What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2024-03-08 compared with 2023-03-10 · 262 added, 252 removed, 865 unchanged (37% of the section changed)

4 unchanged sentences

Audited Consolidated Financial Statements

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

Report of Independent Registered Public Accounting Firm (BDO USA, P.C.;

Costa Mesa, California;

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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:

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

(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 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.

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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 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.

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

We identified the Company’s estimation of undiscounted future cash flows for certain restaurants to determine the recoverability of the carrying value of restaurant property and equipment as a critical audit matter.

The future cash flows requires 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 the Company’s business.

Auditing these significant assumptions involved especially challenging and subjective 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 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

● Evaluating the reasonableness of management’s assumption over the future revenue transaction growth rates for select restaurants by (i) comparing them to historical information for both company-owned and franchised restaurants, and (ii) comparing them to restaurant industry data to determine if contradictory evidence existed.

● Evaluating the reasonableness of management’s assumption over the menu pricing changes for select restaurants by (i) comparing them to historical information for company-owned restaurants, and (ii) comparing them to market and industry data.

● Evaluating the reasonableness of management’s assumption over the restaurant operating margin for select restaurants by comparing them to market and industry data.

/s/ BDO USA, P.C.

We have served as the Company’s auditor since 2011.

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Property and equipment held under finance lease, net

Property and equipment held under operating leases, net ("ROU asset")

Deferred tax assets

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Preferred stock, $ 0.01 par value, 100,000,000 shares authorized;

100,000 shares designated as Series A Preferred Stock;

none issued or outstanding

Common stock, $ 0.01 par value, 200,000,000 shares authorized;

37,008,061 and 36,601,648 shares issued and outstanding as December 28, 2022 and December 29, 2021, respectively

31,353,223 and 37,008,061 shares issued and outstanding as of December 27, 2023 and December 28, 2022, respectively

Additional paid-in-capital

Accumulated deficit

Accumulated other comprehensive income (loss)

Retained earnings (accumulated deficit)

Accumulated other comprehensive income

Total stockholders’ equity

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Occupancy and other operating expenses

Gain on recovery of insurance proceeds, lost profits

Gain on recovery of insurance proceeds, lost profits, net

Company restaurant expenses

General and administrative expenses

Legal settlements

Franchise expenses

1 unchanged sentence

Loss on disposal of assets

Recovery of securities lawsuits related legal expenses and other insurance claims

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

(Gain) loss on disposition of restaurants

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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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For the Fiscal Years Ended

Other comprehensive income (loss)

Other comprehensive (loss) income

Changes in derivative instruments

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

Reclassifications of (gains) losses into net income

Income tax (expense) benefit

Other comprehensive income (loss), net of taxes

Unrealized net gains arising during the period from interest rate swap

Reclassifications of (losses) gains into net income

Income tax benefit (expense)

Other comprehensive (loss) income, net of taxes

Comprehensive income

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Issuance of common stock related to restricted shares, net

Issuance of common stock upon exercise of stock options

Issuance of common stock upon exercise of stock options, net

Shares repurchased for employee tax withholdings

Forfeiture of common stock related to restricted shares

Other comprehensive income, net of income tax

Other comprehensive loss, net of income tax

Balance, December 29, 2021

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Issuance of common stock related to restricted shares, net

Issuance of common stock upon exercise of stock options

Issuance of common stock upon exercise of stock options, net

Shares repurchased for employee tax withholdings

Forfeiture of common stock related to restricted shares

Other comprehensive loss, net of income tax

Other comprehensive income, net of income tax

Common stock cash dividends ($ 1.50 per share)

Balance, December 28, 2022

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Issuance of common stock related to restricted shares, net

Issuance of common stock upon exercise of stock options

Issuance of common stock upon exercise of stock options, net

Shares repurchased for employee tax withholdings

Repurchase of common stock

( 6,030,850 )

Repurchase of common stock - excise tax

Forfeiture of common stock related to restricted shares

Other comprehensive income, net of income tax

Common stock cash dividends ($ 1.50 per share)

Balance, December 27, 2023

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Depreciation and amortization

Bad debt expense

Stock-based compensation expense

Income tax receivable agreement (income) expense

Fire insurance proceeds for expenses paid and lost profit

(Gain) loss on disposition of restaurants

Loss on disposal of assets

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

Impairment of property and equipment

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Proceeds from disposition of restaurants

Proceeds from fire insurance for property and equipment

Purchase of property and equipment

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Minimum tax withholdings related to net share settlements

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

Common stock dividends paid

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

Payment of obligations under finance leases

Deferred financing costs for revolver loan

Net cash flows used in financing activities

Repurchases of common stock

Net cash flows used in by financing activities

(Decrease) increase in cash and cash equivalents

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Unpaid purchases of property and equipment

Unpaid repurchases of common stock

See notes to consolidated financial statements.

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(“Holdings”) is a Delaware corporation headquartered in Costa Mesa, California.

Holdings and its direct and indirect subsidiaries are collectively known as “we,” “us” or the “Company.” The Company’s activities are conducted principally through its indirect wholly-owned subsidiary, El Pollo Loco, Inc.

Holdings and its direct and indirect subsidiaries are collectively referred to herein as the “Company.” The Company’s activities are conducted principally through its indirect wholly-owned subsidiary, El Pollo Loco, Inc.

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

The restaurants, which are located principally in California but also in Arizona, Nevada, Texas, 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.

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 the Company’s Pollo Bowl®, Pollo Salads and Pollo Fit entrees.

At December 27, 2023, the Company operated 172 ( 138 in the greater Los Angeles area) and franchised 323 ( 141 in the greater Los Angeles area) El Pollo Loco restaurants.

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

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

(“LLC”), which is controlled by affiliates of Trimaran Capital, L.L.C.

LLC acquired Chicken Acquisition Corp.

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

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.

On April 22, 2014, CAC, the LLC’s wholly owned subsidiary, Chicken Subsidiary Corp (“CSC”) and CSC’s wholly owned subsidiary, the former El Pollo Loco Holdings, Inc.

(“Old Holdings”) entered into the following reorganization transactions:

(i) Old Holdings merged with and into CSC with CSC continuing as the surviving corporation;

(ii) CSC merged with and into CAC with CAC continuing as the surviving corporation and (iii) CAC renamed itself El Pollo Loco Holdings, Inc.

Holdings has no material assets or operations.

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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

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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 seven years a 53-week fiscal year occurs.

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

Fiscal 2020 was a 53-week fiscal year.

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

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

Principles of Consolidation

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All intercompany balances and transactions have been eliminated in consolidation.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Use of Estimates

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Actual results could materially differ from those estimates.

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

COVID-19 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.

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.

The Company’s significant estimates include estimates for impairment of goodwill, intangible assets and property and equipment, insurance reserves, lease accounting matters, contingent liabilities and income tax valuation allowances.

M arket Trends and Uncertainties

On September 28, 2023, Governor Newsom signed AB 1228 into law, which repealed and replaced the Fast Food Accountability and Standards Recovery Act (“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, the Company expects its labor and regulatory compliance costs will increase beginning in fiscal 2024 and that its results of operations and profitability will be adversely affected if it is not able to implement other measures to counter these increased costs.

The Company has experienced inflationary pressures affecting its operations in certain areas such as food cost, labor costs, construction costs and other restaurant operating costs.

The Company has 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, the Company expects these inflationary and other cost pressures to continue throughout fiscal year 2024 and it may not be able to offset cost increases in the future.

Cash and Cash Equivalents

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Subsequent Events

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.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Subsequent to year-end, on February 13, 2024, the Company announced that its Board of Directors has appointed Elizabeth Williams as the new Chief Executive Officer of the Company and as a member of the Board, effective March 11, 2024.

Williams will succeed Maria Hollandsworth, who has served as the Company’s interim Chief Executive Officer since November 3, 2023.

Further, the Company paid down $ 3.0 million on its 2022 Revolver resulting in outstanding borrowings as of March 7, 2024 of $ 81.0 million.

Concentration of Risk

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Purchases from the Company’s largest supplier totaled 26.6 % of the Company’s purchases for fiscal 2023, 28.5 % for fiscal 2022 and 27.1 % for fiscal 2021 with no amounts payable at December 27, 2023 or December 28, 2022.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In fiscal 2023, 2022 and 2021, Company-operated and franchised restaurants in the greater Los Angeles area generated, in the aggregate, approximately 71.3 %, 71.2 %, and 70.9 %, respectively, of total revenue.

22 unchanged sentences

Shorter of useful life or lease term

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

1 unchanged sentence

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

Costs related to abandoned sites and other site selection costs that cannot be identified with specific restaurants are charged to general and administrative expenses in the accompanying consolidated statements of income, and were less than $ 0.1 million for each of the years ended December 28, 2022, December 29, 2021 and December 30, 2020.

Costs related to abandoned sites and other site selection costs that cannot be identified with specific restaurants are charged to general and administrative expenses in the accompanying consolidated statements of income, and were $ 0.2 million for the year ended December 27, 2023 and less than $ 0.1 million for each of the years ended December 28, 2022 and December 29, 2021.

The Company capitalized internal costs related to site selection and construction activities of $ 1.8 million, $ 1.5 million and $ 1.4 million for the years ended December 27, 2023, December 28, 2022 and December 29, 2021, respectively.

Impairment of Long-Lived and ROU Assets

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

The Company considers a triggering event, related to long-lived assets or ROU assets in a net asset position, to have occurred related to a specific restaurant if the restaurant’s 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.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Impairment of Property and Equipment and ROU Assets

The Company reviews its property and equipment 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 property and equipment and ROU assets may not be recoverable.

The Company considers a triggering event, related to property and equipment 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.

As of December 27, 2023 and December 28, 2022, ROU assets related to closed or subleased restaurant locations totaled $ 42.8 million and $ 30.7 million, respectively.

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

If the Company concludes that the carrying value of certain property and equipment and ROU assets will not be recovered based on expected undiscounted future cash flows, an impairment loss is recorded to reduce the property and equipment or ROU assets to their estimated fair value.

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

1 unchanged sentence

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

The Company determined that triggering events 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 $ 0.5 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.

The Company determined that triggering events occurred for certain stores during the year ended December 27, 2023 that required an impairment review of the Company’s property and equipment and ROU assets.

Based on the results of this analysis, the Company recorded non-cash impairment charges of $ 1.5 million for the year ended December 27, 2023, primarily related to the carrying value of the ROU assets of one restaurant in California and the property and equipment assets of one restaurant in Nevada.

In fiscal 2022, the Company recorded non-cash impairment charges of $ 0.5 million 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.

In fiscal 2021, the Company recorded a non-cash impairment charge 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 property and equipment assets of three restaurants in California.

Given the inherent uncertainty in projecting results for newer restaurants in newer markets, 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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Additionally, any property tax and common area maintenance (“CAM”) payments relating to closed restaurants are included within closed-store expense.

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

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 2020, the Company recognized

EL POLLO LOCO HOLDINGS, INC.

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.

During fiscal 2023, 2022 and 2021, the Company recognized $ 0.2 million, $ 0.3 million and $ 0.4 million, respectively, 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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The Company does not amortize its goodwill and indefinite-lived intangible assets.

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

Goodwill resulted from the acquisition of certain franchise locations.

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 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

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 did no t record any decrement to goodwill related to the disposition of restaurants in fiscal 2023, 2022 and 2021.

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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Deferred Financing Costs

Deferred financing costs are capitalized and amortized over the period of the loan on a straight-line basis, which approximates the effective interest method.

Deferred financing costs are capitalized and amortized over the period of the loan on a straight-line basis.

Included in other assets are deferred financing costs (net of accumulated amortization), related to the revolver, of $ 0.7 million and $ 0.9 million as of December 27, 2023 and December 28, 2022, respectively.

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

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

Amortization expense for deferred financing costs was approximately $ 0.2 million for the year ended December 27, 2023 and $ 0.3 million for both of the years ended December 28, 2022, and December 29, 2021, and is reflected as a component of interest expense in the accompanying consolidated statements of income.

Insurance Reserves

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

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Restaurant Revenue

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The Company offers a loyalty rewards program, which awards a customer points for dollars spent.

Customers earn points for each dollar spent and, as of August 4, 2020, 50 points can be redeemed for a $ 5 reward to be used for a future purchase.

Prior to August 4, 2020, 100 points could be redeemed for a $ 10 reward.

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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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

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

As of December 27, 2023, the Company had executed development agreements that represent commitments to open 107 franchised restaurants at various dates through 2036.

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The Company satisfies the performance obligation related to the franchise license over the term of the franchise agreement, which is typically 20 years .

Payment for the franchise license consists of three components, a fixed-fee related to the franchise/development agreement, a sales-based royalty fee and a sales-based advertising fee.

Payment for the franchise license consists of three components, a fixed-fee

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

related to the franchise/development agreement, a sales-based royalty fee and a sales-based advertising fee.

The fixed fee, as determined by the signed development and/or franchise agreement, is due at the time the development agreement is entered into, and/or when the franchise agreement is signed, and does not include a finance component.

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In addition, there was $ 29.2 million, $ 28.5 million and $ 25.9 million for the years ended December 27, 2023, December 28, 2022 and December 29, 2021, 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

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

within franchise advertising fee revenue.

Fees received in advance of provided services are included in other accrued expenses and current liabilities and were $ 3.0 million and $ 0.8 million at December 27, 2023 and December 28, 2022, respectively.

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Preopening costs incurred in connection with the opening of new restaurants are expensed as incurred.

Preopening costs, which are included in general and administrative expenses on the accompanying consolidated statements of income, were $ 0.3 million, $ 0.3 million and $ 0.1 million for the years ended December 28, 2022, December 29, 2021, and December 30, 2020, respectively.

For each of the years ended December 27, 2023, December 28, 2022, and December 29, 2021, preopening costs, which are included in general and administrative expenses on the accompanying consolidated statements of income were $ 0.3 million.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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Gain on Recovery of Insurance Proceeds, Lost Profits

During the year ended December 30, 2020, the Company received business interruption insurance proceeds of $ 2.0 million, primarily related to restaurant sales losses and expenses related to the COVID-19 pandemic and resulting dining room closures.

Recovery of Securities Class Action Legal Expense and Other Insurance Claims

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

See Note 13 “Commitments and Contingencies—Legal Matters.”

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During fiscal 2023 and fiscal 2022, two of the Company’s restaurants incurred damage resulting from a fire.

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

The Company 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.

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

Gain (Loss) on Disposition of Restaurants

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

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

5 unchanged sentences

Future royalty income is also recognized in revenue as earned.

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

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.

1 unchanged sentence

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

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Derivative Financial Instruments

5 unchanged sentences

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.

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

9 unchanged sentences

Unrecognized tax benefits involve management’s judgment regarding the likelihood of the benefit being sustained.

The final resolution of uncertain tax positions could result in adjustments to recorded amounts and may affect our results of operations, financial position and cash flows.

The final resolution of uncertain tax positions could result in adjustments to recorded amounts and may affect the Company’s results of operations, financial position and cash flows.

The Company’s policy is to recognize interest or penalties related to income tax matters in income tax expense.

The Company had no accrual for interest or penalties at December 27, 2023 or December 28, 2022.

During fiscal 2020, the

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

During fiscal 2023, fiscal 2022 and fiscal 2021, there were no material unrecognized tax benefits.

Management believes no significant change to the amount of unrecognized tax benefits will occur within the next twelve months.

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

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

As of December 27, 2023 and December 28, 2022, the Company had accrued $ 0.4 million and $ 0.7 million, respectively, relating to expected TRA payments.

In fiscal 2023, 2022 and 2021, the Company paid $0.3 million, $ 0.4 million and $ 1.7 million, respectively, to its pre-IPO stockholders under the TRA.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law as a stimulus package, and contained several tax provisions, including a correction of a previous drafting error related to quality improvement property (“QIP”) and immediate refundability of all remaining alternative minimum tax (“AMT”) credits.

The new provisions did not have a material impact on the Company’s consolidated financial statements.

During fiscal 2020, the Company received a NOPA for the years ended December 27, 2017 and December 28, 2016, related to the Company’s methodology regarding its ordering of utilization of AMT NOLs.

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

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

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

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

Under the CARES Act, the Company was able to defer its 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 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.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

3 unchanged sentences

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.

During fiscal 2022, the Company received $ 3.1 million in ERC and the remaining $ 0.3 million was received and recorded during fiscal 2023.

Fair Value Measurements

6 unchanged sentences

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

EL POLLO LOCO HOLDINGS, INC.

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 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.

The following table presents fair value for the interest rate swap at December 29, 2021 (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.

In other words, they are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment).

The following non-financial assets were measured at fair value, on a nonrecurring basis, as of and for the year ended December 28, 2022 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):

The following non-financial assets were measured at fair value, on a nonrecurring basis, as of and for the year ended December 27, 2023 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 Property and Equipment and ROU Assets (in thousands):

Impairment Losses

1 unchanged sentence

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 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):

The following non-financial assets were measured at fair value, on a nonrecurring basis, as of and for the year ended December 28, 2022 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 Property and Equipment and ROU Assets" (in thousands):

Impairment Losses

1 unchanged sentence

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 for which an impairment loss was recognized during the corresponding periods, as discussed above under "Impairment of Long-Lived and ROU Assets"

(in thousands):

The following non-financial assets were measured at fair value, on a nonrecurring basis, as of and for the year ended December 29, 2021 for which an impairment loss was recognized during the corresponding periods, as discussed above under "Impairment of Property and Equipment and ROU Assets" (in thousands):

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Impairment Losses

4 unchanged sentences

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).

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stock-Based Compensation

10 unchanged sentences

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

Recently Issued Accounting Pronouncements

In November 2023, the FASB issued ASU No.

2023-07, “Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosure.” The ASU updates reportable segment disclosure requirements, primarily through requiring enhanced disclosures about significant segment expenses and information used to assess segment performance.

These disclosures are required quarterly.

The ASU is effective for fiscal years beginning after December 15, 2023 and interim periods beginning after December 15, 2024, with early adoption permitted.

It is required to be adopted retrospectively for all prior periods presented in the financial statements The Company is currently evaluating the impact of adopting this ASU on its disclosures.

In December 2023, the FASB issued ASU No.

2023-09, “Income Taxes (Topic 740):

Improvements to Income Tax Disclosures.” The ASU includes amendments requiring enhanced income tax disclosures, primarily related to standardization and disaggregation of rate reconciliation categories and income taxes paid by jurisdiction.

The guidance is effective for fiscal years beginning after December 15, 2024, with early adoption permitted, and should be applied prospectively with the option of retrospective application.

The Company is currently evaluating the impact of adopting this ASU on its disclosures.

The Company reviewed all other recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact to the consolidated financial statements.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Franchise Development Option Agreement with Related Party

On July 11, 2014, EPL and LLC entered into a Franchise Development Option Agreement relating to development of restaurants in the New York–Newark, NY–NJ–CT–PA Combined Statistical Area (the “Territory”).

EPL granted LLC the exclusive option to develop and open 15 restaurants in the Territory over five years (the “Initial Option”), and, provided that the Initial Option is exercised, the exclusive option to develop and open up to an additional 100 restaurants in the Territory over ten years .

On July 11, 2014, EPL and Trimaran Pollo Partners, L.L.C (“Trimaran”) entered into a Franchise Development Option Agreement relating to development of restaurants in the New York–Newark, NY–NJ–CT–PA Combined Statistical Area (the “Territory”).

EPL granted Trimaran the exclusive option to develop and open 15 restaurants in the Territory over five years (the “Initial Option”), and, provided that the Initial Option is exercised, the exclusive option to develop and open up to an additional 100 restaurants in the Territory over ten years .

The Franchise Development Option Agreement terminates (i) ten years after execution, or (ii) if the Initial Option is exercised, five years after that exercise.

LLC may only exercise the Initial Option if EPL first determines to begin development of company-operated restaurants in the Territory or support the development of the Territory.

Trimaran may only exercise the Initial Option if EPL first determines to begin development of company-operated restaurants in the Territory or support the development of the Territory.

The Company has no current intention to begin development in the Territory and as of December 27, 2023, no stores have been opened in the Territory.

On March 28, 2023, Trimaran and certain of Trimaran’s affiliates, (collectively, the “Trimaran Group,”) distributed substantially all of the shares of the Company’s common stock held by the Trimaran Group to their respective investors, members and limited partners.

PROPERTY AND EQUIPMENT

7 unchanged sentences

Depreciation and amortization expense was $ 15.2 million, $ 14.4 million and $ 15.2 million for the years ended December 27, 2023, December 28, 2022, and December 29, 2021, 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.

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

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

TRADEMARKS, OTHER INTANGIBLE ASSETS AND LIABILITIES

Based on the Company’s review of its property and equipment assets for impairment, the Company recorded non-cash impairment charges of $ 1.5 million, $ 0.4 million and $ 0.3 million for the years ended December 27, 2023, December 28, 2022, and December 29, 2021, respectively.

See “Impairment of Property and Equipment and ROU Assets” in Note 2 “Summary of Significant Accounting Policies” for additional information.

TRADEMARKS AND OTHER INTANGIBLE ASSETS

Domestic trademarks consist of the following (in thousands):

1 unchanged sentence

Trademarks, net

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Nature of leases

2 unchanged sentences

As of December 27, 2023, the Company had no leases that it had entered into, but had not yet commenced.

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

Building and facility leases

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

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

however, the Company currently has one facility and 13 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.

3 unchanged sentences

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

These leases typically have four 5-year renewal options , which have generally been excluded in the calculation of the ROU asset and lease liability, as they are not considered reasonably certain to be exercised, unless (1) the renewal had already occurred as of the time of adoption of Topic 842, or (2) there have been significant leasehold improvements that have a useful life that extend past the original lease term.

These leases typically have four 5-year renewal options , which have generally been excluded in the calculation of the ROU asset and lease liability, as they are not considered reasonably certain to be exercised, unless there have been significant leasehold improvements that have a useful life that extend past the original lease term.

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

3 unchanged sentences

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.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 27, 2023.

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

5 unchanged sentences

During fiscal 2023, 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

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 27, 2023 related to one restaurant in California.

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.

1 unchanged sentence

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

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

As a result, the Company recorded a $ 0.5 million non-cash impairment charge for the year ended December 30, 2020 related to one restaurant in Texas, which was sold to a franchisee in the prior year.

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

18 unchanged sentences

Operating lease cost:

Fixed rent cost

Short-term lease cost

14 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

December 27, 2023

16 unchanged sentences

Information regarding the Company’s minimum future lease obligations at December 27, 2023 is as follows (in thousands):

Finance Leases

Operating Leases

30 unchanged sentences

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.

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.

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.

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

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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 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.

For borrowings under the 2022 Revolver and the 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 % at December 28, 2022.

For the year ended December 27, 2023, the Company had interest expense of $ 4.4 million under the 2022 Revolver.

For the years ended December 28, 2022 and December 29, 2021, the Company had interest expense of $ 0.9 million and $ 1.2 million, respectively, under the 2022 Revolver and the 2018 Revolver.

The 2022 Credit Agreement contains certain financial covenants.

7 unchanged sentences

During the year ended December 27, 2023, the Company borrowed $ 18.0 million net of pay downs of $ 21.0 million on its 2022 Revolver.

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

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

7 unchanged sentences

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):

December 28, 2022

December 29, 2021

Other liabilities - Interest rate swap

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

5 unchanged sentences

Interest (income) expense on debt and derivatives, net

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the effect of the Company’s cash flow hedge accounting on AOCI for the years ended December 27, 2023, December 28, 2022 and December 29, 2021 (in thousands):

(Gain) Loss Reclassified from

Net Gain (Loss) Recognized in OCI

AOCI into Interest (Income) Expense

Net Gain Recognized in OCI

AOCI into Interest Income

December 27, 2023

22 unchanged sentences

Deferred franchise and development fees

Derivative liability

Employer social security tax deferral

Total other noncurrent liabilities

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

6 unchanged sentences

The provision for income taxes differs from the amount computed by applying the federal income tax rate of 21.0 % for fiscal 2023, 2022 and 2021 as follows:

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended

2 unchanged sentences

Change in valuation allowance

TRA (income) expense

State credit expiration

TRA expense (income)

Stock option exercises

Deferred tax liability true up

As of December 27, 2023, the Company had no federal and less than $ 0.1 million state NOL carryforwards.

These State NOLs expire beginning 2029.

The Company also has state enterprise zone credits of approximately $ 9.2 million, which expire in 2023.

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.

2 unchanged sentences

The Company has evaluated the available evidence supporting the realization of its gross deferred tax assets.

After evaluating all of the positive and negative evidence, including the Company’s continued income from operations, the Company concluded that it is more likely than not that its deferred tax assets 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.

In fiscal 2021 and 2022, the Company recorded a valuation allowance of approximately $ 0.1 million and $ 0.5 million, respectively, against its deferred tax asset resulting from certain tax credits that may not be realizable prior to the time the credits expire.

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

As of December 28, 2022, the deferred tax assets related to the California Enterprise Zone credits, net of valuation allowances are $ 0.5 million.

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

1 unchanged sentence

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

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

In fiscal 2023, 2022 and 2021, TRA resulted in $ 0.1 million of expense, $ 0.4 million of income and less than $ 0.1 of expense, respectively, in each case 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 .

In fiscal 2023, 2022 and 2021, the Company paid $ 0.3 million, $ 0.4 million and $ 1.7 million, respectively, to its pre-IPO stockholders under the TRA.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

As of December 28, 2022 and December 29, 2021, the deferred tax assets related to California Enterprise Zone credits, net of valuation allowances are $ 0.5 million and $ 1.3 million, respectively.

The Company’s deferred tax assets and liabilities as of December 27, 2023 and December 28, 2022 are summarized below.

5 unchanged sentences

Net operating losses

ROU liabilities

Total deferred tax assets

3 unchanged sentences

Prepaid expense

ROU liabilities

Deferred tax liabilities

Net deferred tax liability

The net deferred tax asset amounts above as of December 28, 2022 and December 29, 2021 have been classified in the accompanying consolidated balance sheets as noncurrent assets and are as follows (in thousands):

Assets - state

The net deferred tax asset/(liability) amounts above as of December 27, 2023 and December 28, 2022 have been classified in the accompanying consolidated balance sheets as noncurrent assets/(liabilities) and are as follows (in thousands):

(Liabilities) assets - state

Liabilities - federal

6 unchanged sentences

examination for years before 2020 by the federal taxing authority, and for years before 2019 by state taxing authorities.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

EMPLOYEE BENEFIT PLANS

3 unchanged sentences

The Company’s contributions to the plan were $ 0.8 million for the years ended December 27, 2023, December 28, 2022 and December 29, 2021.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

STOCK-BASED COMPENSATION

1 unchanged sentence

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

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

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

As of December 27, 2023, 610,098 shares were available for grant.

3 unchanged sentences

At December 27, 2023, options to purchase 843,320 shares of common stock of the Company were outstanding, including 380,896 vested and 462,424 unvested.

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

Unvested options vest over time, or upon the Company’s achievement of annual financial goals.

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.

At December 27, 2023, there were no premium options that were granted above the stock price at date of grant.

In fiscal 2023, the Company granted 562,344 options, with an exercise price equal to the fair market value of the common stock on the date of grant.

18 unchanged sentences

Exercisable at December 27, 2023

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 $ 0.9 million, $ 0.8 million and $ 1.6 million for fiscal years 2023, 2022 and 2021, respectively.

2 unchanged sentences

For options that were based on performance requirements, costs were recognized over periods to which the performance criteria related.

In order to calculate our stock options’ fair values and the associated compensation costs for share-based awards, the Company utilizes the Black–Scholes option pricing model and has developed estimates of various inputs including forfeiture rate, expected term, expected volatility, and risk-free interest rate.

In order to calculate the Company’s stock options’ fair values and the associated compensation costs for share-based awards, the Company utilizes the Black–Scholes option pricing model and has developed estimates of various inputs including forfeiture rate, expected term, expected volatility, and risk-free

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

interest rate.

The forfeiture rate is based on historical rates and reduces the compensation expense recognized.

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The above assumptions generally require significant judgment.

If in the future the Company determines that another method is more reasonable, or if another method for calculating these input assumptions is prescribed by authoritative guidance, and, therefore, should be used to estimate volatility or expected term, the fair value calculated for our stock options could change significantly.

Higher volatility and longer expected lives result in an increase to stock-based compensation expense determined at the date of grant.

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In fiscal 2023 and 2022, 454,081 and 356,610 restricted share awards were granted, respectively, at the fair market value on the date of grant.

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

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Changes in restricted shares for the years ended December 27, 2023 and December 28, 2022, are as follows:

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Unvested shares at December 28, 2022

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Forfeited, cancelled, or expired

Unvested shares at December 27, 2023

As of December 28, 2022, there was total unrecognized compensation expense of $ 5.0 million related to unvested restricted share awards, which the Company expects to recognize over a weighted-average period of 2.62 years.

As of December 28, 2022, all remaining performance stock units and restricted units were forfeited, cancelled, expired, or released.

As of December 27, 2023, there was total unrecognized compensation expense of $ 3.5 million related to unvested restricted share awards, which the Company expects to recognize over a weighted-average period of 2.48 years and unrecognized compensation expense of $ 0.3 million related to unvested restricted units, which it expects to recognize over a weighted-average period of 0.87 years .

EARNINGS PER SHARE

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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 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.

On October 11, 2022, the Company’s Board of Directors approved a share repurchase program (the “2022 Stock Repurchase Plan”) under which the Company was authorized to repurchase up to $ 20.0 million of shares of its common stock through March 28, 2024.

Under the 2022 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.

Pursuant to the 2022 Stock Repurchase Plan, the Company was authorized to effect repurchases using open market purchases, including pursuant to Rule 10b5-1 trading plans, and/or through privately negotiated transactions.

For the year ended December 27, 2023, the Company repurchased 2,030,850 shares of common stock under the 2022 Stock Repurchase Plan, using open market purchases, for total consideration of approximately $ 20.0 million.

The common stock repurchased under 2022 Stock Repurchase Plan were retired upon repurchase.

The 2022 Stock Repurchase Plan commenced on January 9, 2023, and was completed on July 12, 2023.

On August 7, 2023, the Company 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 the Company agreed to purchase an aggregate of 2,500,000 shares of the Company’s common stock from the Sellers at a price of $ 10.63 per share, representing the closing price of such shares as listed on Nasdaq on August 7, 2023, 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 the Company’s 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.

On November 2, 2023, the Company announced that its Board of Directors approved a share repurchase program under which the Company is authorized to repurchase up to $ 20,000,000 of shares of the Company’s common stock.

Shares may be repurchased from time to time on the open market, in block trades, pursuant to structured or derivative transactions or in privately negotiated transactions.

The amount and timing of any shares repurchased under the program will be determined at the discretion of management and will depend on a number of factors, including the market price of the Company’s stock, trading volume, general market and economic conditions, the Company’s capital position, legal requirements, and other factors.

The Company may also from time to time establish one or more plans under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, for the repurchase of shares of its common stock under the program.

The repurchase program does not obligate the Company to acquire any particular number of shares.

The repurchase program will terminate on March 31, 2025 and may be modified, suspended or discontinued at any time.

On November 29, 2023, in accordance with the board approved share repurchase program, the Company entered into a second Stock Repurchase Agreement with the Sellers (the “Repurchase Agreement”), pursuant to which the Company agreed to purchase an aggregate of 1,500,000 shares of the Company’s common stock from the Sellers at a price of

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

$ 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.

John Roth, a former director of the Company until his resignation effective August 16, 2023, is a general partner and chief executive officer of Freeman Spogli, which manages the Sellers.

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 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 LLC, under the caption Armen Galustyan v.

Sather, et al.

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

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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Borgese (collectively, the “Settling Defendants”).

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

Defendant Trimaran was not a party to the settlement.

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

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

Handlers-Bryman and Michael D.

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

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

Existing El Pollo Loco franchisees, Janice P.

Handlers-Bryman and Michael D.

Bryman, as individuals and in their capacities as trustees of the Handlers Bryman Trust (collectively, “Plaintiffs”), filed suit against us alleging, among other things, that we “imposed unreasonable time limitations” on their development of additional restaurant locations in Lancaster, California, and that we thereafter

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.

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

On September 2, 2020, the California Court of Appeals entered an order, following a motion for stipulated reversal of the trial court’s judgment jointly filed by the parties, reversing the trial court’s judgment in the case and instructing the trial court to dismiss the matter with prejudice.

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

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

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

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Employment Agreements

As of December 28, 2022, the Company had employment agreements with three of the officers of the Company.

As of December 27, 2023, the Company had employment agreements with two of the officers of the Company.

These agreements provide for minimum salary levels, possible annual adjustments for cost-of-living changes, and incentive bonuses that are payable under certain business conditions.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Indemnification Agreements

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

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.

On March 28, 2023, Trimaran Group distributed substantially all of the shares of the Company’s common stock held by the Trimaran Group to their respective investors, members and limited partners.

Additionally, on November 29, 2023, the Company entered into the Stock Repurchase Agreement with the Sellers.

The Company previously repurchased 2,500,000 shares of its common stock from the Sellers pursuant to a Stock Repurchase Agreement, dated August 7, 2023, as previously reported on Current Report on Form 8-K filed with the Securities and Exchange Commission on August 8, 2023.

John Roth, a former director of the Company until his resignation effective August 16, 2023, is a general partner and chief executive officer of Freeman Spogli, which manages the Sellers.

See Note 12 “Earnings per Share” for additional information.

REVENUE FROM CONTRACTS WITH CUSTOMERS

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See Note 2 “Summary of Significant Accounting Policies” for a description of the revenue recognition policies.

Franchise and franchise advertising revenue

Franchise and franchise advertising fee revenue

Franchise revenue consists of franchise royalties, initial franchise fees, license fees due from franchisees, IT support services, and rental income for subleases to franchisees.

Franchise advertising revenue consists of advertising contributions received from franchisees.

Franchise advertising fee revenue consists of advertising contributions received from franchisees.

Disaggregated revenue

The following table presents the Company’s revenues for the years ended December 27, 2023, December 28, 2022 and December 29, 2021 disaggregated by revenue source and market (in thousands):

December 27, 2023

December 28, 2022

December 29, 2021

Core Market (1) :

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Total revenue

(1) Core Market includes markets with existing company-operated restaurants at the time of the Company’s Initial Public Offering ("IPO") on July 28, 2014.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Core Market includes markets with existing company-operated restaurants at the time of the Company’s Initial Public Offering ("IPO") on July 28, 2014.

(2) Non-Core Market includes markets entered into by the Company subsequent to the IPO date.

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Other markets

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Contract balances

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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 27, 2023, there was an increase to the contract liability balance due to the Company’s completion of the sale of 18 company-operated restaurants within the California, Utah and Texas to an existing franchisee.

This resulted in a net gain on sale of restaurant of $ 5.0 million including an additional contract liability of $ 0.3 million, relating to allocation of the transaction price to various performance obligations under the applicable contracts of the sale.

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:

This resulted in 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 .

The following table illustrates the estimated revenue to be recognized in the future related to performance obligations that are unsatisfied as of December 27, 2023 (in thousands):

Franchise revenues:

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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):

December 27, 2023

December 28, 2022

December 29, 2021

Loyalty rewards liability, beginning balance

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The Company expects all loyalty points revenue related to performance obligations unsatisfied as of December 27, 2023 to be recognized within one year .

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The gift card liability included in other accrued expenses and current liabilities on the consolidated balance sheets was as follows (in thousands):

December 27, 2023

December 28, 2022

Gift card liability

Revenue recognized from the redemption of gift cards that was included in other accrued expenses and current liabilities at the beginning of the year was as follows (in thousands):

December 27, 2023

December 28, 2022

December 29, 2021

Revenue recognized from gift card liability balance at the beginning of the year

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The Company does not currently incur costs to obtain or fulfill a contract that would be considered contract assets under Topic 606.

SHAREHOLDER RIGHTS AGREEMENT

On August 8, 2023, the Company’s Board of Directors declared a dividend of one preferred share purchase right (a “Right”) for each share of common stock, par value $ 0.01 per share, of the Company (the “Common Shares”) outstanding on August 18, 2023 to the stockholders of record on that date.

In connection with the distribution of the Rights, the Company entered into a Rights Agreement (the “Rights Agreement”), dated as of August 8, 2023, between the Company and Equiniti Trust Company, LLC, as rights agent.

Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Preferred Stock, par value $ 0.01 per share, of the Company (the “Preferred Shares”) at a price of $ 53.75 per one one-thousandth of a Preferred Share represented by a Right, subject to adjustment.

Under the Rights Agreement, the Rights will generally be exercisable only in the event that a person or group of affiliated or associated persons (such person or group being an “Acquiring Person”), other than certain exempt persons, acquires (or commences a tender offer or exchange offer the consummation of which would result in) beneficial ownership of 12.5 % or more of the outstanding Common Shares.

In such case (with certain limited exceptions), each holder of a Right (other than the Acquiring Person, whose Rights shall become void) will have the right to receive, upon exercise at the then current exercise price of the Right, Common Shares (or, if the Board so elects, cash, securities, or other property) having a value equal to two times the exercise price of the Right.

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

At any time after any person or group becomes an Acquiring Person, the Board may exchange the Rights at an exchange ratio of one Common Share per Right (subject to adjustment).

If, at any time after a person or group becomes an Acquiring Person, (i) the Company engages in a consolidation or merger and, in connection there with all or part of the Common Shares are or will be changed into or exchanged for stock or other securities of any other person or cash or any other property;

or (ii) 50 % or more of the Company’s consolidated assets or earning power are sold, then each holder of a Right will thereafter have the right to receive, upon exercise at the then current exercise price of the Right, that number of shares of common stock of the acquiring company having a market value of two times the exercise price of the Right.

At any time prior to the time any person or group becomes an Acquiring Person, the Board may redeem the Rights at a price of $ 0.001 per Right (the “Redemption Price”).

Immediately upon any redemption of the Rights, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price.

Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without limitation, the right to vote or to receive dividends.

The Rights will expire at the close of business on August 7, 2024.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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