What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-03-10 compared with 2022-03-11 · 206 added, 268 removed, 911 unchanged (34% of the section changed)

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

(the “Company”) as of December 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”).

(the “Company”) as of December 28, 2022 and December 29, 2021, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 28, 2022, 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 28, 2022 and December 29, 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 28, 2022, in conformity with accounting principles generally accepted in the United States of America.

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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.

(i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments.

The communication of the 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 a separate opinion 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 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.

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.

The net balance of property and equipment was $78.6 million as of December 28, 2022.

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.

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

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

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.

As such, for these restaurants, management compared the projected undiscounted cash flow to the carrying value to determine whether an impairment loss should be measured.

We identified the Company’s evaluation of projected future cash flows to determine the impairment of restaurant property and equipment as a critical audit matter.

The future cash flows used in certain of the Company's 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 impact of the current inflationary pressures on the Company’s business.

Auditing these significant assumptions involved especially challenging auditor judgment due to the nature and extent of audit effort required to addresses these matters.

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

● 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 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 impact of the current inflationary pressures, and (iii) comparing them to restaurant industry revenue growth rates based on market data to determine if contradictory evidence existed.

/s/ BDO USA, LLP

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Accrued income taxes payable

Accrued interest

Current portion of income tax receivable agreement payable

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Accumulated deficit

Accumulated other comprehensive loss

Accumulated other comprehensive income (loss)

Total stockholders’ equity

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Recovery of securities lawsuits related legal expenses and other insurance claims

Loss on disposition of restaurants

(Gain) loss on disposition of restaurants

Impairment and closed-store reserves

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Interest expense, net

Income tax receivable agreement expense

Income tax receivable agreement (income) expense

Income before provision for income taxes

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Changes in derivative instruments

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

Reclassifications of losses (gains) into net income

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

Reclassifications of (gains) losses into net income

Income tax (expense) benefit

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Shares repurchased for employee tax withholdings

Repurchase of common stock

( 4,395,604 )

Forfeiture of common stock related to restricted shares

Other comprehensive income, net of income tax

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Other comprehensive income, net of income tax

Common stock cash dividends ($ 1.50 per share)

Balance, December 28, 2022

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Stock-based compensation expense

Income tax receivable agreement expense

Loss on disposition of restaurants

Income tax receivable agreement (income) expense

(Gain) loss on disposition of restaurants

Loss on disposal of assets

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Prepaid expenses and other current assets

Income taxes payable

Income taxes (receivable) payable

Accounts payable

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Proceeds from issuance of common stock upon exercise of stock options, net of expenses

Common stock dividends paid

Payment of obligations under finance leases

Repurchases of common stock

Deferred financing costs for revolver loan

Net cash flows used in financing activities

Increase in cash and cash equivalents

(Decrease) increase in cash and cash equivalents

Cash and cash equivalents, beginning of period

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

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

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

At December 28, 2022, the Company operated 188 ( 138 in the greater Los Angeles area) and franchised 302 ( 141 in the greater Los Angeles area) El Pollo Loco restaurants.

In addition, the Company currently licenses one restaurant in the Philippines.

In addition, the Company currently licenses five restaurants in the Philippines.

The Company’s largest stockholder is Trimaran Pollo Partners, L.L.C.

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LLC acquired Chicken Acquisition Corp.

(“CAC”), a predecessor of Holdings, on November 17, 2005 (the “Acquisition”) and has a 45.8 % ownership interest as of December 29, 2021.

(“CAC”), a predecessor of Holdings, on November 17, 2005 (the “Acquisition”).

As of December 28, 2022, LLC, FS Equity Partners V, L.P.

and FS Affiliates V, L.P.

own approximately 30.3 %, 14.8 % and 0.2 %, respectively, of the Company’s outstanding common stock.

FS Equity V and FS Affiliates V, which previously indirectly held shares of the Company’s common stock through LLC, received shares directly on August 31, 2022, upon LLC’s pro rata distribution in kind of shares of the Company’s common stock to FS Equity V and FS Affiliates V.

LLC’s only material asset is its investment in Holdings.

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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 $ 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.

Based on current operations, the Company believes that its cash flows from operations, available cash of $ 20.5 million at December 28, 2022, and available borrowings under the 2022 Revolver (as defined in 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.

Basis of Presentation

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

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

Approximately every six or

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

seven years a 53-week fiscal year occurs.

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

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

Fiscal 2022 and 2021 were 52-week fiscal years.

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

Certain amounts in prior years have been reclassified to conform with the fiscal 2022 presentation.

Principles of Consolidation

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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.

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.

COVID-19 and Macroeconomic Conditions

The Company may face future business disruption and related risks resulting from the ongoing COVID-19 pandemic or from another pandemic, epidemic or infectious disease outbreak, or from broader macroeconomic trends, any of which could have a significant impact on our business.

During fiscal 2022, the Company incurred $ 3.3 million in COVID-19 related expenses, comprised of $ 2.3 million due to overtime primarily related to the first quarter and $ 1.0 million due to leaves of absence related to the remaining three quarters.

During fiscal 2021, the Company incurred $ 3.9 million in COVID-19 related expenses, primarily due to leaves of absence and overtime pay.

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.

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While all of the Company’s restaurants had dining rooms open as of December 28, 2022, the Company continues to experience staffing challenges, including higher wage inflation, overtime costs and other labor related costs.

Further, the Company continues to experience inflationary pressures, which resulted in increased commodity prices and impacted the Company’s business and results of operations during the year ended December 28, 2022.

The Company expects these pressures to continue during fiscal 2023.

Due to the fluidity of the COVID-19 pandemic and the current macroeconomic environment, the Company cannot determine the ultimate impact that the COVID-19 pandemic (and related economic effects) and the current macroeconomic environment will have on the Company’s consolidated financial condition, liquidity, and future results of operations, and therefore any prediction as to the ultimate materiality of the adverse impact on the Company’s consolidated financial condition, liquidity, and future results of operations is uncertain.

Cash and Cash Equivalents

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Subsequent Events

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.

Subsequent to year-end, the Company paid down $ 8.0 million on its 2022 Revolver and outstanding borrowings as of March 9, 2023 were $ 58.0 million.

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Concentration of Risk

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The Company had one supplier for which amounts due at December 28, 2022 totaled 41.7 % 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.

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

Purchases from the Company’s largest supplier totaled 28.5 % of the Company’s purchases for fiscal 2022, 27.1 % for fiscal 2021 and 26.9 % for fiscal 2020 with no amounts payable at December 28, 2022 or December 29, 2021.

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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

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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.

if failure to exercise a renewal option imposes an economic penalty on the Company, such that management determines at the inception of the lease that renewal is reasonably assured, the Company may include the renewal option period in the determination of appropriate estimated useful lives.

The estimated useful service lives are as follows:

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Shorter of useful life or lease term

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company capitalizes certain directly attributable internal costs in conjunction with the acquisition, development and construction of future restaurants.

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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 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.

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 Average Unit Volume (“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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The Company determined that triggering events occurred for certain stores during the year ended December 28, 2022 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.

Based on the results of this analysis, the Company recorded non-cash impairment charges of $ 0.5 million for the year ended December 28, 2022, primarily related to the carrying value o f the ROU assets of one restaurant in California that closed in 2021 and the long-lived assets of two restaurants in California.

In fiscal 2021, the Company recorded non-cash impairment charges of $ 0.7 million primarily related to the carrying value of 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 a non-cash impairment charge of $ 3.5 million primarily related to the carrying value of the ROU assets of one restaurant in Texas and the long-lived assets of four restaurants in California .

Given the inherent uncertainty in projecting results for newer restaurants in newer markets, as well as the impact of the COVID-19 pandemic (and related economic effects), 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.

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Closed-Store Reserves

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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.

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.

During fiscal 2020, the Company recognized

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Goodwill and Indefinite-Lived Intangible Assets

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

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

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

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

The Company determined there was no decrement of goodwill related to the disposition of restaurants in fiscal 2021, 2020 and 2019.

The fair value of the portion of the reporting unit disposed of in a refranchising is determined by reference to the discounted value of the future cash flows expected to be generated by the restaurant and retained by the franchisee, which includes a deduction for the anticipated, future royalties the franchisee will pay the Company associated with the franchise agreement entered into simultaneously with the refranchising transition.

The fair value of the reporting unit retained is based on the price a willing buyer would pay for the reporting unit and includes the value of franchise agreements.

As such, the fair value of the reporting unit retained can include expected cash flows from future royalties from those restaurants currently being refranchised, future royalties from existing franchise businesses and company restaurant operations.

The Company did not record any decrement to goodwill related to the disposition of restaurants in fiscal 2022, 2021 and 2020.

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

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The Company determined that there were no indicators of potential impairment of its goodwill and indefinite-lived intangible assets during fiscal 2022.

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.

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Accordingly, the Company did no t record any impairment to its goodwill or indefinite-lived intangible assets during the year ended December 28, 2022.

Deferred Financing Costs

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Included in other assets are deferred financing costs (net of accumulated amortization), related to the revolver, of $ 0.9 million and $ 0.4 million as of December 28, 2022 and December 29, 2021, 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.

Amortization expense for deferred financing costs was approximately $ 0.3 million for each of the

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three years ended December 28, 2022, December 29, 2021, and December 30, 2020, and is reflected as a component of interest expense in the accompanying consolidated statements of income.

Insurance Reserves

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

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

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statements of income.

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

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

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

As such, initial franchise and development fees received, and

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subsequent renewal fees, are recognized over the franchise or renewal term, which is typically twenty years .

As of December 28, 2022, the Company had executed development agreements that represent commitments to open 72 franchised restaurants at various dates through 2032.

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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 $ 16.1 million, $ 15.3 million and $ 16.1 million for the years ended December 29, 2021,

Advertising expense, which is a component of occupancy and other operating expenses, was $ 16.4 million, $ 16.1 million and $ 15.3 million for the years ended December 28, 2022, December 29, 2021 and December 30, 2020, respectively.

In addition, there was $ 28.5 million, $ 25.9 million and $ 22.6 million for the years ended December 28, 2022, December 29, 2021 and December 30, 2020, 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

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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.

within franchise advertising fee revenue.

Fees received in advance of provided services are included in other accrued expenses and current liabilities and were $ 0.8 million and $ 3.6 million at December 28, 2022 and December 29, 2021, respectively.

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Gain on Recovery of Insurance Proceeds, Lost Profits

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

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

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Gain (Loss) on Disposition of Restaurants

During fiscal 2022, the Company completed the sale of three company-operated restaurants within the Orange County area to an existing franchisee.

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.

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Future royalty income is also recognized in revenue as earned.

The Orange County sale during 2022 resulted in cash proceeds of $ 1.0 million and a net gain on sale of restaurants of $ 0.8 million for the year ended December 28, 2022.

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 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.

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

The derivative contract was entered into with a financial institution.

In connection with the Company’s entry into the 2022 Credit Agreement (as defined in Note 6 “Long-Term Debt”), it terminated the interest rate swap on July 28, 2022.

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

The derivative instrument qualified as a hedging instrument in a qualifying cash flow hedge relationship, and the gain or loss on the derivative instrument was 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 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.

To mitigate the counterparty credit risk, the Company will only enter into contracts with major financial institutions, based upon their credit ratings and other factors, and will continue to assess the creditworthiness of the counterparty.

As of December 29, 2021, the counterparty to the Company’s interest rate swap has performed in accordance with their contractual obligation.

The provision for income taxes, income taxes payable and deferred income taxes is determined using the asset and liability method.

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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

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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.

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 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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The Company had no accrual for interest or penalties at December 28, 2022 or December 29, 2021.

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 2021 and 2019.

During fiscal 2020, the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

During fiscal 2022, fiscal 2021 and fiscal 2020, there were no material unrecognized tax benefits.

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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.

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

As of December 28, 2022, the Company made all deferred payroll tax payments and did not have any corresponding balances 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.

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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

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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.

The ERC credit was initially recorded as a receivable as part of the accounts and other receivable 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.

During fiscal 2022, we received $ 3.1 million in ERC and the remaining $ 0.3 million continues to be recorded as a receivable as part of the accounts and other receivable on the consolidated balance sheet for the year ended December 28, 2022.

Fair Value Measurements

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During fiscal 2019, the Company entered into an interest rate swap (used to hedge interest rate risk), which is required to be measured at fair value on a recurring basis.

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

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

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

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

In connection with the Company’s entry into the 2022 Credit Agreement (as defined in Note 6 “Long-Term Debt”), it terminated the interest rate swap in July 2022.

In settlement of this swap, the Company received approximately $ 0.6 million .

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

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Other non-current liabilities - Interest rate swap

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

Fair Value Measurements Using

Other non-current liabilities - Interest rate swap

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

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Certain ROU assets, net

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

recognized during the corresponding periods, as discussed above under "Impairment of Long-Lived 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 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):

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(in thousands):

Fair Value Measurements Using

Impairment Losses

Certain property and equipment, net

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The recorded value of the TRA approximates fair value, based on borrowing rates currently available to the Company for debts with similar terms and remaining maturities (Level 3 measurement).

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Stock-Based Compensation

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The shares used to compute basic and diluted net income per share represent the weighted-average common shares outstanding.

Recently Adopted Accounting Pronouncements

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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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.

In January 2021, the FASB issued 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 discontinuation of the London Interbank Offered Rate (“LIBOR”) and the use of new interest rate benchmarks.

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 October 2020, the FASB issued ASU No.

2020-10, “Codification Improvements,” which improve the consistency of the codification by including all disclosure guidance in the appropriate Disclosure Section (Section 50).

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

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.

2019-12, “Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes”, which modifies Topic 740 to simplify the accounting for income taxes.

ASU 2019-12 is effective for financial statements issued for annual periods beginning after December 15, 2020, and for the interim periods therein.

The 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

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Depreciation and amortization expense was $ 14.4 million, $ 15.2 million and $ 16.9 million for the years ended December 28, 2022, December 29, 2021, and December 30, 2020, respectively.

Based on the Company’s review of its long-lived assets for impairment, the Company recorded non-cash impairment charges of $ 0.4 million, $ 0.3 million and $ 3.0 million for the years ended December 28, 2022, December 29, 2021, and December 30, 2020, 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 and ROU Assets” in Note 2 “Summary of Significant Accounting Policies” for additional information.

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TRADEMARKS, OTHER INTANGIBLE ASSETS AND LIABILITIES

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

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

As of December 28, 2022, the Company had no leases that it had entered into, but had not yet commenced.

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

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

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

however, the Company currently has one facility and ten 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.

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Furthermore, there are no residual value guarantees and no restrictions imposed by the lease.

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

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decision to renew.

During the year ended December 28, 2022, 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 decision to renew.

As a result of the reassessment, an additional $ 13.0 million of ROU assets and lease liabilities for the year ended December 28, 2022 were recognized, and will be amortized over the new lease term.

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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.

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

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The reassessments had an impact on the original lease classification of one property during the year ended December 28, 2022 which represented $ 0.7 million of the $ 13.0 million total additional ROU asset and lease liabilities for fiscal 2022.

There were no reassessments that impacted the original lease classification during the year ended December 29, 2021.

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

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The Company does not have any related party leases.

During fiscal 2022, the Company determined that the carrying value of an ROU assets at one restaurant was not recoverable.

As a result, the Company recorded a less than $ 0.1 million non-cash impairment charge for the year ended December 28, 2022 related to one restaurant closed in California.

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

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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.

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

The impairment primarily related to four restaurants sold to franchisees and one restaurant closed during fiscal 2019.

Leases of equipment primarily consist of restaurant equipment, copiers and vehicles.

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Other Information

Weighted-average remaining lease term—finance leases

Weighted-average remaining lease term—operating leases

Weighted-average remaining years in lease term—finance leases

Weighted-average remaining years in lease term—operating leases

Weighted-average discount rate—finance leases

Weighted-average discount rate—operating leases

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Information regarding the Company’s minimum future lease obligations at December 28, 2022 is as follows (in thousands):

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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 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.

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

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

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

The rent concessions 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 has recognized these lease payments in its consolidated statement

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

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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LONG-TERM DEBT

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

On July 27, 2022, the Company refinanced and terminated its credit agreement (the “2018 Credit Agreement”) among EPL, as borrower, the Company and Intermediate, as guarantors, Bank of America, N.A., as administrative agent, swingline lender, and letter of credit issuer, the lenders party thereto, and the other parties thereto, which provided for a $ 150.0 million five-year senior secured revolving credit facility (the “2018 Revolver”).

The 2018 Revolver was refinanced pursuant to a credit agreement (the “2022 Credit Agreement”) among EPL, as borrower, the Company and Intermediate, as guarantors, Bank of America, N.A., as administrative agent, swingline lender, and letter of credit issuer, the lenders party thereto, and the other parties thereto, which provides for a $ 150.0 million five-year senior secured revolving credit facility (the “2022 Revolver”).

In connection with the refinancing, the 2018 Credit Agreement was terminated.

The 2022 Revolver includes a sub limit of $ 15.0 million for letters of credit and a sub limit of $ 15.0 million for swingline loans.

The 2022 Revolver and 2022 Credit Agreement will mature on July 27, 2027.

The obligations under the 2022 Credit Agreement and related loan documents are guaranteed by Holdings and Intermediate.

The obligations of Holdings, EPL and Intermediate under the 2022 Credit Agreement and related loan documents are secured by a first priority lien on substantially all of their respective assets.

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

The obligations under the 2018 Credit Agreement and related loan documents were guaranteed by the Company and Intermediate.

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

The special dividend announced by the Company’s Board of Directors on October 11, 2022 is permitted under the terms of 2022 Revolver pursuant to both subclause (iii)(d) and (iii)(e) of the following sentence.

Under the 2022 Revolver, Holdings is restricted from making certain payments such as cash dividends, except that it may, inter alia, (i) pay up to $ 1.0 million per year to repurchase or redeem qualified equity interests of Holdings held by past or present officers, directors, or employees (or their estates) of the Company upon death, disability, or termination of employment, (ii) pay under its TRA, and (iii) so long as no default or event of default has occurred and is continuing, (a) make non-cash repurchases of equity interests in connection with the exercise of stock options by directors, officers and management, provided that those equity interests represent a portion of the consideration of the exercise price of those stock options, (b) pay up to $ 0.5 million in any 12 month consecutive period to redeem, repurchase or otherwise acquire equity interests of any subsidiary that is not a wholly-owned subsidiary from any holder of equity interest in such subsidiary, (c) pay up to $ 2.5 million per year pursuant to stock option plans, employment agreements, or incentive plans, (d) make up to $ 5.0 million in other restricted payments per year, and (e) make other restricted payments, subject to its compliance, on a pro forma basis, with (x) a lease-adjusted consolidated leverage ratio not to exceed 4.25 times and (y) the financial covenants applicable to the 2022 Revolver.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

The obligations under the 2018 Credit Agreement and related loan documents are guaranteed by the Company and Intermediate.

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

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

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

The base rate is calculated as the highest of (a) the federal funds rate plus 0.50 %, (b) the published Bank of America prime rate, or (c) LIBOR plus 1.00 %.

For LIBOR loans, the margin is in the range of 1.25 % to 2.25 %, and for base rate loans the margin is in the range of 0.25 % to 1.25 %.

For borrowings under the 2018 Revolver during fiscal 2021, the interest rate range was 1.3 % to 1.6 %.

Borrowings under the 2022 Credit Agreement (other than any swingline loans) bear interest, at the borrower’s option, at rates based upon either the secured overnight financing rate (“SOFR”) or a base rate, plus, for each rate, a margin determined in accordance with a lease-adjusted consolidated leverage ratio-based pricing grid.

The base rate is calculated as the highest of (a) the federal funds rate plus 0.50 %, (b) the published Bank of America prime rate, or (c) Term SOFR with a term of one-month SOFR plus 1.00 %.

For Term SOFR loans, the margin is in the range of 1.25 % to 2.25 %, and for base rate loans the margin is in a range of 0.25 % to 1.25 %.

Borrowings under the 2022 Revolver may be repaid and reborrowed.

For borrowings under the 2022 Revolver and 2018 Revolver during fiscal 2022, the interest rate range was 1.4 % to 6.0 %.

For borrowings under the 2018 Revolver during fiscal 2021, the interest rate range was 1.3 % to 1.6 %.

The interest rate under the 2022 Revolver was 5.7 % at December 28, 2022 and 1.4 % under the 2018 Revolver at December 29, 2021.

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 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.

For the year ended December 28, 2022, the Company had interest expense of $ 0.9 million under the 2022 Revolver and 2018 Revolver.

For the years ended December 29, 2021 and December 30, 2020, the Company had interest expense of $ 1.2 million and $ 2.7 million, respectively, under the 2018 Revolver.

The 2022 Credit Agreement contains certain financial covenants.

The Company was in compliance with all such covenants at December 28, 2022.

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 28, 2022, $ 9.8 million of letters of credit and $ 66.0 million of borrowings were outstanding under the 2022 Revolver.

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

On July 27, 2022, the Company refinanced and terminated the 2018 Revolver pursuant to the 2022 Credit Agreement.

The 2022 Revolver and 2022 Credit Agreement will mature on July 27, 2027.

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.

During the year ended December 28, 2022, the Company borrowed $ 26.0 million net of pay downs of $ 20.0 million on its 2022 Revolver.

During the year ended December 29, 2021, the Company paid down $ 22.8 million on the 2018 Revolver.

There are no required principal payments prior to maturity for the 2022 Revolver.

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

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.”

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

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

For the year ended December 29, 2021 and December 30, 2020, the swap was a highly effective cash flow hedge.

As of December 29, 2021, the estimated net gain included in AOCI related to the Company’s cash flow hedge that will be reclassified into earnings in the next 12 months is $ 0.6 million, based on current LIBOR interest rates.

The objective of the interest rate swap was 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.

In connection with the Company’s entry into the 2022 Credit Agreement, on July 28, 2022, the Company terminated the interest rate swap, which was previously used to hedge interest rate risk.

Prior to the interest rate swap termination, the swap was a highly effective cash flow hedge.

In settlement of this swap, the Company received approximately $ 0.6 million and derecognized the corresponding interest rate swap asset.

The remaining amount in AOCI related to the hedging relationship will be reclassified into earnings when the hedged forecasted transaction is reported in earnings.

As of December 28, 2022, the estimated net gains included in AOCI related to the Company’s cash flow hedge that will be reclassified into earnings in the next 12 months is $ 0.2 million, based on current Term SOFR interest rates.

The following table shows the financial statement line item and amount of the Company’s cash flow hedge accounting on the consolidated balance sheet (in thousands):

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Other liabilities - Interest rate swap

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

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Interest expense on hedged portion of debt

Interest expense on interest rate swap

Interest expense on debt and derivatives, net

Interest (income) expense on interest rate swap

Interest (income) 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 28, 2022, December 29, 2021 and December 30, 2020 (in thousands):

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Net Gain (Loss) Recognized in OCI

AOCI into Interest expense

AOCI into Interest (Income) Expense

December 28, 2022

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Deferred franchise and development fees

Current portion of lease payment deferrals

Total other accrued expenses and current liabilities

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

OTHER NONCURRENT LIABILITIES

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Total other noncurrent liabilities

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

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Change in valuation allowance

TRA (income) expense

Stock option exercises

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The Company also has state enterprise zone credits of approximately $ 9.2 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.

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

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

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The 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

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

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 except from certain state credits will be realized.

In both fiscal 2021 and 2020, the Company recorded a valuation allowance of approximately $ 0.1 million against its deferred tax asset resulting from certain tax credits that may not be realizable prior to the time the credits expire.

In fiscal 2022, the Company recorded an additional $ 0.5 million to the valuation allowance.

As of December 28, 2022, the total valuation allowance was $ 6.7 million.

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

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.

TRA resulted in $ 0.4 million of income in fiscal 2022 as a result of the amortization of interest expense related

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

In fiscal 2022, 2021 and 2020, the Company paid $ 0.4 million, $ 1.7 million and $ 5.2 million, respectively, to its pre-IPO stockholders under the TRA.

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Net deferred tax liability

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 28, 2022 and December 29, 2021, the Company had no accrual for unrecognized tax benefits.

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examination for years before 2019 by the federal taxing authority, and for years before 2018 by state taxing authorities.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

EMPLOYEE BENEFIT PLANS

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Unvested options vest over time, or upon our achieving annual financial goals.

However, the compensation committee of the board of directors, as administrator of the Company’s 2018 Omnibus Equity Incentive Plan, has the power to accelerate the vesting schedule of stock-based compensation, and, generally, in the event of an employee termination in connection with a change in control of the Company, any unvested portion of an award under the plan shall become fully vested.

However, the compensation committee of the board of directors, as administrator of the Company’s Equity Incentive Plan, has the power to accelerate the vesting schedule of stock-based compensation, and, generally, in the event of an employee termination in connection with a change in control of the Company, any unvested portion of an award under the plan shall become fully vested.

At December 28, 2022, 180,020 premium options, options granted above the stock price at date of grant, remained outstanding.

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The options granted in fiscal 2022 had a four year vesting period.

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

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.

The options granted in fiscal 2021 had a four year vesting period.

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 28, 2022 and December 29, 2021, are as follows:

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Outstanding - December 28, 2022

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Vested and expected to vest at December 28, 2022

Exercisable at December 28, 2022

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The intrinsic value of options exercised, calculated as the difference between the market value on the date of exercise and the exercise price, was $ 0.8 million, $ 1.6 million and $ 9.9 million for fiscal years 2022, 2021 and 2020, respectively.

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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:

The weighted-average estimated fair value of employee stock options granted in fiscal 2022 and 2021 was $ 4.89 and $ 8.10 per share, respectively, using the Black–Scholes model with the following weighted-average assumptions used to value the option grants:

December 28, 2022

December 29, 2021

Expected volatility

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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

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These grants vest based on continued service over three years for directors and four years for employees.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Changes in restricted shares for the years ended December 28, 2022 and December 29, 2021, are as follows:

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

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

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

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

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

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

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

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.

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

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

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On October 11, 2022, the Company’s Board of Directors approved a share repurchase program (the “2022 Stock Repurchase Plan”) under which the Company is authorized to repurchase up to $ 20.0 million of shares of our common stock.

The 2022 Stock Repurchase Plan will terminate on March 28, 2024, may be modified, suspended or discontinued at any time, and does not obligate the Company to acquire any particular number of shares.

Under the 2022 Stock Repurchase Plan, the Company is 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 will be executed using open market purchases, including pursuant to Rule 10b5-1 trading plans, and/or through privately negotiated transactions.

For the year ended December 28, 2022, the Company did no t repurchase any shares of common stock under the 2022 Stock Repurchase Plan.

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

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Anti-dilutive securities not considered in diluted EPS calculation

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Below is a reconciliation of basic and diluted share counts.

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Legal Matters

On or about February 24, 2014, a former employee filed a class action in the Superior Court of the State of California, County of Orange, under the caption Elliott Olvera, et al v.

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

30-2014-00707367-CU-OE-CXC) 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.

(Los Angeles Superior Court Case No.

BC624001), Maria Vega, et al.

El Pollo Loco, Inc.

(Los Angeles Superior Court Case No.

BC649719), and Gonzalez v.

El Pollo Loco, Inc.

(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 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.

The settlement payment was made on February 28, 2020.

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

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

On or about November 5, 2015, a purported Holdings shareholder filed a derivative complaint on behalf of Holdings in the Court of Chancery of the State of Delaware against certain Holdings officers, directors and Trimaran Pollo Partners, L.L.C., under the caption Armen Galustyan v.

Sather, et al.

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

A second purported Holdings shareholder filed a derivative

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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Plaintiffs filed the reply brief on January 4, 2022.

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

The hearing on the appeal took place on March 30, 2022.

On June 28, 2022, the court’s granting of the motion to dismiss against Trimaran was affirmed.

Handlers-Bryman and Michael D.

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Handlers-Bryman and Michael D.

Bryman, as individuals and in their capacities as trustees of the Handlers Bryman Trust (collectively, “Plaintiffs”), filed suit against us alleging, among other things, that we “imposed unreasonable time limitations” on their development of additional restaurant locations in Lancaster, California, and that we thereafter developed company-operated El Pollo Loco restaurants in the “market area” of Plaintiffs’ existing El Pollo Loco restaurant in Lancaster.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

developed company-operated El Pollo Loco restaurants in the “market area” of Plaintiffs’ existing El Pollo Loco restaurant in Lancaster.

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.

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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 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

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 four 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.

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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The Company also intends to enter into indemnification agreements with future directors and officers.

RELATED PARTY TRANSACTIONS

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.

(collectively, “Trimaran” and “Freeman Spogli,” respectively)—possess significant influence when stockholders vote on matters such as election of directors, mergers, consolidations and acquisitions, the sale of all or substantially all of the Company’s assets, decisions affecting the Company’s capital structure, amendments to the Company’s certificate of incorporation or by-laws, and the Company’s winding up and dissolution.

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

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

RELATED PARTY TRANSACTIONS

As of December 28, 2022, LLC, FS Equity Partners V, L.P.

and FS Affiliates V, L.P.

own approximately 30.3 %, 14.8 % and 0.2 %, respectively, of our outstanding common stock.

FS Equity V and FS Affiliates V, which previously indirectly held shares of our common stock through LLC, received shares directly on August 31, 2022, upon LLC’s pro rata distribution in kind of shares of our common stock to FS Equity V and FS Affiliates V.

REVENUE FROM CONTRACTS WITH CUSTOMERS

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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 28, 2022, there was an increase to the contract liability balance due to the Company’s completion of the sale of three company-operated restaurants within the Orange County area to an existing franchisee.

This resulted in an additional contract liability of $ 0.8 million, relating to allocation of the transaction price to various performance obligations under the applicable contracts of the sale.

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 which 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 28, 2022:

Franchise revenues:

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):

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

Loyalty rewards liability, beginning balance

13 unchanged sentences

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