El Pollo Loco Holdings, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA EL POLLO LOCO HOLDINGS, INC. AND SUBSIDIARIES INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS ​ Audited Consolidated Financial Statements ​ Report of Independent Registered Public Accounting Firm 58 Consolidated Balance Sheets – December 30, 2020 and December 25, 2019 61 Consolidated Statements of Operations—For the years ended December 30, 2020, December 25, 2019, and December 26, 2018 62 56 Table of Contents Consolidated Statements of Comprehensive Income (Loss)—For the years ended December 30, 2020, December 25, 2019, and December 26, 2018 63 Consolidated Statements of Changes in Stockholders’ Equity—For the years ended December 30, 2020, December 25, 2019, and December 26, 2018 64 Consolidated Statements of Cash Flows—For the years ended December 30, 2020, December 25, 2019, and December 26, 2018 65 Notes to Consolidated Financial Statements 67 ​ ​ ​ 57 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Shareholders and Board of Directors El Pollo Loco Holdings, Inc. Costa Mesa, California Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of El Pollo Loco Holdings, Inc. (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 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. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. 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. ​ ​ ​ 58 Table of Contents 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: ​ 59 Table of Contents ● 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 We have served as the Company’s auditor since 2011. Costa Mesa, California March 15, 2021 ​ 60 Table of Contents EL POLLO LOCO HOLDINGS, INC. ​ CONSOLIDATED BALANCE SHEETS ​ (Amounts in thousands, except share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ December 30, December 25, ​ 2020 2019 Assets ​ ​ ​ ​ ​ Current assets: ​ ​ ​ ​ Cash and cash equivalents ​ $ 13,219 ​ $ 8,070 Accounts and other receivables, net ​ 9,963 ​ 8,505 Inventories ​ 2,100 ​ 2,009 Prepaid expenses and other current assets ​ 3,865 ​ 5,718 Income tax receivable ​ 2,522 ​ 376 Total current assets ​ 31,669 ​ 24,678 Property and equipment, net ​ 79,642 ​ 91,778 Property and equipment held under finance lease, net ​ 1,661 ​ — Property and equipment held under operating leases, net ("ROU asset") ​ 177,129 ​ 192,395 Goodwill ​ 248,674 ​ 248,674 Trademarks ​ 61,888 ​ 61,888 Deferred tax assets ​ 3,166 ​ 3,709 Other assets ​ 1,392 ​ 1,630 Total assets ​ $ 605,221 ​ $ 624,752 Liabilities and Stockholders’ Equity ​ ​ Current liabilities: ​ ​ Current portion of obligations under finance leases ​ $ 70 ​ $ 34 Current portion of obligations under operating leases ​ 19,907 ​ 16,406 Accounts payable ​ 7,472 ​ 5,627 Accrued salaries and vacation ​ 10,166 ​ 8,618 Accrued insurance ​ 10,416 ​ 9,440 Accrued interest ​ 89 ​ 302 Current portion of income tax receivable agreement payable ​ 1,577 ​ 4,935 Other accrued expenses and current liabilities ​ 16,715 ​ 28,597 Total current liabilities ​ 66,412 ​ 73,959 Revolver loan ​ 62,800 ​ 97,000 Obligations under finance leases, net of current portion ​ 1,692 ​ 83 Obligations under operating leases, net of current portion ​ 178,658 ​ 197,492 Deferred taxes ​ 5,227 ​ 1,672 Income tax receivable agreement payable, net of current portion ​ 1,562 ​ 3,301 Other noncurrent liabilities ​ 11,292 ​ 5,679 Total liabilities ​ 327,643 ​ 379,186 Commitments and contingencies (Note 13) ​ ​ Stockholders’ Equity ​ ​ Preferred stock, $ 0.01 par value, 100,000,000 shares authorized; none issued or outstanding ​ — ​ — Common stock, $ 0.01 par value, 200,000,000 shares authorized; 36,423,505 and 35,126,582 shares issued and outstanding as of December 30, 2020 and December 25, 2019, respectively ​ 364 ​ 351 Additional paid-in-capital ​ 339,561 ​ 330,950 Accumulated deficit ​ ( 61,514 ) ​ ( 85,988 ) Accumulated other comprehensive (loss) income ​ ( 833 ) ​ 253 Total stockholders’ equity ​ 277,578 ​ 245,566 Total liabilities and stockholders’ equity ​ $ 605,221 ​ $ 624,752 See notes to consolidated financial statements. 61 Table of Contents EL POLLO LOCO HOLDINGS, INC. ​ CONSOLIDATED STATEMENTS OF OPERATIONS ​ (Amounts in thousands, except share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Fiscal Years Ended ​ December 30, 2020 December 25, 2019 December 26, 2018 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Revenue ​ ​ ​ Company-operated restaurant revenue ​ $ 374,064 ​ $ 391,112 ​ $ 388,835 Franchise revenue ​ 29,418 ​ 28,819 ​ 25,771 Franchise advertising fee revenue ​ 22,605 ​ 22,399 ​ 21,222 Total revenue ​ 426,087 ​ 442,330 ​ 435,828 Cost of operations ​ ​ ​ Food and paper cost ​ 98,774 ​ 109,264 ​ 111,142 Labor and related expenses ​ 114,455 ​ 116,703 ​ 112,417 Occupancy and other operating expenses ​ 92,422 ​ 92,005 ​ 91,385 Gain on recovery of insurance proceeds, lost profits ​ ​ ( 2,000 ) ​ ​ — ​ ​ — Company restaurant expenses ​ 303,651 ​ 317,972 ​ 314,944 General and administrative expenses ​ 35,918 ​ 40,389 ​ 50,261 Legal settlements ​ 2,566 ​ — ​ 36,258 Franchise expenses ​ 28,761 ​ 27,612 ​ 24,429 Depreciation and amortization ​ 16,878 ​ 17,855 ​ 17,825 Loss on disposal of assets ​ 189 ​ 266 ​ 278 Recovery of securities lawsuits related legal expenses and other insurance claims ​ ( 123 ) ​ ( 10,000 ) ​ ( 8,356 ) Impairment and closed-store reserves ​ 4,691 ​ 4,852 ​ 9,650 Loss on disposition of restaurants ​ — ​ 5,058 ​ — Total expenses ​ 392,531 ​ 404,004 ​ 445,289 Income (loss) from operations ​ 33,556 ​ 38,326 ​ ( 9,461 ) Interest expense, net ​ 3,292 ​ 3,687 ​ 3,502 Income tax receivable agreement expense (income) ​ 139 ​ 57 ​ ( 761 ) Income (loss) before provision (benefit) for income taxes ​ 30,125 ​ 34,582 ​ ( 12,202 ) Provision (benefit) for income taxes ​ 5,651 ​ 9,682 ​ ( 3,208 ) Net income (loss) ​ $ 24,474 ​ $ 24,900 ​ $ ( 8,994 ) Net income (loss) per share ​ ​ ​ Basic ​ $ 0.70 ​ $ 0.68 ​ $ ( 0.23 ) Diluted ​ $ 0.68 ​ $ 0.67 ​ $ ( 0.23 ) Weighted-average shares used in computing net income (loss) per share ​ ​ ​ Basic ​ 35,193,325 ​ 36,739,209 ​ 38,574,553 Diluted ​ 35,796,406 ​ 37,441,503 ​ 38,574,553 ​ See notes to consolidated financial statements. ​ 62 Table of Contents EL POLLO LOCO HOLDINGS, INC. ​ CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) ​ (Amounts in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Fiscal Years Ended ​ December 30, December 25, December 26, ​ ​ 2020 ​ 2019 ​ 2018 Net income (loss) ​ $ 24,474 ​ $ 24,900 ​ $ ( 8,994 ) Other comprehensive (loss) income ​ ​ ​ Changes in derivative instruments ​ ​ ​ Unrealized net (losses) gains arising during the period from interest rate swap ​ ( 1,762 ) ​ 430 ​ — Reclassifications of losses (gains) into net income ​ 278 ​ ( 84 ) ​ — Income tax benefit (expense) ​ 398 ​ ( 93 ) ​ — Other comprehensive (loss) income, net of taxes ​ ( 1,086 ) ​ 253 ​ — Comprehensive income (loss) ​ $ 23,388 ​ $ 25,153 ​ $ ( 8,994 ) ​ See notes to consolidated financial statements. ​ 63 Table of Contents EL POLLO LOCO HOLDINGS, INC. ​ CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY ​ (Amounts in thousands, except share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accumulated ​ ​ ​ ​ ​ Additional ​ ​ Other Total ​ ​ Common Stock ​ Paid-in ​ Accumulated ​ Comprehensive ​ Stockholders’ ​ Shares Amount Capital Deficit Income (Loss) Equity Balance, December 28, 2017 ​ 38,661,850 ​ $ 387 ​ $ 372,990 ​ $ ( 98,427 ) ​ $ — ​ $ 274,950 Cumulative effect of accounting change (see Note 2) ​ — ​ — ​ — ​ ( 3,467 ) ​ — ​ ( 3,467 ) Stock-based compensation ​ — ​ — ​ 2,005 ​ — ​ — ​ 2,005 Issuance of common stock related to restricted shares, net ​ 155,229 ​ 1 ​ ( 1 ) ​ — ​ — ​ — Issuance of common stock upon exercise of stock options ​ 269,549 ​ 3 ​ 1,834 ​ — ​ — ​ 1,837 Shares repurchased for employee tax withholdings ​ ( 10,768 ) ​ — ​ ( 114 ) ​ — ​ — ​ ( 114 ) Repurchase of common stock ​ ( 66,409 ) ​ ( 1 ) ​ ( 980 ) ​ — ​ — ​ ( 981 ) Net loss ​ — ​ — ​ — ​ ( 8,994 ) ​ — ​ ( 8,994 ) Balance, December 26, 2018 ​ 39,009,451 ​ 390 ​ 375,734 ​ ( 110,888 ) ​ — ​ 265,236 Stock-based compensation ​ — ​ — ​ 2,474 ​ — ​ — ​ 2,474 Issuance of common stock related to restricted shares, net ​ 309,404 ​ 2 ​ ( 2 ) ​ — ​ — ​ — Issuance of common stock upon exercise of stock options ​ 234,728 ​ 2 ​ 1,448 ​ — ​ — ​ 1,450 Shares repurchased for employee tax withholdings ​ ( 31,397 ) ​ — ​ ( 365 ) ​ — ​ — ​ ( 365 ) Repurchase of common stock ​ ( 4,395,604 ) ​ ( 43 ) ​ ( 48,339 ) ​ — ​ — ​ ( 48,382 ) Other comprehensive income, net of income tax ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 253 ​ ​ 253 Net income ​ — ​ — ​ — ​ 24,900 ​ — ​ 24,900 Balance, December 25, 2019 ​ 35,126,582 ​ 351 ​ 330,950 ​ ( 85,988 ) ​ 253 ​ 245,566 Stock-based compensation ​ — ​ — ​ 3,093 ​ — ​ — ​ 3,093 Issuance of common stock related to restricted shares, net ​ 439,061 ​ 4 ​ ( 4 ) ​ — ​ — ​ — Issuance of common stock upon exercise of stock options ​ 970,736 ​ 10 ​ 5,856 ​ — ​ — ​ 5,866 Shares repurchased for employee tax withholdings ​ ( 23,407 ) ​ — ​ ( 335 ) ​ — ​ — ​ ( 335 ) Forfeiture of common stock related to restricted shares ​ ( 89,467 ) ​ ( 1 ) ​ 1 ​ — ​ — ​ — Other comprehensive loss, net of income tax ​ — ​ — ​ — ​ — ​ ( 1,086 ) ​ ( 1,086 ) Net income ​ — ​ — ​ — ​ 24,474 ​ — ​ 24,474 Balance, December 30, 2020 ​ 36,423,505 ​ $ 364 ​ $ 339,561 ​ $ ( 61,514 ) ​ $ ( 833 ) ​ $ 277,578 ​ See notes to consolidated financial statements. ​ 64 Table of Contents EL POLLO LOCO HOLDINGS, INC. ​ CONSOLIDATED STATEMENTS OF CASH FLOWS ​ (Amounts in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Fiscal Years Ended ​ December 30, December 25, December 26, ​ 2020 2019 2018 Cash flows from operating activities: ​ ​ ​ ​ ​ ​ Net income (loss) ​ $ 24,474 ​ $ 24,900 ​ $ ( 8,994 ) Adjustments to reconcile net income (loss) to net cash flows provided by operating activities: ​ ​ ​ Depreciation and amortization ​ 16,878 ​ 17,855 ​ 17,825 Bad debt expense ​ ​ 190 ​ ​ — ​ ​ — Stock-based compensation expense ​ 3,093 ​ 2,474 ​ 2,005 Income tax receivable agreement expense (income) ​ 139 ​ 57 ​ ( 761 ) Loss on disposition of restaurants ​ — ​ 5,058 ​ — Loss on disposal of assets ​ 189 ​ 266 ​ 278 Impairment of property and equipment ​ 3,498 ​ 3,559 ​ 5,147 Closed-store reserve expense ​ — ​ — ​ 4,503 Amortization of deferred financing costs ​ 252 ​ 251 ​ 280 Amortization of favorable and unfavorable leases, net ​ — ​ — ​ ( 47 ) Deferred income taxes, net ​ 4,008 ​ 9,578 ​ ( 3,428 ) Changes in operating assets and liabilities: ​ ​ ​ Accounts and other receivables ​ ( 1,155 ) ​ 1,094 ​ ( 2,387 ) Inventories ​ ( 92 ) ​ 338 ​ ( 190 ) Prepaid expenses and other current assets ​ 1,853 ​ ( 2,727 ) ​ ( 319 ) Income taxes receivable/payable ​ ( 2,145 ) ​ ( 448 ) ​ 37 Other assets ​ ( 13 ) ​ ( 412 ) ​ 122 Accounts payable ​ 666 ​ ( 3,192 ) ​ 482 Accrued salaries and vacation ​ 1,548 ​ 1,044 ​ 235 Accrued insurance ​ 976 ​ 2,364 ​ 1,225 Payment related to tax receivable agreement ​ ( 5,237 ) ​ ( 5,764 ) ​ ( 7,272 ) Other accrued expenses and liabilities ​ ( 8,575 ) ​ ( 20,160 ) ​ 36,701 Net cash flows provided by operating activities ​ 40,547 ​ 36,135 ​ 45,442 Cash flows from investing activities: ​ ​ ​ Proceeds from disposition of restaurants ​ — ​ 4,770 ​ — Purchase of property and equipment ​ ( 6,690 ) ​ ( 15,439 ) ​ ( 27,802 ) Net cash flows used in investing activities ​ ( 6,690 ) ​ ( 10,669 ) ​ ( 27,802 ) Cash flows from financing activities: ​ ​ ​ Proceeds from borrowings on revolver and swingline loans ​ 59,500 ​ 42,000 ​ 13,307 Payments on revolver and swingline loan ​ ​ ( 93,700 ) ​ ​ ( 19,000 ) ​ ​ ( 33,000 ) Minimum tax withholdings related to net share settlements ​ ( 335 ) ​ ( 365 ) ​ ( 114 ) Proceeds from issuance of common stock upon exercise of stock options, net of expenses ​ 5,866 ​ 1,450 ​ 1,837 Payment of obligations under finance leases ​ ( 39 ) ​ ( 68 ) ​ ( 132 ) Deferred financing costs for revolver loan ​ — ​ — ​ ( 138 ) Repurchases of common stock ​ — ​ ( 48,382 ) ​ ( 981 ) Net cash flows used in financing activities ​ ( 28,708 ) ​ ( 24,365 ) ​ ( 19,221 ) Increase (decrease) in cash and cash equivalents ​ 5,149 ​ 1,101 ​ ( 1,581 ) Cash and cash equivalents, beginning of period ​ 8,070 ​ 6,969 ​ 8,550 Cash and cash equivalents, end of period ​ $ 13,219 ​ $ 8,070 ​ $ 6,969 ​ 65 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Fiscal Years Ended ​ December 30, December 25, December 26, ​ ​ 2020 2019 2018 Supplemental cash flow information ​ ​ ​ Cash paid during the period for interest ​ $ 2,956 ​ $ 3,649 ​ $ 3,393 Cash paid during the period for income taxes ​ $ 4,225 ​ $ 558 ​ $ 183 Unpaid purchases of property and equipment ​ $ 1,925 ​ $ 746 ​ $ 1,543 Schedule of non-cash transactions ​ ​ ​ Borrowing on revolver for financing fees ​ $ — ​ $ — ​ $ 693 ​ ​ See notes to consolidated financial statements. ​ 66 Table of Contents EL POLLO LOCO HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ​ 1. DESCRIPTION OF BUSINESS El Pollo Loco Holdings, Inc. (“Holdings”) is a Delaware corporation headquartered in Costa Mesa, California. Holdings and its direct and indirect subsidiaries are collectively known as “we,” “us” or the “Company.” The Company’s activities are conducted principally through its indirect wholly-owned subsidiary, El Pollo Loco, Inc. (“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 Pollo Fit 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. In addition, the Company currently licenses one restaurant in the Philippines. The Company’s largest stockholder is Trimaran Pollo Partners, L.L.C. (“LLC”), which is controlled by affiliates of Trimaran Capital, L.L.C. LLC acquired Chicken Acquisition Corp. (“CAC”), a predecessor of Holdings, on November 17, 2005 (the “Acquisition”) and has a 46.0 % ownership interest as of December 30, 2020. LLC’s only material asset is its investment in Holdings. On April 22, 2014, CAC, its wholly owned subsidiary, Chicken Subsidiary Corp (“CSC”) and CSC’s wholly owned subsidiary, the former El Pollo Loco Holdings, Inc. (“Old Holdings”) entered into the following reorganization transactions: (i) Old Holdings merged with and into CSC with CSC continuing as the surviving corporation; (ii) CSC merged with and into CAC with CAC continuing as the surviving corporation and (iii) CAC renamed itself El Pollo Loco Holdings, Inc. Holdings has no material assets or operations. Holdings and Holdings’ direct subsidiary, EPL Intermediate, Inc. (“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. EPL and Intermediate may pay dividends to Intermediate and to Holdings, respectively. The Company operates in one operating segment. All significant revenues relate to retail sales of food and beverages through either company or franchised restaurants. ​ 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Liquidity 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 $ 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 The Company uses a 52- or 53-week fiscal year ending on the last Wednesday of each calendar year. Fiscal 2020, 2019, and 2018 ended on December 30, 2020, December 25, 2019 and December 26, 2018, respectively. 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 67 Table of Contents 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. Principles of Consolidation The accompanying consolidated financial statements include the accounts of Holdings and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and revenue and expenses during the period reported. 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, tax receivable agreement (the “TRA”) liability, contingent liabilities and income tax valuation allowances. COVID-19 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 68 Table of Contents 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 liquid instruments with a maturity of three months or less at the date of purchase to be cash equivalents. Subsequent Events 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. Concentration of Risk Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally-insured limits. The Company has never experienced any losses related to these balances. 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. Purchases from the Company’s largest supplier totaled 26.9 % of the Company’s purchases for fiscal 2020, 29.0 % for fiscal 2019 and 28.8 % for fiscal 2018 with no amounts payable at December 30, 2020 or December 25, 2019. 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 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. 69 Table of Contents EL POLLO LOCO HOLDINGS, INC. 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. Accounts and Other Receivables, Net Accounts and other receivables consist primarily of royalties, advertising and sublease rent and related amounts receivable from franchisees. Such receivables are due on a monthly basis, which may differ from the Company’s fiscal month-end dates. Accounts and other receivables also include credit/debit card receivables. 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 $ 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 Inventories consist principally of food, beverages and supplies and are valued at the lower of average cost or net realizable value. Property and Equipment, Net Property and equipment are recorded at cost and are depreciated using the straight-line method over the estimated useful lives of the assets. Expenditures for reimbursements and improvements that significantly add to the productivity capacity or extend the useful life are capitalized, while expenditures for maintenance and repairs are expensed as incurred. Leasehold improvements and property held under finance leases are amortized over the shorter of their estimated useful lives or the remaining lease terms. For leases with renewal periods at the Company’s option, the Company generally uses the original lease term, excluding the option periods, to determine estimated useful lives; if failure to exercise a renewal option imposes an economic penalty on the Company, such that management determines at the inception of the lease that renewal is reasonably assured, the Company may include the renewal option period in the determination of appropriate estimated useful lives. The estimated useful service lives are as follows: ​ ​ ​ ​ Buildings 20 years Land improvements 3 — 30 years Building improvements 3 — 10 years Restaurant equipment 3 — 10 years Other equipment 2 — 10 years Property/equipment held under finance leases ​ Shorter of useful life or lease term Leasehold improvements Shorter of useful life or lease term ​ The Company capitalizes certain directly attributable internal costs in conjunction with the acquisition, development and construction of future restaurants. The Company also capitalizes certain directly attributable costs, including interest, in conjunction with constructing new restaurants. 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 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 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. 70 Table of Contents 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. 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. The fair value is measured on a nonrecurring basis using unobservable (Level 3) inputs. There is uncertainty in the projected undiscounted future cash flows used in the Company’s impairment review analysis, which requires the use of estimates and assumptions. 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. 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. 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 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. In addition, an impairment charge was recognized for any remaining carrying value of certain restaurant assets. During fiscal 2018, the Company closed seven restaurants in Arizona, California and Texas. These closures resulted in closed-store reserve expenses of $ 4.5 million during fiscal 2018. 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. Rather, when a restaurant is closed, the Company will evaluate the ROU Asset for impairment, based on anticipated sublease recoveries. The remaining value of the ROU Asset is amortized on a straight-line basis, with the expense recognized in closed-store reserve expense. 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. 71 Table of Contents 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 The Company’s indefinite-lived intangible assets consist of trademarks. Goodwill represents the excess of cost over fair value of net identified assets acquired in business combinations accounted for under the purchase method. The Company does not amortize its goodwill and indefinite-lived intangible assets. Goodwill resulted from the Acquisition and from the acquisition of certain franchise locations. 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 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 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 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. An impairment test consists of either a qualitative assessment or a comparison of the fair value of an intangible asset with its carrying amount. The excess of the carrying amount of an intangible asset over its fair value is its impairment loss. The assumptions used in the estimate of fair value are generally consistent with the past performance of the Company’s reporting segment and are also consistent with the projections and assumptions that are used in current operating plans. These assumptions are subject to change as a result of changing economic and competitive conditions. 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 Deferred financing costs are capitalized and amortized over the period of the loan on a straight-line basis, which approximates the effective interest method. 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 $ 0.6 million and $ 0.8 million as of December 30, 2020 and 72 Table of Contents EL POLLO LOCO HOLDINGS, INC. 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. Insurance Reserves The Company is responsible for workers’ compensation, general and health insurance claims up to a specified aggregate stop loss amount. The Company maintains a reserve for estimated claims both reported and incurred but not reported, based on historical claims experience and other assumptions. 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 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. Restaurant Revenue Revenues from the operation of company-operated restaurants are recognized as food and beverage products are delivered to customers and payment is tendered at the time of sale. The Company presents sales net of sales-related taxes and promotional allowances. 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 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. Additionally, if a reward is not used within six months , it expires. 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 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. The Company expects the loyalty points to be redeemed and recognized over a one-year period. The Company sells gift cards to its customers in the restaurants and through selected third parties. The gift cards sold to customers have no stated expiration dates and are subject to actual and/or potential escheatment rights in several of the jurisdictions in which the Company operates. Furthermore, due to these escheatment rights, the Company does not recognize breakage related to the sale of gift cards due to the immateriality of the amount remaining after escheatment. The Company recognizes income from gift cards when redeemed by the customer. Unredeemed gift card balances are deferred and recorded as other accrued expenses on the accompanying consolidated balance sheets. 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. Franchise Revenue Franchise revenue consists of franchise royalties, initial franchise fees, license fees due from franchisees and IT support services. 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 73 Table of Contents EL POLLO LOCO HOLDINGS, INC. 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. This revenue stream is made up of the following performance obligations: ● Franchise License – inclusive of advertising services, development agreements, training, access to plans and help desk services; ● Discounted renewal option; and ● Hardware services. The Company satisfies the performance obligation related to the franchise license over the term of the franchise agreement, which is typically 20 years . Payment for the franchise license consists of three components, a fixed-fee related to the franchise/development agreement, a sales-based royalty fee and a sales-based advertising fee. 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 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 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. As this is considered a separate performance obligation, the Company allocated a portion of the initial franchise fee to this discounted renewal, on a pro-rata basis, assuming a 20 year renewal. This performance obligation is satisfied over the renewal term, which is typically 10 or 20 years , while payment is fixed and due at the time the renewal is signed. The Company purchases hardware, such as scanners, printers, cash registers and tablets, from third-party vendors, which it then sells to franchisees. As the Company is considered the principal in this relationship, payment received for the hardware is considered revenue, and is received upon transfer of the goods from the Company to the Franchisee. As of December 30, 2020, there were no performance obligations, related to hardware services that were unsatisfied or partially satisfied. Franchise Advertising Fee Revenue 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 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 74 Table of Contents 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. Fees received in advance of provided services are included in other accrued expenses and current liabilities and were $ 0.1 million and $ 0.5 million at December 30, 2020 and December 25, 2019, respectively. Pursuant to the Company’s Franchise Disclosure Document, company-operated restaurants contribute to the advertising fund on the same basis as franchised restaurants. At December 30, 2020, the Company was obligated to spend $ 0.1 million more in future periods to comply with this requirement. Production costs of commercials, programming and other marketing activities are charged to the advertising funds when the advertising is first used for its intended purpose. Total contributions and other marketing expenses are included in general and administrative expenses in the accompanying consolidated statements of operations. Preopening Costs Preopening costs incurred in connection with the opening of new restaurants are expensed as incurred. Preopening costs, which are included in general and administrative expenses on the accompanying consolidated statements of operations, were $ 0.1 million, $ 0.4 million and $ 0.8 million for the years ended December 30, 2020, December 25, 2019, and December 26, 2018, respectively. Leases The Company’s operations utilize property, facilities, equipment and vehicles. 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 more than 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. 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. 75 Table of Contents 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 During fiscal 2019, the Company completed the sale of four company-operated restaurants within the San Francisco area to an existing franchisee, seven company-operated restaurants in the Phoenix area to another existing franchisee and five company-operated restaurants in Texas to a third franchisee. The Company has determined that these restaurant dispositions represent multiple element arrangements, and as a result, the cash consideration received was allocated to the separate elements based on their relative standalone selling price. Cash proceeds included upfront consideration for the sale of the restaurants and franchise fees, as well as future cash consideration for royalties and lease payments. The Company considered the future lease payments in allocating the initial cash consideration received. The cash consideration per restaurant for franchise fees is consistent with the amounts stated in the related franchise agreements, which are charged for separate standalone arrangements. The Company initially defers and subsequently recognizes the franchise fees over the term of the franchise agreement. Future royalty income is also recognized in revenue as earned. 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. 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 is not used for trading purposes. The derivative contract is entered into with financial institutions. The Company records the derivative instrument at fair value within other assets on its consolidated balance sheet. 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 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. As a result of the use of an interest rate swap, the Company is exposed to risk that the counterparty will fail to meet their contractual obligations. To mitigate the counterparty credit risk, the Company will only enter into contracts with major financial institutions, based upon their credit ratings and other factors, and will continue to assess the creditworthiness of the counterparty. As of December 30, 2020, the counterparty to the Company’s interest rate swap has performed in accordance with their contractual obligation. Income Taxes The provision for income taxes, income taxes payable and deferred income taxes is determined using the asset and liability method. Deferred tax assets and liabilities are determined based on temporary differences between the financial carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which the temporary differences are expected to reverse. On a periodic basis, the Company assesses the probability that its net deferred tax assets, if any, will be recovered. 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. 76 Table of Contents 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. federal and state jurisdictions where it is required to file. When there are uncertainties related to potential income tax benefits, in order to qualify for recognition, the position the Company takes has to have at least a “more likely than not” chance of being sustained (based on the position’s technical merits) upon challenge by the respective authorities. The term “more likely than not” means a likelihood of more than 50%. Otherwise, the Company may not recognize any of the potential tax benefit associated with the position. The Company recognizes a benefit for a tax position that meets the “more likely than not” criterion as the largest amount of tax benefit that is greater than 50% likely of being realized upon its effective resolution. Unrecognized tax benefits involve management’s judgment regarding the likelihood of the benefit being sustained. The final resolution of uncertain tax positions could result in adjustments to recorded amounts and may affect our results of operations, financial position and cash flows. 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 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 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. In fiscal 2015, the Company incurred a charge of approximately $ 41.4 million relating to the present value of its total expected TRA payments. As of December 30, 2020 and December 25, 2019, the Company had accrued $ 3.2 million and $ 8.2 million, respectively relating to expected TRA payments. 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 Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories: ● Level 1: Quoted prices for identical instruments in active markets. ● Level 2: Observable prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs or significant value drivers are observable. 77 Table of Contents EL POLLO LOCO HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ● Level 3: 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 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. 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 ​ Fair Value Level 1 Level 2 Level 3 Other non-current liabilities - Interest rate swap ​ $ 1,139 ​ $ — ​ $ 1,139 ​ $ — ​ ​ The following table presents fair value for the interest rate swap at December 25, 2019 (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fair Value Measurements Using ​ Fair Value Level 1 Level 2 Level 3 Other assets - Interest rate swap ​ $ 360 ​ $ — ​ $ 360 ​ $ — ​ 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 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): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total Level 1 Level 2 Level 3 ​ Impairment Losses Certain property and equipment, net ​ $ — ​ $ — ​ $ — ​ $ — $ 2,955 Certain ROU assets, net ​ $ 902 ​ $ — ​ $ — ​ $ 902 ​ $ 543 ​ 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): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total Level 1 Level 2 Level 3 Impairment Losses Certain property and equipment, net ​ $ — ​ $ — ​ $ — ​ $ — $ 339 Certain ROU assets, net ​ $ 6,196 ​ ​ ​ ​ ​ ​ ​ ​ 6,196 ​ ​ 3,220 ​ 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 ​ Total Level 1 Level 2 Level 3 Losses Certain property and equipment, net ​ $ 449 ​ $ — ​ $ — ​ $ 449 ​ $ 5,147 ​ 78 Table of Contents EL POLLO LOCO HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and certain accrued expenses approximate fair value due to their short-term maturities. The recorded value of the TRA approximates fair value, based on borrowing rates currently available to the Company for debts with similar terms and remaining maturities (Level 3 measurement). Stock-Based Compensation 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. The guidance also requires companies to estimate the fair value of stock option awards on the date of grant using an option pricing model, which require the input of subjective assumptions. The Company is required to use judgment in estimating the amount of stock-based awards that are expected to be forfeited. If actual forfeitures differ significantly from the original estimate, stock-based compensation expense and the results of operations could be affected. The cost is recognized on a straight-line basis over the period during which an employee is required to provide service, usually the vesting period. For options or restricted shares that are based on a performance requirement, the cost is recognized on an accelerated basis over the period to which the performance criteria relate. Earnings per Share Earnings per share (“EPS”) is calculated using the weighted average number of common shares outstanding during each period. Diluted EPS assumes the conversion, exercise or issuance of all potential common stock equivalents unless the effect is to reduce a loss or increase the income per share. For purposes of this calculation, options and restricted stock awards are considered to be common stock equivalents and are only included in the calculation of diluted earnings per share when their effect is dilutive. The shares used to compute basic and diluted net income per share represent the weighted-average common shares outstanding. Recently Adopted Accounting Pronouncements 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. 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. 79 Table of Contents 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. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”, which modifies Topic 740 to simplify the accounting for income taxes. ASU 2019-12 is effective for financial statements issued for annual periods beginning after December 15, 2020, and for the interim periods therein. 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. 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 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 . The Franchise Development Option Agreement terminates (i) ten years after execution, or (ii) if the Initial Option is exercised, five years after that exercise. 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. 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. ​ 3. PROPERTY AND EQUIPMENT The costs and related accumulated depreciation and amortization of major classes of property are as follows (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ December 30, 2020 December 25, 2019 Land ​ $ 12,323 ​ $ 12,323 Buildings and improvements ​ 147,939 ​ 144,794 Other property and equipment ​ 77,177 ​ 75,234 Construction in progress ​ 3,567 ​ 4,213 ​ ​ 241,006 ​ 236,564 Less: accumulated depreciation and amortization ​ ( 161,364 ) ​ ( 144,786 ) ​ ​ $ 79,642 ​ $ 91,778 ​ 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. 80 Table of Contents EL POLLO LOCO HOLDINGS, INC. 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. ​ 4. TRADEMARKS, OTHER INTANGIBLE ASSETS AND LIABILITIES Domestic trademarks consist of the following (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 30, ​ December 25, ​ 2020 2019 Cost ​ $ 120,700 ​ $ 120,700 Accumulated impairment charges ​ ( 58,812 ) ​ ( 58,812 ) Trademarks, net ​ $ 61,888 ​ $ 61,888 ​ ​ ​ 5. LEASES 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. All leases that either (1) commenced, or (2) were modified or re-measured after December 27, 2018 are accounted for under Topic 842. As a result of Topic 842, the Company recognized a ROU Asset of $ 205.2 million and a lease liability of $ 222.3 million on its consolidated balance sheet as of December 27, 2018. However, the adoption of Topic 842 did not result in a material impact on the Company’s consolidated statement of operations or consolidated statement of cash flows. Nature of leases The Company’s operations utilize property, facilities, equipment and vehicles leased from others. 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 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. Building and facility leases The majority of the Company’s building and facilities leases are classified as operating leases; however, the Company currently has two facility and two equipment leases that are classified as finance leases. 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. Additionally, a number of the Company’s leases have payments, which increase at pre-determined dates based on the change in the consumer price index. 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 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. 81 Table of Contents EL POLLO LOCO HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The initial terms of land and restaurant building leases are generally 20 years , exclusive of options to renew. These leases typically have four 5-year renewal options , which have generally been excluded in the calculation of the ROU asset and lease liability, as they are not considered reasonably certain to be exercised, unless (1) the renewal had already occurred as of the time of adoption of Topic 842, or (2) there have been significant leasehold improvements that have a useful life that extend past the original lease term. Furthermore, there are no residual value guarantees and no restrictions imposed by the lease. During the year ended December 30, 2020, the Company reassessed the lease terms on 12 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 $ 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. 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. The Company also subleases facilities to certain franchisees and other non-related parties which are also considered operating leases. Sublease income also includes contingent rental income based on net revenues. The vast majority of these leases have rights to extend terms via fixed rental increases. However, none of these leases have early termination rights, the right to purchase the premises or any residual value guarantees. The Company does not have any related party leases. 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. The impairment primarily related to four restaurants sold to franchisees and one restaurant closed during fiscal 2019. Equipment Leases of equipment primarily consist of restaurant equipment, copiers and vehicles. These leases are fixed payments with no variable component. Additionally, no optional renewal periods have been included in the calculation of the ROU Asset, there are no residual value guarantees and no restrictions imposed. Significant Assumptions and Judgments In applying the requirements of Topic 842, the Company made significant assumptions and judgments related to determination of whether a contract contains a lease and the discount rate used for the lease. In determining if any of the Company’s contracts contain a lease the Company made assumptions and judgments related to its ability to direct the use of any assets stated in the contract and the likelihood of renewing any short-term contracts for a period extending past twelve months. The Company also made significant assumptions and judgments in determining an appropriate discount rate for property leases. These included using a consistent discount rate for a portfolio of leases entered into at varying dates, using the full 20-year term of the lease, excluding any options, and using the total minimum lease payments. The Company utilizes a third-party valuation firm in determining the discount rate, based on the above assumptions. For all other leases, the Company uses the discount rate implicit in the lease, or the Company’s incremental borrowing rate. 82 Table of Contents EL POLLO LOCO HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, disaggregated by underlying asset (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 30, 2020 ​ December 25, 2019 ​ ​ Property Equipment ​ ​ ​ Property Equipment ​ ​ ​ ​ Leases ​ Leases ​ Total ​ Leases ​ Leases ​ Total Finance lease cost: ​ ​ ​ ​ ​ ​ ​ ​ Amortization of right-of-use assets ​ $ 11 ​ $ — ​ $ 11 ​ $ 9 ​ $ — ​ $ 9 Interest on lease liabilities ​ 27 ​ — ​ 27 ​ 27 ​ — ​ 27 Operating lease cost ​ 26,578 ​ 1,227 ​ 27,805 ​ 26,212 ​ 1,273 ​ 27,485 Short-term lease cost ​ — ​ 23 ​ 23 ​ — ​ 34 ​ 34 Variable lease cost ​ 444 ​ 191 ​ 635 ​ 455 ​ 186 ​ 641 Sublease income ​ ( 3,251 ) ​ — ​ ( 3,251 ) ​ ( 2,430 ) ​ — ​ ( 2,430 ) Total lease cost ​ $ 23,809 ​ $ 1,441 ​ $ 25,250 ​ $ 24,273 ​ $ 1,493 ​ $ 25,766 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 ​ ​ $ 23,972 ​ $ 24,540 Lease cost – General & administrative ​ ​ 464 ​ ​ 463 Lease cost – Depreciation and amortization ​ ​ 11 ​ ​ 9 Lease cost – Interest expense ​ ​ 27 ​ ​ 27 Lease cost - Closed-store reserve ​ ​ 776 ​ ​ 727 Total lease cost ​ ​ $ 25,250 ​ $ 25,766 ​ 83 Table of Contents 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 ​ December 25, 2019 ​ Property Equipment ​ ​ ​ Property ​ Equipment ​ ​ ​ ​ ​ Leases ​ Leases ​ Total ​ Leases ​ Leases ​ Total Cash paid for amounts included in the measurement of lease liabilities ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating cash flows used for operating leases ​ $ 23,683 ​ $ 1,230 $ 24,913 ​ $ 25,168 ​ $ 1,282 ​ $ 26,450 Financing cash flows used for finance leases ​ $ 34 ​ $ 5 $ 39 ​ $ 68 ​ $ — ​ $ 68 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Non-cash investing and financing activities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating lease ROU assets obtained in exchange for lease liabilities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating lease ROU assets ​ $ 5,850 ​ $ 13 $ 5,863 ​ $ 10,339 ​ $ 256 ​ $ 10,595 Finance lease ROU assets obtained in exchange for lease liabilities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Finance lease ROU assets ​ $ 1,623 ​ $ 54 ​ $ 1,677 ​ $ — ​ $ — ​ $ — Derecognition of ROU assets due to terminations, impairment or modifications ​ $ ( 543 ) ​ $ ( 26 ) $ ( 569 ) ​ $ ( 4,574 ) ​ $ ( 157 ) ​ $ ( 4,731 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating lease ROU assets obtained and liabilities incurred as a result of adoption of ASC 842: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating lease ROU assets ​ $ — ​ $ — ​ $ — ​ $ 200,555 ​ $ 4,668 ​ $ 205,223 Operating lease liabilities ​ $ — ​ $ — ​ $ — ​ $ 217,615 ​ $ 4,668 ​ $ 222,283 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other Information ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted-average remaining lease term—finance leases ​ 18.98 ​ 4.52 ​ ​ ​ ​ 2.83 ​ ​ — ​ ​ ​ Weighted-average remaining lease term—operating leases ​ 11.45 ​ 2.31 ​ ​ ​ ​ 12.08 ​ ​ 3.20 ​ ​ ​ Weighted-average discount rate—finance leases ​ 2.50 % 1.68 % ​ ​ ​ 11.10 % ​ — ​ ​ ​ Weighted-average discount rate—operating leases ​ 4.29 % 3.93 % ​ ​ ​ 4.38 % ​ 3.96 % ​ ​ ​ 84 Table of Contents EL POLLO LOCO HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Information regarding the Company’s minimum future lease obligations at December 30, 2020 is as follows (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Finance ​ Operating Leases ​ Minimum Minimum Minimum ​ ​ Lease ​ Lease ​ Sublease For the Years Ending ​ Payments ​ Payments ​ Income December 29, 2021 ​ $ 126 ​ $ 28,952 ​ $ 2,897 December 28, 2022 ​ 150 ​ 26,460 ​ 3,312 December 27, 2023 ​ 105 ​ 24,115 ​ 3,345 December 25, 2024 ​ 105 ​ 21,821 ​ 3,231 December 31, 2025 ​ 101 ​ 19,371 ​ 2,881 Thereafter ​ 1,684 ​ 125,221 ​ 24,476 Total ​ $ 2,271 ​ $ 245,940 ​ $ 40,142 Less: imputed interest ( 1.68 % - 4.29 %) ​ ( 509 ) ​ ( 47,375 ) ​ Present value of lease obligations ​ 1,762 ​ 198,565 ​ Less: current maturities ​ ( 70 ) ​ ( 19,907 ) ​ Noncurrent portion ​ $ 1,692 ​ $ 178,658 ​ ​ Short-Term Leases The Company has multiple short-term leases, which have terms of less than 12 months, and thus were excluded from the recognition requirements of Topic 842. 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. Lessor 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 . These lease agreements generally provide for a fixed base rent and, in some instances, contingent rent based on a percentage of gross operating profit or net revenues. All leases are considered operating leases. For the leases in which the Company is the lessor, there are options to extend the lease. However, there are no terms and conditions to terminate the lease, no right to purchase premises and no residual value guarantees. Additionally, there are no related party leases. 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 . ​ 6. 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, 85 Table of Contents 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. The obligations under the 2018 Credit Agreement and related loan documents are guaranteed by the Company and Intermediate. 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 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. The base rate is calculated as the highest of (a) the federal funds rate plus 0.50 %, (b) the published Bank of America prime rate, or (c) LIBOR plus 1.00 %. For LIBOR loans, the margin is in the range of 1.25 % to 2.25 %, and for base rate loans the margin is in the range of 0.25 % to 1.25 %. For borrowings under the 2018 Revolver during fiscal 2020, the interest rate range was 1.6 % to 3.3 %. 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. For the year ended December 30, 2020, the Company had interest expense of $ 2.7 million under the 2018 Revolver. For the year ended December 25, 2019, the Company had interest expense of $ 3.1 million under the 2018 and 2014 Revolver, and for the year ended December 26, 2018, the Company had interest expense of $ 3.0 million under the 2014 Revolver. The 2018 Credit Agreement contains certain financial covenants. 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. Maturities 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. There are no required principal payments prior to maturity for the 2018 Revolver. Interest Rate Swap 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 86 Table of Contents EL POLLO LOCO HOLDINGS, INC. 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 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. The following table shows the financial statement line item and amount of the Company’s cash flow hedge accounting on the consolidated balance sheet (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 30, 2020 ​ December 25, 2019 ​ Notional Fair value Notional Fair value Other assets - Interest rate swap ​ ​ — ​ ​ — ​ $ 40,000 ​ $ 360 Other liabilities - Interest rate swap ​ $ 40,000 ​ $ 1,139 ​ ​ — ​ ​ — ​ The following table summarizes the effect of the Company’s cash flow hedge accounting on the consolidated statements of operations (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 30, 2020 December 25, 2019 Interest expense on hedged portion of debt ​ $ 979 ​ $ 461 ​ Interest expense (income) on interest rate swap ​ 278 ​ ( 84 ) Interest expense on debt and derivatives, net ​ $ 1,257 ​ $ 377 ​ ​ 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 ​ December 25, 2019 ​ December 26, 2018 ​ December 30, 2020 ​ December 25, 2019 ​ December 26, 2018 Interest rate swap ​ $ ( 1,762 ) ​ $ 430 ​ $ — ​ $ 278 ​ $ ( 84 ) ​ $ — ​ ​ See Note 2 “Summary of Significant Accounting Policies” for the fair value of the Company’s derivative asset. ​ 7. OTHER ACCRUED EXPENSES AND CURRENT LIABILITIES Other accrued expenses and current liabilities consist of the following (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ December 30, 2020 December 25, 2019 Accrued sales and property taxes ​ $ 5,216 ​ $ 4,665 Gift card liability ​ 4,008 ​ 3,006 Accrued legal settlements and professional fees ​ 321 ​ 16,901 Deferred franchise and development fees ​ 503 ​ 705 Current portion of lease payment deferrals ​ ​ 1,793 ​ ​ — Other ​ 4,874 ​ 3,320 Total other accrued expenses and current liabilities ​ $ 16,715 ​ $ 28,597 ​ ​ 87 Table of Contents EL POLLO LOCO HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ​ ​ 8. OTHER NONCURRENT LIABILITIES Other noncurrent liabilities consist of the following (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ December 30, 2020 December 25, 2019 Deferred franchise and development fees ​ $ 5,125 ​ $ 5,612 Derivative liability ​ ​ 1,139 ​ ​ — Employer social security tax deferral ​ ​ 4,853 ​ ​ — Other ​ 175 ​ 67 Total other noncurrent liabilities ​ $ 11,292 ​ $ 5,679 ​ ​ ​ 9. INCOME TAXES The provision (benefit) for income taxes is based on the following components (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 30, December 25, December 26, For the Years Ended ​ 2020 ​ 2019 ​ 2018 Current income taxes: ​ ​ ​ Federal ​ $ 520 ​ $ — ​ $ — State ​ 1,123 ​ 104 ​ 220 Total current ​ 1,643 ​ 104 ​ 220 Deferred income taxes: ​ ​ ​ Federal ​ 3,350 ​ 5,991 ​ ( 3,526 ) State ​ 658 ​ 3,587 ​ 98 Total deferred ​ 4,008 ​ 9,578 ​ ( 3,428 ) Tax provision (benefit) for income taxes ​ $ 5,651 ​ $ 9,682 ​ $ ( 3,208 ) ​ 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. 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 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. 88 Table of Contents EL POLLO LOCO HOLDINGS, INC. 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 30, ​ December 25, ​ December 26, ​ For the Years Ended 2020 2019 2018 Statutory federal income tax rate applied to earnings before income taxes and extraordinary items ​ 21.0 % 21.0 % 21.0 % State tax benefit (net of federal benefit) 4.3 6.0 5.0 ​ Change in valuation allowance 0.4 2.4 ( 6.9 ) ​ TRA expense — — 1.3 ​ WOTC Credit ( 0.9 ) ( 0.8 ) 3.3 ​ Stock option exercises ( 6.6 ) ( 1.0 ) 2.1 ​ Other 0.6 0.3 0.5 ​ Total 18.8 % 27.9 % 26.3 % ​ 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. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company has evaluated the available evidence supporting the realization of its gross deferred tax assets. After evaluating all of the positive and negative evidence, including the Company’s continued income from operations, the Company concluded that it is more likely than not that its deferred tax assets will be realized. In fiscal 2019 and 2018, the Company recorded a valuation allowance of approximately $ 0.9 million and $ 5.1 million, respectively, against its deferred tax asset resulting from certain tax credits that may not be realizable prior to the time the credits expire. In fiscal 2020, the Company recorded an additional $ 0.1 million to the valuation allowance. As of December 30, 2020, the total valuation allowance was $ 6.1 million. On July 30, 2014, the Company entered into the TRA. The TRA calls for the Company to pay its pre-IPO stockholders 85 % of the cash savings that the Company realizes in its taxes as a result of utilizing its NOLs and other tax attributes attributable to preceding periods. The TRA charge expense (benefit) is a permanent add-back to the Company’s taxable income. 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. As of December 30, 2020 and December 25, 2019, the deferred tax assets related to California Enterprise Zone credits, net of valuation allowances are $ 2.5 million and $ 3.3 million, respectively. 89 Table of Contents EL POLLO LOCO HOLDINGS, INC. 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. ​ ​ ​ ​ ​ ​ ​ ​ ​ December 30, December 25, ​ ​ 2020 ​ 2019 Deferred assets: ​ ​ Capital leases ​ $ 27 ​ $ 31 Accrued vacation ​ 506 ​ 454 Accrued legal ​ — ​ 4,434 Accrued workers’ compensation ​ 1,894 ​ 1,090 Enterprise zone and other credits ​ 8,579 ​ 10,442 Net operating losses ​ 5 ​ 1,814 Fixed assets ​ 4,643 ​ 2,955 ROU assets ​ 53,875 ​ 57,931 Other ​ 6,349 ​ 4,698 Total deferred tax assets ​ 75,878 ​ 83,849 Valuation allowance ​ ( 6,127 ) ​ ( 5,993 ) Net deferred tax assets ​ 69,751 ​ 77,856 Deferred liabilities: ​ ​ Goodwill ​ ( 6,218 ) ​ ( 6,060 ) Trademark ​ ( 16,773 ) ​ ( 16,745 ) Prepaid expense ​ ( 720 ) ​ ( 791 ) ROU liabilities ​ ( 48,005 ) ​ ( 52,056 ) Other ​ ( 96 ) ​ ( 167 ) Deferred tax liabilities ​ ( 71,812 ) ​ ( 75,819 ) Net deferred tax (liability) asset ​ $ ( 2,061 ) ​ $ 2,037 ​ 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): ​ ​ ​ ​ ​ ​ ​ ​ ​ December 30, December 25, ​ ​ 2020 ​ 2019 Noncurrent: ​ ​ ​ ​ ​ ​ Assets (liabilities) - state ​ $ 3,166 ​ $ 3,709 Assets (liabilities) - federal ​ ( 5,227 ) ​ ( 1,672 ) Net deferred tax (liability) asset ​ $ ( 2,061 ) ​ $ 2,037 ​ ​ ​ ​ 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. The Company believes that no significant changes to the amount of unrecognized tax benefits will occur within the next twelve months. The Company is subject to taxation in the United States and in various state jurisdictions. The Company is no longer subject to U.S. examination for years before 2017 by the federal taxing authority, and for years before 2016 by state taxing authorities. ​ ​ ​ ​ ​ 10. EMPLOYEE BENEFIT PLANS The Company sponsors a defined contribution employee benefit plan that permits its employees, subject to certain eligibility requirements, to contribute up to 25 % of their qualified compensation to the plan. 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 90 Table of Contents 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. ​ 11. 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 At December 30, 2020, options to purchase 1,030,866 shares of common stock of the Company were outstanding, including 685,007 vested and 345,859 unvested. Unvested options vest over time, or upon our achieving annual financial goals. However, the compensation committee of the board of directors, as administrator of the Company’s 2018 Omnibus Equity Incentive Plan, has the power to accelerate the vesting schedule of stock-based compensation, and, generally, in the event of an employee termination in connection with a change in control of the Company, any unvested portion of an award under the plan shall become fully vested. At December 30, 2020, 303,786 premium options, options granted above the stock price at date of grant, remained 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 options for the years ended December 30, 2020 and December 25, 2019, are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted-Average Aggregate ​ ​ Weighted-Average Contractual Life Intrinsic Value ​ ​ Shares ​ Exercise Price Life (Years) (in thousands) Outstanding - December 26, 2018 2,102,404 ​ $ 7.68 ​ ​ ​ ​ ​ ​ Grants ​ 323,900 ​ ​ 11.51 ​ ​ ​ ​ ​ ​ Exercised ( 234,728 ) ​ 6.18 ​ ​ ​ ​ ​ ​ Forfeited, cancelled or expired ( 114,006 ) ​ 13.35 ​ ​ ​ ​ ​ ​ Outstanding - December 25, 2019 2,077,570 ​ $ 8.14 ​ ​ ​ ​ ​ ​ Exercised ( 970,736 ) ​ 6.04 ​ ​ ​ ​ ​ ​ Forfeited, cancelled or expired ( 75,968 ) ​ $ 12.14 ​ ​ ​ ​ ​ ​ Outstanding - December 30, 2020 1,030,866 ​ $ 9.82 ​ ​ 5.51 ​ $ 8,638 Vested and expected to vest at December 30, 2020 1,026,480 ​ $ 9.81 ​ ​ 5.50 ​ $ 8,609 Exercisable at December 30, 2020 685,007 ​ $ 9.02 ​ ​ 4.28 ​ $ 6,288 ​ 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. The Company measures and recognizes compensation expense for the estimated fair value of stock options for employees and non-employee directors and similar awards based on the grant-date fair value of the award. 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 91 Table of Contents 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. The forfeiture rate is based on historical rates and reduces the compensation expense recognized. The expected term for options granted is derived using the “simplified” method, in accordance with SEC guidance. The Company calculates the risk-free interest rate using the implied yield for a U.S. Treasury security with constant maturity and a remaining term equal to the expected term of the Company’s employee stock options. The Company does not anticipate paying any cash dividends for the foreseeable future and therefore uses an expected dividend yield of zero for option valuation purposes. Expected volatility is estimated using four publicly-traded companies in our market category. These are selected based on similarities of market capitalization, size, and other financial and operational characteristics. 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 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 December 26, 2018 Expected volatility ​ 28.7 % 28.4 % Risk-free interest rate 2.3 % 2.9 % Expected term (years) 6.25 6.25 ​ Expected dividends — — ​ ​ 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. The above assumptions generally require significant judgment. If in the future we determine that another method is more reasonable, or if another method for calculating these input assumptions is prescribed by authoritative guidance, and, therefore, should be used to estimate volatility or expected term, the fair value calculated for our stock options could change significantly. Higher volatility and longer expected lives result in an increase to stock-based compensation expense determined at the date of grant. 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. Changes in the estimated forfeiture rate can have a significant effect on reported stock-based compensation expense, as the cumulative effect of adjusting the rate for all expense amortization is recognized in the period the forfeiture estimate is changed. If a revised forfeiture rate is higher than the previously-estimated forfeiture rate, an adjustment is made that will result in a decrease to the stock-based compensation expense recognized in the financial statements. If a revised forfeiture rate is lower than the previously-estimated forfeiture rate, an adjustment is made that will result in an increase to the stock-based compensation expense recognized in the financial statements. The effect of forfeiture adjustments was insignificant in fiscal 2020, 2019 and 2018. We will continue to use significant judgment in evaluating the expected term, volatility, and forfeiture rate related to our stock-based compensation. Restricted Shares In fiscal 2020 and 2019, 415,022 and 299,052 restricted share awards were granted, respectively, at the fair market value on the date of grant. These grants vest based on continued service over three years for directors and four years for employees. Additionally, in fiscal 2018, 72,116 performance share units were granted, which vest over a minimum of one year and a maximum of five years . Performance share units are granted at fair market value on the date of grant and are subject to service-based and market-based vesting conditions. A portion of the performance share units satisfied their market-based vesting conditions during the fourth quarter of fiscal 2018 and vested upon the satisfaction of their service condition in the second quarter of fiscal 2019. The Company bases the amount of unearned compensation recorded on the fair market value of the awards on the date of issuance. 92 Table of Contents 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted-Average ​ ​ Shares ​ Fair Value Unvested shares at December 26, 2018 490,700 ​ $ 10.91 Granted 299,052 ​ $ 11.62 Released ( 147,862 ) ​ $ 10.73 Forfeited, cancelled, or expired ( 53,882 ) ​ $ 11.81 Unvested shares at December 25, 2019 588,008 ​ $ 11.23 Granted 415,022 ​ $ 12.50 Released ( 158,748 ) ​ $ 11.73 Forfeited, cancelled, or expired ( 101,878 ) ​ $ 12.32 Unvested shares at December 30, 2020 742,404 ​ $ 11.68 ​ 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. ​ ​ 12. EARNINGS PER SHARE Basic EPS is calculated using the weighted-average number of shares of common stock outstanding during the years ended December 30, 2020, December 25, 2019, and December 26, 2018. 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. 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. 93 Table of Contents 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 30, ​ December 25, ​ December 26, ​ 2020 2018 2018 Numerator: ​ ​ ​ Net income (loss) ​ $ 24,474 ​ $ 24,900 ​ $ ( 8,994 ) Denominator: ​ ​ ​ Weighted-average shares outstanding—basic ​ 35,193,325 ​ 36,739,209 ​ 38,574,553 Weighted-average shares outstanding—diluted ​ 35,796,406 ​ 37,441,503 ​ 38,574,553 Net income (loss) per share—basic ​ $ 0.70 ​ $ 0.68 ​ $ ( 0.23 ) Net income (loss) per share—diluted ​ $ 0.68 ​ $ 0.67 ​ $ ( 0.23 ) Anti-dilutive securities not considered in diluted EPS calculation ​ 81,041 ​ 526,295 ​ 2,593,104 ​ Below is a reconciliation of basic and diluted share counts. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Years Ended ​ December 30, December 25, December 26, ​ ​ 2020 ​ 2019 ​ 2018 Weighted-average shares outstanding—basic 35,193,325 36,739,209 38,574,553 Dilutive effect of stock options and restricted shares 603,081 702,294 — Weighted-average shares outstanding—diluted 35,796,406 37,441,503 38,574,553 ​ ​ 13. COMMITMENTS AND CONTINGENCIES Legal Matters On or about February 24, 2014 , a former employee filed a class action in the Superior Court of the State of California, County of Orange, under the caption Elliott Olvera, et al v. 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. No specific amount of damages sought was specified in the complaint. The court recently certified two classes of plaintiffs - one class encompasses restaurant employees who were not provided proper rest breaks because they were not allowed to leave the premises during their breaks and the other class encompasses restaurant employees who were required to wait at the restaurant after they finished working for the night until the manager set the alarm for safety purposes. The parties reached a settlement in principle on January 24, 2019 of all claims brought on behalf of the 32,000 + putative class members in the Olvera Action, as well as all claims for failure to pay overtime compensation, failure to provide meal periods and rest breaks, and failure to provide itemized wage statements brought in the class actions captioned Martha Perez v. El Pollo Loco, Inc. (Los Angeles Superior Court Case No. BC624001), Maria Vega, et al. v. El Pollo Loco, Inc. (Los Angeles Superior Court Case No. BC649719), and Gonzalez v. El Pollo Loco, Inc. (Los Angeles Superior Court Case No. BC712867). The settlement reached in principle in the Olvera , Perez , Vega , and Gonzalez actions resolves all potential claims from April 12, 2010 through April 1, 2019 El Pollo Loco restaurant employees may have against El Pollo Loco for failure to pay for all compensation owed, failure to pay overtime compensation, failure to provide meal periods and rest breaks, and failure to provide itemized wage statements, among other wage and hour related claims. 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. The Company fully expects to have to defend against similar lawsuits in the future. Daniel Turocy, et al. v. El Pollo Loco Holdings, Inc., et al. (Case No. 8:15-cv-01343) was filed in the United States District Court for the Central District of California on August 24, 2015, and Ron Huston, et al. v. El Pollo Loco Holdings, Inc., et al. (Case No. 8:15-cv-01710) was filed in the United States District Court for the Central District of 94 Table of Contents EL POLLO LOCO HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS California on October 22, 2015. The two lawsuits have been consolidated, with co-lead plaintiffs and class counsel. A consolidated complaint was filed on January 29, 2016, on behalf of co-lead plaintiffs and others similarly situated, alleging violations of federal securities laws in connection with Holdings common stock purchased or otherwise acquired and the purchase of call options or the sale of put options, between May 1, 2015 and August 13, 2015 (the “Class Period”). The named defendants are Holdings; Stephen J. Sather, Laurance Roberts, and Edward J. Valle (collectively, the “Individual Defendants”); and Trimaran Pollo Partners, LLC, Trimaran Capital Partners, and Freeman Spogli & Co. (collectively, the “Controlling Shareholder Defendants”). Among other things, Plaintiffs allege that, in 2014 and early 2015, Holdings suffered losses due to rising labor costs in California and, in an attempt to mitigate the effects of such rising costs, removed a $ 5 value option from the Company’s menu, which resulted in a decrease in traffic from value-conscious consumers. Plaintiffs further allege that during the Class Period, Holdings and the Individual Defendants made a series of materially false and misleading statements that concealed the effect that these factors were having on store sales growth, resulting in Holdings stock continuing to be traded at artificially inflated prices. As a result, Plaintiffs and other members of the putative class allegedly suffered damages in connection with their purchase of Holdings’ stock during the Class Period. In addition, Plaintiffs allege that the Individual Defendants and Controlling Shareholder Defendants had direct involvement in, and responsibility over, the operations of Holdings, and are presumed to have had, among other things, the power to control or influence the transactions giving rise to the alleged securities law violations. In both cases, Plaintiffs seek an unspecified amount of damages, as well as costs and expenses (including attorneys’ fees). On July 25, 2016, the Court issued an order granting, without prejudice, Defendants’ Motion to Dismiss plaintiff’s complaint for failure to state a claim. Plaintiffs were granted leave to amend their complaint, and filed an amended complaint on August 22, 2016. Defendants moved to dismiss the amended complaint, and on March 20, 2017, the Court dismissed the amended complaint and granted Plaintiffs leave to file another amended complaint. Plaintiffs filed another amended complaint on April 17, 2017. Defendants filed a motion to dismiss the amended complaint on or about May 17, 2017. The Court denied Defendants’ motion to dismiss the third amended complaint on August 4, 2017. On December 8, 2017, Plaintiffs filed a motion for class certification, and on July 3, 2018, the Court granted Plaintiffs’ motion and certified a class as to all of Plaintiffs’ claims. Defendants filed a petition for appellate review of a portion of the Court’s July 3, 2018 class certification order. On October 19, 2018 the Ninth Circuit Court of Appeals denied the petition. 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 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. On or about November 5, 2015, a purported Holdings shareholder filed a derivative complaint on behalf of Holdings in the Court of Chancery of the State of Delaware against certain Holdings officers, directors and Trimaran Pollo Partners, L.L.C., under the caption Armen Galustyan v. Sather, et al. (Case No. 11676-VCL). The derivative complaint alleges that these defendants breached their fiduciary duties to Holdings and were unjustly enriched when they sold shares of Holdings at artificially inflated prices due to alleged misrepresentations and omissions regarding EPL’s comparable store sales in the second quarter of 2015. The Holdings shareholder’s requested remedies include an award of compensatory damages to Holdings, as well as a court order to improve corporate governance by putting forward for stockholder vote certain resolutions for amendments to Holdings’ Bylaws or Certificate of Incorporation. 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. A second purported Holdings shareholder filed a derivative complaint on or about September 23, 2016, under the caption Diep v. Sather , CA 12760-VCL in the Delaware Court of Chancery. The Diep action is also purportedly brought on behalf of Holdings, names the same defendants and asserts substantially the same claims on substantially the same alleged facts as does Galustyan . Defendants moved to stay or dismiss the Diep action. On March 17, 2017, the Delaware court granted in part, and denied in part, the motion to stay the Diep action. The court denied defendants’ motion to dismiss the complaint for failure to state a claim. On January 17, 2018, the court entered an 95 Table of Contents 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. 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. Janice P. Handlers-Bryman and Michael D. Bryman v. El Pollo Loco, Inc. , Los Angeles Superior Court (Case No. MC026045) (the “Lancaster Lawsuit”) was filed on February 9, 2016. Existing El Pollo Loco franchisees, Janice P. Handlers-Bryman and Michael D. Bryman, as individuals and in their capacities as trustees of the Handlers Bryman Trust (collectively, “Plaintiffs”), filed suit against us alleging, among other things, that we “imposed unreasonable time limitations” on their development of additional restaurant locations in Lancaster, California, and that we thereafter developed company-operated El Pollo Loco restaurants in the “market area” of Plaintiffs’ existing El Pollo Loco restaurant in Lancaster. Plaintiffs asserted claims against us for, among other things, (i) breach of the implied covenant of good faith and fair dealing, (ii) intentional interference with prospective business, and (iii) unfair business practices. In addition to an unspecified amount of damages and costs of the lawsuit, Plaintiffs sought reformation of the contract, declaratory relief, disgorgement of alleged revenues and profits, injunctive relief, and a judicial mandate requiring us to either transfer the company-operated locations to Plaintiffs or to continuously disgorge to Plaintiffs the unjust enrichment allegedly obtained by us through the operation of the company-operated restaurants in Lancaster. We denied Plaintiffs’ allegations as the franchise agreement did not grant Plaintiffs any exclusive territorial rights and, instead, expressly reserved for us the right to open and operate - and the right to grant others the right to open and operate - El Pollo Loco restaurants “in the immediate vicinity of or adjacent to” Plaintiffs’ restaurant in Lancaster. On April 24, 2017, four days before the commencement of trial, Plaintiffs filed a voluntary dismissal, without prejudice, of the Lancaster Lawsuit without any payment or other concession by us. The corresponding dismissal was entered by the court on April 25, 2017. On May 22, 2017, Plaintiffs filed a motion for relief from the dismissal which was granted by the court on June 29, 2017. The trial in the case was bifurcated between the liability and damages phases. The liability phase commenced on November 16, 2017. The only cause of action that the court allowed to go to the jury was the cause of action for breach of the covenant of good faith and fair dealing. The court elected not to present the cause of action for intentional interference with prospective business to the jury. (The causes of action for reformation due to mistake and unconscionability, unfair business practices under California Business & Professions Code §17200 et seq., and declaratory relief were not presented to the jury as these types of equitable claims are to be decided by the court as a matter of law.) On December 11, 2017, the jury returned a verdict in favor of Plaintiffs finding that the Company breached the implied covenant of good faith and fair dealing by (1) constructing the two new company-operated El Pollo Loco restaurants in Lancaster, and (2) not offering the two new company-operated El Pollo Loco restaurants in Lancaster to Plaintiffs. Because the trial was bifurcated, the December 11, 2017 verdict did not include a determination of damages. The damages phase of the trial commenced on April 20, 2018. On May 1, 2018, the jury returned a verdict on damages in favor of Plaintiffs in the following amounts: (1) $ 4,356,600 in “impact damages” arising out of our construction of the two new company-operated El Pollo Loco restaurants in Lancaster, and (2) $ 4,481,206 in “lost opportunity damages” arising out of our failure to offer the two new company-operated El Pollo Loco restaurants in Lancaster to Plaintiffs. On August 1, 2018, the court issued a final judgment and decision on the unfair business practices claim under California Business & Professions Code § 17200 et seq. 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. Thus, the court entered a total monetary judgment of $ 8,837,806 . There was no ruling on the causes of action for reformation due to mistake, and declaratory relief, and on January 27, 2020, the court entered an amended judgment dismissing these claims. 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 attorneys’ fees. 96 Table of Contents 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. 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. Bryman v. 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. 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. The Company is also involved in various other claims and legal actions that arise in the ordinary course of business. The Company does not believe that the ultimate resolution of these other actions will have a material adverse effect on its financial position, results of operations, liquidity, or capital resources. 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. 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 97 Table of Contents 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. At December 30, 2020, the Company’s total estimated commitment to purchase chicken was $ 32.3 million. Contingent Lease Obligations As a result of assigning the Company’s interest in obligations under real estate leases in connection with the sale of company-operated restaurants to some of the Company’s franchisees, the Company is contingently liable on five lease agreements. These leases have various terms, the latest of which expires in 2036. As of December 30, 2020, the potential amount of undiscounted payments the Company could be required to make in the event of non-payment by the primary lessee was $ 3.0 million. The present value of these potential payments discounted at the Company’s estimated pre-tax cost of debt at December 30, 2020 was $ 2.7 million. The Company’s franchisees are primarily liable on the leases. The Company has cross-default provisions with these franchisees that would put them in default of their franchise agreements in the event of non-payment under the leases. The Company believes that these cross-default provisions reduce the risk that payments will be required to be made under these leases. 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 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. Indemnification Agreements The Company has entered into indemnification agreements with each of its current directors and officers. These agreements require the Company to indemnify these individuals to the fullest extent permitted under Delaware law against liabilities that may arise by reason of their service to the Company and to advance expenses incurred as a result of any proceeding against them as to which they could be indemnified. The Company also intends to enter into indemnification agreements with future directors and officers. ​ 14. RELATED PARTY TRANSACTIONS LLC owns approximately 46.0 % of the Company’s outstanding common stock. This large position means that LLC and its majority owners—predecessors and affiliates of, and certain funds managed by, Trimaran Capital Partners and Freeman Spogli & Co. (collectively, “Trimaran” and “Freeman Spogli,” respectively)—possess significant influence when stockholders vote on matters such as election of directors, mergers, consolidations and acquisitions, the sale of all or substantially all of the Company’s assets, decisions affecting the Company’s capital structure, amendments to the Company’s certificate of incorporation or by-laws, and the Company’s winding up and dissolution. 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. ​ 98 Table of Contents EL POLLO LOCO HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. REVENUE FROM CONTRACTS WITH CUSTOMERS Revenue Recognition Nature of products and services The Company has two revenue streams, company-operated restaurant revenue and franchise related revenue. See Note 2 “Summary of Significant Accounting Policies” for a description of the revenue recognition policies. Franchise and franchise advertising revenue Franchise revenue consists of franchise royalties, initial franchise fees, license fees due from franchisees, IT support services, and rental income for subleases to franchisees. Franchise advertising revenue consists of advertising contributions received from franchisees. Disaggregated revenue 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): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 30, ​ December 25, ​ December 25, ​ ​ 2020 ​ ​ 2019 ​ 2018 Core Market (1) : ​ ​ ​ ​ ​ Company-operated restaurant revenue ​ $ 346,662 ​ $ 351,624 ​ $ 340,421 Franchise revenue ​ 14,216 ​ 14,918 ​ 14,144 Franchise advertising fee revenue ​ 10,632 ​ 11,049 ​ 10,831 Total core market ​ $ 371,510 ​ $ 377,591 ​ $ 365,396 Non-Core Market (2) : ​ ​ ​ Company-operated restaurant revenue ​ $ 27,402 ​ $ 39,488 ​ $ 48,414 Franchise revenue ​ 15,202 ​ 13,901 ​ 11,627 Franchise advertising fee revenue ​ 11,973 ​ 11,350 ​ 10,391 Total non-core market ​ $ 54,577 ​ $ 64,739 ​ $ 70,432 Total revenue ​ $ 426,087 ​ $ 442,330 ​ $ 435,828 (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 30, 2020, December 25, 2019 and December 26, 2018: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 30, 2020 December 25, 2019 December 26, 2018 ​ Greater Los Angeles area market 71.3 % 70.5 % 69.2 % ​ Other markets 28.7 % 29.5 % 30.8 % ​ Total 100 % 100 % 100 % ​ ​ 99 Table of Contents EL POLLO LOCO HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Contract balances The following table provides information about the change in the franchise contract liability balances during the year ended December 30, 2020 and December 25, 2019 (in thousands): ​ ​ ​ ​ ​ December 26, 2018 $ 5,593 Revenue recognized - beginning balance ​ ( 441 ) Additional contract liability ​ 1,457 Revenue recognized - additional contract liability ​ ( 292 ) December 25, 2019 ​ $ 6,317 Revenue recognized - beginning balance ​ ( 1,082 ) Additional contract liability ​ 398 Revenue recognized - additional contract liability ​ ( 5 ) December 30, 2020 ​ $ 5,628 ​ The Company’s franchise contract liability includes development fees, initial franchise and license fees, franchise renewal fees, lease subsidies and royalty discounts and is included within other accrued expenses and current liabilities and other noncurrent liabilities within the accompanying consolidated balance sheets. The Company receives area development fees from franchisees when they execute multi-unit area development agreements. Initial franchise and license fees, or franchise renewal fees, are received from franchisees upon the execution of, or renewal of, a franchise agreement. Revenue is recognized from these agreements as the underlying performance obligation is satisfied, which is over the term of the agreement. For the year ended December 25, 2019, there was an increase to the contract liability balance due to the Company’s completion of the sale of four company-operated restaurants within the San Francisco area to an existing franchisee and seven company-operated restaurants in the Phoenix area to another existing franchisee. 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 30, 2020 (in thousands): ​ ​ ​ ​ ​ Franchise revenues: ​ 2021 ​ $ 508 2022 ​ 427 2023 ​ 410 2024 ​ 394 2025 ​ 386 Thereafter ​ 3,503 Total ​ $ 5,628 ​ 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): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 30, ​ December 25, ​ December 26, ​ ​ 2020 ​ 2019 ​ 2018 Loyalty rewards liability, beginning balance ​ $ 1,084 ​ $ 1,048 ​ $ 425 Revenue deferred ​ 2,463 ​ 2,395 ​ 1,850 Revenue recognized ​ ( 2,647 ) ​ ( 2,359 ) ​ ( 1,227 ) Loyalty rewards liability, ending balance ​ $ 900 ​ $ 1,084 ​ $ 1,048 ​ The Company expects all loyalty points revenue related to performance obligations unsatisfied as of December 30, 2020 to be recognized within one year . 100 Table of Contents EL POLLO LOCO HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Gift Cards The gift card liability included in other accrued expenses and current liabilities on the consolidated balance sheets was as follows (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ December 30, ​ December 25, ​ ​ 2020 ​ 2019 Gift card liability ​ $ 4,008 ​ $ 3,006 ​ 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): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 30, ​ December 25, ​ December 26, ​ ​ 2020 ​ 2019 ​ 2018 Revenue recognized from gift card liability balance at the beginning of the year ​ $ 880 ​ $ 800 ​ $ 816 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Contract Costs The Company does not currently incur costs to obtain or fulfill a contract that would be considered contract assets under Topic 606. ​ ​ 101 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ​