are calculated using the prevailing index or rate at lease commencement.

Subsequent escalations in the index or rate and contingent rental payments are recognized as variable lease expenses.

The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Leases of equipment primarily consist of restaurant equipment, computer systems and vehicles.

The Company subleases facilities to certain franchisees and other non-related parties which are recorded on a straight-line basis.

Refer to "Changes in Accounting Policy" below for more details on treatment of operating leases under Topic 842 that was adopted on December 27, 2018.

For periods prior to the adoption of Topic 842, leases are accounted for under Topic 840.

Under Topic 840, rent expense for the Company’s operating leases, which generally have escalating rents over the term of the lease, is recorded on a straight-line basis over the expected lease term.

The lease term begins when the Company has the right to control the use of the leased property, which is typically before rent payments are due under the terms of the lease.

Rent expense is included in occupancy and other operating expenses on the consolidated statements of operations.

The difference between rent expense and rent paid is recorded as deferred rent, which is included in current liabilities and other noncurrent liabilities in the accompanying consolidated balance sheets.

Percentage rent expenses are recorded based on estimated sales or gross margin for respective restaurants over the contingency period.

Any leasehold improvements that are funded by lessor incentives under operating leases are recorded as leasehold improvements and amortized over the expected lease term.

Such incentives are also recorded as deferred rent and amortized as reductions to rent expense over the expected lease term.

Gain on Recovery of Insurance Proceeds, Lost Profits

During the year ended December 30, 2020, the Company received business interruption insurance proceeds of $ 2.0 million, primarily related to restaurant sales losses and expenses related to the COVID-19 pandemic and resulting dining room closures.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Recovery of Securities Class Action Legal Expense and Other Insurance Claims

During fiscal 2020, the Company received insurance proceeds of $ 0.1 million related to a property claim.

During 2019 and 2018, the Company received insurance proceeds of $ 10.0 million and $ 8.4 million, respectively, related to the reimbursement of certain legal expenses paid in prior years for the defense of securities lawsuits.

See Note 13 “Commitments and Contingencies—Legal Matters.”

Loss on Disposition of Restaurants

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These sales resulted in cash proceeds of $ 4.8 million and a net loss on sale of restaurants of $ 5.1 million for the year ended December 25, 2019.

These restaurants are now included in the total number of franchised El Pollo Loco restaurants.

Recovery of Securities Class Action Legal Expense

During fiscal 2019 , 2018 and 2017 , the Company received insurance proceeds of $10.0 million , $8.4 million and $1.7 million , respectively, related to the reimbursement of certain legal expenses paid in prior years for the defense of securities lawsuits.

See "Note 13.

Commitments and Contingencies—Legal Matters."

Since the date of their sale, these restaurants are now included in the total number of franchised El Pollo Loco restaurants.

Derivative Financial Instruments

The Company uses an interest rate swap, a derivative instrument, to hedge interest rate risk and are not used for trading purposes.

The Company uses an interest rate swap, a derivative instrument, to hedge interest rate risk and is not used for trading purposes.

The derivative contract is entered into with financial institutions.

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The derivative instrument qualifies as a hedging instrument in a qualifying cash flow hedge relationship, the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive income (“AOCI”) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.

For any derivative instruments not

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

designated as hedging instruments, the gain or loss will be recognized in earnings immediately.

For any derivative instruments not designated as hedging instruments, the gain or loss will be recognized in earnings immediately.

If a derivative previously designated as a hedge is terminated, or no longer meets the qualifications for hedge accounting, any balances in AOCI will be reclassified into earnings immediately.

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If after evaluating all of the positive and negative evidence, a conclusion is made that it is more likely than not that some portion or all of the net deferred tax assets will not be recovered, a valuation allowance is provided by a charge to tax expense to reserve the portion of the deferred tax assets which are not expected to be realized.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company reviews its filing positions for all open tax years in all U.S.

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The Company’s policy is to recognize interest or penalties related to income tax matters in income tax expense.

The Company had no accrual for interest or penalties at December 25, 2019 or December 26, 2018 , and did not recognize interest or penalties during the years ended December 25, 2019 , December 26, 2018 , and December 27, 2017 , since there were no material unrecognized tax benefits.

The Company had no accrual for interest or penalties at December 30, 2020 or December 25, 2019.

During fiscal 2020 the Company recognized interest of $ 0.1 million related to the Notice of Proposed Adjustment (“NOPA”), discussed below.

The Company did not recognize any interest or penalties during fiscal 2019 or fiscal 2018.

During fiscal 2020, fiscal 2019 and fiscal 2018, there were no material unrecognized tax benefits.

Management believes no significant change to the amount of unrecognized tax benefits will occur within the next twelve months.

On July 30, 2014, the Company entered into an income tax receivable agreement ("TRA").

On July 30, 2014, the Company entered into a TRA.

The TRA calls for the Company to pay to its pre-IPO stockholders 85 % of the savings in cash that the Company realizes in its taxes as a result of utilizing its net operating losses and other tax attributes attributable to preceding periods.

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In fiscal 2020, 2019 and 2018, we paid $ 5.2 million, $ 5.8 million and $ 7.3 million, respectively, to our pre-IPO stockholders under the TRA.

On March 27, 2020, President Trump signed into a law a stimulus package, the Coronavirus Aid, Relief and Economic Security ("CARES") Act, which contains several tax provisions and deferral of employer Social Security taxes that are otherwise owed for wage payments.

The Company has taken advantage of provisions available under the CARES Act.

Specifically, the Company has deferred payment of employer Social Security taxes that are otherwise owed for wage payments and are included within other noncurrent liabilities.

See Note 8 “Other Noncurrent Liabilities” for details of these balances.

The tax provisions include a correction of a previous drafting error related to quality improvement property ("QIP") and immediate refundability of all remaining alternative minimum tax ("AMT") credits.

The new provisions did not have a material impact on the Company’s consolidated financial statements.

During the year ended December 30, 2020, the Company received a NOPA for the years ended December 27, 2017 and December 28, 2016, related to the Company’s methodology regarding its ordering of utilization of AMT net operating losses ("NOL”).

This resulted in payment of $ 0.4 million, and the audit is closed.

As a result of the CARES Act, discussed above, this amount is immediately refundable upon filing of a Form 1139, which the Company filed during the year ended December 30, 2020 and recognized a receivable, included in accounts and other receivables within the consolidated balance sheet as of December 30, 2020.

Fair Value Measurements

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and model-derived valuations whose inputs or significant value drivers are observable.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unobservable inputs used when little or no market data is available.

During the year ended December 25, 2019, the Company entered into an interest rate swap, which is required to be measured at fair value on a recurring basis.

The fair value was determined based on Level 2 inputs, which include valuation models, as

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

reported by the Company's counterparty.

The fair value was determined based on Level 2 inputs, which include valuation models, as reported by the Company’s counterparty.

These valuation models use a discounted cash flow analysis on the cash flows of the derivative based on the terms of the contract and the forward yield curves adjusted for our credit risk.

The key inputs for the valuation models are observable market prices, discount rates, and forward yield curves.

Long-Term Debt" for further discussion regarding our interest rate swaps.

See Note 6 “Long-Term Debt” for further discussion regarding the Company’s interest rate swaps.

The following table presents fair value for the interest rate swap at December 30, 2020 (in thousands):

Fair Value Measurements Using

Other non-current liabilities - Interest rate swap

The following table presents fair value for the interest rate swap at December 25, 2019 (in thousands):

Fair Value Measurements Using

Other assets - Interest rate swap

The Company had no assets or liabilities required to be measured at fair value on a recurring basis as of December 26, 2018 .

Certain assets and liabilities are measured at fair value on a nonrecurring basis.

In other words, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment).

The following non-financial instruments were measured at fair value, on a nonrecurring basis, as of and for the year ended December 25, 2019 (in thousands):

Fair Value Measurements Using

The following non-financial instruments were measured at fair value, on a nonrecurring basis, as of and for the year ended December 30, 2020, reflecting certain property and equipment and ROU assets, for which an impairment loss was recognized during the corresponding periods, as discussed above under Impairment of Long-Lived Assets and ROU Assets.

(in thousands):

Impairment Losses

Certain ROU assets, net

Certain property and equipment, net

The following non-financial instruments were measured at fair value, on a nonrecurring basis, as of and for the year ended December 26, 2018 (in thousands):

Fair Value Measurements Using

Certain ROU assets, net

The following non-financial instruments were measured at fair value, on a nonrecurring basis, as of and for the year ended December 25, 2019, reflecting certain property and equipment and ROU assets for which an impairment loss was recognized during the corresponding periods, as discussed above under "Impairment of Long-Lived Assets and ROU Assets"

(in thousands):

Impairment Losses

Certain property and equipment, net

The following non-financial instruments were measured at fair value, on a nonrecurring basis, as of and for the year ended December 27, 2017 (in thousands):

Certain ROU assets, net

The following non-financial instruments were measured at fair value, on a nonrecurring basis, as of and for the year ended December 26, 2018, reflecting certain property and equipment for which an impairment loss was recognized during the corresponding periods, as discussed above under "Impairment of Long-Lived Assets and ROU Assets"

(in thousands):

Fair Value Measurements Using

Impairment Losses

Certain property and equipment, net

During fiscal 2019 , the Company recorded $3.6 million of expenses related to the impairment of assets primarily related to the carrying value of the ROU assets of four restaurants sold to franchisees and the long-lived assets of one restaurant in California.

In fiscal 2018 , the Company recorded $5.1 million in impairment charges primarily related to the carrying value of the long-lived assets of four restaurants in Arizona, California and Texas, as well as the strategic decision to close two restaurants in Texas.

In fiscal 2017, the Company recorded $32.6 million in impairment charges that was primarily related to the carrying value of the long-lived assets of 23 restaurants in Arizona, California and Texas.

The fair value measurements used in these impairment evaluations were based on discounted cash flow estimates using unobservable Level 3 inputs, based on market assumptions.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fair Value of Financial Instruments

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Stock-Based Compensation

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Accounting literature requires the recognition of compensation expense using a fair-value based method for costs related to all share-based payments including stock options and restricted stock issued under the Company’s employee stock plans.

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Recently Adopted Accounting Pronouncements

In August 2018, the SEC adopted the final rule under SEC Release No.

33-10532, “Disclosure Update and Simplification, ” amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded.

In addition, the amendments expanded the disclosure requirements on the analysis of stockholders' equity for interim financial statements.

Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement.

The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed.

The Company adopted SEC Release No.

33-10532 as of December 27, 2018.

In June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2018-07, “Compensation—Stock Compensation (Topic 718):

Improvements to Nonemployee Share-Based Payment Accounting”, (“ASU 2018-07”) which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees.

ASU 2018-07 is effective for financial statements issued for annual periods beginning after December 15, 2018, and for the interim periods therein.

The Company adopted ASU 2018-07 as of December 27, 2018 and it did not have a significant impact on the Company’s consolidated financial position or results of operations.

In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging," which refines and expands existing hedge accounting guidance.

The Company adopted ASU 2017-12 as of December 27, 2018.

The adoption of this standard did not have a material impact on the consolidated financial statements.

In January 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No.

2021-01, "Reference Rate Reform (Topic 848):

Scope” which clarifies the FASB’s recent rate reform guidance in Topic 848, Reference Rate Reform, that optional expedients and exceptions therein for contract modification and hedge accounting apply to derivatives that are affected by the discontinuing transition.

ASU 2021-01 is effective immediately.

Entities may choose to apply the amendments retrospectively as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively to new modifications from any date within an interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued.

The Company adopted this ASU on January 7, 2021.

The adoption of ASU 2021-01 did not have a significant impact on the Company’s consolidated financial position or results of operations.

In March 2020, the FASB issued ASU No.

2020-04, "Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting,"

which provides optional guidance, for a limited time, to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting.

ASU 2020-04 is effective for a limited time, from March 12, 2020, through December 31, 2022.

The Company adopted this ASU on March 12, 2020.

The adoption of ASU 2020-04 did not have a significant impact on the Company’s consolidated financial position or results of operations.

In February 2018, the FASB issued ASU No.

2016-02, “Leases,” (“Topic 842”).

Topic 842 establishes a right-of-use model that requires a lessee to record a ROU Asset and a lease liability on the balance sheet for all leases with terms longer than 12 months.

Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.

The new standard was effective for fiscal years beginning after December 15, 2018, including interim periods therein.

In July 2018, the FASB issued ASU No.

2018-11, which provides an alternative transition method that allows entities to apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

The Company adopted Topic 842, and all related ASU’s as of December 27, 2018.

See “Changes in Accounting Policies” below for further details.

2018-13, "Fair Value Measurement (Topic 820):

Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement,"

which finalizes proposed ASU No.

2015-350, and of the same name as part of its disclosure framework project, which focuses on improving the effectiveness of disclosures in the notes to financial statements by facilitating clear communication of the information required by U.S.

GAAP that is most important to users of each entity’s financial statements.

The Company adopted ASU No.

2018-13 during the first quarter of 2020.

The adoption of ASU 2018-13 did not have a significant impact on the Company’s consolidated financial position or results of operations.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In June 2016, the FASB issued ASU No.

2016-13, "Financial Instruments—Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments,"

which finalizes proposed ASU No.

2012-260 "Financial Instruments—Credit Losses (Subtopic 825-15)"

and adds Topic 326 "Financial Instruments—Credit Losses", to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

The Company adopted ASU No.

2016-13 during the first quarter of 2020.

The adoption of ASU 2016-03 did not have a significant impact on the Company’s consolidated financial position or results of operations.

Recent Accounting Pronouncements Not Yet Adopted

In October 2020, the FASB issued ASU No.

2020-10, "Codification Improvements,"

which improve the consistency of the codification by including all disclosure guidance in the appropriate Disclosure Section (Section 50).

ASU 2020-10 is effective for annual periods beginning after December 15, 2020, and for interim periods within annual periods beginning after December 15, 2022.

The adoption of ASU 2020-10 is not expected to have a significant impact on the Company’s consolidated financial position or results of operations.

In December 2019, the FASB issued ASU No.

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The adoption of ASU 2019-12 is not expected to have a significant impact on the Company’s consolidated financial position or results of operations.

Changes in Accounting Policies

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Except for the changes below, the Company has consistently applied the accounting policies to all periods presented in these consolidated financial statements.

The Company adopted Topic 842 with a date of initial application of December 27, 2018.

As a result, the Company has changed its accounting policy for leases as detailed below.

The Company’s operations utilize property, facilities, equipment and vehicles, the majority of which are operating leases.

Additionally, the Company has various contracts with vendors that have been determined to contain an embedded lease in accordance with Topic 842.

As of the date of adoption, the Company recognized a ROU Asset and lease liability equal to the present value of these leases within its consolidated balance sheet for any leases with terms longer than 12 months.

The Company also has one finance lease, subleases facilities to certain franchises and is the lessor for certain property, facilities and equipment owned by the Company.

The adoption of Topic 842 did not have an impact on our current accounting policies for these items.

Furthermore, the adoption of this standard did not have any impact on the Company’s consolidated statement of operations or the consolidated statement of cash flows.

The Company applied Topic 842 using the effective date method, which allowed the Company to apply the standard as of the adoption date, and to recognize the cumulative effect of initially applying Topic 842 as an adjustment to retained earnings at December 27, 2018, if applicable.

Therefore, the comparative information has not been adjusted and continues to be reported under Topic 840.

However, the adoption of Topic 842 did not have any impact to its retained earnings.

Additionally, the Company elected to apply the package of practical expedients, which allowed for carryforwards of 1) historical lease classifications, 2) determination of whether a contract contains a lease under the new definition of a lease and 3) whether previously capitalized initial direct costs qualify for capitalization.

Leases," for further details.

Franchise Development Option Agreement with Related Party

On July 11, 2014, EPL and LLC entered into a Franchise Development Option Agreement relating to development of our restaurants in the New York–Newark, NY–NJ–CT–PA Combined Statistical Area (the “Territory”).

On July 11, 2014, EPL and LLC entered into a Franchise Development Option Agreement relating to development of restaurants in the New York–Newark, NY–NJ–CT–PA Combined Statistical Area (the “Territory”).

EPL granted LLC the exclusive option to develop and open 15 restaurants in the Territory over five years (the “Initial Option”), and, provided that the Initial Option is exercised, the exclusive option to develop and open up to an additional 100 restaurants in the Territory over ten years .

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LLC may only exercise the Initial Option if EPL first determines to begin development of company-operated restaurants in the Territory or support the development of the Territory.

We have no current intention to begin development in the Territory and as of December 25, 2019 , no stores have been opened in the Territory.

The Company has no current intention to begin development in the Territory and as of December 30, 2020, no stores have been opened in the Territory.

PROPERTY AND EQUIPMENT

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Depreciation and amortization expense was $ 16.9 million, $ 17.9 million and $ 17.8 million for the years ended December 30, 2020, December 25, 2019, and December 26, 2018, respectively.

Based on the Company’s review of its long-lived assets for impairment, the Company recorded non-cash impairment charges of $0.3 million , $5.1 million and $32.6 million for the years ended December 25, 2019 , December 26, 2018 , and December 27, 2017 , respectively.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Based on the Company’s review of its long-lived assets for impairment, the Company recorded non-cash impairment charges of $ 3.0 million, $ 0.3 million and $ 5.1 million for the years ended December 30, 2020, December 25, 2019, and December 26, 2018, respectively.

D epending on the severity and longevity of the COVID-19 pandemic and the extent and duration of any economic downturn , the Company’s financial performance could be further impacted and it is possible that material impairments could be identified in future periods.

See “Impairment of Long-Lived Assets and ROU Assets” in Note 2, “Summary of Significant Accounting Policies” for additional information.

TRADEMARKS, OTHER INTANGIBLE ASSETS AND LIABILITIES

Domestic trademarks consist of the following (in thousands):

December 25, 2019

December 26, 2018

Accumulated impairment charges

Trademarks, net

Other intangible assets subject to amortization consist of the following (in thousands):

December 25, 2019

December 26, 2018

Favorable leasehold interest

accumulated amortization

Total favorable leasehold interest, net

Unfavorable leasehold interest liability

accumulated amortization

Unfavorable leasehold interest liability, net

Upon the adoption of Topic 842 the favorable and unfavorable leasehold interest balances were netted with the ROU Asset for the respective operating lease.

See “Change in accounting policies" in Note 2 and "Note 5.

Leases” for further details of the Company’s adoption of Topic 842.

The aggregate amortization expense for the years ended December 26, 2018 , and December 27, 2017 was less than $0.1 million and $0.1 million , respectively.

Adoption of Topic 842 "Leases"

On December 27, 2018, the Company adopted Topic 842, using the effective date method, recognizing and measuring all leases that existed as of December 27, 2018.

The Company recorded a cumulative-effect adjustment as of December 27, 2018.

Comparative periods are presented in accordance with ASC Topic 840 and do not include any retrospective adjustments to comparative periods to reflect the adoption of Topic 842.

All leases that either (1) commenced, or (2) were modified or re-measured after December 27, 2018 are accounted for under Topic 842.

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Additionally, the Company has various contracts with vendors that have been determined to contain an embedded lease in accordance with Topic 842.

As of December 25, 2019 , the Company had one lease that it had entered into, but had not yet commenced.

As of December 30, 2020, the Company had no leases that it had entered into, but had not yet commenced.

The Company does not have control of the property until lease commencement.

1 unchanged sentence

The majority of the Company’s building and facilities leases are classified as operating leases;

however, the Company currently has one facility lease that is classified as a finance lease.

however, the Company currently has two facility and two equipment leases that are classified as finance leases.

1 unchanged sentence

For all leases, the Company also reimburses the landlord for non-lease components, or items that are not considered components of a contract, such as common area maintenance, property tax and insurance costs.

While the Company

While the Company determined not to separate lease and non-lease components, these payments are based on actual costs, making them variable consideration and excluding them from the calculations of the ROU asset and lease liability.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

determined not to separate lease and non-lease components, these payments are based on actual costs, making them variable consideration and excluding them from the calculations of the ROU Asset and lease liability.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The initial terms of land and restaurant building leases are generally 20 years , exclusive of options to renew.

3 unchanged sentences

As a result of the reassessment, an additional $ 3.9 million of ROU assets and lease liabilities for the year ended December 30, 2020 were recognized, and will be amortized over the new lease term.

The reassessment did not have any impact on the original lease classification.

During the year ended December 25, 2019, the Company reassessed the lease terms on 11 restaurants due to certain triggering events, such as the addition of significant leasehold improvements, the decision to terminate a lease, or the decision to renew.

As a result of the reassessment, an additional $ 4.7 million of ROU assets and lease liabilities for the year ended December 25, 2019 were recognized, and will be amortized over the new lease term.

The reassessments did not have any impact on the original lease classification.

Additionally, as the Company adopted all practical expedients available under Topic 842, no reallocation between lease and non-lease components was necessary.

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The Company does not have any related party leases.

During fiscal 2019 , we determined that the carrying value of ROU assets at certain restaurants was not recoverable.

During fiscal 2020, the Company determined that the carrying value of ROU assets at one restaurant were not recoverable.

As a result, we recorded a $ 0.5 million impairment expense for the year ended December 30, 2020 related to one restaurant in Texas, which was sold to a franchisee in the prior year.

During fiscal 2019, the Company determined that the carrying value of ROU assets at certain restaurants was not recoverable.

As a result, we recorded a $ 3.2 million impairment expense for the year ended December 25, 2019.

10 unchanged sentences

For all other leases, the Company uses the discount rate implicit in the lease, or the Company’s incremental borrowing rate.

As the Company has adopted the practical expedient not to separate lease and non-lease components, no significant assumptions or judgments were necessary in allocating consideration between these components, for all classes of underlying assets.

The following table presents the Company’s total lease cost at December 25, 2019 , disaggregated by underlying asset (in thousands):

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Property Leases

Equipment Leases

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the Company’s total lease cost, disaggregated by underlying asset (in thousands):

December 30, 2020

December 25, 2019

Finance lease cost:

6 unchanged sentences

Total lease cost

Prior to the adoption of Topic 842, the Company had a net rent expense of $ 23.7 million net of sublease income of $ 2.2 million for the year ended December 26, 2018.

The following table presents the Company’s total lease cost on the consolidated statement of operations (in thousands):

December 30, 2020

December 25, 2019

Lease cost – Occupancy and other operating expenses

3 unchanged sentences

Lease cost - Closed-store reserve

Total lease cost, net

During the year ended December 25, 2019 , the Company had the following cash and non-cash activities associated with its leases (in thousands):

Total lease cost

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During the year ended December 30, 2020 and December 25, 2019, the Company had the following cash and non-cash activities associated with its leases (in thousands):

December 30, 2020

Property Leases

Equipment Leases

December 25, 2019

Cash paid for amounts included in the measurement of lease liabilities

4 unchanged sentences

Operating lease ROU assets

Finance lease ROU assets obtained in exchange for lease liabilities:

Finance lease ROU assets

Derecognition of ROU assets due to terminations, impairment or modifications

8 unchanged sentences

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Information regarding the Company’s minimum future lease obligations at December 30, 2020 is as follows (in thousands):

Finance Leases

Operating Leases

5 unchanged sentences

December 31, 2025

imputed interest (3.96% to 11.1%)

Present value of capital lease obligations

current maturities

Noncurrent portion

Information regarding the Company’s minimum future lease obligations at December 26, 2018 is as follows, under ASC 840 (in thousands):

Capital Leases

Operating Leases

For the Years Ending

December 25, 2019

December 30, 2020

December 29, 2021

December 28, 2022

December 27, 2023

imputed interest (11.0% to 11.1%)

Present value of capital lease obligations

imputed interest ( 1.68 % - 4.29 %)

Present value of lease obligations

current maturities

3 unchanged sentences

The Company has recognized these lease payments in its consolidated statement of operations on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred.

In April 2020, the FASB issued guidance allowing entities to make a policy election whether to account for lease concessions related to the COVID-19 pandemic as lease modifications.

The election applies to any lessor-provided lease concession related to the impact of the COVID-19 pandemic, provided the concession does not result in a substantial increase in the rights of the lessor or in the obligations of the lessee.

During the fiscal year ended December 30, 2020, the Company received non-substantial concessions from certain landlords in the form of rent deferrals and abatements.

The Company elected to not account for these rent concessions as lease modifications.

The rent concessions are recorded as part of other accrued expenses.

The recognition of rent concessions did not have a material impact on our consolidated financial statements as of December 30, 2020.

The Company is a lessor for certain property, facilities and equipment owned by the Company and leased to others, principally franchisees, under non-cancelable leases with initial terms ranging from 3 to 20 years .

4 unchanged sentences

Additionally, there are no related party leases.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

For each of the years ended December 25, 2019 , December 26, 2018 and December 27, 2017 , the Company received $0.5 million of lease income from company-owned locations .

For the year ended December 30, 2020, the Company received $ 0.6 million of lease income from company-owned locations.

For both years ended December 25, 2019 and December 26, 2018, the Company received $ 0.5 million of lease income from company-owned locations .

LONG-TERM DEBT

On July 13, 2018 , the Company refinanced the 2014 Revolver, pursuant to a credit agreement (the "2018 Credit Agreement") among EPL, as borrower, and the Company and Intermediate, as guarantors, Bank of America, N.A., as administrative agent, swingline lender, and letter of credit issuer, the lenders party thereto, and the other parties thereto, which provides for the $150.0 million five -year 2018 Revolver.

On July 13, 2018, the Company refinanced the 2014 Revolver, pursuant to a credit agreement (the "2018 Credit Agreement") among EPL, as borrower, and the Company and Intermediate, as guarantors, Bank of America, N.A., as administrative agent, swingline lender, and letter of credit issuer, the lenders party thereto, and the other parties thereto,

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

which provides for the $ 150.0 million five-year 2018 Revolver.

The 2018 Revolver includes a sub limit of $ 15.0 million for letters of credit and a sub limit of $ 15.0 million for swingline loans.

1 unchanged sentence

The obligations of the Company, EPL and Intermediate under the 2018 Credit Agreement and related loan documents are secured by a first priority lien on substantially all of their respective assets.

Under the 2018 Revolver, Holdings may not make certain payments such as cash dividends, except that it may, inter alia, (i) pay up to $1.0 million per year to repurchase or redeem qualified equity interests of Holdings held by past or present officers, directors, or employees (or their estates) of the Company upon death, disability, or termination of employment, (ii) pay under its income tax receivable agreement (the “TRA”), and, (iii) so long as no default or event of default has occurred and is continuing, (a) make non-cash repurchases of equity interests in connection with the exercise of stock options by directors, officers and management, provided that those equity interests represent a portion of the consideration of the exercise price of those stock options, (b) pay up to $0.5 million in any 12 month consecutive period to redeem, repurchase or otherwise acquire equity interests of any subsidiary that is not a wholly-owned subsidiary from any holder of equity interest in such subsidiary, (c) pay up to $2.5 million per year pursuant to stock option plans, employment agreements, or incentive plans, (d) make up to $5.0 million in other restricted payments per year, and (e) make other restricted payments, subject to its compliance, on a pro forma basis, with (x) a lease-adjusted consolidated leverage ratio not to exceed 4.25 times and (y) the financial covenants applicable to the 2018 Revolver.

Under the 2018 Revolver, Holdings may not make certain payments such as cash dividends, except that it may, inter alia, (i) pay up to $ 1.0 million per year to repurchase or redeem qualified equity interests of Holdings held by past or present officers, directors, or employees (or their estates) of the Company upon death, disability, or termination of employment, (ii) pay under its TRA, and (iii) so long as no default or event of default has occurred and is continuing, (a) make non-cash repurchases of equity interests in connection with the exercise of stock options by directors, officers and management, provided that those equity interests represent a portion of the consideration of the exercise price of those stock options, (b) pay up to $ 0.5 million in any 12 month consecutive period to redeem, repurchase or otherwise acquire equity interests of any subsidiary that is not a wholly-owned subsidiary from any holder of equity interest in such subsidiary, (c) pay up to $ 2.5 million per year pursuant to stock option plans, employment agreements, or incentive plans, (d) make up to $ 5.0 million in other restricted payments per year, and (e) make other restricted payments, subject to its compliance, on a pro forma basis, with (x) a lease-adjusted consolidated leverage ratio not to exceed 4.25 times and (y) the financial covenants applicable to the 2018 Revolver.

Borrowings under the 2018 Revolver (other than any swingline loans) bear interest, at the borrower’s option, at rates based upon either LIBOR or a base rate, plus, for each rate, a margin determined in accordance with a lease-adjusted consolidated leverage ratio-based pricing grid.

2 unchanged sentences

For borrowings under the 2018 Revolver during fiscal 2020, the interest rate range was 1.6 % to 3.3 %.

For borrowings under the 2014 Revolver and the 2018 Revolver during fiscal 2018 , the interest rate range was 3.3% to 4.0% .

For borrowings under the 2018 Revolver during fiscal 2019, the interest rate range was 3.2 % to 6.0 %.

The interest rate under the 2018 Revolver was 1.6 % at December 30, 2020 and 3.2 % under the 2018 Revolver at December 25, 2019.

3 unchanged sentences

The Company was in compliance with all such covenants at December 30, 2020.

However, depending on the severity and longevity of the COVID-19 pandemic and the extent and duration of any economic downturn , the Company’s financial performance and liquidity could be further impacted and could impact the Company’s ability to comply with certain financial covenants required in the 2018 Credit Agreement, specifically the lease-adjusted coverage ratio and fixed-charge coverage ratio.

At December 30, 2020, $ 8.4 million of letters of credit and $ 62.8 million of the revolving line of credit were outstanding.

The amount available under the revolving line of credit was $ 78.8 million at December 30, 2020.

At December 25, 2019, $ 8.4 million of letters of credit and $ 97.0 million of the revolving line of credit were outstanding.

The amount available under the revolving line of credit was $ 44.6 million at December 25, 2019.

The 2018 Revolver and 2018 Credit Agreement will mature on July 13, 2023.

During the year ended December 30, 2020, the Company paid down $ 34.2 million, net of borrowings of $ 59.5 million on the Company’s 2018 Revolver.

During the year ended December 25, 2019, the Company borrowed $ 23.0 million net of pay downs of $ 19.0 million on the Company’s 2018 Revolver, primarily to fund settlement payments.

See Note 13 for further details regarding the settlement payments.

During the year ended December 26, 2018 , the Company elected to pay down $20.0 million , net of new borrowings of $13.0 million during the year, of outstanding borrowings on the Company’s 2014 Revolver, respectively.

There are no required principal payments prior to maturity for the 2018 Revolver.

1 unchanged sentence

During the year ended December 25, 2019, the Company entered into a variable-to-fixed interest rate swap agreement with a notional amount of $ 40.0 million that matures in June 2023.

The objective of the interest rate swap is to reduce the Company's exposure to interest rate risk for a portion of its variable-rate interest payments on its borrowings under the 2018 Revolver.

Under the terms of the swap agreement, the variable LIBOR-based component of interest payments are converted to a fixed rate

The objective of the interest rate swap is to reduce the Company’s exposure to interest rate risk for a portion of its variable-rate interest payments on its borrowings under

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The interest rate swap is designated as a cash flow hedge, as the changes in the future cash flows of the swap are expected to offset changes in expected future interest payments on the related variable-rate debt, in accordance with ASC 815, Derivatives and Hedging.

There were no interest rate swaps outstanding as of December 26, 2018 .

The changes in the fair value of the interest rate swap are not included in earnings, but are included in other comprehensive income (“OCI”).

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

the 2018 Revolver.

Under the terms of the swap agreement, the variable LIBOR-based component of interest payments was converted to a fixed rate of 1.31 % , plus applicable margin, which is currently 1.5 % .

The interest rate swap was designated as a cash flow hedge, as the changes in the future cash flows of the swap were expected to offset changes in expected future interest payments on the related variable-rate debt, in accordance with ASC 815 “Derivatives and Hedging.”

The changes in the fair value of the interest rate swap are not included in earnings, but are included in other comprehensive (loss) income (“OCI”).

These changes in fair value are subsequently reclassified into net earnings as a component of interest expense as the hedged interest payments are made on the variable rate borrowings.

For the year ended December 25, 2019 , the swap was a highly effective cash flow hedge.

For the year ended December 30, 2020 and December 25, 2019, the swap was a highly effective cash flow hedge.

As of December 30, 2020, the estimated net gain included in AOCI related to the Company’s cash flow hedge that will be reclassified into earnings in the next 12 months is $ 0.5 million, based on current LIBOR interest rates.

1 unchanged sentence

December 30, 2020

December 25, 2019

Other assets - Interest rate swap

Other liabilities - Interest rate swap

The following table summarizes the effect of the Company’s cash flow hedge accounting on the consolidated statements of operations (in thousands):

2 unchanged sentences

Interest expense on hedged portion of debt

Interest income on interest rate swap

Interest expense (income) on interest rate swap

Interest expense on debt and derivatives, net

The following table summarizes the effect of the Company's cash flow hedge accounting on AOCI for the years ended December 25, 2019 and December 26, 2018 (in thousands):

Gain Recognized in OCI

(Gain) Reclassified from AOCI into Interest expense

The following table summarizes the effect of the Company’s cash flow hedge accounting on AOCI for the years ended December 30, 2020, December 25, 2019 and December 26, 2018 (in thousands):

Loss (Gain) Reclassified from

Net (Loss) Gain Recognized in OCI

AOCI into Interest expense

December 30, 2020

2 unchanged sentences

December 30, 2020

December 25, 2019

December 26, 2018

Interest rate swap

See Note 2 for the fair value of the Company's derivative asset.

See Note 2 “Summary of Significant Accounting Policies” for the fair value of the Company’s derivative asset.

OTHER ACCRUED EXPENSES AND CURRENT LIABILITIES

3 unchanged sentences

Accrued sales and property taxes

Accrued legal settlements and professional fees

Gift card liability

Accrued legal settlements and professional fees

Deferred franchise and development fees

Current portion of lease payment deferrals

Total other accrued expenses and current liabilities

(1) The Company previously included the short-term portion deferred rent, tenant improvement allowance and lease escalation liabilities within “Other accrued expenses and current liabilities.” Upon its adoption of Topic 842, these balances were netted with the ROU Asset for the respective operating lease.

See “Change in accounting policies" in Note 2 and Note 5 for further details of the Company’s adoption of Topic 842.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

OTHER NONCURRENT LIABILITIES

2 unchanged sentences

December 25, 2019

Deferred rent (1)

Deferred franchise and development fees

Derivative liability

Employer social security tax deferral

Total other noncurrent liabilities

(1) In accordance with the Company’s adoption of Topic 842 “Leases” all deferred rent balances are now included with in the Company’s ROU Asset.

Refer to “Changes in accounting policies” in Note 2 and Note 5 for further details of the Company’s adoption of Topic 842.

(2) The Company previously included the non-current portion tenant improvement allowance and lease escalation liabilities within “Other noncurrent liabilities.” Upon its adoption of Topic 842, these balances were netted with the ROU Asset for the respective operating lease.

See “Changes in accounting policies” in Note 2 and Note 5 for further details of the Company’s adoption of Topic 842.

The provision (benefit) for income taxes is based on the following components (in thousands):

For the Years Ended

December 25, 2019

December 26, 2018

December 27, 2017

Current income taxes:

2 unchanged sentences

Total deferred

Adjustment to deferred taxes for tax rate change

Tax provision (benefit) for income taxes

On December 22, 2017 the U.S.

government enacted the Tax Cuts and Jobs Act (the "Tax Act").

The Tax Act reduces the corporate tax rate to from 35% to 21% , effective for tax years beginning January 1, 2018.

The Company is subject to the provisions of ASC 740, Income Taxes, which requires that the effect on deferred tax assets and liabilities of a change in tax rates be recognized in the period the tax rate change was enacted.

The enacted reduction in the corporate federal income tax rate resulted in a re-measurement of the Company’s net deferred tax assets and liabilities with a one-time, non-cash increase to income tax benefit.

Consequently, we recorded a decrease related to deferred tax assets and deferred tax liabilities of $12.1

On March 27, 2020, President Trump signed into a law a stimulus package, CARES Act, which contains several tax provisions and deferral of employer Social Security taxes that are otherwise owed for wage payments.

The tax provisions include a correction of a previous drafting error related to QIP and immediate refundability of all remaining AMT credits.

The new provisions did not have a material impact on our consolidated financial statements.

This resulted in payment of $ 0.4 million, and the audit is closed.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

million and $13.5 million , respectively, with a net benefit to deferred income tax expense of $1.4 million for the year ended December 27, 2017 .

In addition, under the new tax law, the corporate alternative minimum tax (“AMT”) is repealed effective for tax years beginning January 1, 2018.

For tax years beginning in 2018, 2019 and 2020, to the extent AMT credit carryovers exceed regular tax liability, 50% of the excess of AMT credit carryovers would be refundable.

Any remaining AMT credits would be fully refundable in 2021.

The provision for income taxes differs from the amount computed by applying the federal income tax rate of 21.0% for both fiscal 2019 and 2018 and 35.0% for fiscal 2017 as follows:

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The provision for income taxes differs from the amount computed by applying the federal income tax rate of 21.0 % for fiscal 2020, 2019 and 2018 as follows:

For the Years Ended

December 25, 2019

December 26, 2018

December 27, 2017

Statutory federal income tax rate applied to

earnings before income taxes and extraordinary items

Statutory federal income tax rate applied to earnings before income taxes and extraordinary items

State tax benefit (net of federal benefit)

Change in valuation allowance

Revaluation of deferred taxes

Stock option exercises

As of December 30, 2020, the Company had no federal and less than $ 0.1 million state net operating loss ( “ NOL ” ) carryforwards.

These State NOLs expire beginning 2028.

The Company also has state enterprise zone credits of approximately $ 10.2 million, which expire in 2023, and federal Work Opportunity Credits of approximately $ 0.5 million, which will start expiring in 2039.

The utilization of NOL carryforwards may be subject to limitation under section 382 of the Internal Revenue Code of 1986 (the “ Code ” ) and similar state law provisions.

Deferred income tax assets and liabilities are recorded for differences between the financial statement and tax basis of the assets and liabilities that will result in taxable or deductible amounts in the future based on enacted laws and rates applicable to the periods in which the differences are expected to affect taxable income.

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The TRA charge expense (benefit) is a permanent add-back to the Company’s taxable income.

TRA resulted in approximately $0.1 million of expense in fiscal 2019 as a result of changes to future forecasted results, $0.8 million of benefit in fiscal 2018 as a result of changes to future forecasted results and timing of deductibility of certain temporary differences including the current year settlement accrual and $5.6 million benefit in fiscal 2017 as a result of reduction in the federal corporate income tax rate related to tax reform.

TRA resulted in $ 0.1 million of expense in fiscal 2020 as a result of changes to future forecasted results and deduction on 2018 legal settlement accrual, $ 0.1 million of expense in fiscal 2019 as a result of changes to future forecasted results, $ 0.8 million of benefit in fiscal 2018 as a result of changes to future forecasted results and timing of deductibility of certain temporary differences including the current year settlement accrual and $ 5.6 million benefit in fiscal 2017 as a result of reduction in the federal corporate income tax rate related to tax reform.

In fiscal 2020, we paid $ 5.2 million to our pre-IPO stockholders under the TRA.

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EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company’s deferred tax assets and liabilities as of December 30, 2020 and December 25, 2019 are summarized below.

The balances reflect the revaluation for the reduction in the Federal corporate rate to 21.0% .

December 25, 2019

December 26, 2018

Deferred assets:

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Accrued legal

Deferred rent

Accrued workers’ compensation

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Deferred tax liabilities

Net deferred tax asset

The net deferred tax asset amounts above as of December 25, 2019 and December 26, 2018 have been classified in the accompanying consolidated balance sheets as noncurrent assets.

As of December 25, 2019 , the Company has federal and state NOL carryforwards of approximately $8.6 million and less than $0.1 million , respectively, which expire beginning in 2032 and 2027, respectively.

The Company also has state enterprise zone credits of approximately $10.6 million , which expire in 2023 , and federal Work Opportunity Credits of approximately $1.7 million , which will expire in 2038 .

The utilization of NOL carryforwards may be subject to limitation under section 382 of the Internal Revenue Code of 1986 (the “Code”) and similar state law provisions.

As of December 25, 2019 , December 26, 2018 , and December 27, 2017 , the Company had no accrual for unrecognized tax benefits.

Net deferred tax (liability) asset

The net deferred tax asset amounts above as of December 30, 2020 and December 25, 2019 have been classified in the accompanying consolidated balance sheets as noncurrent assets and are as follows (in thousands):

Assets (liabilities) - state

Assets (liabilities) - federal

Net deferred tax (liability) asset

As of December 30, 2020 and December 25, 2019, the Company had no accrual for unrecognized tax benefits.

Consequently, no interest or penalties have been accrued by the Company.

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examination for years before 2017 by the federal taxing authority, and for years before 2016 by state taxing authorities.

The Company is currently under IRS examination for tax year ending December 28, 2016 and December 27, 2017.

As of December 25, 2019 , no proposed adjustments were issued by the IRS.

During the first quarter of 2020, the Company has had new discussions with the IRS regarding a potential timing difference adjustment that would not result in a significant impact to the financial statements, if agreed to by the Company.

EMPLOYEE BENEFIT PLANS

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The Company matches 100 % of the employees’ contributions of the first 3 % of the employees’ annual qualified compensation, and 50 % of the employees’ contributions of the next 2 % of the employees’ annual qualified compensation.

The Company’s matching contribution immediately fully vests.

The Company’s contributions to the plan were $0.8 million for both years ended December 25, 2019 and December 26, 2018 and $0.7 million for the year ended December 27, 2017 .

The Company’s matching

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

contribution immediately fully vests.

The Company’s contributions to the plan were $ 0.8 million for the years ended December 30, 2020, December 25, 2019 and December 26, 2018.

STOCK-BASED COMPENSATION

Pursuant to the 2018 Omnibus Equity Incentive Plan the Company grants stock options (“options”), restricted stock units, performance-based stock units and restricted stock.

The Company has authorized 5,652,240 shares of common stock for issuance in connection with stock awards.

As of December 30, 2020, 803,527 shares were available for grant.

During the years ended December 30, 2020, December 25, 2019 and December 26, 2018, the Company recognized stock-based compensation expense of $ 3.1 million, $ 2.5 million and $ 2.0 million, respectively.

These expenses were included in general and administrative expenses consistent with the salary expense for the related optionees in the accompanying consolidated statements of operations.

In connection with the retirement of our former President and Chief Executive Officer during fiscal 2018, the Company modified previously granted equity awards to accelerate the vesting of 33,545 awards, which would have otherwise vested in May 2018, and extended the exercisability of all vested and outstanding options until the expiration of the original term of such awards.

As a result, the Company incurred incremental stock-based compensation expense of $ 0.8 million for the year ended December 26, 2018.

Stock Options

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At December 30, 2020, 303,786 premium options, options granted above the stock price at date of grant, remained outstanding.

In fiscal 2019 and 2018 , the Company granted 323,900 and 311,272 options, respectively, with an exercise price equal to the fair market value of the common stock on the date of grant.

The options granted in fiscal 2019 and 2018 had a four -year vesting period.

On November 15, 2016, the board of directors approved the modification of the remaining performance-based stock options granted in 2014 and 2013 to vest based solely on service conditions.

As a result, 17,378 performance-based stock options that would not have vested based on the 2017 performance target vested at the end of fiscal 2017, subject to continued employment of the option holder and the other terms and conditions of the 2014 Stock Option Plan.

As of December 25, 2019 , there were no remaining performance-based stock options and 2,077,570 time based stock options outstanding.

The Company did not grant any options during fiscal 2020.

In fiscal 2019, the Company granted 323,900 options, with an exercise price equal to the fair market value of the common stock on the date of grant.

The options granted in fiscal 2019 had a four-year vesting period.

Stock options generally expire 10 years from the date of grant.

Changes in stock options for the years ended December 25, 2019 and December 26, 2018 , are as follows:

Changes in options for the years ended December 30, 2020 and December 25, 2019, are as follows:

Weighted-Average

Contractual Life

Intrinsic Value

Exercise Price

(in thousands)

Outstanding - December 26, 2018

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Exercisable at December 30, 2020

Stock options at December 25, 2019 are summarized as follows:

Range of Exercise Prices

Weighted-Average

Contractual Life

Average Exercise

Weighted-Average

Exercise Price

$9.65 - $13.95

$4.09 - $15.00

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The intrinsic value of options outstanding and options exercisable, calculated as the difference between the market value as of December 25, 2019 and the exercise price, is $14.3 million and $12.3 million , respectively.

The intrinsic value of options exercised, calculated as the difference between the market value on the date of exercise and the exercise price, was $ 9.9 million, $ 2.1 million and $ 1.5 million for fiscal years 2020, 2019 and 2018, respectively.

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For options that are based on a service requirement, the cost is recognized on a straight-line basis over the requisite service period, usually the vesting period.

For options that were based on performance requirements, costs were recognized over periods to which the performance criteria related.

The Company has authorized 5,652,240 shares of common stock for issuance in connection with stock awards.

As of December 25, 2019 , 1,040,703 shares were available for grant.

For options that were based on performance requirements, costs were recognized over periods

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

to which the performance criteria related.

In order to calculate our stock options’ fair values and the associated compensation costs for share-based awards, the Company utilizes the Black–Scholes option pricing model and has developed estimates of various inputs including forfeiture rate, expected term, expected volatility, and risk-free interest rate.

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Volatility is calculated by taking the historical daily closing equity prices of our peer companies, prior to the grant date, over a period equal to the expected term.

The weighted-average estimated fair value of employee stock options granted in fiscal 2019 and 2018 was $3.85 per share and $3.78 per share, respectively, using the Black–Scholes model with the following weighted-average assumptions used to value the option grants:

The weighted-average estimated fair value of employee stock options granted in fiscal 2019 and fiscal 2018 was $ 3.85 per share and $ 3.78 per share, respectively, using the Black–Scholes model with the following weighted-average assumptions used to value the option grants:

December 25, 2019

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Expected dividends

During the years ended December 25, 2019 , December 26, 2018 and December 27, 2017 , the Company recognized stock option compensation expense of $0.5 million , $1.1 million and $0.6 million , respectively.

These expenses were included in general and administrative expenses consistent with the salary expense for the related optionees in the accompanying consolidated statements of operations.

In connection with the retirement of our former President and Chief Executive Officer ("CEO") during fiscal 2018, the Company modified previously granted equity awards to accelerate the vesting of 33,545 awards, which would have otherwise vested in May 2018, and extended the exercisability of all vested and outstanding options until the expiration of the original term of such awards.

As a result, the Company incurred incremental stock-based compensation expense of $0.8 million for the year ended December 26, 2018.

As of December 30, 2020, we had total unrecognized compensation expense of $ 1.0 million related to unvested stock options, which the Company expects to recognize over a weighted average period of 1.99 years.

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Higher volatility and longer expected lives result in an increase to stock-based compensation expense determined at the date of grant.

Stock-based compensation expense affects our general and administrative expense.

We estimate our forfeiture rate based on an analysis of our actual forfeitures and will continue to evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover behavior, and other factors.

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The effect of forfeiture adjustments was insignificant in fiscal 2020, 2019 and 2018.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

We will continue to use significant judgment in evaluating the expected term, volatility, and forfeiture rate related to our stock-based compensation.

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The Company bases the amount of unearned compensation recorded on the fair market value of the awards on the date of issuance.

In fiscal 2019 , 2018 , and 2017 the Company recognized share-based compensation expense of $2.0 million , $1.0 million , and $0.5 million , respectively.

This expense was included in general and administrative expenses in the accompanying consolidated statements of operations.

As of December 25, 2019 , there was total unrecognized compensation expense of $5.4 million related to unvested restricted share awards, which the Company expects to recognize over a weighted-average period of 2.79 years .

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Changes in restricted shares for the years ended December 30, 2020 and December 25, 2019, are as follows:

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Unvested shares at December 30, 2020

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Unvested shares at December 30, 2020, included 658,268 unvested restricted shares, 36,058 unvested performance stock units and 48,078 unvested restricted units.

As of December 30, 2020, there was total unrecognized compensation expense of $ 6.3 million related to unvested restricted share awards, which the Company expects to recognize over a weighted-average period of 2.77 years, unrecognized compensation expense of $ 0.1 million related to performance stock units, which it expects to recognize over a weighted-average period of 2.35 years and unrecognized compensation expense of $ 0.3 million related to unvested restricted units, which it expects to recognize over a weighted-average period of 1.35 years.

EARNINGS PER SHARE

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Diluted EPS is calculated using the weighted-average number of shares of common stock outstanding and potentially dilutive during the period, using the treasury stock method.

On August 2, 2018, the Company announced that the Board of Directors had authorized a stock repurchase program.

The Company entered into a stock repurchase plan on August 28, 2018 (the “2018 Stock Repurchase Plan”), which allowed for the repurchase of up to $ 20.0 million of the Company’s common stock.

The 2018 Stock Repurchase Plan commenced on November 6, 2018 and terminated on June 26, 2019.

On April 30, 2019, as part of the Company’s focus on stockholder returns, the Board of Directors approved a new stock repurchase program.

The Company entered into a stock repurchase plan on May 17, 2019 (the “2019 Stock Repurchase Plan”), which allowed for the repurchase of up to $ 30.0 million of the Company’s common stock.

The 2019 Stock Repurchase Plan commenced on June 27, 2019, and was exhausted on September 26, 2019.

The Company’s repurchases were executed using open market purchases, including pursuant to Rule 10b5-1 trading plans, and/or through privately negotiated transactions.

For the year ended December 25, 2019, the Company repurchased 1,558,836 and 2,836,768 shares of common stock under the 2018 Stock Repurchase Plan and the 2019 Stock Repurchase Plan, respectively, executed using open market purchases, for total consideration of approximately $ 18.4 million and $ 30.0 million, respectively.

The common stock repurchased under both the 2018 Stock Repurchase Plan and the 2019 Stock Repurchase Plan was retired upon repurchase.

For the year ended December 26, 2018, the Company repurchased 66,409 shares of common stock under the 2018 Stock Repurchase Plan for total considerations of approximately $ 1.0 million.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Below are basic and diluted EPS data for the periods indicated, which are in thousands except for per share data.

For the Years Ended

December 25, 2019

December 26, 2018

December 27, 2017

Net income (loss)

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Net income (loss) per share—diluted

Anti-dilutive securities not considered in diluted EPS

Anti-dilutive securities not considered in diluted EPS calculation

Below is a reconciliation of basic and diluted share counts.

For the Years Ended

December 25, 2019

December 26, 2018

December 27, 2017

Weighted-average shares outstanding—basic

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El Pollo Loco, Inc., et al (Case No.

30-2014-00707367-CU-OE-CXC) (the "Olvera Action") on behalf of all putative class members (all hourly employees from 2010 to the present) alleging certain violations of California labor laws, including failure to pay overtime compensation, failure to provide meal periods and rest breaks, and failure to provide itemized wage statements.

The putative lead plaintiff’s requested remedies include compensatory and punitive damages, injunctive relief, disgorgement of profits, and reasonable attorneys’ fees and costs.

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A $ 16.3 million accrual of an expected settlement amount related to this matter was recorded as of December 26, 2018, and the court formally approved the settlement on January 31, 2020.

The settlement payment was made on February 28, 2020.

Purported class actions alleging wage and hour violations are commonly filed against California employers.

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El Pollo Loco Holdings, Inc., et al.

8:15-cv-01710) was filed in the United States District Court for the Central District of

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

8:15-cv-01710) was filed in the United States District Court for the Central District of California on October 22, 2015.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

California on October 22, 2015.

The two lawsuits have been consolidated, with co-lead plaintiffs and class counsel.

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On January 23, 2019, the parties filed a Notice of Settlement and Joint Request for Order to Stay Proceedings, stating the parties have reached an agreement in principle to settle the claims and allegations in the action and are negotiating the terms of a Stipulation of Settlement.

On January 24, 2019, the Court ordered that all proceedings in the action be stayed until April 3, 2019, on or before which the parties are to file a Stipulation of Settlement and a motion for preliminary approval of the settlement.

Defendants maintain that the Plaintiffs' claims are without merit, and have entered into the settlement to eliminate the uncertainties, burden and expense of further protracted litigation.

On January 24, 2019, the Court ordered that all proceedings in the action be stayed until April 3, 2019, on or before which the parties were to file, and did so file, a Stipulation of Settlement and a motion for preliminary approval of the settlement.

The court granted preliminary approval of the settlement on May 13, 2019.

Defendants maintain that the Plaintiffs’ claims are without merit, and entered into the settlement with Plaintiffs to eliminate the uncertainties, burden and expense of further protracted litigation.

A $ 20.0 million accrual of an expected settlement amount related to this matter was recorded as of December 26, 2018 and all settlement payments were made during the year ended December 25, 2019.

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The parties have stipulated to, which the court has ordered, a stay of these proceedings pending the outcome of Turocy v.

El Pollo Loco Holdings, Inc ., discussed above.

El Pollo Loco Holdings, Inc.

, discussed above.

A second purported Holdings shareholder filed a derivative complaint on or about September 23, 2016, under the caption Diep v.

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The court denied defendants’ motion to dismiss the complaint for failure to state a claim.

On January 17, 2018, the court entered an order granting the parties’ stipulation staying all proceedings in the Diep action for five months or until the completion of an investigation of the allegations in the action by a special litigation committee of the Holdings board of directors (the "SLC").

On January 17, 2018, the court entered an

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

order granting the parties’ stipulation staying all proceedings in the Diep action for five months or until the completion of an investigation of the allegations in the action by a special litigation committee of the Holdings board of directors (the "SLC").

On February 13, 2019, after concluding its investigation, the SLC filed a motion to dismiss the Diep action.

The SLC filed its investigative report under seal as an exhibit to the motion to dismiss.

Discovery related to the SLC's motion is ongoing.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Following discovery related to the SLC’s motion, on September 25, 2020, the SLC filed its opening brief with the Delaware court in support of the motion to dismiss.

Plaintiff filed his brief in Opposition to SLC’s motion to dismiss on or about January 7, 2021.

SLC filed its reply brief on or about January 21, 2021.

The hearing for the motion to dismiss is currently scheduled for April 23, 2021.

Handlers-Bryman and Michael D.

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As part of the final judgment, the court found El Pollo Loco liable and issued injunctive relief requiring El Pollo Loco to revise its franchise disclosure document and franchise agreement.

The court also awarded Plaintiffs restitution of

$4,356,600 for “impact damages” arising out of our construction of the two new company-operated El Pollo Loco restaurants in Lancaster.

The court, reversing its previous position, held that these damages could be awarded in addition to the "lost opportunity damages" awarded by the jury.

The court also awarded Plaintiffs restitution of $ 4,356,600 for “impact damages” arising out of our construction of the two new company-operated El Pollo Loco restaurants in Lancaster.

The court, reversing its previous position, held that these damages could be awarded in addition to the "lost opportunity damages"

awarded by the jury.

Thus, the court entered a total monetary judgment of $ 8,837,806 .

1 unchanged sentence

The trial court subsequently awarded the Plaintiffs $ 249,728 in costs and $ 1,391,703 in attorney fees.

Post judgment interest is running at 10% simple interest per year on the total amount of the monetary judgment, costs, and attorney’ fees.

Post judgment interest is running at 10 % simple interest per year on the total amount of the monetary judgment, costs, and attorneys’ fees.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On August 27, 2018, the Company filed a notice of appeal as to the entire judgment.

The appeal on the merits is currently pending.

Briefing on the merits has not yet occurred in the appellate court.

The record was delivered by the trial court clerk to the court of appeal on August 20, 2019.

The Company's opening brief is due to be filed in the Court of Appeals by April 1, 2020.

Based on the assessment by management of the numerous legal arguments that can be raised on appeal, together with independent assessments from our legal trial and appellate counsel, the Company believes that a loss is currently not probable or estimable under ASC 450, "Contingencies", and as of December 25, 2019 no accrual has been made with regard to the verdict.

As required by California law, on or about August 16, 2018, the Company obtained an appeal bond through a Surety company to secure the trial court’s judgment during the pendency of the appeal.

On March 19, 2020, the Surety, One Beacon, from whom the Company procured the appeal bond to secure the judgment against the Company in the matter of Janice P.

Handlers-Bryman and Michael D.

El Pollo Loco, Inc., issued a collateral demand to the Company.

On April 17, 2020, the Company provided to One Beacon a Letter of Credit in the amount of $ 2,651,342 to satisfy the Surety’s collateral demand.

On July 13, 2020, One Beacon agreed to release its collateral demand and returned the Letter of Credit to the Company.

During fiscal 2020, the Company reached an agreement with the Plaintiffs to resolve the lawsuit for a payment by the Company of $ 2.5 million, which was recorded within operating expenses in the Company’s statement of operations for the fiscal year ended December 30, 2020.

Additionally, during fiscal 2020, the matter was formally resolved.

On September 2, 2020, the California Court of Appeals entered an order, following a motion for stipulated reversal of the trial court’s judgment jointly filed by the parties, reversing the trial court’s judgment in the case and instructing the trial court to dismiss the matter with prejudice.

On September 10, 2020, the trial court entered an order reversing its judgment and dismissing the case with prejudice.

The settlement payment of $ 2.5 million has been made and the appeal bond has been released.

On or about November 9, 2020, a former employee filed a representative action for violation of the Private Attorneys General Act of 2004 (“PAGA”) pursuant to Labor Code sections 2698 et seq.

in the Superior Court of the State of California, County of Los Angeles, under the caption Kenneth E.

Reising, et al v.

El Pollo Loco, Inc., et al (Case No.

20STCV42951) on behalf of all non-exempt employees from June 19, 2020 to the present, alleging certain violations of California labor laws.

The claims include failure to pay overtime compensation, failure to provide meal periods and rest breaks, failure to reimburse employees for business expenses, failure to provide suitable seating, and failure to provide accurate itemized wage statements.

The requested remedies include statutory penalties and reasonable attorneys’ fees and costs.

No specific amount of damages sought was specified in the complaint.

The Company filed an Answer to the complaint on or about January 5, 2021.

Based on the assessment by management of the numerous legal arguments that can be raised on this claim, the Company believes that a loss is currently not probable or estimable under ASC 450, "Contingencies", and as of December 30, 2020 no accrual has been made with regard to the verdict.

On or about February 4, 2021, a former employee filed a class action in the Superior Court of the State of California, County of Riverside, under the caption Brandie Crispin, et al v.

El Pollo Loco, Inc.

et al (Case No.

CVRI2100490) on behalf of all putative class members (all non-exempt General Managers from February 4, 2017 to the present) alleging certain violations of California labor laws.

The claims include failure to pay overtime compensation, failure to provide meal periods and rest breaks, and failure to provide accurate itemized wage statements.

The putative lead plaintiff’s requested remedies include compensatory damages, statutory penalties, injunctive relief, and reasonable attorneys’ fees and costs.

No specific amount of damages sought was specified in the complaint.

As of the date of this filing, the Company has not yet been served the complaint.

Plaintiff also notified the Labor and Workforce Development Agency and the Company that it intends to commence a representative action against the Company for violation of the Private Attorneys General Act of 2004 (“PAGA”) pursuant to Labor Code sections 2698 et seq.

The Company is also involved in various other claims and legal actions that arise in the ordinary course of business.

1 unchanged sentence

A significant increase in the number of claims, or an increase in amounts owing under successful claims, could materially and adversely affect its business, consolidated financial condition, results of operations, and cash flows.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Purchase Commitments

The Company has long-term beverage supply agreements with certain major beverage vendors.

Pursuant to the terms of these arrangements, marketing rebates are provided to the Company and its franchisees from the beverage vendors based upon the dollar volume of purchases for system-wide restaurants which will vary according to their demand for beverage syrup and fluctuations in the market rates for beverage syrup.

Pursuant to the terms of these arrangements, marketing rebates are provided to the Company and its franchisees from the beverage vendors based

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

upon the dollar volume of purchases for system-wide restaurants which will vary according to their demand for beverage syrup and fluctuations in the market rates for beverage syrup.

These contracts have terms extending through the end of 2024.

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The Company believes that these cross-default provisions reduce the risk that payments will be required to be made under these leases.

Accordingly, no liability has been recorded in the Company’s consolidated financial statements related to these contingent liabilities.

Due to the current uncertainty related to the COVID-19 pandemic and the impact it has had on the ability of the Company’s franchisees to make their lease payments, the Company has recorded a $ 0.1 million liability in the Company’s consolidated financial statements related to these contingent liabilities.

Employment Agreements

As of December 25, 2019 , the Company had employment agreements with four of the officers of the Company.

As of December 30, 2020, the Company had employment agreements with three of the officers of the Company.

These agreements provide for minimum salary levels, possible annual adjustments for cost-of-living changes, and incentive bonuses that are payable under certain business conditions.

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So long as LLC maintains at least 40 % ownership, (i) any member of the board of directors may be removed at any time without cause by affirmative vote of a majority of the Company’s common stock, and (ii) stockholders representing 40 % or greater ownership may cause special stockholder meetings to be called.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

REVENUE FROM CONTRACTS WITH CUSTOMERS

Adoption of Topic 606, "Revenue from Contracts with Customers"

On December 28, 2017, the Company adopted Topic 606 using the modified retrospective method applied to those contracts, which were not fully satisfied as of December 28, 2017.

Results for reporting periods beginning after December 28, 2017, are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.

Revenue Recognition

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The Company has two revenue streams, company-operated restaurant revenue and franchise related revenue.

See Note 2 for a description of the revenue recognition policies.

See Note 2 “Summary of Significant Accounting Policies” for a description of the revenue recognition policies.

Franchise and franchise advertising revenue

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Disaggregated revenue

The following table presents our revenues for the years ended December 25, 2019 and December 26, 2018 disaggregated by revenue source and market (in thousands):

December 25, 2019

December 26, 2018

The following table presents our revenues for the years ended December 30, 2020, December 25, 2019 and December 26, 2018 disaggregated by revenue source and market (in thousands):

Core Market (1) :

9 unchanged sentences

Total revenue

(1) Core Market includes markets with existing company-operated restaurants at the time of the Company's Initial Public Offering ("IPO") on July 28, 2014.

(1) Core Market includes markets with existing company-operated restaurants at the time of the Company’s Initial Public Offering ("IPO") on July 28, 2014.

(2) Non-Core Market includes markets entered into by the Company subsequent to the IPO date.

The following table presents our revenues disaggregated by geographic market for the years ended December 25, 2019 and December 26, 2018 :

The following table presents our revenues disaggregated by geographic market for the years ended December 30, 2020, December 25, 2019 and December 26, 2018:

December 30, 2020

December 25, 2019

December 26, 2018

Greater Los Angeles area market

Other markets

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Contract balances

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This resulted in an additional contract liability of $ 0.7 million, relating to allocation of the transaction price to various performance obligations under the applicable contracts of the sale.

The following table illustrates the estimated revenue to be recognized in the future related to performance obligations that are unsatisfied as of December 25, 2019 :

Franchise revenues (in thousands):

The following table illustrates the estimated revenue to be recognized in the future related to performance obligations that are unsatisfied as of December 30, 2020 (in thousands):

Franchise revenues:

Changes in the loyalty rewards program liability included in deferred revenue within other accrued expenses and current liabilities on the consolidated balance sheets were as follows (in thousands):

Loyalty rewards liability, beginning balance

Revenue deferred

Revenue recognized

Loyalty rewards liability, ending balance

The Company expects all loyalty points revenue related to performance obligations unsatisfied as of December 30, 2020 to be recognized within one year .

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The gift card liability included in other accrued expenses and current liabilities on the consolidated balance sheets was as follows (in thousands):

Gift card liability

Revenue recognized from the redemption of gift cards that was included in other accrued expenses and current liabilities at the beginning of the year was as follows (in thousands):

Revenue recognized from gift card liability balance at the beginning of the year

Contract Costs

The Company does not currently incur costs to obtain or fulfill a contract that would be considered contract assets under Topic 606.

QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following table sets forth a summary of our unaudited quarterly operating results for each of the last eight quarters in the period ended December 25, 2019 .

We have derived this data from our unaudited consolidated interim financial statements that, in our opinion, have been prepared on substantially the same basis as the audited financial statements contained elsewhere in this report and include all normal recurring adjustments necessary for a fair presentation of the financial information for the periods presented.

These unaudited quarterly results should be read in conjunction with our financial statements and notes thereto included elsewhere in this report.

The operating results in any quarter are not necessarily indicative of the results that may be expected for any future period.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

(Dollar amounts in thousands, except

Selected Financial Data

Total revenue ($)

Income (loss) from operations ($)

Provision (benefit) for income taxes ($)

Net income (loss) ($)

Per Share Data (2) :

Net income (loss) per share:

Weighted average shares used in computing net income per share:

Selected Operating Data

Number of restaurants (at period end)

Company-operated

Average unit volume (AUV)

(company-operated) (1)

Comparable restaurant sales growth (%)

Company-operated

AUVs consist of average annualized sales of all company-operated restaurants over the fiscal quarter.

Due to the use of weighted average shares outstanding for each quarter of computing earnings per share, the sum of the quarterly per share amounts may not equal the per share amount for the year.

Due to a loss for the period, zero incremental shares are included because the effect would be antidilutive.

Loss from operations and net loss includes a $36.3 million legal settlement in the period.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data