What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-03-11 compared with 2021-03-15 · 279 added, 447 removed, 900 unchanged (45% of the section changed)

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Audited Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm (BDO USA, LLP;

Costa Mesa, California;

PCAOB ID # 243 )

Consolidated Balance Sheets – December 29, 2021 and December 30, 2020

Consolidated Statements of Operations—For the years ended December 30, 2020, December 25, 2019, and December 26, 2018

Consolidated Statements of Comprehensive Income (Loss)—For the years ended December 30, 2020, December 25, 2019, and December 26, 2018

Consolidated Statements of Income—For the years ended December 29, 2021, December 30, 2020, and December 25, 2019

Consolidated Statements of Comprehensive Income—For the years ended December 29, 2021, December 30, 2020, and December 25, 2019

Consolidated Statements of Changes in Stockholders’ Equity—For the years ended December 29, 2021, December 30, 2020, and December 25, 2019

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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”).

(the “Company”) as of December 29, 2021 and December 30, 2020, the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 29, 2021, 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 29, 2021 and December 30, 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 29, 2021, 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 29, 2021, 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 11, 2022 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

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

Critical Audit Matters

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

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

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

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates 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 matter 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 matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.

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.

As discussed in Notes 2 and 3 to the consolidated financial statements, the Company reviews its long-lived assets including property and equipment, related to restaurants held and used in the business, 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.

As such, for these restaurants, management compared the projected undiscounted cash flow to the carrying value.

Total property and equipment, net of accumulated depreciation was $75.7 million as of December 29, 2021.

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.

The 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.

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 completeness and accuracy of data used in the projected cash flow models, including recalculating the projected cash flows for selected restaurants with impairment indicators.

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

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

Impairment of Right of Use Assets for Closed Restaurant Locations

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

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

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

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

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

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

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

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

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

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

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

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

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

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

/s/ BDO USA, LLP

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Accrued insurance

Accrued interest

Accrued income taxes payable

Current portion of income tax receivable agreement payable

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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

36,601,648 and 36,423,505 shares issued and outstanding as December 29, 2021 and December 30, 2020, respectively

Additional paid-in-capital

Accumulated deficit

Accumulated other comprehensive (loss) income

Accumulated other comprehensive loss

Total stockholders’ equity

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EL POLLO LOCO HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except share data)

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Recovery of securities lawsuits related legal expenses and other insurance claims

Impairment and closed-store reserves

Loss on disposition of restaurants

Impairment and closed-store reserves

Total expenses

Income (loss) from operations

Income from operations

Interest expense, net

Income tax receivable agreement expense (income)

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

Provision (benefit) for income taxes

Net income (loss)

Net income (loss) per share

Weighted-average shares used in computing net income (loss) per share

Income tax receivable agreement expense

Income before provision for income taxes

Provision for income taxes

Net income per share

Weighted-average shares used in computing net income per share

See notes to consolidated financial statements.

EL POLLO LOCO HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

For the Fiscal Years Ended

Net income (loss)

Other comprehensive (loss) income

Other comprehensive income (loss)

Changes in derivative instruments

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Reclassifications of losses (gains) into net income

Income tax benefit (expense)

Other comprehensive (loss) income, net of taxes

Comprehensive income (loss)

Income tax (expense) benefit

Other comprehensive income (loss), net of taxes

Comprehensive income

See notes to consolidated financial statements.

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Balance, December 26, 2018

Cumulative effect of accounting change (see Note 2)

Stock-based compensation

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Repurchase of common stock

( 4,395,604 )

Other comprehensive income, net of income tax

Balance, December 25, 2019

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Shares repurchased for employee tax withholdings

Repurchase of common stock

( 4,395,604 )

Other comprehensive income, net of income tax

Forfeiture of common stock related to restricted shares

Other comprehensive loss, net of income tax

Balance, December 30, 2020

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Forfeiture of common stock related to restricted shares

Other comprehensive loss, net of income tax

Other comprehensive income, net of income tax

Balance, December 29, 2021

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Cash flows from operating activities:

Net income (loss)

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

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

Depreciation and amortization

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Stock-based compensation expense

Income tax receivable agreement expense (income)

Income tax receivable agreement expense

Loss on disposition of restaurants

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Impairment of property and equipment

Closed-store reserve expense

Amortization of deferred financing costs

Amortization of favorable and unfavorable leases, net

Deferred income taxes, net

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Prepaid expenses and other current assets

Income taxes receivable/payable

Income taxes payable

Accounts payable

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Payment of obligations under finance leases

Deferred financing costs for revolver loan

Repurchases of common stock

Net cash flows used in financing activities

Increase (decrease) in cash and cash equivalents

Increase in cash and cash equivalents

Cash and cash equivalents, beginning of period

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Unpaid purchases of property and equipment

Schedule of non-cash transactions

Borrowing on revolver for financing fees

See notes to consolidated financial statements.

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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.

On April 22, 2014, CAC, the LLC’s 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:

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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.

Based on current operations, the Company believes that its cash flows from operations, available cash of $ 30.0 million at December 29, 2021, and available borrowings under the 2018 Revolver (as defined in Note 6) 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, the Company’s financial performance and liquidity could be further impacted and could impact the Company’s ability to meet certain covenants required in its 2018 Credit Agreement (as defined in Note 6), specifically the lease-adjusted coverage ratio and fixed-charge coverage ratio.

Basis of Presentation

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

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

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

Approximately every six or

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.

seven years a 53-week fiscal year occurs.

Fiscal 2021 and 2019 were 52-week fiscal years.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

These closures typically lasted from one to three days .

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

During the COVID-19 pandemic, the Company has experienced periods of significant disruption to its restaurant operations.

Following the pandemic declaration in March 2020, federal, state and local governments have periodically responded to the public health crisis by requiring social distancing, issuing “stay at home” directives, and implementing restaurant restrictions - including government-mandated dining room closures - that limited business to off-premise services only (take-out, drive-thru and delivery).

The COVID-19 pandemic and the measures taken to prevent its spread have adversely affected the Company’s operations and financial results, particularly during fiscal 2020 as well as periods of 2021 when COVID-19 infections increased with the spread of new strains of the virus.

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

The Company 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.

While all of the Company’s restaurants had dining rooms open as of December 29, 2021, the Company continues to experience staffing challenges, which resulted in reduced operating hours and service channels at some of the Company’s restaurants and resulted in higher wage inflation, overtime costs and other labor related costs.

Further, the Company experienced inflationary pressures due to supply chain disruptions that resulted in increased commodity prices and impacted the Company’s business and results of operations during the year ended December 29, 2021.

The Company expects these pressures to continue during fiscal 2022.

During fiscal 2021, the Company incurred $ 3.9 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

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

During fiscal 2021 as part of the CARES Act , the Company recognized the Employee Retention Credit (“ERC”) in the amount of $ 3.4 million, which is recorded as an offset to the corresponding payroll expense and is classified as part of the labor and other operating expenses on the consolidated statements of income for the year ended December 29, 2021.

See additional information presented in Note 2 “Summary of Significant Accounting Policies” below.

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.

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.

Cash and Cash Equivalents

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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.

On March 8, 2022, the Company’s Board of Directors appointed Mr.

Roberts as Chief Executive Officer, President and a Class III director on the Board of Directors of the Company, effective March 9, 2022.

Roberts will continue to serve as the Company’s interim Chief Financial Officer and as its principal executive officer, principal accounting officer and principal financial officer.

Refer to Item 9B below for additional information.

Concentration of Risk

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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.

The Company had one supplier for which amounts due at December 29, 2021 totaled 26.1 % of the Company’s accounts payable.

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

Purchases from the Company’s largest supplier totaled 27.1 % of the Company’s purchases for fiscal 2021, 26.9 % for fiscal 2020 and 29.0 % for fiscal 2019 with no amounts payable at December 29, 2021 or December 30, 2020.

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One franchisee accounted for 10.6 % of total accounts receivable as of December 29, 2021, and one franchisee accounted for 11.5 % of total accounts receivable as of December 30, 2020.

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.

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

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

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

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

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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.

if failure to exercise a renewal option imposes an economic penalty on the Company, such that management determines at the inception of the

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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:

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

Costs related to abandoned sites and other site selection costs that cannot be identified with specific restaurants are charged to general and administrative expenses in the accompanying consolidated statements of operations, and were 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.

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 income, and were less than $ 0.1 million for each of the years ended December 29, 2021, December 30, 2020 and December 25, 2019.

The Company capitalized internal costs related to site selection and construction activities of $ 1.4 million, $ 1.0 million and $ 1.1 million for the years ended December 29, 2021, December 30, 2020 and December 25, 2019, respectively.

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

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Impairment of Long-Lived and ROU Assets

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

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.

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 AUV 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.

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

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.

The Company determined that triggering events occurred for certain stores during the year ended December 29, 2021 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 $ 0.7 million for the year ended December 29, 2021, primarily related to the carrying value o f the ROU assets of one restaurant in Texas that closed in 2019, the carrying value of one restaurant in California that closed in 2021 and the long-lived assets of three restaurants in California.

In fiscal 2020, the Company recorded non-cash impairment charges of $ 3.5 million 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 a non-cash impairment charge 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.

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.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

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.

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

During fiscal 2021, the Company recognized $ 0.4 million of closed-store reserve expense related to the amortization of ROU assets, property taxes and CAM payments for its closed locations.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During fiscal 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.

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.

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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.

The Company determined that there were no indicators of potential impairment of its goodwill and indefinite-lived intangible assets during fiscal 2021.

Accordingly, the Company did not record any impairment to its goodwill or indefinite-lived intangible assets during the year ended December 29, 2021.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 25, 2019, respectively.

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

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.

Included in other assets are deferred financing costs (net of accumulated amortization), related to the revolver, of $ 0.4 million and $ 0.6 million as of December 29, 2021 and December 30, 2020, respectively.

Amortization expense for deferred financing costs was approximately $ 0.3 million for each of the three years ended December 29, 2021, December 30, 2020, and December 25, 2019, and is reflected as a component of interest expense in the accompanying consolidated statements of income.

Insurance Reserves

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The expense for such reserves for the years ended December 29, 2021, December 30, 2020 and December 25, 2019, totaled $ 9.0 million, $ 8.4 million, and $ 9.6 million, respectively.

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

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

Restaurant Revenue

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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.

As of December 29, 2021 and December 30, 2020, the revenue allocated to loyalty points that have not been redeemed was $ 0.7 million and $ 0.9 million, respectively, which is 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.

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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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

statements of operations.

statements of income.

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.

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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

Advertising expense, which is a component of occupancy and other operating expenses, was $ 16.1 million, $ 15.3 million and $ 16.1 million for the years ended December 29, 2021,

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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.

December 30, 2020 and December 25, 2019, respectively.

In addition, there was $ 25.9 million, $ 22.6 million and $ 22.4 million for the years ended December 29, 2021, December 30, 2020 and December 25, 2019, 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 $ 3.6 million and $ 0.1 million at December 29, 2021 and December 30, 2020, respectively.

Pursuant to the Company’s Franchise Disclosure Document, company-operated restaurants contribute to the advertising fund on the same basis as franchised restaurants.

Company-operated restaurants contribute to the advertising fund on the same basis as franchised restaurants.

At December 29, 2021, the Company was obligated to spend $ 3.6 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.

Total contributions and other marketing expenses are included in general and administrative expenses in the accompanying consolidated statements of income.

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.

Preopening costs, which are included in general and administrative expenses on the accompanying consolidated statements of income, were $ 0.3 million, $ 0.1 million and $ 0.4 million for the years ended December 29, 2021, December 30, 2020, and December 25, 2019, respectively.

The Company’s operations utilize property, facilities, equipment and vehicles.

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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.

ROU assets represent the Company’s 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.

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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.

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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.

During fiscal 2019, the Company received insurance proceeds of $ 10.0 million 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 2021, the Company completed the sale of eight restaurants within the Sacramento area to an existing franchisee.

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.

Cash proceeds included upfront consideration for the sale of the restaurants and franchise fees, as well as future cash consideration for royalties.

The cash consideration per restaurant related to 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.

The Sacramento sale resulted in cash proceeds of $ 4.6 million and a net loss on sale of restaurants of $ 1.5 million for the year ended December 29, 2021.

The three sales during 2019 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.

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

The derivative contract is entered into with a financial institution.

The Company records the derivative instrument on its consolidated balance sheets at fair value.

The derivative instrument qualifies as a hedging instrument in a qualifying cash flow hedge relationship, and the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive (loss) 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.

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 to 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.

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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.

Deferred tax assets and liabilities are determined based on temporary differences between the financial carrying amounts and the tax bases 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.

If, after evaluating all of the positive and negative evidence, a conclusion is

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 charging to tax expense a reserve for the portion of deferred tax assets which are not expected to be realized.

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

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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.

The Company did not recognize any interest or penalties during fiscal 2021 and 2019.

During fiscal 2021, fiscal 2020 and fiscal 2019, 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.

On July 30, 2014, the Company entered into a TRA, which calls for the Company to pay to its pre-IPO stockholders 85 % of the savings in cash that the Company realizes in its income taxes as a result of utilizing its net operating losses (“NOLs”) and other tax attributes attributable to preceding periods.

As of December 29, 2021 and December 30, 2020, the Company had accrued $ 1.5 million and $ 3.1 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.

In fiscal 2021, 2020 and 2019, the Company paid $ 1.7 million, $ 5.2 million and $ 5.8 million, respectively, to its pre-IPO stockholders under the TRA.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law as a stimulus package, and contained several tax provisions, including 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.

During fiscal 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 NOLs.

Resolution of this NOPA resulted in a payment of $ 0.4 million, and the audit is closed.

As a result of the CARES Act, this amount was immediately refundable upon filing of a Form 1139.

The Company filed the Form 1139 during the year ended December 30, 2020 and received a refund totaling $ 0.5 million.

The CARES Act also provides for the deferral of employer Social Security taxes that are otherwise owed for wage payment and the creation of refundable employee retention credits.

The total amount deferred as of December 30, 2020 is $ 4.9 million, of which 50 % is due by December 31, 2021 and another 50 % is due by December 31, 2022.

As of December 29, 2021, deferred payroll tax payments of $ 2.4 million were included in other non-current liabilities on the Company’s consolidated balance sheet.

Additionally, the Company assessed its eligibility for the business relief provision under the CARES Act known as the Employee Retention Credit (“ERC”), a refundable payroll tax credit for 50% of qualified wages paid during 2020.

The American Rescue Plan passed into law on March 11, 2021 extended the ERC through September 30, 2021, and the credit was increased to 70 % of qualified wages paid from January 1, 2021 through September 30, 2021.

During fiscal 2021, the Company recognized the ERC credit in the amount of $ 3.4 million as income as it is probable that it will comply with the ERC eligibility requirements.

The Company has elected an accounting policy to present government assistance as a reduction of the related expense.

The ERC credit is recorded as a receivable as part of the accounts and other receivable

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

on the consolidated balance sheet for the year ended December 29, 2021 and as an offset to the corresponding payroll expense which is classified as part of the labor and other operating expenses on the consolidated statements of income for the year ended December 29, 2021.

Fair Value Measurements

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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Fair Value Measurements Using

Other assets - Interest rate swap

Other non-current liabilities - Interest rate swap

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):

In other words, they 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 assets were measured at fair value, on a nonrecurring basis, as of and for the year ended December 29, 2021 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 and ROU Assets (in thousands):

Impairment Losses

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Certain ROU assets, net

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

The following non-financial assets 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

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

recognized during the corresponding periods, as discussed above under "Impairment of Long-Lived and ROU Assets"

(in thousands):

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Certain ROU assets, net

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

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

(in thousands):

1 unchanged sentence

Certain property and equipment, net

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Certain ROU assets, net

Fair Value of Financial Instruments

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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.

Stock-based compensation expense is recognized 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 fair value of stock option awards is estimated 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.

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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.

In November 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2021-10, “Government Assistance (Topic 832):

Disclosures by Business Entities about Government Assistance” which requires business entities to disclose in notes to their financial statements information about certain types of government assistance that they receive.

The Company adopted this ASU during the fourth quarter of 2021 and made appropriate disclosures in accordance with this standard.

The adoption of ASU 2021-10 did not have a significant impact on the Company’s consolidated financial position or results of operations.

For additional information on the impact of the adoption of ASU 2021-10, see above under “Income Taxes” in this Note 2, “Summary of Significant Accounting Policies.”

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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.

In July 2021, the FASB issued ASU No.

2021-05, “Leases (Topic 842):

Lessors – Certain Leases with Variable Lease Payments” which no longer requires a lessor to recognize a selling loss upon commencement of a lease with variable lease payments that prior to the amendment would have been classified as a sales-type or direct financing lease.

The Company adopted this ASU during the third quarter of 2021.

The adoption of ASU 2021-05 did not have a significant impact on the Company’s consolidated financial position or results of operations.

Recent Accounting Pronouncements Not Yet Adopted

In January 2021, the FASB issued ASU No.

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

ASU 2021-01 is effective immediately.

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 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).

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, 2020.

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.

The Company adopted this ASU during the first quarter of 2021.

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

In December 2019, the FASB issued ASU No.

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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.

The Company adopted this ASU during the first quarter of 2021.

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

Franchise Development Option Agreement with Related Party

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accumulated depreciation and amortization

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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Depreciation and amortization expense was $ 15.2 million, $ 16.9 million and $ 17.9 million for the years ended December 29, 2021, December 30, 2020, and December 25, 2019, respectively.

Based on the Company’s review of its long-lived assets for impairment, the Company recorded non-cash impairment charges of $ 0.3 million, $ 3.0 million and $ 0.3 million for the years ended December 29, 2021, December 30, 2020, and December 25, 2019, 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.

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

TRADEMARKS, OTHER INTANGIBLE ASSETS AND LIABILITIES

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Trademarks, net

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

1 unchanged sentence

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.

As of December 29, 2021, the Company had two leases that it had entered into, but had not yet commenced.

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

1 unchanged sentence

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

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

however, the Company currently has two facility and nine 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.

2 unchanged sentences

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

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

1 unchanged sentence

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.

During the year ended December 29, 2021, the Company reassessed the lease terms on 22 restaurants due to certain triggering events, such as the addition of significant leasehold improvements, the decision to terminate a lease, or the

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

decision to renew.

As a result of the reassessment, an additional $ 17.8 million of ROU assets and lease liabilities for the year ended December 29, 2021 were recognized, and will be amortized over the new lease term.

8 unchanged sentences

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 2021, the Company determined that the carrying value of ROU assets at two restaurants were not recoverable.

As a result, the Company recorded a $ 0.4 million non-cash impairment charge for the year ended December 29, 2021 related to one restaurant closed in Texas in 2019 and one restaurant closed in California.

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

As a result, the Company recorded a $ 0.5 million non-cash impairment charge 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.

9 unchanged sentences

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.

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.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

1 unchanged sentence

December 30, 2020

December 25, 2019

Finance lease cost:

6 unchanged sentences

Total lease cost

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

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

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

December 29, 2021

December 30, 2020

December 25, 2019

Lease cost – Occupancy and other operating expenses

6 unchanged sentences

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):

The Company had the following cash and non-cash activities associated with its leases (in thousands):

December 29, 2021

December 30, 2020

December 25, 2019

Cash paid for amounts included in the measurement of lease liabilities

7 unchanged sentences

Derecognition of ROU assets due to terminations, impairment or modifications

Operating lease ROU assets obtained and liabilities incurred as a result of adoption of ASC 842:

Operating lease ROU assets

Operating lease liabilities

Other Information

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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.

The Company has recognized these lease payments in its consolidated statement of income 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.

2 unchanged sentences

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 rent concessions were 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.

For the year ended December 29, 2021, there were no rent concessions.

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 .

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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 .

For the years ended December 29, 2021, December 30, 2020, and December 25, 2019, the Company received $ 0.4 million, $ 0.6 million and $ 0.5 million, respectively, of lease income from company-owned locations.

LONG-TERM DEBT

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

The Company, as a guarantor, is a party to a credit agreement (the “2018 Credit Agreement”) among EPL, as borrower, Intermediate, as a guarantor, Bank of America, N.A., as administrative agent, swingline lender, and letter of credit issuer, the lenders party thereto, and the other parties thereto, which provides for a $ 150.0 million five-year senior

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

secured revolving credit facility (the “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.

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For the year ended December 29, 2021, the Company had interest expense of $ 1.2 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.

For the year ended December 30, 2020, the Company had interest expense of $ 2.7 million under the 2018 Revolver, and for the year ended December 25, 2019, the Company had interest expense of $ 3.1 million under the 2018 and 2014 Revolver.

The 2018 Credit Agreement contains certain financial covenants.

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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.

At December 29, 2021, $ 10.0 million of letters of credit and $ 40.0 million of borrowings were outstanding under the 2018 Revolver.

The amount available under the 2018 Revolver was $ 100.0 million at December 29, 2021.

At December 30, 2020, $ 8.4 million of letters of credit and $ 62.8 million of borrowings were outstanding under the 2018 Revolver.

The amount available under the 2018 Revolver was $ 78.8 million at December 30, 2020.

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.

During the year ended December 29, 2021, the Company elected to pay down $ 22.8 million on its 2018 Revolver.

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

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

1 unchanged sentence

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

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

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

Under the terms of the swap agreement, the variable LIBOR-based component of interest payments

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 % .

was converted to a fixed rate of 1.31 % , plus applicable margin, which was 1.5 % for the year ended December 29, 2021.

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.”

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December 30, 2020

Other assets - Interest rate swap

Other liabilities - Interest rate swap

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

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

December 29, 2021

December 30, 2020

December 25, 2019

Interest expense on hedged portion of debt

Interest expense (income) on interest rate swap

Interest expense on interest rate swap

Interest expense on debt and derivatives, net

The following table summarizes the effect of the Company’s cash flow hedge accounting on AOCI for the years ended December 29, 2021, December 30, 2020 and December 25, 2019 (in thousands):

Loss (Gain) Reclassified from

Net (Loss) Gain Recognized in OCI

Gain (Loss) Reclassified from

Net Gain (Loss) Recognized in OCI

AOCI into Interest expense

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Gift card liability

Loyalty rewards program liability

Accrued advertising

Accrued legal settlements and professional fees

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Total other noncurrent liabilities

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

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

For the Years Ended

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Total deferred

Tax provision (benefit) for income taxes

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

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

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

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

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Tax provision for income taxes

The provision for income taxes differs from the amount computed by applying the federal income tax rate of 21.0 % for fiscal 2021, 2020 and 2019 as follows:

1 unchanged sentence

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

State tax benefit (net of federal benefit)

State income tax expense (net of federal benefit)

Change in valuation allowance

Stock option exercises

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

As of December 29, 2021, the Company had no federal and less than $ 0.1 million state 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 Company also has state enterprise zone credits of approximately $ 9.5 million, which expire in 2023.

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.

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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.

After evaluating all of the positive and negative evidence, including the Company’s continued income from operations, the

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Company concluded that it is more likely than not that its deferred tax assets except from certain state credits will be realized.

In fiscal 2020 and 2019, the Company recorded a valuation allowance of approximately $ 0.1 million and $ 0.9 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.

In fiscal 2021, the Company recorded an additional less than $ 0.1 million to the valuation allowance.

As of December 29, 2021, the total valuation allowance was $ 6.2 million.

2 unchanged sentences

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.

TRA resulted in less than $ 0.1 million of expense in fiscal 2021 as a result of the amortization of interest expense related to the total expected TRA payments and changes in estimates for actual tax returns filed and future forecasted taxable income , $ 0.1 million of expense in fiscal 2020 as a result of changes to future forecasted results and deduction on 2018 legal settlement accrual and $ 0.1 million of expense in fiscal 2019 as a result of changes to future forecasted results.

In fiscal 2021, 2020 and 2019, the Company paid $ 1.7 million, $ 5.2 million and $ 5.8 million, respectively, to its pre-IPO stockholders under the TRA.

As of December 29, 2021 and December 30, 2020, the deferred tax assets related to California Enterprise Zone credits, net of valuation allowances are $ 1.3 million and $ 2.5 million, respectively.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company’s deferred tax assets and liabilities as of December 29, 2021 and December 30, 2020 are summarized below.

2 unchanged sentences

Accrued vacation

Accrued legal

Accrued workers’ compensation

8 unchanged sentences

Deferred tax liabilities

Net deferred tax (liability) asset

Net deferred tax liability

The net deferred tax asset amounts above as of December 29, 2021 and December 30, 2020 have been classified in the accompanying consolidated balance sheets as noncurrent assets and are as follows (in thousands):

Assets (liabilities) - state

Assets (liabilities) - federal

Net deferred tax (liability) asset

Assets - state

Liabilities - federal

Net deferred tax liability

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 29, 2021 and December 30, 2020, the Company had no accrual for unrecognized tax benefits.

7 unchanged sentences

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

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

contribution immediately fully vests.

The Company’s matching contribution immediately fully vests.

The Company’s contributions to the plan were $ 0.8 million for the years ended December 29, 2021, December 30, 2020 and December 25, 2019.

2 unchanged sentences

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

On June 8, 2021, our stockholders approved amending the Equity Incentive Plan, formerly the 2018 Omnibus Equity Incentive Plan, under which the new aggregate share limit was increased to be 2,000,000 shares.

As of December 29, 2021, 721,924 shares were available for grant.

During the years ended December 29, 2021, December 30, 2020 and December 25, 2019, the Company recognized stock-based compensation expense of $ 3.2 million, $ 3.1 million and $ 2.5 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.

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

Stock Options

3 unchanged sentences

At December 29, 2021, 212,196 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 2021, the Company granted 256,172 options, with an exercise price equal to the fair market value of the common stock on the date of grant.

1 unchanged sentence

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

In fiscal 2020, the Company did not grant any options.

Changes in options for the years ended December 29, 2021 and December 30, 2020, are as follows:

10 unchanged sentences

Outstanding - December 29, 2021

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Vested and expected to vest at December 29, 2021

3 unchanged sentences

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

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

to which the performance criteria related.

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

4 unchanged sentences

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

Expected volatility is based on the Company’s historical data.

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

In fiscal 2020, the Company did not grant any employee stock options.

The weighted-average estimated fair value of employee stock options granted in fiscal 2021 was $ 8.10 per share using the Black–Scholes model with the following weighted-average assumptions used to value the option grants:

December 29, 2021

3 unchanged sentences

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.

As of December 29, 2021, the Company had total unrecognized compensation expense of $ 1.4 million related to unvested stock options, which the Company expects to recognize over a weighted average period of 2.9 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.

If in the future the Company determines 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.

The Company estimates its forfeiture rate based on an analysis of its 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.

2 unchanged sentences

The effect of forfeiture adjustments was insignificant in fiscal 2021, 2020 and 2019.

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

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

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Restricted Shares

1 unchanged sentence

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.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Changes in restricted shares for the years ended December 29, 2021 and December 30, 2020, are as follows:

5 unchanged sentences

Unvested shares at December 29, 2021

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.

As of December 29, 2021, there was total unrecognized compensation expense of $ 5.3 million related to unvested restricted share awards, which the Company expects to recognize over a weighted-average period of 2.49 years.

As of December 29, 2021, all remaining performance stock units and restricted units were forfeited, cancelled, expired, or released.

EARNINGS PER SHARE

7 unchanged sentences

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.

Under the 2018 Stock Repurchase Plan and 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.

1 unchanged sentence

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

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

EL POLLO LOCO HOLDINGS, INC.

2 unchanged sentences

For the Years Ended

Net income (loss)

Weighted-average shares outstanding—basic

Weighted-average shares outstanding—diluted

Net income (loss) per share—basic

Net income (loss) per share—diluted

Net income per share—basic

Net income per share—diluted

Anti-dilutive securities not considered in diluted EPS calculation

8 unchanged sentences

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.

30-2014-00707367-CU-OE-CXC) 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 parties reached a settlement in principle on January 24, 2019 of all claims brought on behalf of the 32,000+ putative class members in Olvera, 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.

6 unchanged sentences

(Los Angeles Superior Court Case No.

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.

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 that 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.

2 unchanged sentences

The Company fully expects to have to defend against similar lawsuits in the future.

Daniel Turocy, et al.

El Pollo Loco Holdings, Inc., et al.

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.

El Pollo Loco Holdings, Inc., et al.

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

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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;

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.

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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.

The Holdings shareholder voluntarily dismissed the action on October 7, 2020.

A second purported Holdings shareholder filed a derivative

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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

complaint on or about September 23, 2016, under the caption Diep v.

Sather, CA 12760-VCL in the Delaware Court of Chancery.

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

On January 17, 2018, the court entered an

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.

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

On September 25, 2020, after concluding its investigation, the SLC filed a motion to dismiss the Diep action and filed its investigative report under seal as an exhibit to the motion to dismiss.

On May 21, 2021, while the SLC’s motion to dismiss the Diep action was pending, the Company filed a notice of proposed partial settlement of the Diep action with respect to defendants Kay Bogeajis, Laurance Roberts, Stephen J.

Sather, Edward J.

Valle, Douglas K.

Ammerman, and Samuel N.

Borgese (collectively, the “Settling Defendants”).

Defendant Trimaran Pollo Partners, LLC (“Trimaran”) was not a party to the settlement.

The court approved the settlement of $ 625,000 , less Plaintiffs’ fees of $ 156,250 , on September 10, 2021, and dismissed all claims brought, or that could have been brought, against Settling Defendants.

In connection with this settlement, the Company received $ 469,000 in insurance proceeds, which was recorded within general and administrative expenses in the Company’s statement of income for the year ended December 29, 2021.

On July 30, 2021, the court granted the SLC’s motion to dismiss with respect to the claims asserted against remaining defendant Trimaran.

On October 4, 2021, Plaintiffs filed a notice of appeal of the court’s granting of the motion to dismiss against defendant Trimaran.

Plaintiff filed its opening brief on December 6, 2021.

SLC filed its answering brief on December 20, 2021 and the public version of the brief was filed on January 7, 2022.

Plaintiffs filed the reply brief on January 4, 2022.

The hearing on the appeal is scheduled for March 30, 2022.

Handlers-Bryman and Michael D.

El Pollo Loco, Inc.

, Los Angeles Superior Court (Case No.

El Pollo Loco, Inc., Los Angeles Superior Court (Case No.

MC026045) (the “Lancaster Lawsuit”) was filed on February 9, 2016.

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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.

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.

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.

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 income for the fiscal year ended December 30, 2020.

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

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

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

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

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

Reising, et al v.

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

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

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

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

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

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

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

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

El Pollo Loco, Inc.

et al (Case No.

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

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

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

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

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

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

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

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.

The settlement payment of $ 2.5 million has been made in the third quarter of 2020.

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

The outcomes of these actions are not predictable but 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.

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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

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

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.

syrup and fluctuations in the market rates for beverage syrup.

These contracts have terms extending through the end of 2024.

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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 .

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

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.

During fiscal 2020, 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 recorded a $ 0.1 million liability in the Company’s consolidated financial statements related to these contingent liabilities.

During fiscal 2021, the Company reversed the initially recorded liability of $ 0.1 million due to the Company’s franchisees continuing to make their lease payments without any delays.

Employment Agreements

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RELATED PARTY TRANSACTIONS

LLC owns approximately 46.0 % of the Company’s outstanding common stock.

LLC owns approximately 45.8 % of the Company’s outstanding common stock as of December 29, 2021.

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.

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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):

The following table presents the Company’s revenues for the years ended December 29, 2021, December 30, 2020 and December 25, 2019 disaggregated by revenue source and market (in thousands):

Core Market (1) :

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(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:

The following table presents the Company’s revenues disaggregated by geographic market for the years ended December 29, 2021, December 30, 2020 and December 25, 2019:

December 29, 2021

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Additional contract liability

Revenue recognized - additional contract liability

December 29, 2021

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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.

For the year ended December 29, 2021, there was an increase to the contract liability balance due to the Company’s completion of the sale of eight company-operated restaurants within the Sacramento area to an 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):

The following table illustrates the estimated revenue to be recognized in the future related to performance obligations that are unsatisfied as of December 29, 2021:

Franchise revenues:

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

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

Loyalty rewards liability, beginning balance

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data