What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-03-08 compared with 2023-03-10 · 170 added, 174 removed, 417 unchanged (45% of the section changed)

12 unchanged sentences

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

Fiscal 2020 was a 53-week fiscal year.

Fiscal 2023, 2022 and 2021 were 52-week fiscal years.

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M arket Trends and Uncertainties

We 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 the year ended December 28, 2022, we incurred a total of $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 the year ended December 29, 2021 and December 30, 2020, we incurred $3.9 million and $4.9 million, respectively, in COVID-19 related expenses, primarily due to leaves of absence and overtime pay.

In addition, while all of our restaurants had dining rooms open as of December 28, 2022, we continue to experience staffing challenges, including higher wage inflation, overtime costs and other labor related costs.

Labor costs could also be adversely impacted as a result of the FAST Act, which was signed into law in September 2022 and authorizes the creation of a council to set minimum standards for industry workers in California, including minimum wages.

The FAST Act, which will take effect if approved by voters in November 2024, could result in increased labor cost at our California restaurants thereby potentially impacting the profitability of our California restaurants.

Further, this bill could prompt similar legislation in other states.

We also continue to experience inflationary pressures, which resulted in increased commodity prices and impacted our business and results of operations during the year ended December 28, 2022.

We expect these pressures to continue during fiscal year 2023.

Due to the fluidity of the COVID-19 pandemic and current macroeconomic environment, we cannot determine the ultimate impact on our consolidated financial condition, liquidity, and future results of operations, and therefore any prediction as to the ultimate materiality of the adverse impact on our consolidated financial condition, liquidity, and future results of operations is uncertain.

On September 28, 2023, Governor Newsom signed AB 1228 into law, which repealed and replaced the FAST Act on January 1, 2024.

Pursuant to AB 1228, the minimum wage at fast food restaurants that are part of brands which have more than 60 establishments nationwide will rise to $20 an hour on April 1, 2024, and a Fast Food Council created by AB 1228 will have limited power to approve annual wage increases until 2029.

Under the law, the Fast Food Council will also have the power to develop and propose minimum standards for fast food workers, including standards for working hours, working conditions, and health and safety.

As a result of AB 1228, we expect our labor and regulatory compliance costs will increase beginning in fiscal 2024 and that our results of operations and profitability will be adversely affected if we are not able to implement other measures to counter these increased costs.

We have experienced inflationary pressures affecting our operations in certain areas such as food cost, labor costs, construction costs and other restaurant operating costs.

We have been able to substantially offset these inflationary and other cost pressures through various actions, such as increasing menu prices, managing menu mix, and productivity improvements.

However, we expect these inflationary and other cost pressures to continue throughout fiscal year 2024 and we may not be able to offset cost increases in the future.

Growth Strategies and Outlook

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

● embed our unique El Pollo Loco culture ;

● build awareness and own our lane ;

● deliver exceptional service – profitably ;

● accelerate development.

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

● attract, hire, and retain top talent ;

● EPL hospitality ;

● be known for our famous fire-grilled chicken ;

● digital-centric in service of improving the customer experience;

● expand as an asset light company.

As of December 27, 2023, we had 495 locations in seven states.

In fiscal 2023, we opened two new company-operated restaurants in Nevada and our franchisees opened three new restaurants, one in California, one in Colorado and one in Utah.

In fiscal 2022, we opened four new company-operated restaurants, two in Nevada and two in California, and our franchisees opened nine new restaurants, seven in California, one in Colorado and one in Utah .

In fiscal 2021, we opened two new company-operated restaurants, one in Nevada and one in California, and our franchisees opened two new restaurants, one in Texas and one in Louisiana .

In 2023, we intend to open four to six new company-operated and eight to twelve new franchised restaurants.

In 2024, we intend to open two new company-operated in California and five to seven new franchised restaurants.

To increase comparable restaurant sales, we plan to increase customer frequency, attract new customers, and improve per-person spend.

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Comparable Restaurant Sales

In fiscal 2023, comparable restaurant sales system-wide decreased 0.3%.

In fiscal 2022, comparable restaurant sales system-wide increased 5.9%.

In fiscal 2021, comparable restaurant sales system-wide increased 12.1%.

In fiscal 2020, comparable restaurant sales system-wide decreased 2.4%.

Comparable restaurant sales growth/decline reflects the change in year-over-year sales for the comparable restaurant base.

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System-wide comparable restaurant sales include restaurant sales at all comparable company-operated restaurants and at all comparable franchised restaurants, as reported by franchisees.

Comparable restaurant sales at company-operated restaurants increased 3.7% in fiscal 2022, increased 7.6% in fiscal 2021, and decreased 3.0% in fiscal 2020.

Comparable restaurant sales at company-operated restaurants increased 0.3%, 3.7%, and 7.6%, respectively, in fiscal 2023, 2022 and 2021.

For company-operated restaurants in 2023, the change in comparable restaurant sales consisted of a 2.3% increase in average check size due to increases in menu prices partially offset by a 2.0% decrease in transactions.

In fiscal 2022, the increase in company-operated comparable restaurant sales consisted of a 7.3% increase in average check size partially offset by a 3.3% decrease in transactions .

In fiscal 2021, the increase in company-operated comparable restaurant sales consisted of a 6.3% increase in average check size and a 1.2% increase in transactions.

In fiscal 2020, the decrease in company-operated comparable restaurant sales was primarily the result of a decrease in transactions of 15.8%, partially offset by a 15.3% increase in average check size .

In fiscal 2022, comparable restaurant sales at franchised restaurants increased 7.4%.

In fiscal 2021, comparable restaurant sales at franchised restaurants increased 15.3%, and in fiscal 2020, comparable restaurant sales at franchised restaurants decreased 2.0%.

In fiscal 2023, comparable restaurant sales at franchised restaurants decreased 0.7%.

In fiscal 2022, comparable restaurant sales at franchised restaurants increased 7.4%, and in fiscal 2021, comparable restaurant sales at franchised restaurants increased 15.3%.

Restaurant Development

In fiscal 2022, we opened four company-operated restaurants, and our franchisees opened nine new restaurants.

In fiscal 2023, we opened two company-operated restaurants, and our franchisees opened three new restaurants.

From time to time, we and our franchisees close restaurants.

In fiscal 2022, we closed two company-operated restaurants.

Our franchisees closed one restaurant.

In fiscal 2023, we did not close any company-operated restaurants, and our franchisees did not close any restaurants.

Our restaurant counts at the beginning and end of each of the last three years were as follows:

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Restaurants at end of period

In 2020, we finalized a new restaurant design that we believe will clearly differentiate and communicate our brand, both on the exterior and interior.

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

During the year ended December 28, 2022, we completed six company-operated restaurant remodels and 16 franchise remodels using the new asset design.

In fiscal 2023, we plan to continue our standard practices for remodels, which includes completing a total of 10-15 company and 20-30 franchise remodels using the new design.

During the year ended December 27, 2023, we completed 15 company-operated restaurant remodels and 33 franchise remodels.

In fiscal 2024, we plan to continue our standard practices for remodels, which includes completing a total of 15-20 company and 40-50 franchise remodels.

Remodeling is a use of cash and has implications for our net property and depreciation line items on our consolidated balance sheets and statements of income, among others.

The cost of our restaurant remodels varies depending on the scope of work required, but on average the investment is $0.3 to $0.4 million per restaurant.

The cost of our restaurant remodels varies depending on the scope of work required, but on average the investment is $0.3 million to $0.4 million per restaurant.

Our Loco Rewards loyalty program offers rewards that incentivize customers to visit our restaurants more often each month.

Customers earn points for each dollar spent and 50 points can be redeemed for a $5 reward to be used for a future purchase.

Customers earn points for each dollar spent and points can be redeemed for multiple redemption options.

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

Additionally, if a reward is not used within six months, it expires.

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

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

Factors that influence labor costs include minimum wage and payroll tax legislation, state labor laws (which, in California, may include the FAST Act), overtime, wage inflation, the frequency and severity of workers’ compensation claims, health care costs, and the performance of our restaurants.

Factors that influence labor costs include minimum wage and payroll tax legislation, state labor laws (which, in California, include AB 1228), overtime, wage inflation, the frequency and severity of workers’ compensation claims, health care costs, and the performance of our restaurants.

Occupancy Costs and Other Operating Expenses

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Other restaurant operating expenses include the costs of utilities, advertising, credit card processing fees, restaurant supplies, repairs and maintenance, and other restaurant operating costs.

Gain on Recovery of Insurance Proceeds, Net

Gain on recovery of insurance proceeds includes insurance reimbursements related to the property and equipment damage, expenses incurred, and lost profits.

General and Administrative Expenses

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Also included are pre-opening costs, and expenses above the restaurant level, including salaries for field management, such as area and regional managers, and franchise field operational support.

Legal Settlements

Legal settlements include expenses such as judgments or settlements related to legal matters, legal claims and class action lawsuits.

Franchise Expenses

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We review long-lived assets such as property, equipment, and intangibles on a unit-by-unit basis for impairment when events or circumstances indicate the carrying value of the assets may not be recoverable.

We determine if there is impairment at the restaurant level by comparing undiscounted future cash flows from the related long-lived assets to their respective carrying values and record an impairment charge when appropriate.

We determine if there is impairment at the restaurant level by comparing undiscounted future cash flows from the related property and equipment assets to their respective carrying values and record an impairment charge when appropriate.

In determining future cash flows, significant estimates are made by us with respect to future operating results of each restaurant over its remaining lease term, including sales trends, labor rates, commodity costs and other operating cost assumptions.

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Occupancy and other operating expenses (1)

Gain on recovery of insurance proceeds, lost profits, net

Company restaurant expenses (1)

3 unchanged sentences

Loss on disposal of assets

Gain on recovery of insurance proceeds, property, equipment and expenses

Gain on disposition of restaurants

Impairment and closed-store reserves

(Gain) loss on disposition of restaurants

Total expenses

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Interest expense, net

Income tax receivable agreement (income) expense

Income tax receivable agreement expense (income)

Income before provision for income taxes

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Company-Operated Restaurant Revenue

In fiscal 2022, company-operated restaurant revenue increased $8.5 million, or 2.1%.

The increase in company-operated restaurant sales was primarily due to an increase in company-operated comparable restaurant revenue of $14.3 million, or 3.7%.

In fiscal 2023, company-operated restaurant revenue decreased $4.8 million, or 1.2%.

The decrease in company-operated restaurant sales was primarily due to $10.5 million decrease in revenue from the 21 company-operated restaurants sold by the Company to existing franchisees and the closure of two restaurants, in each case, during or subsequent to the first quarter of 2022.

This company-operated restaurant sales decrease was partially offset by an increase in company-operated comparable restaurant revenue of $1.2 million, or 0.3%.

The company-operated comparable restaurant sales increase consisted of an approximately 2.3% increase in average check size due to increases in menu prices, partially offset by a 2.0% decrease in transactions.

In addition, company-operated restaurant revenue was favorably impacted by $4.3 million of additional sales from the opening of six restaurants during or subsequent to the first quarter of 2022.

This company-operated restaurant sales increase was partially offset by a $9.0 million decrease in revenue from the closure of three restaurants during or subsequent to the first quarter of 2021, the eleven company-operated restaurants sold by the Company to existing franchisees during or subsequent to the first quarter of 2021.

Franchise Revenue

In fiscal 2023, franchise revenue increased $2.8 million, or 7.3%.

This increase was primarily due to a franchise comparable restaurant sales increa se of 7.4%, the opening of eleven restaurants during or subsequent to the first quarter of 2021 and revenue generated from eleven company-operated restaurants sold by the Company to existing franchisees

during or subsequent to the first quarter of 2021 .

This franchise revenue increase was partially offset by the closure of three franchise locations during the same period.

This increase was primarily due to revenue generated from 21 company-operated restaurants sold by the Company to existing franchisees and the opening of 12 restaurants, in each case, during or subsequent to the first quarter of 2022.

This franchise revenue increase was partially offset by the franchise comparable restaurant sales decrea se of 0.7%.

Franchise Advertising Fee Revenue

Franchise advertising fee revenue increased $0.7 million, or 2.5% from the comparable period in the prior year.

As advertising fee revenue is a percentage of franchisees’ revenue, the year-to-date fluctuation was due to the increases noted in franchise revenue above.

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

Food and Paper Costs

Food and paper costs increased $13.4 million, or 12.8%, in fiscal 2022.

The increase in food and paper costs resulted primarily from commodity inflation, partially offset by lower transactions.

In addition, the increase in food and paper costs resulted from a $1.1 million increase from restaurants opened during the current or prior year.

These increases were partially offset by a reduction of $1.5 million for restaurant locations sold to franchisees during the current or prior year.

Food and paper costs as a percentage of company-operated restaurant revenue were 29.2% in fiscal 2022, up from 26.4% in fiscal 2021 primarily due to commodity inflation, partially offset by an increase in pricing.

Food and paper costs decreased $9.5 million, or 8.1%, in fiscal 2023.

The decrease in food and paper costs resulted primarily from lower transactions including restaurant locations sold to franchisees during the current or prior year, partially offset by commodity inflation.

Food and paper costs as a percentage of company-operated restaurant revenue were 27.2% in fiscal 2023, down from 29.2% in fiscal 2022 primarily due to an increase in pricing, partially offset by commodity inflation.

Labor and Related Expenses

Labor and related expenses increased $10.5 million, or 8.7%, in fiscal 2022.

The increase was primarily due to a $8.2 million increase primarily related to minimum wage increases in California during fiscal 2022 and other labor wage increases as a result of competitive pressure.

Further, the increase for the year-to-date period was due to recognizing a $3.4 million Employee Retention Credit which was recorded as an offset to the corresponding payroll tax expense and was classified as part of the labor and other operating expenses on the consolidated statements of income during the year ended December 29, 2021.

In addition, the labor and related expenses were impacted by a $1.3 million increase from restaurants opened during or after the first quarter of the prior year and $1.0 million in higher payroll taxes primarily associated with the labor increases above.

The increase in labor and related expenses for the year-to-date period was partially offset by a $2.1 million reduction in labor related to the eleven locations sold to existing franchisees during the current or prior year and a $1.2 million reduction in restaurants closed during the current or prior year.

Labor and related expenses as a percentage of company-operated restaurant revenue were 32.4% in fiscal 2022, up from 30.5% in fiscal 2021 primarily due to the cost increases highlighted above, partially offset by the higher menu prices.

Labor and related expenses decreased $3.5 million, or 2.7%, in fiscal 2023.

The decrease was primarily due to a $4.0 million decrease related to the 2.0% decrease in year-over-year sales transactions, a $2.9 million decrease in overtime pay due to improvements in operational execution and a $1.8 million decrease related to COVID-19 sick pay.

The decrease in labor and related expenses for the year was partially offset by a $4.1 million increase primarily related to higher wage rates from minimum wage increases in California during fiscal 2023 and 2022 and other labor wage increases as a result of competitive pressure and a $1.9 million increase in labor related costs due to due to open restaurant management staffing positions in fiscal 2022 being filled during fiscal 2023.

Labor and related expenses as a percentage of company-operated restaurant revenue were 31.9% in fiscal 2023, down from 32.4% in fiscal 2022 primarily due to the increase in pricing, and overtime and sick pay decreases, partially offset by the cost increases highlighted above.

Occupancy and Other Operating Expenses

Occupancy and other operating expenses increased $4.0 million, or 4.1%, in fiscal 2022.

The increase was primarily due to a $2.4 million increase in utilities costs primarily due to increases in natural gas and electricity costs, a $0.6 million increase in market place delivery fees, a $0.4 million increase in freight fuel costs, a $0.3 million increase in repairs and maintenance and a $0.3 million increase in advertising expense.

Occupancy and other operating expenses decreased $0.1 million, or 0.1%, in fiscal 2023.

The decrease was primarily due to a $0.8 million decrease in utilities and a $0.3 million decrease in market place delivery fees.

The decrease in occupancy and other operating expenses was partially offset by a $1.0 million increase in occupancy cost.

Occupancy and other operating expenses as a percentage of company-operated restaurant revenue were 25.4% in fiscal 2023, up from 25.2% in fiscal 2022 primarily due to the cost increases highlighted above .

Gain on Recovery of Insurance Proceeds, Lost Profits

During fiscal 2023 and fiscal 2022, two of our restaurants incurred damage resulting from a fire.

In fiscal 2023, we incurred costs directly related to the fire of less than $0.1 million.

We recognized gains of $0.2 million, related to the reimbursement of property and equipment and expenses incurred and $0.3 million related to the reimbursement of lost profits.

The gain on recovery of insurance proceeds and reimbursement of lost profits, net of the related costs, is included in the accompanying consolidated statements of income, for the year ended December 27, 2023, as a reduction of company restaurant expenses.

We received from the insurance company cash of $0.5 million, net of the insurance deductible, during fiscal 2023.

General and Administrative Expenses

General and administrative expenses decreased $0.8 million, or 1.9%, in fiscal 2022.

The decrease was due primarily to a $1.1 million decrease in labor related costs, primarily related to a decrease in management bonus expense and a $0.4 million decrease in legal-related expenses.

The decrease in general and administrative expenses was partially offset by a $0.6 million increase in other general and administrative expenses.

General and administrative expenses as a percentage of total revenue were 8.3% in fiscal 2022, down from 8.8% in fiscal 2021.

This decrease is primarily due to the cost decreases described above and leverage on higher sales.

General and administrative expenses increased $2.9 million, or 7.5%, in fiscal 2023.

The increase was due primarily to a $1.4 million increase in labor related costs, primarily related to an increase in estimated management bonus expense, a $1.1 million increase in restructuring costs related to certain positions in the organization, and a $0.6 million increase in

executive transition costs.

General and administrative expenses as a percentage of total revenue were 9.0% in fiscal 2023, up from 8.3% in fiscal 2022.

This increase is primarily due to the cost increases described above.

Franchise Expenses

Franchise expenses increased $2.2 million, or 6.2%, in fiscal 2023.

The increase was primarily due to an increase in advertising expenses, primarily resulting from higher franchise revenue, higher franchise services expense and higher

rent expense for locations sub-leased to franchisees that have a portion of the rent based on a percentage of revenue generated.

Impairment and Closed-Store Reserves

During fiscal 2022, we recorded a $0.5 million non-cash impairment charge 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.

During fiscal 2021, we recorded a $0.7 million non-cash impairment charge 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.

During fiscal 2022, we recognized $0.3 million of closed-store reserve expense related to the amortization of ROU assets, property taxes and CAM payments for our closed locations compared to $0.4 million during fiscal 2021 .

Gain and Loss on Disposition of Restaurants

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

The increase was primarily due to an increase in advertising expenses, primarily resulting from higher franchise revenue, higher franchise services expense and higher rent expense for locations sub-leased to franchisees that have a portion of the rent based on a percentage of revenue generated.

Gain on Disposition of Restaurants

During fiscal 2023, we completed the sale of 18 restaurants within California, Utah and Texas to existing franchisees.

We 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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The cash consideration per restaurant related to franchise fees is consistent with the amounts stated in the related franchise agreements, which are charged for separate standalone arrangements.

The Company initially defers and subsequently recognizes the franchise fees over the term of the franchise agreement.

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

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

During fiscal 2021, we completed the sale of eight company-operated restaurants within the Sacramento area to an existing franchisee.

We initially defer and subsequently recognize the franchise fees over the term of the franchise agreement.

During fiscal 2023, these sales resulted in cash proceeds of $7.7 million and a net gain on sale of restaurants of $5.0 million.

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

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

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

future cash consideration for royalties.

Cash proceeds included upfront consideration for the sale of the restaurants and franchise fees.

The cash consideration per restaurant related to franchise fees is consistent with the amounts stated in the related franchise agreements, which are charged for separate standalone arrangements.

The Company initially defers and subsequently recognizes the franchise fees over the term of the franchise agreement.

Future royalty income is also recognized in revenue as earned.

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

We initially defer and subsequently recognize the franchise fees over the term of the franchise agreement.

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

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

Impairment and Closed-Store Reserves

During fiscal 2023, we recorded a $1.5 million non-cash impairment charge primarily related to the property and equipment assets of one restaurant in Nevada and the carrying value o f the ROU assets of one restaurant in California.

During fiscal 2022, we recorded a $0.5 million non-cash impairment charge primarily related to the carrying value o f the ROU assets of one restaurant in California that closed in 2021 and the property and equipment assets of two restaurants in California.

During fiscal 2023, we recognized $0.2 million of closed-store reserve expense related to the amortization of ROU assets, property taxes and CAM payments for our closed locations compared to $0.3 million during fiscal 2022 .

Interest Expense, Net

For fiscal 2022, net interest expense, decreased by $0.1 million, primarily related to lower outstanding balances on our 2022 Revolver (as defined below) during part of the year.

For fiscal 2023, net interest expense, increased by $3.1 million, primarily related to higher outstanding balances on our 2022 Revolver (as defined below) as well as the higher interest rates during fiscal 2023 versus the comparable period during the prior year.

Income Tax Receivable Agreement

On July 30, 2014, we entered into the tax receivable agreement (the “TRA”) liability .

On July 30, 2014, we entered into the income tax receivable agreement (the “TRA”) .

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

In fiscal 2022 and fiscal 2021 we recognized income tax receivable agreement income of $0.4 million and expense of less than $0.1 million, respectively.

In fiscal 2023 and fiscal 2022 we recognized income tax receivable agreement expense of $0.1 million and income of $0.4 million, respectively.

In fiscal 2023 and 2022, we paid $0.3 million and $0.4 million, respectively, to our pre-IPO stockholders under the TRA.

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In fiscal 2023, we recorded an income tax expense of $9.4 million, compared to income tax expense of $8.1 million in fiscal 2022, reflecting an estimated effective tax rate of 26.7% and 28.0%, respectively.

The difference between the 21.0% statutory rate and the Company’s effective tax rate of 28.0% for the year ended December 28, 2022 is primarily a result of state taxes, the change in valuation allowance against certain state credits, a tax shortfall related to equity compensation and non-deductible executive compensation, partially offset by a Work Opportunity Tax Credit benefit.

The difference between the 21.0% statutory rate and the Company’s effective tax rate of 26.2% for the year ended December 29, 2021 is primarily a result of windfall tax benefit related to stock options exercised and state taxes, a Work Opportunity Tax Credit benefit and the change in valuation allowance against certain state credits as a result of future forecasted income apportioned to the state jurisdiction .

The difference between the 21.0% statutory rate and our effective tax rate of 26.7% for the year ended December 27, 2023 is primarily a result of windfall tax benefit related to stock options exercised, state taxes, a Work Opportunity Tax Credit benefit and the corresponding valuation allowance release in connection with the California Enterprise Zone credits expiration .

The difference between the 21.0% statutory rate and our effective tax rate of 28.0% for the year ended December 28, 2022 is primarily a result of state taxes, the change in valuation allowance against certain state credits, a tax shortfall related to equity compensation and non-deductible executive compensation, partially offset by a Work Opportunity Tax Credit benefit.

Fiscal Year 2022 Compared to Fiscal Year 2021

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These key measures include company-operated restaurant revenue, system-wide sales, comparable restaurant sales, company-operated average unit volumes (“AUV”), restaurant contribution, restaurant contribution margin, new restaurant openings, EBITDA, and Adjusted EBITDA.

In fiscal 2022, our restaurants generated company-operated restaurant revenue of $403.2 million and system-wide sales of $1,039.0 million, and system comparable sales growth of 5.9%, consisting of company-operated restaurant comparable sales growth of 3.7% and franchised comparable sales growth of 7.4%.

In fiscal 2023, our restaurants generated company-operated restaurant revenue of $398.4 million and system-wide sales of $1,050.2 million, and system comparable sales decline of 0.3%, consisting of company-operated restaurant comparable sales growth of 0.3% and franchised comparable sales decline of 0.7%.

The company-operated comparable sales increase consisted of a 2.3% increase in average check size due to increases in menu prices and partially offset by a 2.0% decrease in transactions.

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Management believes that restaurant contribution and restaurant contribution margin are important tools for investors, because they are widely-used metrics within the restaurant industry to evaluate restaurant-level productivity, efficiency, and performance.

Restaurant contribution and restaurant contribution margin may also assist investors in evaluating our business and performance relative to industry peers and provide greater transparency with respect to the Company’s financial condition and results of operation.

Management further believes restaurant level operating margin is useful to investors to highlight trends in our core business that may not otherwise be apparent to investors when relying solely on GAAP financial measures.

A reconciliation of restaurant contribution and restaurant contribution margin to company-operated restaurant revenue is provided below:

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General and administrative expenses

Legal settlements

Franchise expenses

1 unchanged sentence

Loss on disposal of assets

Gain on recovery of insurance proceeds, property, equipment and expenses

Franchise revenue

Franchise advertising fee revenue

Recovery of securities lawsuits related legal expenses and other insurance claims

Impairment and closed-store reserves

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EBITDA and Adjusted EBITDA as presented in this Annual Report are supplemental measures of our performance that are neither required by, nor presented in accordance with, GAAP.

EBITDA and Adjusted EBITDA are not measurements of our financial performance under GAAP and should not be considered as alternatives to net income, operating income, or any other performance measures derived in accordance with GAAP, or as alternatives to cash flow from operating activities as a measure of our liquidity.

from operating activities as a measure of our liquidity.

In addition, in evaluating EBITDA and Adjusted EBITDA, you should be aware that in the future we will incur expenses or charges such as those added back to calculate EBITDA and Adjusted EBITDA.

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Loss on disposal of assets (b)

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

Impairment and closed-store reserves (d)

(Gain) loss on disposition of restaurants (e)

Income tax receivable agreement (income) expense (f)

Securities class action legal expense (g)

Impairment and closed-store reserves (c)

(Gain) loss on disposition of restaurants (d)

Income tax receivable agreement expense (income) (e)

Securities class action legal expense (f)

Special dividend (g)

Legal settlements (h)

Special legal expenses (i)

Pre-opening costs (j)

Shareholder advisory fees (j)

Gain on recovery of insurance proceeds (k)

Executive transition costs (l)

Severance (m)

Pre-opening costs (n)

Adjusted EBITDA

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

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

During fiscal 2022, we recorded non-cash impairment charges of $0.5 million, 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.

During fiscal 2023, we recorded non-cash impairment charges of $1.5 million, primarily related to the property and equipment assets of one restaurant in Nevada and the carrying value o f the ROU assets of one restaurant in California.

D uring fiscal 2023, we recognized $0.2 million of closed-store reserve expense, primarily related to the amortization of ROU assets, property taxes and CAM payments for our closed locations.

In fiscal 2021, we recorded non-cash impairment charges of $0.7 million for the year ended December 29, 2021, primarily related to the carrying value of one restaurant in Texas closed in 2019, the ROU assets of one restaurant in California closed in 2021, and the long-lived assets of three restaurants in California.

In fiscal 2022, we recorded non-cash impairment charges of $0.5 million for the year ended December 28, 2022, primarily related to the carrying value of the ROU assets of one restaurant in California that closed in 2021 and the property and equipment assets of two restaurants in California.

During fiscal 2022, we recognized $0.3 million of closed-store reserve expense, primarily related to the amortization of ROU assets, property taxes and CAM payments for our closed locations.

In fiscal 2020, we recorded impairment charges of $3.5 million for the year ended December 30, 2020, 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.

In fiscal 2021, we recorded non-cash impairment charges of $0.7 million for the year ended December 29, 2021, primarily related to the carrying value of one restaurant in Texas that closed in 2019, the ROU assets of one restaurant in California closed in 2021, and the property and equipment assets of three restaurants in California.

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

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

(d) During fiscal 2023, we completed the sale of 18 company-operated restaurants within California, Utah and Texas to existing franchisees.

These sales during 2023 resulted in cash proceeds of $7.7 million and a net gain on sale of restaurants of $5.0 million for the year ended December 27, 2023.

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

This 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.

During fis cal 2021, we completed the sale of our eight restaurants within Sacramento area to an existing franchisee.

During fis cal 2021, we completed the sale of our eight restaurants within Sacramento area to an

existing franchisee.

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

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

This agreement calls for us to pay to our pre-IPO stockholders 85% of the savings in cash that we realize in our taxes as a result of utilizing our net operating losses and other tax attributes

attributable to preceding periods.

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

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

For the years ended December 27, 2023, December 28, 2022 and December 29, 2021, income tax receivable agreement (income) expense consisted of the amortization of interest expense and changes in estimates for actual tax returns filed, related to our total expected TRA payments.

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

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

During the year ended December 29, 2021, we received $0.5 million in insurance proceeds, net of legal expenses, related to the derivative complaint.

See Note 13 “ Commitments and Contingencies—Legal Matters” in the accompanying “Notes to Consolidated Financial Statements” in this Annual Report.

(h) Fiscal 2020 consists of an expense of $2.6 million related to resolution of the longstanding lawsuit involving a contract dispute with one of the Company’s franchisees concerning asserted territory rights, as well as amounts incurred related to the payment of the final settlement amounts for consolidated wage and hour class action lawsuits resolved during fiscal 2020.

For additional information on legal settlements , see Note 13 “Commitments and Contingencies—Legal Matters” in the accompanying “Notes to Consolidated Financial Statements” in this Annual Report.

(i) Consists of costs related to a special dividend declaration.

On October 11, 2022, the Board of Directors declared a special dividend of $1.50 per share on the common stock of the Company.

(g) During fiscal 2023 and fiscal 2022, we encountered costs related to a special dividend declaration.

On October 11, 2022, the Board of Directors declared a special dividend of $1.50 per share on our common stock.

T he special dividend was paid on November 9, 2022, to stockholders of record, including holders of restricted stock, at the close of business on October 24, 2022.

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

(h) Includes $0.5 million received from legal settlements, net of legal expenses.

(i) Consists of legal costs related to the share distribution that occurred on March 28, 2023.

Refer to Note 14, “Related Party Transactions” for further details on the share distribution.

(j) Consists of advisory fees pertaining to a Shareholder Rights Agreement adopted in connection with a shareholder’s accumulation of a significant amount of shares of our common stock.

Refer to Note 16, “Shareholder Rights Agreement” for further details on the Shareholder Rights Agreement.

(k) During fiscal 2023 and fiscal 2022, two of our restaurants incurred damage resulting from a fire.

In fiscal 2023, we incurred costs directly related to the fire of less than $0.1 million.

We recognized gains of $0.2 million, related to the reimbursement of property and equipment and expenses incurred and $0.3 million related to the reimbursement of lost profits.

The gain on recovery of insurance proceeds and reimbursement of lost profits, net of the related costs is included in the accompanying consolidated statements of income, for fiscal 2023, as a reduction of company restaurant expenses.

We received from the insurance company cash of $0.5 million, net of the insurance deductible, during fiscal 2023.

(l) Includes costs associated with the transition of our CEO, such as severance, executive recruiting costs and stock-based compensation costs associated with the transition of our former CEO.

(m) On April 13, 2023 the Company made the decision to eliminate and restructure certain positions in the organization, which resulted in one-time costs of approximately $1.1 million.

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

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

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Our restaurants do not require significant inventories or receivables.

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

However, depending on the effects of the COVID-19 pandemic (and its related economic impacts) and macroeconomic conditions, our financial performance and liquidity could be further impacted and could impact our ability to meet certain financial covenants required in our 2022 Credit Agreement (as defined in Note 6 “Long-Term Debt”) , specifically the lease-adjusted coverage ratio and fixed-charge coverage ratio.

We believe that these sources of liquidity and capital are sufficient to finance our

continued operations, including planned capital expenditures, for at least the next 12 months and beyond from the issuance of the consolidated financial statements.

However, depending on macroeconomic conditions, our financial performance and liquidity could be further impacted and could impact our ability to meet certain financial covenants required in our 2022 Credit Agreement (as defined in Note 6 “Long-Term Debt”) , specifically the lease-adjusted coverage ratio and fixed-charge coverage ratio.

The following table presents summary cash flow information for the years indicated:

(Amounts in thousands)

Net cash provided by (used in)

Net cash (used in) provided by

Operating activities

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Operating Activities

In fiscal 2023, net cash provided by operating activities increased by $2.1 million compared to fiscal 2022.

This increase was due primarily to an increase in profitability and favorable working capital fluctuations during fiscal 2023.

In fiscal 2022, net cash provided by operating activities decreased by $13.6 million compared to fiscal 2021.

This decrease was due primarily to lower profitability and unfavorable working capital fluctuations during fiscal 2022.

In fiscal 2021, net cash provided by operating activities increased by $11.6 million compared to fiscal 2020.

This increase was due primarily to an increase in profitability after non-cash items and favorable working capital fluctuations for the year ended December 29, 2021.

Investing Activities

In fiscal 2023, net cash used in investing activities decreased by $5.5 million compared to fiscal 2022.

This decrease was due primarily to cash proceeds of $7.7 million received during fiscal 2023 related to the sale of nine company-operated restaurants within Texas to an existing franchisee, eight company-operated restaurants within California to existing franchisees and one company-operated restaurant in Utah to another existing franchisee.

In fiscal 2022, net cash used in investing activities increased by $6.4 million compared to fiscal 2021.

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This was partially offset by cash proceeds of $1.0 million received during fiscal 2022 related to the sale of three restaurants within the Orange County area to an existing franchisee compared to cash proceeds of $4.6 million received during fiscal 2021 related to the sale of eight restaurants within the Sacramento area to an existing franchisee.

In fiscal 2021, net cash used in investing activities increased by $5.8 million compared to fiscal 2020.

This increase was due primarily to opening two new company-operated restaurants and remodeling ten restaurants during the year ended December 29, 2021 compared to opening one new company-operated restaurant and completing two new remodels during the year ended December 30, 2020.

This was partially offset by cash proceeds of $4.6 million received during the year ended December 29, 2021 related to the sale of eight restaurants within the Sacramento area to an existing franchisee .

Financing Activities

In fiscal 2023, net cash used in financing activities increased by $11.3 million compared to fiscal 2022.

The increase was due primarily to repurchases of common stock of $59.2 million during fiscal 2023.

This increase was partially offset by $18.0 million in net borrowings on the 2022 Revolver during fiscal 2023 compared to the net pay downs of $26.0 million on the 2022 Revolver during fiscal 2022.

In fiscal 2022, net cash used in financing activities increased by $6.4 million compared to fiscal 2021.

This change was due primarily to a special dividend payout of $56.0 million during fiscal 2022 partially offset by net borrowings on the 2022 Revolver of $26.0 million, compared to net pay downs of $22.8 million in fiscal 2021.

Additionally, this change was due to a $1.7 million cash inflow related to option exercises during the year ended December 28, 2022, compared to a $0.9 million cash inflow during the year ended December 29, 2021.

In fiscal 2021, net cash used in financing activities decreased by $5.9 million compared to fiscal 2020.

This decrease was due primarily to $22.8 million of net pay downs on the 2018 Revolver during fiscal 2021, compared to net pay downs of $34.2 million in fiscal 2020.

The change was partially offset by a decrease of $5.0 million in proceeds received from the issuance of common stock upon exercise of stock options in fiscal 2021 compared to fiscal 2020.

Debt and Other Obligations

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

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.

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 our past or present officers, directors, or employees (or their estates) 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.

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.

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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 2022 Revolver during fiscal 2023, the interest rate range was 5.7% to 7.0%.

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

The interest rate under the 2022 Revolver was 7.0% at December 27, 2023 and 5.7% under the 2022 Revolver at December 28, 2022.

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During the year ended December 28, 2022, we refinanced and terminated our 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”) and entered into the 2022 Credit Agreement.

On July 29, 2022, we made a $20.0 million payment to the 2022 Revolver and the outstanding balance as of December 28, 2022 was $66.0 million.

See Note 6, “Long-Term Debt” in the accompanying “Notes to Consolidated Financial Statements” in this Annual Report for additional information.

In connection with our entry into the 2022 Credit Agreement, we terminated the interest rate swap on July 28, 2022 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, we received approximately $0.6 million and derecognized the corresponding interest rate swap asset.

The remaining amount in accumulated other comprehensive (loss) income (“AOCI”) related to the hedging relationship will be reclassified into earnings when the hedged forecasted transaction is reported in earnings.

Material Cash Requirements

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The remaining $16.2 million of capital expenditures during 2023 were related to investments in existing restaurants, including new equipment and hardware, technology to optimize efficiencies, remodeling and similar improvements.

In 2023, we expect to incur between $27.0 million and $31.0 million in total capital expenditures, of which we expect $11.0 million to $13.0 million will be related to our construction of new restaurants, and $14.0 million to $16.0 million will be related to investments in existing restaurants, including new equipment and hardware, technology to optimize efficiencies, remodeling and similar improvements.

Finally, we expect a portion of our incurred capital expenditures in 2023 to be for additional corporate initiatives, including investments in

technology for support centers to boost innovation, enhancing the customer experience, and improving operations.

In 2024, we expect to incur between $25.0 million and $28.0 million in total capital expenditures, of which we expect $4.0 million to $6.0 million will be related to our construction of new restaurants, and $19.0 million to $21.0 million will be related to investments in existing restaurants, including new

equipment and hardware, technology to optimize efficiencies, remodeling and similar improvements.

Finally, we expect a portion of our incurred capital expenditures in 2024 to be for additional corporate initiatives, including investments in technology for support centers to boost innovation, enhancing the customer experience, and improving operations.

We expect to fund these capital expenditures primarily with operating cash flows.

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Refer to Note 13 “Commitments and Contingencies” in the accompanying “Notes to Consolidated Financial Statements” in this Annual Report for further details regarding our obligations.

Share Repurchase Programs

On October 11, 2022, our Board of Directors approved the 2022 Stock Repurchase Plan under which we were authorized to repurchase up to $20.0 million of shares of our common stock through March 28, 2024.

Under the 2022 Stock Repurchase Plan, we were permitted to repurchase our common stock from time to time, in amounts and at prices that we deemed appropriate, subject to market conditions and other considerations.

Pursuant to the 2022 Stock Repurchase Plan, we were authorized to repurchase shares of our common stock using open market purchases, including pursuant to Rule 10b5-1 trading plans, and/or through privately negotiated transactions.

As of September 27, 2023, the program was completed.

Further, on October 31, 2023, our Board of Directors approved another share repurchase program under which we are authorized to repurchase up to $20.0 million of shares of our common stock.

The repurchase program will terminate on March 31, 2025, may be modified, suspended or discontinued at any time, and does not obligate us to acquire any particular number of shares.

Repurchase Agreements

On August 7, 2023, we entered into a Stock Repurchase Agreement with FS Equity Partners V, L.P.

and FS Affiliates V, L.P.

(together, the “Sellers”), pursuant to which we agreed to purchase an aggregate of 2,500,000 shares of our common stock from the Sellers at a price of $10.63 per share for a total purchase price of $26.6 million.

The repurchase was completed in August 2023.

Prior to the repurchase, Freeman Spogli & Co.

(“Freeman Spogli”), collectively with the Sellers and certain other funds managed by Freeman Spogli, was our largest stockholder.

In addition, John Roth, a director of the Company until his resignation on August 16, 2023, is a general partner of Freeman Spogli and its chief executive officer.

Further, on November 29, 2023, we entered into a second Stock Repurchase Agreement with the Sellers (the “Repurchase Agreement”), pursuant to which we agreed to purchase an aggregate of 1,500,000 shares of our common stock from the Sellers at a price of $8.40 per share, representing the closing price of such shares as listed on Nasdaq on November 29, 2023, for a total purchase price of $12,600,000.

The repurchase was completed on December 4, 2023.

Following completion of this repurchase, approximately $7.4 million of our common stock remained available for repurchase under the share repurchase program at December 27, 2023.

Critical Accounting Policies and Estimates

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In the case of gift card sales, we record revenue when the gift card is redeemed by the customer.

We record royalties from

franchised restaurant sales based on a percentage of restaurant revenues in the period that the related franchised restaurants’ revenues are earned.

We record royalties from franchised restaurant sales based on a percentage of restaurant revenues in the period that the related franchised restaurants’ revenues are earned.

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.

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These assumptions used in our estimates of fair value are generally consistent with past performance and are also consistent with the projections and assumptions that we use in our forward-looking operating plans.

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

These assumptions

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

Changes in these estimates and assumptions could materially affect our determinations of fair value and impairment.

We determined that there were no indicators of potential impairment of our goodwill and indefinite-lived intangible assets during fiscal 2022 and 2021.

Accordingly, we did not record any impairment to goodwill or indefinite-lived intangible assets during the year ended December 28, 2022.

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.

Upon the sale or refranchising of a restaurant, we evaluate whether there is a decrement of goodwill.

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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.

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

Long-Lived and ROU Assets

We determined that, in connection with the sale of 18 units, there were indicators of potential impairment of our goodwill and indefinite-lived intangible assets during fiscal 2023.

After completing the impairment analysis, we did not record any decrement to goodwill related to the disposition of restaurants in fiscal 2023, 2022 and 2021.

Property and Equipment and ROU Assets

We state the value of our property and equipment, including primarily leasehold improvements and restaurant equipment, furniture, and fixtures, at cost, minus accumulated depreciation and amortization.

We calculate depreciation using the straight-line method of accounting over the estimated useful lives of the related assets.

We amortize our leasehold improvements using the straight-line method of accounting over the shorter of the lease term (including reasonably assured renewal periods) or the estimated useful lives of the related assets.

We expense repairs and maintenance as incurred, but capitalize major improvements and betterments.

We make judgments and estimates related to the expected useful lives of those assets that are affected by factors such as changes in economic conditions and changes in operating performance.

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

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

The Company considers a triggering event 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.

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

We review our property and equipment and ROU assets for impairment on a restaurant-by-restaurant basis whenever events or changes in circumstances indicate that the carrying value of certain assets may not be recoverable.

We consider a triggering event 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.

If we conclude that the carrying value of certain assets will not be recovered based on expected undiscounted future cash flows, an impairment write-down is recorded to reduce the assets to their estimated fair value.

The fair value is measured on a nonrecurring basis using unobservable (Level 3) inputs.

There is uncertainty in the projected undiscounted future cash flows used in our impairment review analysis.

Further, the projected undiscounted future cash flows require management to develop estimates and assumptions about future revenue transaction growth rates, menu pricing changes, and restaurant operating margins, which are made more uncertain by the impact of the current inflationary pressures on our business.

If actual performance does not achieve the projections, we may recognize impairment charges in future periods, and such charges could be material.

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We make significant assumptions and judgments related to determination of whether a contract contains a lease and the discount rate used for the lease.

In determining if any of our contracts contain a lease, we make assumptions and judgments related to our ability to direct the use of any assets stated in the contract and the likelihood of renewing any short-term contracts for a period extending past twelve months.

short-term contracts for a period extending past twelve months.

We also make significant assumptions and judgments in determining an appropriate discount rate for property leases.

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However, we anticipate that any such adjustments would not materially impact our financial statements.

On July 30, 2014, we entered into the TRA.

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

The TRA charge expense (benefit) is a permanent add-back to our taxable income.

TRA resulted in $0.4 million of income in fiscal 2022 and 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, we paid $0.4 million, $1.7 million and $5.2 million, respectively, to our pre-IPO stockholders under the TRA.

In addition, in fiscal 2014, we applied for various tax credits that resulted in $6.7 million of additional deferred tax assets and tax benefits.

As of fiscal 2022, the deferred asset balance related to these various tax credits, net of valuation allowance was $0.5 million.

The fiscal 2022 provision includes a $6.7 million valuation allowance against our deferred tax asset, resulting from certain tax credits that may not be realizable prior to the time the credits expire.

During fiscal 2020, we received a Notice of Proposed Adjustment for the years ended December 27, 2017 and December 28, 2016, related to our methodology regarding our ordering of NOL.

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

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

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

Stock-Based Compensation

We measure and recognize compensation expense for the estimated fair value of equity instruments for employees and non-employee directors based on the grant-date fair value of the award.

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

We granted 372,958 options during fiscal 2022.

In fiscal 2022, we granted 356,610 restricted stock awards, with an exercise price equal to the fair market value of the common stock on the date of grant.

The awards granted in fiscal 2022, 2021 and 2020 had a four-year vesting period for employees and three-year vesting period for directors.

In order to calculate the grant date fair value for our stock options, we utilize the Black–Scholes option pricing model.

The model involves several assumptions including the expected term of the option, expected volatility and risk-free interest rate.

The volatility and the expected life assumptions were bas ed on our historical data.

If we changed our assumptions of stock price volatility or expected lives of our stock options, our stock-based compensation expense and results of operations may be materially different.

As of December 27, 2023, we released the corresponding valuation allowance since the ten-year carryover period for the California Enterprise Zone credit has expired at the end of fiscal 2023.

In fiscal 2023, the Company did not record any additional valuation allowance.

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 7. Management’s Discussion and Analysis