What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-06 compared with 2021-05-07 · 183 added, 114 removed, 318 unchanged (48% of the section changed)

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Forward-looking statements discuss our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business.

You can identify forward-looking statements because they do not relate strictly to historical

or current facts.

You can identify forward-looking statements because they do not relate strictly to historical or current facts.

These statements may include words such as “aim,” “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “outlook,” “potential,” “project,” “projection,” “plan,” “intend,” “seek,” “may,” “could,” “would,” “will,” “should,” “can,” “can have,” “likely,” the negatives thereof and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events.

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All forward-looking statements are expressly qualified in their entirety by these cautionary statements.

You should evaluate all forward-looking statements made in this report in the context of the factors that could cause outcomes to differ materially from our expectations.

You should evaluate all forward-

looking statements made in this report in the context of the factors that could cause outcomes to differ materially from our expectations.

These factors include, but are not limited to:

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● vulnerability to natural disasters given the geographic concentration and real estate intensive nature of our business;

● our ability to effectively identify and secure appropriate new sites for restaurants;

● the possibility that we may continue to incur significant impairment of certain of our assets, in particular in our new markets;

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We caution you that the important factors referenced above may not contain all of the factors that are important to you.

In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences we anticipate or affect us or our operations in the ways

that we expect.

The forward-looking statements included in this report are made only as of the date hereof.

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We strive to offer food that integrates the culinary traditions of Mexico with the healthier lifestyle of Los Angeles, a combination that we call “LA-Mex.” Our distinctive menu features our signature product--citrus-marinated fire-grilled chicken--and a variety of Mexican and LA-inspired entrees that we create from our chicken.

We serve individual and family-sized chicken meals, a variety of Mexican and LA-inspired entrees, and sides, and, throughout the year, on a limited-time basis, additional proteins like shrimp.

We serve individual and family-sized chicken meals, a variety of Mexican and LA-inspired entrees, and sides,

and, throughout the year, on a limited-time basis, additional proteins like shrimp.

Our entrees include favorites such as our Chicken Avocado Burrito, Pollo Fit entrees, chicken tostada salads, and Pollo Bowls.

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

As of March 31, 2021, the majority of our restaurants have dining rooms open at a limited capacity and continue to maintain take-away, mobile pick-up, delivery, and drive-thru operations where available.

During the last two months of 2020 and early 2021, the Los Angeles market was heavily impacted by an increase in COVID-19 cases.

Due to our high concentration of restaurants in this market, we were disproportionately impacted by this spike.

During the thirteen weeks ended March 31, 2021, we temporarily closed 45 restaurants, of which all have reopened as of March 31, 2021.

Similarly, during the thirteen weeks ended March 31, 2021, our franchisees temporarily closed 15 restaurants, of which all have reopened as of March 31, 2021.

As of June 30, 2021, the nearly all of our restaurants have dining rooms open at full capacity and continue to maintain take-away, mobile pick-up, delivery, and drive-thru operations where available.

During the thirteen and twenty-six weeks ended June 30, 2021, we temporarily closed 5 and 50 restaurants, respectively, of which all have reopened as of June 30, 2021.

Similarly, during both thirteen and twenty-six weeks ended June 30, 2021, our franchisees temporarily closed 27 restaurants, of which all have reopened as of June 30, 2021.

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

These closures typically lasted from one to three days.

As of March 31, 2021, we had not permanently closed any restaurants due to the COVID-19 pandemic.

Subsequent to March 31, 2021, the Company has temporarily closed two restaurants, typically for one to three days, and franchisees have not temporarily closed any restaurants.

During the thirteen weeks ended March 31, 2021, we incurred 2.8 million in COVID-19 related expenses, primarily due to leaves of absence and overtime pay.

As of June 30, 2021, we had not permanently closed any restaurants due to the COVID-19 pandemic.

Subsequent to June 30, 2021, the Company has not temporarily closed any restaurants, and franchisees have not temporarily closed any restaurants.

During the thirteen and twenty-six weeks ended June 30, 2021, we incurred $0.2 million and $3.0 million, respectively, in COVID-19 related expenses, primarily due to leaves of absence and overtime pay.

During both thirteen and twenty-six weeks ended June 24, 2020, the Company incurred $ 1.1 million in COVID-19 related expenses, primarily due to leaves of absence and overtime pay.

Growth Strategies and Outlook

As of March 31, 2021, we had 481 locations in six states.

As of June 30, 2021, we had 480 locations in six states.

In fiscal 2020, we opened one new company-operated restaurant in Nevada, which was in process prior to the COVID-19 pandemic and our franchisees opened three new restaurants, two in California and one in Arizona.

For the thirteen weeks ended March 31, 2021, two new company-operated restaurants were opened, one in Nevada and one in California, and no new franchised restaurants were opened.

For the twenty-six weeks ended June 30, 2021, two new company-operated restaurants were opened, one in Nevada and one in California, and no new franchised restaurants were opened.

We plan to continue to expand our business, drive restaurant sales growth, and enhance our competitive positioning, by executing the following strategies:

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Comparable Restaurant Sales

For the thirteen weeks ended March 31, 2021, system-wide comparable restaurant sales increased by 7.4%, from the comparable period in the prior year.

For company-operated restaurants, comparable restaurant sales for the thirteen weeks ended March 31, 2021 increased by 3.3%.

For company-operated restaurants, the quarter’s change in comparable restaurant sales consisted of an approximately 15.7% increase in average check size, partially offset by a decline in transactions of 10.7%.

For franchised restaurants, comparable restaurant sales increased 10.5% for the thirteen weeks ended March 31, 2021.

For the thirteen and twenty-six weeks ended June 30, 2021, system-wide comparable restaurant sales increased by 21.0% and 14.2%, respectively, from the comparable period in the prior year.

For company-operated restaurants, comparable restaurant sales for the thirteen and twenty-six weeks ended June 30, 2021 increased by 16.4% and 9.8%, respectively.

For company-operated restaurants, the quarter’s change in comparable restaurant sales consisted of an approximately

0.4% increase in average check size and an increase in transactions of 15.9%, and the year-to-date change in comparable restaurant sales consisted of a 1.5% increase in transactions and a 8.2% increase in average check size .

For franchised restaurants, comparable restaurant sales increased 24.5% and 17.5% for the thirteen and twenty-six weeks ended June 30, 2021, respectively.

Refer to Comparable Restaurant Sales definition in “Key Performance Indicators” section below.

Restaurant Development

Our restaurant counts at the beginning and end of each of the last three fiscal years and the thirteen weeks ended March 31, 2021, were as follows:

Thirteen Weeks Ended

Our restaurant counts at the beginning and end of each of the last three fiscal years and the twenty-six weeks ended June 30, 2021, were as follows:

Twenty-Six Weeks Ended

Fiscal Year Ended

March 31, 2021

June 30, 2021

Company-operated restaurant activity:

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We believe that our remodels using this new design will result in higher restaurant revenue and a strengthened brand.

As of March 31, 2021 we have completed five remodels using the new asset design.

As of June 30, 2021, we have completed seven remodels using the new asset design.

In fiscal 2021, we plan to complete a total of 15 company and 40 franchise remodels using the new design.

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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.

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 point’s terms.

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

In addition, customers can earn additional points and free entrées for a variety of engagement activities.

As points are available for redemption past the quarter earned, a portion of the revenue associated with the earned points will be deferred until redemption or expiration.

As of both March 31, 2021 and December 30, 2020, the revenue allocated to loyalty points that have not been redeemed is $0.7 million and $0.9 million, respectively, which is reflected in the Company’s accompanying condensed consolidated balance sheets within other accrued expenses and current liabilities.

The Company had over 2.2 million loyalty program members as of March 31, 2021.

As of June 30, 2021 and December 30, 2020, the revenue allocated to loyalty points that had not been redeemed was $0.6 million and $0.9 million, respectively, which is reflected in the Company’s

accompanying condensed consolidated balance sheets within other accrued expenses and current liabilities.

The Company had over 2.4 million loyalty program members as of June 30, 2021.

Critical Accounting Policies and Use of Estimates

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Labor and related expenses include wages, payroll taxes, workers’ compensation expense, benefits, and bonuses paid to our restaurant management teams.

Like other expense items, we expect labor costs to grow proportionately as our

restaurant revenue grows.

Factors that influence labor costs include minimum wage and payroll tax legislation, the frequency and severity of workers’ compensation claims, health care costs, and the performance of our restaurants.

Like other expense items, we expect labor costs to grow proportionately as our restaurant revenue grows.

Factors that influence labor costs include minimum wage and payroll tax legislation, overtime, the frequency and severity of workers’ compensation claims, health care costs, and the performance of our restaurants.

Occupancy Costs and Other Operating Expenses

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If these assumptions change in the future, we may be required to record impairment charges for these assets and these charges could be material.

When the Company closes a restaurant, it will evaluate the right-of-use (“ROU”) asset for impairment, based on anticipated sublease recoveries.

When the Company closes a restaurant, it 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, in addition to property tax and CAM charges for closed restaurants.

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Comparison of Results of Operations

Our operating results for the thirteen weeks ended March 31, 2021 and March 25, 2020 and expressed as percentages of total revenue, with the exception of cost of operations and company restaurant expenses, which are expressed as a percentage of company-operated restaurant revenue, are compared below.

Our operating results for the thirteen weeks ended June 30, 2021 and June 24, 2020 and expressed as percentages of total revenue, with the exception of cost of operations and company restaurant expenses, which are expressed as a percentage of company-operated restaurant revenue, are compared below.

Thirteen Weeks Ended

March 31, 2021

March 25, 2020

June 30, 2021

June 24, 2020

Increase / (Decrease)

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Loss on disposal of assets

Recovery of securities lawsuits related legal expenses and other insurance claims

Loss on assets held for sale

Impairment and closed-store reserves

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Interest expense, net of interest income

Income tax receivable agreement income

Income tax receivable agreement expense

Income before provision for income taxes

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All other percentages use total revenue.

Our operating results for the twenty-six weeks ended June 30, 2021 and June 24, 2020 and expressed as percentages of total revenue, with the exception of cost of operations and company restaurant expenses, which are expressed as a percentage of company-operated restaurant revenue, are compared below.

Twenty-Six Weeks Ended

June 30, 2021

June 24, 2020

Increase / (Decrease)

Statements of Income Data

Company-operated restaurant revenue

Franchise revenue

Franchise advertising fee revenue

Total revenue

Cost of operations

Food and paper costs (1)

Labor and related expenses (1)

Occupancy and other operating expenses (1)

Company restaurant expenses (1)

General and administrative expenses

Franchise expenses

Depreciation and amortization

Loss on disposal of assets

Recovery of securities lawsuits related legal expenses and other insurance claims

Loss on assets held for sale

Impairment and closed-store reserves

Total expenses

Income from operations

Interest expense, net of interest income

Income tax receivable agreement (income) expense

Income before provision for income taxes

Provision for income taxes

(1) Percentages for line items relating to cost of operations and company restaurant expenses are calculated with company-operated restaurant revenue as the denominator.

All other percentages use total revenue.

Company-Operated Restaurant Revenue

For the quarter, company-operated restaurant revenue increased $19.3 million, or 22.0%, from the comparable period in the prior year.

The increase in company-operated restaurant sales was primarily due to a 3.3% increase in company-operated comparable restaurant sales and an increase of $0.5 million of non-comparable restaurant sales.

The company-operated comparable restaurant sales increase consisted of an approximately 15.7% increase in average check size, partially offset by a decline in transactions of 10.7%.

It is uncertain whether the increase in average check size will persist once the pandemic ends.

This company-operated restaurant sales increase was partially offset by a $1.0 million decrease in revenue due to temporary restaurant closures resulting from the COVID-19 pandemic, and a less than $0.1 million decrease in revenue recognized for our loyalty points program.

The increase in company-operated restaurant sales was primarily due to an increase in company-operated comparable restaurant revenue of $17.0 million, or 16.4%.

The company-operated comparable restaurant sales increase consisted of an approximately 0.4% increase in average check size and a 15.9% increase in transactions.

In addition, company-operated revenue was favorably impacted by $1.3 million of additional sales from restaurants opened during or after the second quarter of the prior year and a $1.1 million increase in revenue from restaurants that were temporarily closed due to the COVID-19 pandemic during the second quarter of the prior year.

Year-to-date, company-operated restaurant revenue increased $20.8 million, or 11.5%, from the comparable period in the prior year.

The increase in company-operated restaurant sales was primarily due to a $19.2 million, or 9.8% increase in company-operated comparable restaurant revenue.

In addition, company-operated revenue was favorably impacted by $1.7 million of additional sales from restaurants opened during or after the first quarter of the prior year and a $0.2 million increase in revenue from restaurants that were temporarily closed due to the COVID-19 pandemic during the year-to-date period of the prior year.

The company-operated comparable restaurant sales increase consisted of an approximately 8.2% increase in average check size and a 1.5% increase in transactions.

See above under “COVID-19 Impact” for additional information related to the impact of the COVID-19 pandemic on our business.

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For the quarter, franchise revenue increased $1.7 million, or 24.9%, from the comparable period in the prior year.

This increase was primarily due to a franchise comparable restaurant sales increase of 10.5% and the opening of three units during or subsequent to the first quarter of 2020.

This increase was primarily due to a franchise comparable restaurant sales increase of 24.5% and the opening of two restaurants during or subsequent to the second quarter of 2020.

This franchise revenue increase was partially offset by the closure of three franchise locations during or subsequent to the second quarter of 2020.

Year-to-date, franchise revenue increased $2.2 million, or 16.1%, from the comparable period in the prior year.

This increase was primarily due to a franchise comparable restaurant sales increase of 17.5% and the opening of three restaurants during or subsequent to the first quarter of 2020 .

This franchise revenue increase was partially offset by the closure of seven franchise locations during or subsequent to the first quarter of 2020.

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For the quarter, franchise advertising fee revenue increased $1.4 million, or 28.0%, from the comparable period in the prior year.

Year-to-date, franchise advertising fee revenue increased $1.9 million, or 18.1%, from the comparable period in the prior year.

As advertising fee revenue is a percentage of franchisees’ revenue, the quarter-to-date fluctuations were due to the increases and decreases noted in franchise revenue above.

Food and Paper Costs

For the quarter, food and paper costs decreased $1.2 million, or 4.6%, from the comparable period in the prior year, primarily due to a $1.2 million decrease in food costs.

The decrease in food and paper costs for the quarter resulted primarily from lower company transactions and more effective waste management, partially offset by sales mix and commodity inflation.

For the quarter, food and paper costs as a percentage of company-operated restaurant revenue were 25.9%, down from 27.6% in the comparable period of the prior year.

The percentage decrease for the quarter was due primarily to an increase in pricing, lower food usage and effective waste management, partially offset by sales mix and commodity inflation.

For the quarter, food and paper costs increased $5.0 million, or 21.9%, from the comparable period in the prior year, primarily due to a $3.6 million increase in food costs and a $1.4 million increase in paper costs.

Year-to-date, food and paper costs increased $3.8 million, or 7.9%, from the comparable period in the prior year, due to a $2.4 million increase in food costs and a $1.4 million increase in paper costs.

The increase in food and paper costs for the quarter and year-to-date periods resulted primarily from higher company transactions, sales mix and commodity inflation.

For the quarter, food and paper costs as a percentage of company-operated restaurant revenue were 26.1%, consistent with the comparable period of the prior year as higher prices offset the cost increases above.

Year-to-date, food and paper costs as a percentage of company-operated restaurant revenue were 26.0%, down from 26.9% in the comparable period of the prior year.

The percentage decrease for the year-to-date period was due primarily to an increase in pricing and effective waste management, partially offset by sales mix and commodity inflation.

Labor and Related Expenses

For the quarter, labor and related expenses increased $5.8 million, or 22.4%, from the comparable period in the prior year.

The increase for the quarter was due to $2.8 million increase in labor costs associated with the COVID-19 pandemic and $0.5 million higher wages primarily due to minimum wage increases in California during fiscal 2020 and 2021.

These increases were partially offset by $1.0 million in labor efficiencies and $0.3 million decrease in workers compensation expense due to decreased claims activity.

For the quarter, labor and related expenses as a percentage of company-operated restaurant revenue were 32.6%, consistent with the comparable period in the prior year.

This percentage was impacted by wage increases in California and labor costs associated with the COVID-19 pandemic, offset by an increase in pricing and labor efficiencies.

The increase for the quarter was pr imarily due to $2.6 million related to the 15.9% increase in year-over-year sales transactions, a $1.3 million increase in overtime, a $0.6 million increase related to higher minimum wage increases in California during fiscal 2020 and 2021, a $0.5 million increase in medical and workers compensation expense, due to higher claims activity, $0.4 million higher in payroll taxes and $0.4 million related to employee training and other labor related expenses.

Year-to-date, labor and related expenses increased $7.8 million, or 14.3%, from the comparable period in the prior year.

The increase for the year-to-date period was due to a $2.2 million increase in overtime, $1.4 million related to the 1.5% increase in year-over-year sales transactions, a $1.2 million increase related to higher minimum wage increases in California during fiscal 2020 and 2021, $1.2 million in labor costs associated with the COVID-19 pandemic, a $0.4 million increase in medical and workers compensation expense due to higher claims activity, $0.5 million in higher payroll taxes and $0.9 million related to employee training and other labor related expenses.

For the quarter, labor and related expenses as a percentage of company-operated restaurant revenue were 29.5%, consistent with the comparable period in the prior year as higher prices and efficiencies offset the cost increases highlighted above.

Year-to-date labor and related expenses as a percentage of company-operated restaurant revenue were 31.0%, up from 30.2% in the comparable period in the prior year.

The year-to-date percentage was impacted by the cost increases highlighted above, partially offset by an increase in pricing and labor efficiencies.

Occupancy and Other Operating Expenses

For the quarter, occupancy and other operating expenses increased $3.4 million, or 15.6%, from the comparable period of the prior year.

Fluctuations in occupancy and other expenses consisted primarily of a $0.6 million increase in market place delivery fees, a $0.3 million increase in occupancy costs, primarily related to rent expense and higher general liability claims, a $0.3 million increase in repairs and maintenance costs, a $0.3 million increase in operating supplies, a $0.1 million increase in advertising fees, a $0.1 million increase in credit card charges and a $0.1 million increase in utilities.

These increases were partially offset by a $0.1 million decrease in other operating expenses.

For the quarter, occupancy and other operating expenses as a percentage of company-operated restaurant revenue were 25.3% up from 23.9% in the comparable period in the prior year.

The increases for the quarter resulted primarily from the increases noted above.

Fluctuations in occupancy and other expenses consisted primarily of a $0.8 million increase in advertising fees, a $0.6 million increase in utilities, a $0.4 million increase in repairs and maintenance costs, a $0.4 million increase in other operating expenses, a $0.4 million increase in market place delivery fees, a $0.3 million increase in operating supplies, a $0.2 million increase in occupancy costs, primarily related to rent expense and higher general liability claims and a $0.3 million increase in credit card charges.

Year-to-date, occupancy and other operating expenses increased $5.1 million, or 11.7%, from the comparable period of the prior year.

The increase was primarily due to a $0.9 million increase in advertising fees, $0.9 million increase in market place delivery fees, a $0.7 million increase in utilities, a $0.7 million increase in operating supplies, a $0.7 million increase in repairs and maintenance costs, a $0.5 million increase in occupancy costs, primarily related to rent expense and higher general liability claims, a $0.4 million increase in credit card charges and a $0.4 million increase in other operating expenses.

For the quarter, occupancy and other operating expenses as a percentage of company-operated restaurant revenue were 23.7% down from 25.0% in the comparable period in the prior year.

Year-to-date, occupancy and other operating expenses as a percentage of company-operated restaurant revenue were 24.5%, up from 24.4% in the comparable period of the prior year.

The decrease for the quarter resulted primarily from higher revenue, partially offset by the increase in costs noted above.

The slightly higher percentage on a year-to-date basis reflects the cost increases noted above partially offset by higher year-to-date revenue.

General and Administrative Expenses

For the quarter, general and administrative expenses increased $0.1 million, or 0.6%, from the comparable period in the prior year.

The increase for the quarter was due primarily to a $0.6 million increase in labor related costs, primarily related to an increase in management bonus expense, a $0.3 million increase in legal and professional expenses, a $0.3 million increase in stock compensation expenses and a $0.1 million increase in restaurant pre-opening costs.

This increase was partially offset by $0.1 million decrease in recruiting costs and a $0.1 million decrease in other general and administrative expenses.

For the quarter, general and administrative expenses as a percentage of total revenue were 9.7%, up from 8.9% in the comparable period of the prior year.

The percentage increase for the quarter-to-date period resulted primarily from the cost increases discussed above.

The increase for the quarter was due primarily to a $1.3 million increase in labor related costs, primarily related to an increase in management bonus expense, a $0.3 million increase in stock compensation expenses, and a $0.4 million increase in temporary office staff and recruiting fees, partially offset by a $2.1 million decrease in legal and professional expenses.

Year-to-date, general and administrative expenses increased $1.2 million, or 6.1%, from the comparable period in the prior year.

The increase for the year-to-date period was due primarily to a $1.6 million increase in labor related costs, primarily related to an increase in management bonus expense, a $0.7 million increase in stock compensation expenses and a $0.7 million increase in temporary office staff and recruiting fees.

This increase was partially offset by a $1.8 million decrease in legal and professional expenses, related primarily to a $2.5 million legal settlement in the prior year period discussed in Note 7, “Commitments and Contingencies, Legal Matters” in the Notes to Condensed Consolidated Financial Statements above.

For the quarter, general and administrative expenses as a percentage of total revenue were 8.6%, down from 10.5% in the comparable period of the prior year.

The percentage decrease for the quarterly period resulted primarily from higher revenue.

Year-to-date, general and administrative expenses as a percentage of total revenue were 9.1%, down from 9.7% in the comparable period of the prior year.

The year-to-date percentage decrease is primarily due to the higher revenue, partially offset by the cost increases discussed above.

Loss on held for sale assets

During the thirteen and twenty-six weeks ended June 30, 2021, we agreed in principle to sell eight restaurants within the Sacramento area to an existing franchisee.

The net assets were recorded to assets held for sale at the lower of carrying value or fair value less costs to sell, which resulted in a loss on held for sale assets of $1.5 million for the thirteen and twenty-six weeks ended June 30, 2021.

Prior to June 30, 2021, we received $4.6 million of cash primarily representing the purchase price of the transaction.

The funds were recorded within our cash and cash equivalents and other accrued expenses and current liabilities within our condensed consolidated balance sheet.

The eight restaurants were sold subsequent to June 30, 2021.

Impairment and Closed-Store Reserves

During the thirteen weeks ended March 31, 2021, we recorded non-cash impairment charges of $0.3 million, primarily related to the carrying value of the ROU assets of one restaurant in Texas closed in 2019 and the long-lived assets of three restaurants in California.

During the thirteen weeks ended March 25, 2020, we recorded a non-cash impairment charge of $1.9 million, primarily related to the carrying value of the assets of one restaurant in Texas and the long-lived assets of three restaurants in California.

During the thirteen and twenty-six weeks ended June 30, 2021, we recorded non-cash impairment charges of $0.4 million and $0.7 million, respectively, primarily related to the carrying value of the ROU assets of one restaurant in Texas closed in 2019, the ROU assets of one restaurant in California, and the long-lived assets of three restaurants in California.

During the thirteen and twenty-six weeks ended June 24, 2020, we recorded non-cash impairment charges of $0.1 million and $2.0 million, respectively, primarily related to the carrying value of the assets of one restaurant in Texas and the long-lived assets of three restaurants in California.

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.

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Additionally, any property tax and CAM payments relating to closed restaurants are included within closed-store expense.

During the thirteen weeks ended March 31, 2021, we recognized $0.3 million of closed-store reserve expense related to the amortization of ROU assets, property taxes and CAM payments for our closed locations.

During the thirteen weeks ended March 25, 2020, we recognized $0.5 million of closed-store reserve expense, primarily related to the amortization of ROU assets, property taxes and CAM payments for our closed locations.

During the thirteen and twenty-six weeks ended June 30, 2021, we recognized less than $0.1 million and $0.2 million, respectively, of closed-store reserve expense related to the amortization of ROU assets, property taxes and CAM payments for our closed locations.

During the thirteen and twenty-six weeks ended June 24, 2020, we recognized $0.4 million and $0.9 million, respectively, of closed-store reserve expense, primarily related to the amortization of ROU assets, property taxes and CAM payments for our closed locations.

Interest Expense, Net

For the quarter, interest expense, net, decreased $0.4 million from the comparable period in the prior year.

For the quarter and year-to-date, interest expense, net, decreased $0.5 million and $0.9 million, respectively, from the comparable period in the prior year.

The decrease is primarily related to lower interest rates and lower outstanding balances on our 2018 Revolver.

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The TRA calls for us to pay to our pre-IPO stockholders 85% of the savings in cash that we realize in our taxes as a result of utilizing our NOLs and other tax attributes attributable to preceding periods.

For the thirteen weeks ended March 31, 2021, we recorded income tax receivable agreement income of less than $0.1 million, and for the thirteen weeks ended March 25, 2020 we recorded income tax receivable agreement income of $0.1 million.

For the thirteen and twenty-six weeks ended June 30, 2021, we recorded income tax receivable agreement expense of less than $0.1 million and income tax receivable agreement income of less than $0.1 million, respectively, and for the thirteen and twenty-six weeks ended June 24, 2020 we recorded income tax receivable agreement expense of $0.3 million and $0.2 million, respectively.

Provision for Income Taxes

For the quarter ended March 31, 2021, we recorded an income tax provision of $1.6 million, reflecting an estimated effective tax rate of 28.7%.

For the quarter ended March 25, 2020, we recorded an income tax provision of $1.3 million, reflecting an estimated effective tax rate of approximately 26.5%.

The difference between the 21.0% statutory rate and the Company’s effective tax rate of 28.7% for the quarter ended March 31, 2021 is primarily a result of state taxes, a Work Opportunity Tax Credit benefit, the change in valuation allowance against certain state credits, a windfall tax benefit related to stock options exercised and non-deductible executive compensation.

For the quarter ended June 30, 2021, we recorded an income tax provision of $3.4 million, reflecting an estimated effective tax rate of 27.8%.

For the quarter ended June 24, 2020, we recorded an income tax provision of $0.8 million, reflecting an estimated effective tax rate of approximately 12.0%.

For the year-to-date period ended June 30, 2021, we recorded an income tax provision of $5.0 million, reflecting an estimated effective tax rate of approximately 28.1%.

For the year-to-date ended June 24, 2020, we recorded an income tax provision of $2.1 million, reflecting an estimated effective tax rate of approximately 18.4%.

The difference between the 21.0% statutory rate and the Company’s effective tax rate of 28.1% for the year-to-date ended June 30, 2021 is primarily a result of a windfall tax benefit related to stock options exercised, non-deductible executive compensation, state taxes, a Work Opportunity Tax Credit benefit, the change in valuation allowance against certain state credits and prior year true up related to stock based compensation.

Key Performance Indicators

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System-Wide Sales

System-wide sales are neither required by, nor presented in accordance with, accounting principles generally accepted in the United States of America (“GAAP”).

System-wide sales are neither required by, nor presented in accordance with GAAP.

System-wide sales are the sum of company-operated restaurant revenue and sales from franchised restaurants.

Our total revenue in our consolidated statements of operations is limited to company-operated restaurant revenue and franchise revenue from our franchisees.

Accordingly, system-wide sales should not be

considered in isolation or as a substitute for our results as reported under GAAP.

Accordingly, system-wide sales should not be considered in isolation or as a substitute for our results as reported under GAAP.

Management believes that system-wide sales are an important figure for investors, because they are widely used in the restaurant industry, including by our management, to evaluate brand scale and market penetration.

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Thirteen Weeks Ended

(Dollar amounts in thousands)

March 31, 2021

March 25, 2020

Twenty-Six Weeks Ended

June 30, 2021

June 24, 2020

June 30, 2021

June 24, 2020

Company-operated restaurant revenue

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Comparable restaurant sales exclude restaurants closed during the applicable period.

At March 31, 2021 and March 25, 2020, there were 465 and 472 comparable restaurants, 191 and 191 company-operated restaurants and 274 and 281 franchised restaurants, respectively.

At June 30, 2021 and June 24, 2020, there were 465 and 469 comparable restaurants, 191 and 191 company-operated restaurants and 274 and 278 franchised restaurants, respectively.

Comparable restaurant sales indicate the performance of existing restaurants, since new restaurants are excluded.

12 unchanged sentences

Thirteen Weeks Ended

Twenty-Six Weeks Ended

(Dollar amounts in thousands)

March 31, 2021

March 25, 2020

June 30, 2021

June 24, 2020

June 30, 2021

June 24, 2020

Restaurant contribution:

4 unchanged sentences

Loss on disposal of assets

Loss on assets held for sale

Franchise revenue

Franchise advertising fee revenue

Recovery of securities lawsuits related legal expenses and other insurance claims

Impairment and closed-store reserves

29 unchanged sentences

Thirteen Weeks Ended

Twenty-Six Weeks Ended

(Amounts in thousands)

March 31, 2021

March 25, 2020

June 30, 2021

June 24, 2020

June 30, 2021

June 24, 2020

Non-GAAP adjustments:

Provision for income taxes

Provision (benefit) for income taxes

Interest expense, net of interest income

2 unchanged sentences

Loss on disposal of assets (b)

Impairment and closed-store reserves (c)

Income tax receivable agreement income (d)

Securities class action legal expense (e)

Legal settlements (f)

Pre-opening costs (g)

Loss on assets held for sale (c)

Recovery of securities lawsuits related legal expense and other insurance claims (d)

Impairment and closed-store reserves (e)

Income tax receivable agreement expense (income) (f)

Securities class action legal expense (g)

Legal settlements (h)

Pre-opening costs (i)

Adjusted EBITDA

1 unchanged sentence

(b) Loss on disposal of assets includes the loss on disposal of assets related to retirements and replacement or write-off of leasehold improvements or equipment.

During the thirteen weeks ended March 25, 2020, we recorded a non-cash impairment charge of $1.9 million, primarily related to the carrying value of the ROU assets of one restaurant in Texas and the long-lived assets of three restaurants in California.

(d) On July 30, 2014, we entered into the TRA.

(c) During the thirteen and twenty-six weeks ended June 30, 2021, we agreed in principle to sell eight restaurants within Sacramento area to an existing franchisee.

The related net assets were reclassified to assets held for sale and remeasured at their fair value less costs to sell, which resulted in a loss on held for sale assets of $1.5 million for the twenty-six weeks ended June 30, 2021.

(d) During the thirteen and twenty-six weeks ended June 24, 2020, we received insurance proceeds of $0.1 million related to a property claim.

(e) Includes costs related to impairment of long-lived and ROU assets and closing restaurants.

During the thirteen and twenty-six weeks ended June 24, 2020, we recorded non-cash impairment charges of $0.1 million and $2.0 million, respectively, primarily related to the carrying value of the ROU assets of one restaurant in Texas and the long-lived assets of three restaurants in California.

During the thirteen and twenty-six weeks ended June 30, 2021, we recognized less than $0.1 million and $0.2 million of closed-store reserve expense related to the amortization of ROU assets, property taxes and CAM payments for our closed locations.

(f) On July 30, 2014, we entered into the TRA.

This agreement calls for us to pay to our pre-IPO stockholders 85% of the savings in cash that we realize in our taxes as a result of utilizing our NOL and other tax attributes attributable to preceding periods.

For the thirteen weeks ended March 31, 2021 and March 25, 2020, income tax receivable agreement (income) expense consisted of the amortization of interest expense and changes in estimates for actual tax returns filed, related to our total expected TRA payments.

(e) Consists of costs related to the defense of securities lawsuits.

For the thirteen and twenty-six weeks ended June 30, 2021 and June 24, 2020, income tax receivable agreement (income) expense consisted of the amortization of interest expense and changes in estimates for actual tax returns filed, related to our total expected TRA payments.

(g) Consists of costs related to the defense of securities lawsuits.

See Note 7, “Commitments and Contingencies, Legal Matters” in the Notes to Condensed Consolidated Financial Statements above.

(f) Includes amounts incurred related to the payment of the final settlement amounts for multiple wage and hour class action suits.

(g) Pre-opening costs are a component of general and administrative expenses, and consist of costs directly associated with the opening of new restaurants and incurred prior to opening, including management labor costs, staff labor costs during training, food and supplies used during training, marketing costs, and other related pre-opening costs.

(h) Includes amounts incurred related to the payment of the final settlement amounts for multiple wage and hour class action suits.

(i) Pre-opening costs are a component of general and administrative expenses, and consist of costs directly associated with the opening of new restaurants and incurred prior to opening, including management labor costs, staff labor costs during training, food and supplies used during training, marketing costs, and other related pre-opening costs.

These are generally incurred over the three to five months prior to opening.

7 unchanged sentences

We believe that these sources of liquidity and capital are sufficient to finance our continued operations for at least the next 12 months from the issuance of the consolidated financial statements.

However, depending on the severity and longevity of the COVID-19 pandemic, the efforts taken to reduce its spread and the possibility of a subsequent resurgence of the COVID-19 outbreak after the current outbreak subsides, our financial performance and liquidity could be further impacted and could impact our ability to meet certain financial covenants required in our 2018 Credit Agreement (as defined below), specifically the lease-adjusted coverage ratio and fixed-charge coverage ratio.

However, depending on the severity and longevity of the COVID-19 pandemic, the efforts taken to reduce its spread and the possibility of a subsequent resurgence of the COVID-19 outbreak after the current outbreak subsides, our financial performance and liquidity could be further impacted and could impact our ability to meet certain financial covenants required in our 2018 Credit Agreement, specifically the lease-adjusted coverage ratio and fixed-charge coverage ratio.

The following table presents summary cash flow information for the periods indicated.

Thirteen Weeks Ended

Twenty-Six Weeks Ended

(Amounts in thousands)

March 31, 2021

March 25, 2020

June 30, 2021

June 24, 2020

Net cash provided by (used in)

4 unchanged sentences

Operating Activities

For the thirteen weeks ended March 31, 2021, net cash from operating activities changed by approximately $15.0 million from the comparable period of the prior year.

This change was due primarily to a $16.3 million payment made in the first quarter of 2020 related to our wage and hour class action settlements for the thirteen weeks ended March 25, 2020, slightly offset by unfavorable working capital fluctuations.

For the twenty-six weeks ended June 30, 2021, net cash from operating activities changed by approximately $15.5 million from the comparable period of the prior year.

This change was due primarily to an increase in profitability after non-cash items and favorable working capital fluctuations.

Investing Activities

For the thirteen weeks ended March 31, 2021, net cash used in investing activities increased by $3.7 million from the comparable period of the prior year.

This increase was due primarily to opening two new company-operated restaurant and remodeling three restaurants in the thirteen weeks ended March 31, 2021 compared to opening no new company-operated restaurants and completing no new remodels in the thirteen weeks ended March 25, 2020.

For the twenty-six weeks ended June 30, 2021, net cash used in investing activities increased by $1.8 million from the comparable period of the prior year.

This increase was due primarily to opening two new company-operated restaurants and remodeling five restaurants in the twenty-six weeks ended June 30, 2021 compared to opening no new company-operated restaurants and completing no new remodels in the twenty-six weeks ended June 30, 2020.

In addition, during the twenty-six weeks ended June 30, 2021, the Company received a deposit of $4.6 million on sale of eight restaurants within the Sacramento area.

Financing Activities

For the thirteen weeks ended March 31, 2021, net cash from in financing activities changed by $53.2 million from the comparable period of the prior year.

This change was due primarily to an increase in net borrowings of $44.5 million on the 2018 Revolver during the thirteen weeks ended March 25, 2020, primarily as a precautionary measure to bolster our existing cash position in light of the COVID-19 pandemic, as well as to provide for the $16.3 million litigation settlement payment.

In addition, during the thirteen weeks ended March 31, 2021, the Company paid down $9.0 million on the 2018 Revolver.

For the twenty-six weeks ended June 30, 2021, net cash from financing activities changed by $66.6 million from the comparable period of the prior year.

This change was due primarily to an increase in net borrowings of $44.5 million on the 2018 Revolver during the twenty-six weeks ended June 24, 2020, primarily as a precautionary measure to bolster our existing cash position in light of the COVID-19 pandemic, as well as to provide for the $16.3 million litigation settlement payment.

In addition, during the twenty-six weeks ended June 30, 2021, the Company paid down $22.8 million on the 2018 Revolver.

Debt and Other Obligations

8 unchanged sentences

Borrowings under the 2018 Revolver may be repaid and reborrowed.

The interest rate range was 1.36% to 1.65% for the thirteen weeks ended March 31, 2021, and 3.11% to 3.29% for the thirteen weeks ended March 25, 2020.

The interest rate range was 1.35% to 1.36% and 1.35% to 1.65% for the thirteen and twenty-six weeks ended June 30, 2021, respectively, and 1.67% to 3.11% and 1.67% to 3.29% for the thirteen and twenty-six weeks ended June 24, 2020.

The 2018 Credit Agreement contains certain financial covenants.

The Company was in compliance with the financial covenants as of March 31, 2021.

However, depending on the severity and longevity of the COVID-19 pandemic, the efforts taken to reduce its spread and the possibility of a resurgence of the COVID-19 outbreak after the initial outbreak subside, 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 our 2018 Credit Agreement, specifically the lease-adjusted coverage ratio and fixed-charge coverage ratio.

At March 31, 2021, $8.4 million of letters of credit and $53.8 million of borrowings were outstanding under the 2018 Revolver.

There were $87.8 million remaining borrowings available under the 2018 Revolver at March 31, 2021.

The Company was in compliance with the financial covenants as of June 30, 2021.

At June 30, 2021, $8.4 million of letters of credit and $40.0 million of borrowings were outstanding under the 2018 Revolver.

There were $101.6 million remaining borrowings available under the 2018 Revolver at June 30, 2021.

During the year ended December 25, 2019, we entered into an interest rate swap with a notional amount of $40.0 million, related to the outstanding borrowings under our 2018 Revolver.

2 unchanged sentences

Contractual Obligations

Other than our paydown of $9.0 million on the 2018 Revolver during the thirteen weeks ended March 31, 2021 described above, our contractual obligations outstanding on March 31, 2021 have not changed materially since those disclosed under “Debt and Other Obligations – Contractual Obligations” in Part II, Item 7 of our annual report on Form 10-K for the year ended December 30, 2020.

Other than our paydown of $22.8 million on the 2018 Revolver during the twenty-six weeks ended June 30, 2021 described above, our contractual obligations outstanding on June 30, 2021 have not changed materially since those disclosed under “Debt and Other Obligations – Contractual Obligations” in Part II, Item 7 of our annual report on Form 10-K for the year ended December 30, 2020.

Our contractual commitments relate to future (i) debt payments, including expected interest expense, calculated based on current interest rates, (ii) restaurant operating lease payments, (iii) income tax receivable agreement payments, and (iv) purchasing commitments for chicken.

Off-Balance Sheet and Other Arrangements

As of March 31, 2021 and December 25, 2020, we were using $8.4 million of borrowing capacity on the 2018 Revolver for letters of credit in support of our insurance programs.

As of June 30, 2021 and December 25, 2020, we were using $8.4 million of borrowing capacity on the 2018 Revolver for letters of credit in support of our insurance programs.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis