El Pollo Loco Holdings, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA EL POLLO LOCO HOLDINGS, INC. AND SUBSIDIARIES INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS ​ Audited Consolidated Financial Statements ​ Report of Independent Registered Public Accounting Firm (BDO USA, P.C.; Costa Mesa, California; PCAOB ID # 243 ) 54 Consolidated Balance Sheets – December 27, 2023 and December 28, 2022 56 Consolidated Statements of Income—For the years ended December 27, 2023, December 28, 2022, and December 29, 2021 57 Consolidated Statements of Comprehensive Income—For the years ended December 27, 2023, December 28, 2022, and December 29, 2021 58 Consolidated Statements of Changes in Stockholders’ Equity—For the years ended December 27, 2023, December 28, 2022, and December 29, 2021 59 Consolidated Statements of Cash Flows—For the years ended December 27, 2023, December 28, 2022, and December 29, 2021 60 Notes to Consolidated Financial Statements 61 ​ ​ ​ 53 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Shareholders and Board of Directors El Pollo Loco Holdings, Inc. Costa Mesa, California Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of El Pollo Loco Holdings, Inc. (the “Company”) as of December 27, 2023 and December 28, 2022, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 27, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 27, 2023 and December 28, 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 27, 2023, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 27, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 8, 2024 expressed an unqualified opinion thereon. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Impairment of Restaurant Property and Equipment As discussed in Notes 2 and 3 to the consolidated financial statements, the Company reviews its long-lived assets related to restaurants held and used in the business, including property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The net balance of property and equipment was $84.0 million as of December 27, 2023. 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 flows to the carrying value to determine whether an impairment loss should be measured. 54 Table of Contents 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 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. ​ Costa Mesa, California March 8, 2024 ​ 55 Table of Contents EL POLLO LOCO HOLDINGS, INC. ​ CONSOLIDATED BALANCE SHEETS ​ (Amounts in thousands, except share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ December 27, December 28, ​ 2023 2022 Assets ​ ​ ​ ​ ​ Current assets: ​ ​ ​ ​ Cash and cash equivalents ​ $ 7,288 ​ $ 20,493 Accounts and other receivables, net ​ 10,148 ​ 10,084 Inventories ​ 1,911 ​ 2,442 Prepaid expenses and other current assets ​ 5,634 ​ 3,662 Income tax receivable ​ 153 ​ 768 Total current assets ​ 25,134 ​ 37,449 Property and equipment, net ​ 84,027 ​ 78,644 Property and equipment held under finance lease, net ​ 1,528 ​ 1,532 Property and equipment held under operating leases, net ("ROU asset") ​ 168,007 ​ 165,584 Goodwill ​ 248,674 ​ 248,674 Trademarks ​ 61,888 ​ 61,888 Deferred tax assets ​ — ​ 512 Other assets ​ 3,043 ​ 2,935 Total assets ​ $ 592,301 ​ $ 597,218 Liabilities and Stockholders’ Equity ​ ​ Current liabilities: ​ ​ Current portion of obligations under finance leases ​ $ 140 ​ $ 110 Current portion of obligations under operating leases ​ 19,490 ​ 19,995 Accounts payable ​ 12,541 ​ 12,741 Accrued salaries and vacation ​ 9,332 ​ 8,873 Accrued insurance ​ 11,831 ​ 11,120 Accrued income taxes payable ​ 70 ​ — Accrued interest ​ 394 ​ 291 Current portion of income tax receivable agreement payable ​ 422 ​ 263 Other accrued expenses and current liabilities ​ 18,361 ​ 15,120 Total current liabilities ​ 72,581 ​ 68,513 Revolver loan ​ 84,000 ​ 66,000 Obligations under finance leases, net of current portion ​ 1,617 ​ 1,626 Obligations under operating leases, net of current portion ​ 168,084 ​ 165,149 Deferred taxes ​ 8,878 ​ 8,517 Income tax receivable agreement payable, net of current portion ​ — ​ 409 Other noncurrent liabilities ​ 6,445 ​ 5,856 Total liabilities ​ 341,605 ​ 316,070 Commitments and contingencies (Note 13) ​ ​ Stockholders’ equity ​ ​ 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; 31,353,223 and 37,008,061 shares issued and outstanding as of December 27, 2023 and December 28, 2022, respectively ​ 313 ​ 370 Additional paid-in-capital ​ 236,421 ​ 292,244 Retained earnings (accumulated deficit) ​ 13,962 ​ ( 11,592 ) Accumulated other comprehensive income ​ — ​ 126 Total stockholders’ equity ​ 250,696 ​ 281,148 Total liabilities and stockholders’ equity ​ $ 592,301 ​ $ 597,218 See notes to consolidated financial statements. 56 Table of Contents EL POLLO LOCO HOLDINGS, INC. ​ CONSOLIDATED STATEMENTS OF INCOME ​ (Amounts in thousands, except share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Fiscal Years Ended ​ December 27, 2023 December 28, 2022 December 29, 2021 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Revenue ​ ​ ​ Company-operated restaurant revenue ​ $ 398,437 ​ $ 403,218 ​ $ 394,733 Franchise revenue ​ 41,002 ​ 38,225 ​ 33,729 Franchise advertising fee revenue ​ 29,225 ​ 28,516 ​ 25,901 Total revenue ​ 468,664 ​ 469,959 ​ 454,363 Cost of operations ​ ​ ​ Food and paper cost ​ 108,250 ​ 117,774 ​ 104,394 Labor and related expenses ​ 127,244 ​ 130,773 ​ 120,308 Occupancy and other operating expenses ​ 101,398 ​ 101,543 ​ 97,557 Gain on recovery of insurance proceeds, lost profits, net ​ ​ ( 327 ) ​ ​ — ​ ​ — Company restaurant expenses ​ 336,565 ​ 350,090 ​ 322,259 General and administrative expenses ​ 42,025 ​ 39,093 ​ 39,852 Franchise expenses ​ 38,404 ​ 36,169 ​ 32,831 Depreciation and amortization ​ 15,235 ​ 14,418 ​ 15,176 Loss on disposal of assets ​ 192 ​ 165 ​ 289 Gain on recovery of insurance proceeds, property, equipment and expenses ​ ( 247 ) ​ — ​ — (Gain) loss on disposition of restaurants ​ ​ ( 5,034 ) ​ ​ ( 848 ) ​ ​ 1,534 Impairment and closed-store reserves ​ 1,732 ​ 752 ​ 1,087 Total expenses ​ 428,872 ​ 439,839 ​ 413,028 Income from operations ​ 39,792 ​ 30,120 ​ 41,335 Interest expense, net ​ 4,811 ​ 1,677 ​ 1,824 Income tax receivable agreement expense (income) ​ 103 ​ ( 436 ) ​ 58 Income before provision for income taxes ​ 34,878 ​ 28,879 ​ 39,453 Provision for income taxes ​ 9,324 ​ 8,078 ​ 10,332 Net income ​ $ 25,554 ​ $ 20,801 ​ $ 29,121 Net income per share ​ ​ ​ Basic ​ $ 0.75 ​ $ 0.57 ​ $ 0.81 Diluted ​ $ 0.74 ​ $ 0.57 ​ $ 0.80 Weighted-average shares used in computing net income per share ​ ​ ​ Basic ​ 34,253,542 ​ 36,350,579 ​ 35,973,892 Diluted ​ 34,374,706 ​ 36,575,904 ​ 36,446,756 ​ See notes to consolidated financial statements. ​ 57 Table of Contents EL POLLO LOCO HOLDINGS, INC. ​ CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ​ (Amounts in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Fiscal Years Ended ​ ​ December 27, December 28, December 29, ​ ​ 2023 ​ 2022 ​ 2021 Net income ​ $ 25,554 ​ $ 20,801 ​ $ 29,121 ​ Other comprehensive (loss) income ​ ​ ​ ​ Changes in derivative instruments ​ ​ ​ ​ Unrealized net gains arising during the period from interest rate swap ​ — ​ 862 ​ 257 ​ Reclassifications of (losses) gains into net income ​ ( 170 ) ​ ( 296 ) ​ 486 ​ Income tax benefit (expense) ​ 44 ​ ( 150 ) ​ ( 200 ) ​ Other comprehensive (loss) income, net of taxes ​ ( 126 ) ​ 416 ​ 543 ​ Comprehensive income ​ $ 25,428 ​ $ 21,217 ​ $ 29,664 ​ ​ See notes to consolidated financial statements. ​ 58 Table of Contents EL POLLO LOCO HOLDINGS, INC. ​ CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY ​ (Amounts in thousands, except share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Accumulated Accumulated ​ ​ ​ ​ ​ Additional Deficit) Other Total ​ ​ Common Stock ​ Paid-in ​ Retained ​ Comprehensive ​ Stockholders’ ​ Shares Amount Capital Earnings Income (Loss) Equity Balance, December 30, 2020 ​ 36,423,505 ​ $ 364 ​ $ 339,561 ​ $ ( 61,514 ) ​ $ ( 833 ) ​ $ 277,578 Stock-based compensation ​ — ​ — ​ 3,220 ​ — ​ — ​ 3,220 Issuance of common stock related to restricted shares, net ​ 246,780 ​ 2 ​ ( 2 ) ​ — ​ — ​ — Issuance of common stock upon exercise of stock options, net ​ 132,760 ​ 1 ​ 865 ​ — ​ — ​ 866 Shares repurchased for employee tax withholdings ​ ( 40,384 ) ​ — ​ ( 705 ) ​ — ​ — ​ ( 705 ) Forfeiture of common stock related to restricted shares ​ ( 161,013 ) ​ ( 2 ) ​ 2 ​ — ​ — ​ — Other comprehensive loss, net of income tax ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 543 ​ ​ 543 Net income ​ — ​ — ​ — ​ 29,121 ​ — ​ 29,121 Balance, December 29, 2021 ​ 36,601,648 ​ 365 ​ 342,941 ​ ( 32,393 ) ​ ( 290 ) ​ 310,623 Stock-based compensation ​ — ​ — ​ 3,491 ​ — ​ — ​ 3,491 Issuance of common stock related to restricted shares, net ​ 356,610 ​ 4 ​ ( 4 ) ​ — ​ — ​ — Issuance of common stock upon exercise of stock options, net ​ 185,798 ​ 2 ​ 1,711 ​ — ​ — ​ 1,713 Shares repurchased for employee tax withholdings ​ ( 30,128 ) ​ — ​ ( 322 ) ​ — ​ — ​ ( 322 ) Forfeiture of common stock related to restricted shares ​ ( 105,867 ) ​ ( 1 ) ​ 1 ​ — ​ — ​ — Other comprehensive income, net of income tax ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 416 ​ ​ 416 Common stock cash dividends ($ 1.50 per share) ​ — ​ ​ — ​ ​ ( 55,574 ) ​ ​ — ​ ​ — ​ ​ ( 55,574 ) Net income ​ — ​ — ​ — ​ 20,801 ​ — ​ 20,801 Balance, December 28, 2022 ​ 37,008,061 ​ 370 ​ 292,244 ​ ( 11,592 ) ​ 126 ​ 281,148 Stock-based compensation ​ — ​ — ​ 2,964 ​ — ​ — ​ 2,964 Issuance of common stock related to restricted shares, net ​ 454,081 ​ 5 ​ ( 5 ) ​ — ​ — ​ — Issuance of common stock upon exercise of stock options, net ​ 219,960 ​ 2 ​ 1,169 ​ — ​ — ​ 1,171 Shares repurchased for employee tax withholdings ​ ( 26,344 ) ​ — ​ ( 243 ) ​ — ​ — ​ ( 243 ) Repurchase of common stock ​ ( 6,030,850 ) ​ ​ ( 61 ) ​ ​ ( 59,155 ) ​ ​ — ​ ​ — ​ ​ ( 59,216 ) Repurchase of common stock - excise tax ​ — ​ ​ — ​ ​ ( 556 ) ​ ​ — ​ ​ — ​ ​ ( 556 ) Forfeiture of common stock related to restricted shares ​ ( 271,685 ) ​ ( 3 ) ​ 3 ​ — ​ — ​ — Other comprehensive income, net of income tax ​ — ​ — ​ — ​ — ​ ( 126 ) ​ ( 126 ) Net income ​ — ​ — ​ — ​ 25,554 ​ — ​ 25,554 Balance, December 27, 2023 ​ 31,353,223 ​ $ 313 ​ $ 236,421 ​ $ 13,962 ​ $ - ​ $ 250,696 ​ See notes to consolidated financial statements. ​ 59 Table of Contents EL POLLO LOCO HOLDINGS, INC. ​ CONSOLIDATED STATEMENTS OF CASH FLOWS ​ (Amounts in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Fiscal Years Ended ​ December 27, December 28, December 29, ​ 2023 2022 2021 Cash flows from operating activities: ​ ​ ​ ​ ​ ​ Net income ​ $ 25,554 ​ $ 20,801 ​ $ 29,121 Adjustments to reconcile net income to net cash flows provided by operating activities: ​ ​ ​ Depreciation and amortization ​ 15,235 ​ 14,418 ​ 15,176 Stock-based compensation expense ​ 2,964 ​ 3,491 ​ 3,220 Income tax receivable agreement (income) expense ​ 103 ​ ( 436 ) ​ 58 Fire insurance proceeds for expenses paid and lost profit ​ ​ 327 ​ ​ — ​ ​ — (Gain) loss on disposition of restaurants ​ ​ ( 5,034 ) ​ ​ ( 848 ) ​ ​ 1,534 Loss on disposal of assets ​ 192 ​ 165 ​ 289 Gain on recovery of insurance proceeds, property, equipment and expenses, net ​ ​ ( 247 ) ​ ​ — ​ ​ — Impairment of property and equipment ​ 1,536 ​ 481 ​ 711 Amortization of deferred financing costs ​ 201 ​ 340 ​ 251 Deferred income taxes, net ​ 906 ​ 4,600 ​ 957 Changes in operating assets and liabilities: ​ ​ ​ Accounts and other receivables ​ ( 216 ) ​ 3,323 ​ ( 3,444 ) Inventories ​ 531 ​ ( 125 ) ​ ( 218 ) Prepaid expenses and other current assets ​ ( 1,972 ) ​ 71 ​ 133 Income taxes (receivable) payable ​ 838 ​ ( 1,657 ) ​ 3,410 Other assets ​ ( 309 ) ​ ( 240 ) ​ ( 1,052 ) Accounts payable ​ ( 3,965 ) ​ 3,977 ​ 2,533 Accrued salaries and vacation ​ 459 ​ ( 2,667 ) ​ 1,373 Accrued insurance ​ 711 ​ ( 73 ) ​ 777 Payment related to tax receivable agreement ​ ( 350 ) ​ ( 430 ) ​ ( 1,658 ) Other accrued expenses and liabilities ​ 3,224 ​ ( 6,642 ) ​ ( 1,072 ) Net cash flows provided by operating activities ​ 40,688 ​ 38,549 ​ 52,099 Cash flows from investing activities: ​ ​ ​ Proceeds from disposition of restaurants ​ 7,722 ​ 1,002 ​ 4,556 Proceeds from fire insurance for property and equipment ​ ​ 163 ​ ​ — ​ ​ — Purchase of property and equipment ​ ( 21,332 ) ​ ( 19,917 ) ​ ( 17,041 ) Net cash flows used in investing activities ​ ( 13,447 ) ​ ( 18,915 ) ​ ( 12,485 ) Cash flows from financing activities: ​ ​ ​ Proceeds from borrowings on revolver and swingline loans ​ 39,000 ​ 46,000 ​ — Payments on revolver and swingline loan ​ ​ ( 21,000 ) ​ ​ ( 20,000 ) ​ ​ ( 22,800 ) Minimum tax withholdings related to net share settlements ​ ​ ( 243 ) ​ ​ ( 322 ) ​ ​ ( 705 ) Common stock dividends paid ​ — ​ ( 55,574 ) ​ — Proceeds from issuance of common stock upon exercise of stock options, net of expenses ​ ​ 1,171 ​ ​ 1,713 ​ ​ 866 Payment of obligations under finance leases ​ ( 158 ) ​ ( 162 ) ​ ( 148 ) Deferred financing costs for revolver loan ​ — ​ ( 842 ) ​ — Repurchases of common stock ​ ( 59,216 ) ​ — ​ — Net cash flows used in by financing activities ​ ( 40,446 ) ​ ( 29,187 ) ​ ( 22,787 ) (Decrease) increase in cash and cash equivalents ​ ( 13,205 ) ​ ( 9,553 ) ​ 16,827 Cash and cash equivalents, beginning of period ​ 20,493 ​ 30,046 ​ 13,219 Cash and cash equivalents, end of period ​ $ 7,288 ​ $ 20,493 ​ $ 30,046 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Fiscal Years Ended ​ December 27, December 28, December 29, ​ ​ 2023 2022 2021 Supplemental cash flow information ​ ​ ​ Cash paid during the period for interest ​ $ 4,819 ​ $ 1,450 ​ $ 1,066 Cash paid during the period for income taxes ​ $ 7,721 ​ $ 5,100 ​ $ 5,968 Unpaid purchases of property and equipment ​ $ 5,098 ​ $ 1,333 ​ $ 2,454 Unpaid repurchases of common stock ​ $ — ​ $ — ​ $ — ​ ​ See notes to consolidated financial statements. ​ ​ ​ ​ ​ 60 Table of Contents EL POLLO LOCO HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ​ 1. DESCRIPTION OF BUSINESS El Pollo Loco Holdings, Inc. (“Holdings”) is a Delaware corporation headquartered in Costa Mesa, California. 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 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. Holdings has no material assets or operations. Holdings and Holdings’ direct subsidiary, EPL Intermediate, Inc. (“Intermediate”), guarantee EPL’s 2022 Revolver (see Note 6 “Long-Term Debt”) on a full and unconditional basis and Intermediate has no subsidiaries other than EPL. EPL is a separate and distinct legal entity, and has no obligation to make funds available to Intermediate. EPL and Intermediate may pay dividends to Intermediate and to Holdings, respectively. The Company operates in one operating segment. All significant revenues relate to retail sales of food and beverages through either company or franchised restaurants. ​ 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Liquidity The Company’s principal liquidity and capital requirements are new restaurants, existing restaurant capital investments (remodel and maintenance), interest payments on its debt, lease obligations and working capital and general corporate needs. At December 27, 2023, the Company’s total debt was $ 84.0 million. The Company’s ability to make payments on its indebtedness and to fund planned capital expenditures depends on available cash and its ability to generate adequate cash flows in the future, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond the Company’s control. Based on current operations, the Company believes that its cash flows from operations, available cash of $ 7.3 million at December 27, 2023, and available borrowings under the 2022 Revolver (as defined in Note 6 “Long-Term Debt”) will be adequate to meet the Company’s liquidity needs for the next twelve months from the issuance of the consolidated financial statements. Basis of Presentation The Company uses a 52- or 53-week fiscal year ending on the last Wednesday of each calendar year. Fiscal 2023, 2022, and 2021 ended on December 27, 2023, December 28, 2022 and December 29, 2021, respectively. In a 52-week fiscal year, each quarter includes 13 weeks of operations. In a 53-week fiscal year, the first, second and third quarters each include 13 weeks of operations and the fourth quarter includes 14 weeks of operations. Approximately every six or seven years a 53-week fiscal year occurs. Fiscal 2023, 2022 and 2021 were 52-week fiscal years. 53-week years may cause revenues, expenses, and other results of operations to be higher due to the additional week of operations. Principles of Consolidation The accompanying consolidated financial statements include the accounts of Holdings and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. 61 Table of Contents EL POLLO LOCO HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and revenue and expenses during the period reported. 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, 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 The Company considers all liquid instruments with a maturity of three months or less at the date of purchase to be cash equivalents. Subsequent Events 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. Ms. 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 Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally-insured limits. The Company has never experienced any losses related to these balances. The Company had one supplier for which amounts due at December 27, 2023 totaled 15.14 % of the Company’s accounts payable. As of December 28, 2022, the Company had one supplier for which the amount due totaled 41.7 % of the Company’s accounts payable. 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. 62 Table of Contents 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. One franchisee accounted for 11.4 % of total accounts receivable as of December 27, 2023, and one franchisee accounted for 12.9 % of total accounts receivable as of December 28, 2022. Management believes the loss of the significant supplier or franchisee could have a material adverse effect on the Company’s consolidated results of operations and financial condition. Accounts and Other Receivables, Net Accounts and other receivables consist primarily of royalties, advertising and sublease rent and related amounts receivable from franchisees. Such receivables are due on a monthly basis, which may differ from the Company’s fiscal month-end dates. Accounts and other receivables also include credit/debit card receivables. The need for an allowance for doubtful accounts is reviewed on a specific identification basis and takes into consideration past due balances and the financial strength of the obligor. Inventories Inventories consist principally of food, beverages and supplies and are valued at the lower of average cost or net realizable value. Property and Equipment, Net Property and equipment are recorded at cost and are depreciated using the straight-line method over the estimated useful lives of the assets. Expenditures for reimbursements and improvements that significantly add to the productivity capacity or extend the useful life are capitalized, while expenditures for maintenance and repairs are expensed as incurred. Leasehold improvements and property held under finance leases are amortized over the shorter of their estimated useful lives or the remaining lease terms. For leases with renewal periods at the Company’s option, the Company generally uses the original lease term, excluding the option periods, to determine estimated useful lives; if failure to exercise a renewal option imposes an economic penalty on the Company, such that management determines at the inception of the lease that renewal is reasonably assured, the Company may include the renewal option period in the determination of appropriate estimated useful lives. The estimated useful service lives are as follows: ​ ​ ​ ​ Buildings 20 years Land improvements 3 — 30 years Building improvements 3 — 10 years Restaurant equipment 3 — 10 years Other equipment 2 — 10 years Property/equipment held under finance leases ​ Shorter of useful life or lease term Leasehold improvements Shorter of useful life or lease term ​ The Company capitalizes certain directly attributable internal costs in conjunction with the acquisition, development and construction of future restaurants. The Company also capitalizes certain directly attributable costs, including interest, in conjunction with constructing new restaurants. 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 $ 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. 63 Table of Contents 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 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. There is uncertainty in the projected undiscounted future cash flows used in the Company’s impairment review analysis, which requires the use of estimates and assumptions. 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 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. Closed-Store Reserves When a restaurant is closed, the Company will evaluate the ROU asset for impairment, based on anticipated sublease recoveries. The remaining value of the ROU asset is amortized on a straight-line basis, with the expense recognized in closed-store reserve expense. Additionally, any property tax and common area maintenance (“CAM”) payments relating to closed restaurants are included within closed-store expense. 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 The Company’s indefinite-lived intangible assets consist of trademarks. Goodwill represents the excess of cost over fair value of net identified assets acquired in business combinations accounted for under the purchase method. The Company does not amortize its goodwill and indefinite-lived intangible assets. 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 64 Table of Contents 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 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. The Company reviews goodwill for impairment utilizing either a qualitative assessment or a fair value test by comparing the fair value of a reporting unit with its carrying amount. If the Company decides that it is appropriate to perform a qualitative assessment and concludes that the fair value of a reporting unit more likely than not exceeds its carrying value, no further evaluation is necessary. If the Company performs the fair value test, the Company will compare the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its fair value, the Company will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized cannot exceed the total amount of goodwill allocated to that reporting unit. The Company performs annual impairment tests for indefinite-lived intangible assets during the fourth fiscal quarter of each year, or more frequently if impairment indicators arise. An impairment test consists of either a qualitative assessment or a comparison of the fair value of an intangible asset with its carrying amount. The excess of the carrying amount of an intangible asset over its fair value is its impairment loss. The assumptions used in the estimate of fair value are generally consistent with the past performance of the Company’s reporting segment and are also consistent with the projections and assumptions that are used in current operating plans. These assumptions are subject to change as a result of changing economic and competitive conditions. The Company determined that there were no indicators of potential impairment of its goodwill and indefinite-lived intangible assets during fiscal 2023. Accordingly, the Company did no t record any impairment to its goodwill or indefinite-lived intangible assets during the year ended December 27, 2023. Deferred Financing Costs 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 $ 0.2 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 The Company is responsible for workers’ compensation, general and health insurance claims up to a specified aggregate stop loss amount. The Company maintains a reserve for estimated claims both reported and incurred but not reported, based on historical claims experience and other assumptions. At December 27, 2023 and December 28, 2022, the Company had accrued $ 11.8 million and $ 11.1 million, respectively, and such amounts are reflected as accrued insurance in the accompanying consolidated balance sheets. The expense for such reserves for the years ended December 27, 2023, December 28, 2022 and December 29, 2021, totaled $ 9.2 million, $ 8.7 million, and $ 9.0 million, respectively. These amounts are included in labor and related expenses and general and administrative expenses on the accompanying consolidated statements of income. 65 Table of Contents EL POLLO LOCO HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Restaurant Revenue Revenues from the operation of company-operated restaurants are recognized as food and beverage products are delivered to customers and payment is tendered at the time of sale. The Company presents sales net of sales-related taxes and promotional allowances. Promotional allowances amounted to approximately $ 8.7 million, $ 7.5 million and $ 7.7 million during the years ended December 27, 2023, December 28, 2022, and December 29, 2021, respectively. The Company offers a loyalty rewards program, which awards a customer points for dollars spent. 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. When a customer is part of the rewards program, the obligation to provide future discounts related to points earned is considered a separate performance obligation, to which a portion of the transaction price is allocated. The performance obligation related to loyalty points is deemed to have been satisfied, and the amount deferred in the balance sheet is recognized as revenue, when the points are transferred to a reward and redeemed, the reward or points have expired, or the likelihood of redemption is remote. A portion of the transaction price is allocated to loyalty points, if necessary, on a pro-rata basis, based on stand-alone selling price, as determined by menu pricing and loyalty points terms. As of December 27, 2023 and December 28, 2022, the revenue allocated to loyalty points that have not been redeemed was $ 0.7 million and $ 0.5 million, respectively, which is reflected in the Company’s accompanying consolidated balance sheets within other accrued expenses and current liabilities. The Company expects the loyalty points to be redeemed and recognized over a one-year period. The Company sells gift cards to its customers in the restaurants and through selected third parties. The gift cards sold to customers have no stated expiration dates and are subject to actual and/or potential escheatment rights in several of the jurisdictions in which the Company operates. Furthermore, due to these escheatment rights, the Company does not recognize breakage related to the sale of gift cards due to the immateriality of the amount remaining after escheatment. The Company recognizes income from gift cards when redeemed by the customer. Unredeemed gift card balances are deferred and recorded as other accrued expenses on the accompanying consolidated balance sheets. Franchise Revenue Franchise revenue consists of franchise royalties, initial franchise fees, license fees due from franchisees and IT support services. Rental income for subleases to franchisees are outside of the scope of the revenue standard and are within the scope of lease guidance. Under Topic 842, sublease income is recorded on a net basis within the consolidated statements of income. Franchise royalties are based upon a percentage of net sales of the franchisee and are recorded as income as such sales are earned by the franchisees. For franchise and development agreement fees, the initial franchise services, or exclusivity of the development agreements, are not distinct from the continuing rights or services offered during the term of the franchise agreement and are, therefore, treated as a single performance obligation. As such, initial franchise and development fees received, and subsequent renewal fees, are recognized over the franchise or renewal term, which is typically twenty years . As of December 27, 2023, the Company had executed development agreements that represent commitments to open 107 franchised restaurants at various dates through 2036. This revenue stream is made up of the following performance obligations: ● Franchise License – inclusive of advertising services, development agreements, training, access to plans and help desk services; ● Discounted renewal option; and ● Hardware services. 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 66 Table of Contents 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. The sales-based royalty fee and sales-based advertising fee are considered variable consideration and are recognized as revenue as such sales are earned by the franchisees. Both sales-based fees qualify under the royalty constraint exception, and do not require an estimate of future transaction price. Additionally, the Company is utilizing the practical expedient available under ASC Topic 606, “Revenue from Contracts with Customers” (“Topic 606”) regarding disclosure of the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied for sales-based royalties. In certain franchise agreements, the Company offers a discounted renewal to incentivize future renewals after the end of the initial franchise term. As this is considered a separate performance obligation, the Company allocated a portion of the initial franchise fee to this discounted renewal, on a pro-rata basis, assuming a 20 year renewal. This performance obligation is satisfied over the renewal term, which is typically 10 or 20 years , while payment is fixed and due at the time the renewal is signed. The Company purchases hardware, such as scanners, printers, cash registers and tablets, from third-party vendors, which it then sells to franchisees. As the Company is considered the principal in this relationship, payment received for the hardware is considered revenue, and is received upon transfer of the goods from the Company to the franchisee. As of December 27, 2023, there were no performance obligations, related to hardware services that were unsatisfied or partially satisfied. Franchise Advertising Fee Revenue The Company presents advertising contributions received from franchisees as franchise advertising fee revenue and records all expenses of the advertising fund within franchise expenses. Advertising Costs Advertising expense is recorded as the obligation to contribute to the advertising fund and is accrued, generally when the associated revenue is recognized. Advertising expense, which is a component of occupancy and other operating expenses, was $ 16.2 million, $ 16.4 million and $ 16.1 million for the years ended December 27, 2023, December 28, 2022 and December 29, 2021, respectively. 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 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. Company-operated restaurants contribute to the advertising fund on the same basis as franchised restaurants. At December 27, 2023, the Company was obligated to spend $ 3.0 million more in future periods to comply with this requirement. Production costs of commercials, programming and other marketing activities are charged to the advertising funds when the advertising is first used for its intended purpose. Total contributions and other marketing expenses are included in general and administrative expenses in the accompanying consolidated statements of income. Preopening Costs Preopening costs incurred in connection with the opening of new restaurants are expensed as incurred. 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. 67 Table of Contents EL POLLO LOCO HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Leases The Company’s operations utilize property, facilities, equipment and vehicles. Buildings and facilities leased from others are primarily for restaurants and support facilities. 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 more than a defined amount. Initial terms of land and restaurant building leases generally have terms of 20 years , exclusive of options to renew. ROU assets and operating and finance lease liabilities are recognized at the lease commencement date, which is the date the Company takes possession of the property. Operating and finance lease liabilities represent the present value of lease payments not yet paid. ROU assets represent the Company’s right to use an underlying asset and are based upon the operating and finance lease liabilities adjusted for prepayments or accrued lease payments, lease incentives, and impairment of ROU assets. To determine the present value of lease payments not yet paid, the Company estimates incremental borrowing rates corresponding to the lease term including reasonably certain renewal periods. The Company’s leases generally have escalating rents over the term of the lease, and are recorded on a straight-line basis over the expected lease term. Additionally, tenant incentives used to fund leasehold improvements are recognized when earned and reduce the right-of-use asset related to the lease. These are amortized through the operating lease asset as reductions of expense over the lease term. Operating and finance lease liabilities that are based on an index or rate are calculated using the prevailing index or rate at lease commencement. Subsequent escalations in the index or rate and contingent rental payments are recognized as variable lease expenses. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. Leases of equipment primarily consist of restaurant equipment, computer systems and vehicles. The Company subleases facilities to certain franchisees and other non-related parties which are recorded on a straight-line basis. Gain on Recovery of Insurance Proceeds, Lost Profits 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. During fiscal 2021, the Company completed the sale of eight restaurants within the Sacramento area to an existing franchisee. The Company has determined that these restaurant dispositions represent multiple element arrangements, and as a result, the cash consideration received was allocated to the separate elements based on their relative standalone selling price. Cash proceeds included upfront consideration for the sale of the restaurants and franchise fees, as well as future cash consideration for royalties. The cash consideration per restaurant related to franchise fees is consistent with the amounts stated in the related franchise agreements, which are charged for separate standalone arrangements. The Company initially defers and subsequently recognizes the franchise fees over the term of the franchise agreement. Future royalty income is also recognized in revenue as earned. 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. The Sacramento sale resulted in cash proceeds of $ 4.6 million and a net loss on sale of restaurants of $ 1.5 million for the year ended December 29, 2021. Since the date of their sale, these restaurants are now included in the total number of franchised El Pollo Loco restaurants. 68 Table of Contents EL POLLO LOCO HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Derivative Financial Instruments The Company used an interest rate swap, a derivative instrument, to hedge interest rate risk and not for trading purposes. The derivative contract was entered into with a financial institution. In connection with the Company’s entry into the 2022 Credit Agreement (as defined in Note 6 “Long-Term Debt”), it terminated the interest rate swap on July 28, 2022. The Company recorded the derivative instrument on its consolidated balance sheets at fair value. The derivative instrument qualified as a hedging instrument in a qualifying cash flow hedge relationship, and the gain or loss on the derivative instrument was reported as a component of accumulated other comprehensive (loss) income (“AOCI”) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. For any derivative instruments not designated as hedging instruments, the gain or loss will be recognized in earnings immediately. Income Taxes The provision for income taxes, income taxes payable and deferred income taxes is determined using the asset and liability method. Deferred tax assets and liabilities are determined based on temporary differences between the financial carrying amounts and the tax bases of assets and liabilities using enacted tax rates in effect in the years in which the temporary differences are expected to reverse. On a periodic basis, the Company assesses the probability that its net deferred tax assets, if any, will be recovered. If, after evaluating all of the positive and negative evidence, a conclusion is made that it is more likely than not that some portion or all of the net deferred tax assets will not be recovered, a valuation allowance is provided by charging to tax expense a reserve for the portion of deferred tax assets which are not expected to be realized. The Company reviews its filing positions for all open tax years in all U.S. federal and state jurisdictions where it is required to file. When there are uncertainties related to potential income tax benefits, in order to qualify for recognition, the position the Company takes has to have at least a “more likely than not” chance of being sustained (based on the position’s technical merits) upon challenge by the respective authorities. The term “more likely than not” means a likelihood of more than 50%. Otherwise, the Company may not recognize any of the potential tax benefit associated with the position. The Company recognizes a benefit for a tax position that meets the “more likely than not” criterion as the largest amount of tax benefit that is greater than 50% likely of being realized upon its effective resolution. 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 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 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 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. 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. ​ 69 Table of Contents 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. The American Rescue Plan passed into law on March 11, 2021 extended the ERC through September 30, 2021, and the credit was increased to 70 % of qualified wages paid from January 1, 2021 through September 30, 2021. During fiscal 2021, the Company recognized the ERC credit in the amount of $ 3.4 million as income as it is probable that it will comply with the ERC eligibility requirements. The Company has elected an accounting policy to present government assistance as a reduction of the related expense. The ERC credit 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, the Company received $ 3.1 million in ERC and the remaining $ 0.3 million was received and recorded during fiscal 2023. Fair Value Measurements Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories: ● Level 1: Quoted prices for identical instruments in active markets. ● Level 2: Observable prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs or significant value drivers are observable. ● Level 3: Unobservable inputs used when little or no market data is available. 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 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): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total Level 1 Level 2 Level 3 ​ Impairment Losses Certain property and equipment, net ​ $ — ​ $ — ​ $ — ​ $ — $ 1,497 Certain ROU assets, net ​ $ 244 ​ $ — ​ $ — ​ $ 244 ​ $ 39 ​ 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): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total Level 1 Level 2 Level 3 Impairment Losses Certain property and equipment, net ​ $ — ​ $ — ​ $ — ​ $ — $ 442 Certain ROU assets, net ​ $ 327 ​ $ — ​ $ — ​ $ 327 ​ $ 39 ​ 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): 70 Table of Contents EL POLLO LOCO HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total Level 1 Level 2 Level 3 Impairment Losses Certain property and equipment, net ​ $ — ​ $ — ​ $ — ​ $ — ​ $ 304 Certain ROU assets, net ​ $ 411 ​ $ — ​ $ — ​ $ 411 ​ $ 407 ​ Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and certain accrued expenses approximate fair value due to their short-term maturities. 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). Stock-Based Compensation Stock-based compensation expense is recognized using a fair-value based method for costs related to all share-based payments including stock options and restricted stock issued under the Company’s employee stock plans. The fair value of stock option awards is estimated on the date of grant using an option pricing model, which require the input of subjective assumptions. The Company is required to use judgment in estimating the amount of stock-based awards that are expected to be forfeited. If actual forfeitures differ significantly from the original estimate, stock-based compensation expense and the results of operations could be affected. The cost is recognized on a straight-line basis over the period during which an employee is required to provide service, usually the vesting period. For options or restricted shares that are based on a performance requirement, the cost is recognized on an accelerated basis over the period to which the performance criteria relate. Earnings per Share Earnings per share (“EPS”) is calculated using the weighted average number of common shares outstanding during each period. Diluted EPS assumes the conversion, exercise or issuance of all potential common stock equivalents unless the effect is to reduce a loss or increase the income per share. For purposes of this calculation, options and restricted stock awards are considered to be common stock equivalents and are only included in the calculation of diluted earnings per share when their effect is dilutive. 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. ​ 71 Table of Contents EL POLLO LOCO HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Franchise Development Option Agreement with Related Party 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. 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. ​ 3. PROPERTY AND EQUIPMENT The costs and related accumulated depreciation and amortization of major classes of property are as follows (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ December 27, 2023 December 28, 2022 Land ​ $ 12,323 ​ $ 12,323 Buildings and improvements ​ 148,259 ​ 153,377 Other property and equipment ​ 86,423 ​ 83,035 Construction in progress ​ 7,270 ​ 3,196 ​ ​ 254,275 ​ 251,931 Less: accumulated depreciation and amortization ​ ( 170,248 ) ​ ( 173,287 ) ​ ​ $ 84,027 ​ $ 78,644 ​ 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 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. ​ 4. TRADEMARKS AND OTHER INTANGIBLE ASSETS Domestic trademarks consist of the following (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 27, ​ December 28, ​ 2023 2022 Cost ​ $ 120,700 ​ $ 120,700 Accumulated impairment charges ​ ( 58,812 ) ​ ( 58,812 ) Trademarks, net ​ $ 61,888 ​ $ 61,888 ​ ​ 72 Table of Contents EL POLLO LOCO HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. LEASES Nature of leases The Company’s operations utilize property, facilities, equipment and vehicles leased from others. Additionally, the Company has various contracts with vendors that have been determined to contain an embedded lease in accordance with Topic 842. As of December 27, 2023, the Company had no leases that it had entered into, but had not yet commenced. 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 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. Additionally, a number of the Company’s leases have payments, which increase at pre-determined dates based on the change in the consumer price index. For all leases, the Company also reimburses the landlord for non-lease components, or items that are not considered components of a contract, such as common area maintenance, property tax and insurance costs. While the Company determined not to separate lease and non-lease components, these payments are based on actual costs, making them variable consideration and excluding them from the calculations of the ROU asset and lease liability. 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 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. During the year ended December 27, 2023, the Company reassessed the lease terms on 36 restaurants due to certain triggering events, such as the addition of significant leasehold improvements, the decision to terminate a lease, or the decision to renew. As a result of the reassessment, an additional $ 21.5 million of ROU assets and lease liabilities for the year ended December 27, 2023 were recognized, and will be amortized over the new lease term. During the year ended December 28, 2022, the Company reassessed the lease terms on 22 restaurants due to certain triggering events, such as the addition of significant leasehold improvements, the decision to terminate a lease, or the decision to renew. As a result of the reassessment, an additional $ 13.0 million of ROU assets and lease liabilities for the year ended December 28, 2022 were recognized, and will be amortized over the new lease term. There were no reassessments that impacted the original lease classification during the year ended December 27, 2023. 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. Additionally, as the Company adopted all practical expedients available under Topic 842, no reallocation between lease and non-lease components was necessary. The Company also subleases facilities to certain franchisees and other non-related parties which are also considered operating leases. Sublease income also includes contingent rental income based on net revenues. The vast majority of these leases have rights to extend terms via fixed rental increases. However, none of these leases have early termination rights, the right to purchase the premises or any residual value guarantees. The Company does not have any related party leases. 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 73 Table of Contents 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. During fiscal 2021, the Company determined that the carrying value of ROU assets at two restaurants were not recoverable. As a result, the Company recorded a $ 0.4 million non-cash impairment charge for the year ended December 29, 2021 related to one restaurant closed in Texas in 2019 and one restaurant closed in California. Equipment Leases of equipment primarily consist of restaurant equipment, copiers and vehicles. These leases are fixed payments with no variable component. Additionally, no optional renewal periods have been included in the calculation of the ROU Asset, there are no residual value guarantees and no restrictions imposed. Significant Assumptions and Judgments In applying the requirements of Topic 842, the Company made significant assumptions and judgments related to determination of whether a contract contains a lease and the discount rate used for the lease. In determining if any of the Company’s contracts contain a lease, the Company made assumptions and judgments related to its ability to direct the use of any assets stated in the contract and the likelihood of renewing any short-term contracts for a period extending past twelve months. The Company also made significant assumptions and judgments in determining an appropriate discount rate for property leases. These included using a consistent discount rate for a portfolio of leases entered into at varying dates, using the full 20-year term of the lease, excluding any options, and using the total minimum lease payments. For all other leases, the Company uses the discount rate implicit in the lease, or the Company’s incremental borrowing rate. As the Company has adopted the practical expedient not to separate lease and non-lease components, no significant assumptions or judgments were necessary in allocating consideration between these components, for all classes of underlying assets. 74 Table of Contents EL POLLO LOCO HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table presents the Company’s total lease cost, disaggregated by underlying asset (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 27, 2023 ​ December 28, 2022 ​ December 29, 2021 ​ Property Equipment ​ ​ Property Equipment ​ ​ Property Equipment ​ ​ ​ ​ Leases ​ Leases ​ Total ​ Leases ​ Leases ​ Total ​ Leases ​ Leases ​ Total Finance lease cost: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Amortization of right-of-use assets ​ $ 73 ​ $ 2 ​ $ 75 ​ $ 73 ​ $ 2 ​ $ 75 ​ $ 78 ​ $ 2 ​ $ 80 Interest on lease liabilities ​ ​ 40 ​ ​ 5 ​ 45 ​ 42 ​ ​ 3 ​ 45 ​ ​ 58 ​ ​ 1 ​ ​ 59 Operating lease cost: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fixed rent cost ​ ​ 27,597 ​ 387 ​ 27,984 ​ 26,537 ​ 1,005 ​ 27,542 ​ 26,501 ​ 1,122 ​ 27,623 Short-term lease cost ​ — ​ 8 ​ 8 ​ — ​ 18 ​ 18 ​ — ​ 21 ​ 21 Variable lease cost ​ 546 ​ 1,279 ​ 1,825 ​ 597 ​ 677 ​ 1,274 ​ 539 ​ 354 ​ 893 Sublease income ​ ( 5,570 ) ​ — ​ ( 5,570 ) ​ ( 4,555 ) ​ — ​ ( 4,555 ) ​ ( 3,823 ) ​ — ​ ( 3,823 ) Total lease cost ​ $ 22,686 ​ $ 1,681 ​ $ 24,367 ​ $ 22,694 ​ $ 1,705 ​ $ 24,399 ​ $ 23,353 ​ $ 1,500 ​ $ 24,853 ​ The following table presents the Company’s total lease cost on the consolidated statement of income (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 27, 2023 December 28, 2022 December 29, 2021 Lease cost – Occupancy and other operating expenses ​ $ 23,736 ​ $ 23,730 ​ $ 24,020 Lease cost – General & administrative ​ 492 ​ ​ 465 ​ ​ 413 Lease cost – Depreciation and amortization ​ 75 ​ ​ 73 ​ ​ 78 Lease cost – Interest expense ​ 45 ​ ​ 45 ​ ​ 59 Lease cost – Closed-store reserve ​ 19 ​ ​ 86 ​ ​ 283 Total lease cost ​ $ 24,367 ​ $ 24,399 ​ $ 24,853 ​ 75 Table of Contents EL POLLO LOCO HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company had the following cash and non-cash activities associated with its leases (dollar amounts in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 27, 2023 ​ December 28, 2022 ​ December 29, 2021 ​ Property Equipment ​ ​ Property Equipment ​ ​ ​ Property ​ Equipment ​ ​ ​ ​ ​ Leases ​ Leases ​ Total ​ Leases ​ Leases ​ Total ​ Leases ​ Leases ​ Total Cash paid for amounts included in the measurement of lease liabilities ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating cash flows used for operating leases ​ $ 27,835 ​ $ 321 $ 28,156 ​ $ 27,221 ​ $ 953 ​ $ 28,174 ​ $ 26,414 ​ $ 1,084 ​ $ 27,498 Financing cash flows used for finance leases ​ $ 93 ​ $ 65 $ 158 ​ $ 106 ​ $ 56 ​ $ 162 ​ $ 102 ​ $ 46 ​ $ 148 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Non-cash investing and financing activities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating lease ROU assets obtained in exchange for lease liabilities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating lease ROU assets ​ $ 21,448 ​ $ 54 $ 21,502 ​ $ 12,978 ​ $ 92 ​ $ 13,070 ​ $ 17,763 ​ $ — ​ $ 17,763 Finance lease ROU assets obtained in exchange for lease liabilities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Finance lease ROU assets ​ $ — ​ $ 135 ​ $ 135 ​ $ — ​ $ 28 ​ $ 28 ​ $ — ​ $ 196 ​ $ 196 Derecognition of ROU assets due to terminations, impairment or modifications ​ $ ( 40 ) ​ $ ( 4 ) $ ( 44 ) ​ $ ( 39 ) ​ $ ( 35 ) ​ $ ( 74 ) ​ $ ( 4,513 ) ​ $ ( 99 ) ​ $ ( 4,612 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other Information ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted-average remaining years in lease term—finance leases ​ 16.87 ​ 3.15 ​ ​ ​ ​ 17.87 ​ ​ 3.19 ​ ​ ​ ​ ​ 18.42 ​ ​ 4.02 ​ ​ ​ Weighted-average remaining years in lease term—operating leases ​ 10.42 ​ 3.33 ​ ​ ​ ​ 10.73 ​ ​ 1.73 ​ ​ ​ ​ ​ 11.27 ​ ​ 1.44 ​ ​ ​ Weighted-average discount rate—finance leases ​ 2.57 % 5.68 % ​ ​ ​ 2.57 % ​ 1.53 % ​ ​ ​ ​ 2.78 % ​ 1.54 % ​ ​ Weighted-average discount rate—operating leases ​ 5.00 % 4.52 % ​ ​ ​ 4.54 % ​ 3.80 % ​ ​ ​ ​ 4.45 % ​ 3.89 % ​ ​ ​ Information regarding the Company’s minimum future lease obligations at December 27, 2023 is as follows (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Finance Leases ​ Operating Leases ​ Minimum Minimum Minimum ​ ​ Lease ​ Lease ​ Sublease For the Years Ending ​ Payments ​ Payments ​ Income December 25, 2024 ​ $ 191 ​ $ 28,328 ​ $ 5,886 December 31, 2025 ​ 187 ​ 27,126 ​ 5,518 December 30, 2026 ​ 154 ​ 25,043 ​ 5,034 December 29, 2027 ​ 144 ​ 23,581 ​ 4,858 December 27, 2028 ​ 103 ​ 21,384 ​ 4,484 Thereafter ​ 1,376 ​ 118,426 ​ 27,854 Total ​ $ 2,155 ​ $ 243,888 ​ $ 53,634 Less: imputed interest ( 2.57 % - 5.68 %) ​ ( 398 ) ​ ( 56,314 ) ​ Present value of lease obligations ​ 1,757 ​ 187,574 ​ Less: current maturities ​ ( 140 ) ​ ( 19,490 ) ​ Noncurrent portion ​ $ 1,617 ​ $ 168,084 ​ ​ Short-Term Leases The Company has multiple short-term leases, which have terms of less than 12 months, and thus were excluded from the recognition requirements of Topic 842. The Company has recognized these lease payments in its consolidated statement 76 Table of Contents EL POLLO LOCO HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS of income on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred. Lessor The Company is a lessor for certain property, facilities and equipment owned by the Company and leased to others, principally franchisees, under non-cancelable leases with initial terms ranging from 3 to 20 years . These lease agreements generally provide for a fixed base rent and, in some instances, contingent rent based on a percentage of gross operating profit or net revenues. All leases are considered operating leases. For the leases in which the Company is the lessor, there are options to extend the lease. However, there are no terms and conditions to terminate the lease, no right to purchase premises and no residual value guarantees. Additionally, there are no related party leases. For the years ended December 27, 2023, December 28, 2022, and December 29, 2021, the Company received $ 0.3 million, $ 0.4 million and $ 0.4 million, respectively, of lease income from company-owned locations. ​ 6. LONG-TERM DEBT On July 27, 2022, the Company refinanced and terminated its credit agreement (the “2018 Credit Agreement”) among EPL, as borrower, the Company and Intermediate, as guarantors, Bank of America, N.A., as administrative agent, swingline lender, and letter of credit issuer, the lenders party thereto, and the other parties thereto, which provided for a $ 150.0 million five-year senior secured revolving credit facility (the “2018 Revolver”). The 2018 Revolver was refinanced pursuant to a credit agreement (the “2022 Credit Agreement”) among EPL, as borrower, the Company and Intermediate, as guarantors, Bank of America, N.A., as administrative agent, swingline lender, and letter of credit issuer, the lenders party thereto, and the other parties thereto, which provides for a $ 150.0 million five-year senior secured revolving credit facility (the “2022 Revolver”). In connection with the refinancing, the 2018 Credit Agreement was terminated. The 2022 Revolver includes a sub limit of $ 15.0 million for letters of credit and a sub limit of $ 15.0 million for swingline loans. The 2022 Revolver and 2022 Credit Agreement will mature on July 27, 2027 . The obligations under the 2022 Credit Agreement and related loan documents are guaranteed by Holdings and Intermediate. The obligations of Holdings, EPL and Intermediate under the 2022 Credit Agreement and related loan documents are secured by a first priority lien on substantially all of their respective assets. The 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 77 Table of Contents EL POLLO LOCO HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 during fiscal 2023, the interest rate range was 5.7 % to 7.0 %. 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. The Company was in compliance with all such covenants at December 27, 2023. At December 27, 2023, $ 9.8 million of letters of credit and $ 84.0 million of borrowings were outstanding under the 2022 Revolver. The amount available under the 2022 Revolver was $ 56.2 million at December 27, 2023. At December 28, 2022, $ 9.8 million of letters of credit and $ 66.0 million of borrowings were outstanding under the 2022 Revolver. The amount available under the 2022 Revolver was $ 74.2 million at December 28, 2022. Maturities On July 27, 2022, the Company refinanced and terminated the 2018 Revolver pursuant to the 2022 Credit Agreement. The 2022 Revolver and 2022 Credit Agreement will mature on July 27, 2027. During the year ended December 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 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. Interest Rate Swap During the year ended December 25, 2019, the Company entered into a variable-to-fixed interest rate swap agreement with a notional amount of $ 40.0 million that matures in June 2023. The objective of the interest rate swap was to reduce the Company’s exposure to interest rate risk for a portion of its variable-rate interest payments on its borrowings under the 2018 Revolver. The interest rate swap was designated as a cash flow hedge, as the changes in the future cash flows of the swap were expected to offset changes in expected future interest payments on the related variable-rate debt, in accordance with Accounting Standards Codification (“ASC”) 815 “Derivatives and Hedging.” In connection with the Company’s entry into the 2022 Credit Agreement, on July 28, 2022, the Company terminated the interest rate swap, which was previously used to hedge interest rate risk. Prior to the interest rate swap termination, the swap was a highly effective cash flow hedge. In settlement of this swap, the Company received approximately $ 0.6 million and derecognized the corresponding interest rate swap asset. The remaining amount in AOCI related to the hedging relationship will be reclassified into earnings when the hedged forecasted transaction is reported in earnings. The following table summarizes the effect of the Company’s cash flow hedge accounting on the consolidated statements of income (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 27, 2023 December 28, 2022 December 29, 2021 Interest expense on hedged portion of debt ​ $ — ​ $ 439 ​ $ 568 ​ Interest (income) expense on interest rate swap ​ ( 170 ) ​ ( 296 ) ​ ​ 486 Interest (income) expense on debt and derivatives, net ​ $ ( 170 ) ​ $ 143 ​ $ 1,054 ​ ​ 78 Table of Contents 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 Recognized in OCI ​ AOCI into Interest Income ​ ​ December 27, 2023 December 28, 2022 December 29, 2021 December 27, 2023 December 28, 2022 December 29, 2021 Interest rate swap ​ $ — ​ $ 862 ​ $ 257 ​ $ ( 170 ) ​ $ ( 296 ) $ 486 ​ ​ See Note 2 “Summary of Significant Accounting Policies” for the fair value of the Company’s derivative asset. ​ 7. OTHER ACCRUED EXPENSES AND CURRENT LIABILITIES Other accrued expenses and current liabilities consist of the following (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ December 27, 2023 December 28, 2022 Accrued sales and property taxes ​ $ 5,229 ​ $ 5,270 Gift card liability ​ 4,877 ​ 4,667 Loyalty rewards program liability ​ ​ 687 ​ ​ 526 Accrued advertising ​ ​ 3,010 ​ ​ 831 Accrued legal settlements and professional fees ​ 720 ​ 1,303 Deferred franchise and development fees ​ 586 ​ 610 Other ​ 3,252 ​ 1,913 Total other accrued expenses and current liabilities ​ $ 18,361 ​ $ 15,120 ​ ​ 8. OTHER NONCURRENT LIABILITIES Other noncurrent liabilities consist of the following (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ December 27, 2023 December 28, 2022 Deferred franchise and development fees ​ $ 6,411 ​ $ 5,767 Other ​ 34 ​ 89 Total other noncurrent liabilities ​ $ 6,445 ​ $ 5,856 ​ ​ 9. INCOME TAXES The provision for income taxes is based on the following components (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 27, December 28, December 29, For the Years Ended ​ 2023 ​ 2022 ​ 2021 Current income taxes: ​ ​ ​ Federal ​ $ 6,572 ​ $ 2,366 ​ $ 7,163 State ​ 1,846 ​ 1,112 ​ 2,158 Total current ​ 8,418 ​ 3,478 ​ 9,321 Deferred income taxes: ​ ​ ​ Federal ​ ( 29 ) ​ 2,958 ​ 93 State ​ 935 ​ 1,642 ​ 918 Total deferred ​ 906 ​ 4,600 ​ 1,011 Tax provision for income taxes ​ $ 9,324 ​ $ 8,078 ​ $ 10,332 ​ ​ 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: 79 Table of Contents EL POLLO LOCO HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 27, ​ December 28, ​ December 29, For the Years Ended 2023 2022 2021 Statutory federal income tax rate applied to earnings before income taxes and extraordinary items ​ 21.0 % ​ 21.0 % ​ 21.0 % State income tax expense (net of federal benefit) 6.4 ​ 7.7 ​ 5.9 ​ Change in valuation allowance ( 19.3 ) ​ — ​ 0.1 ​ State credit expiration ​ 19.1 ​ ​ — ​ ​ — ​ TRA expense (income) 0.1 ​ ( 0.3 ) ​ — ​ 162(m) ​ 0.6 ​ ​ 0.5 ​ ​ 0.8 ​ WOTC Credit ( 0.7 ) ​ ( 0.9 ) ​ ( 0.5 ) ​ Stock option exercises 0.1 ​ 0.3 ​ ( 1.4 ) ​ Deferred tax liability true up ​ ( 1.1 ) ​ ​ — ​ ​ — ​ Other 0.5 ​ ( 0.3 ) ​ 0.3 ​ Total 26.7 % ​ 28.0 % ​ 26.2 % ​ 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 utilization of NOL carryforwards and state enterprise zone credits may be subject to limitation under section 382 of the Internal Revenue Code of 1986 (the “Code”) and similar state law provisions. Deferred income tax assets and liabilities are recorded for differences between the financial statement and tax basis of the assets and liabilities that will result in taxable or deductible amounts in the future based on enacted laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. 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 for certain state credits will be realized. 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. The TRA calls for the Company to pay its pre-IPO stockholders 85 % of the cash savings that the Company realizes in its taxes as a result of utilizing its NOLs and other tax attributes attributable to preceding periods. The TRA charge expense (benefit) is a permanent add-back to the Company’s taxable income. 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. ​ 80 Table of Contents EL POLLO LOCO HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company’s deferred tax assets and liabilities as of December 27, 2023 and December 28, 2022 are summarized below. ​ ​ ​ ​ ​ ​ ​ ​ ​ December 27, December 28, ​ ​ 2023 ​ 2022 Deferred assets: ​ ​ Capital leases ​ $ 62 ​ $ 55 Accrued vacation ​ 470 ​ 508 Accrued workers’ compensation ​ 2,352 ​ 2,201 Enterprise zone and other credits ​ — ​ 7,258 Net operating losses ​ 5 ​ 5 Fixed assets ​ 2,705 ​ 2,392 ROU liabilities ​ 50,735 ​ 50,112 Other ​ 5,560 ​ 4,397 Total deferred tax assets ​ 61,889 ​ 66,928 Valuation allowance ​ — ​ ( 6,727 ) Net deferred tax assets ​ 61,889 ​ 60,201 Deferred liabilities: ​ ​ Goodwill ​ ( 5,938 ) ​ ( 6,420 ) Trademark ​ ( 16,740 ) ​ ( 16,721 ) Prepaid expense ​ ( 1,128 ) ​ ( 595 ) ROU assets ​ ( 45,445 ) ​ ( 44,737 ) Fixed assets ​ ​ ( 1,470 ) ​ ​ — Other ​ ( 46 ) ​ 267 Deferred tax liabilities ​ ( 70,767 ) ​ ( 68,206 ) Net deferred tax liability ​ $ ( 8,878 ) ​ $ ( 8,005 ) ​ 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): ​ ​ ​ ​ ​ ​ ​ ​ ​ December 27, December 28, ​ ​ 2023 ​ 2022 Noncurrent: ​ ​ ​ ​ ​ ​ (Liabilities) assets - state ​ $ ( 416 ) ​ $ 512 Liabilities - federal ​ ( 8,462 ) ​ ( 8,517 ) Net deferred tax liability ​ $ ( 8,878 ) ​ $ ( 8,005 ) ​ As of December 27, 2023 and December 28, 2022, the Company had no accrual for unrecognized tax benefits. Consequently, no interest or penalties have been accrued by the Company. The Company believes that no significant changes to the amount of unrecognized tax benefits will occur within the next twelve months. The Company is subject to taxation in the United States and in various state jurisdictions. The Company is no longer subject to U.S. examination for years before 2020 by the federal taxing authority, and for years before 2019 by state taxing authorities. ​ 10. EMPLOYEE BENEFIT PLANS The Company sponsors a defined contribution employee benefit plan that permits its employees, subject to certain eligibility requirements, to contribute up to 25 % of their qualified compensation to the plan. The Company matches 100 % of the employees’ contributions of the first 3 % of the employees’ annual qualified compensation, and 50 % of the employees’ contributions of the next 2 % of the employees’ annual qualified compensation. The Company’s matching contribution immediately fully vests. 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. ​ 81 Table of Contents EL POLLO LOCO HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. STOCK-BASED COMPENSATION Pursuant to the 2018 Omnibus Equity Incentive Plan the Company grants stock options (“options”), restricted stock units, performance-based stock units and restricted stock. The Company has authorized 5,652,240 shares of common stock for issuance in connection with stock awards. 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. During the years ended December 27, 2023, December 28, 2022 and December 29, 2021, the Company recognized stock-based compensation expense of $ 3.0 million, $ 3.5 million and $ 3.2 million, respectively. These expenses were included in general and administrative expenses consistent with the salary expense for the related optionees in the accompanying consolidated statements of income. Stock Options 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 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 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. The options granted in fiscal 2023 had a four year vesting period. Stock options generally expire ten years from the date of grant. In fiscal 2022, the Company granted 372,958 options, with an exercise price equal to the fair market value of the common stock on the date of grant. The options granted in fiscal 2022 had a four year vesting period. Stock options generally expire 10 years from the date of grant . Changes in options for the years ended December 27, 2023 and December 28, 2022, are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted-Average Aggregate ​ ​ Weighted-Average Contractual Life Intrinsic Value ​ ​ Shares ​ Exercise Price Life (Years) (in thousands) Outstanding - December 29, 2021 978,078 ​ $ 11.45 ​ ​ ​ ​ ​ ​ Grants ​ 372,958 ​ ​ 10.54 ​ ​ ​ ​ ​ ​ Exercised ( 185,798 ) ​ ​ 9.22 ​ ​ ​ ​ ​ ​ Forfeited, cancelled or expired ( 97,059 ) ​ 12.06 ​ ​ ​ ​ ​ ​ Outstanding – December 28, 2022 1,068,179 ​ $ 9.92 ​ ​ ​ ​ ​ ​ Grants 562,344 ​ 9.15 ​ ​ ​ ​ ​ ​ Exercised ( 219,960 ) ​ ​ 5.32 ​ ​ ​ ​ ​ ​ Forfeited, cancelled or expired ( 567,243 ) ​ $ 10.63 ​ ​ ​ ​ ​ ​ Outstanding – December 27, 2023 843,320 ​ $ 10.13 ​ ​ 6.73 ​ $ 33 Vested and expected to vest at December 27, 2023 835,581 ​ $ 10.14 ​ ​ 6.71 ​ $ 32 Exercisable at December 27, 2023 380,896 ​ $ 11.09 ​ ​ 3.90 ​ $ — ​ 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. The Company measures and recognizes compensation expense for the estimated fair value of stock options for employees and non-employee directors and similar awards based on the grant-date fair value of the award. For options that are based on a service requirement, the cost is recognized on a straight-line basis over the requisite service period, usually the vesting period. For options that were based on performance requirements, costs were recognized over periods to which the performance criteria related. 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 82 Table of Contents 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. The expected term for options granted is derived using the “simplified” method, in accordance with SEC guidance. The Company calculates the risk-free interest rate using the implied yield for a U.S. Treasury security with constant maturity and a remaining term equal to the expected term of the Company’s employee stock options. The Company does not anticipate paying any cash dividends for the foreseeable future and therefore uses an expected dividend yield of zero for option valuation purposes. Expected volatility is based on the Company’s historical data. Volatility is calculated by taking the historical daily closing equity prices of the Company, prior to the grant date, over a period equal to the expected term. The weighted-average estimated fair value of employee stock options granted in fiscal 2023 and 2022 was $ 4.41 and $ 4.89 per share, respectively, using the Black–Scholes model with the following weighted-average assumptions used to value the option grants: ​ ​ ​ ​ ​ ​ ​ ​ December 27, 2023 December 28, 2022 Expected volatility ​ 43.8 % 43.0 % Risk-free interest rate 3.7 % 2.9 % Expected term (years) 6.20 6.25 ​ Expected dividends — — ​ ​ As of December 27, 2023, the Company had total unrecognized compensation expense of $ 1.8 million related to unvested stock options, which the Company expects to recognize over a weighted average period of 2.9 years. The above assumptions generally require significant judgment. If in the future 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 the Company’s 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. The Company estimates its forfeiture rate based on an analysis of its actual forfeitures and will continue to evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover behavior, and other factors. Changes in the estimated forfeiture rate can have a significant effect on reported stock-based compensation expense, as the cumulative effect of adjusting the rate for all expense amortization is recognized in the period the forfeiture estimate is changed. If a revised forfeiture rate is higher than the previously-estimated forfeiture rate, an adjustment is made that will result in a decrease to the stock-based compensation expense recognized in the financial statements. If a revised forfeiture rate is lower than the previously-estimated forfeiture rate, an adjustment is made that will result in an increase to the stock-based compensation expense recognized in the financial statements. The effect of forfeiture adjustments was insignificant in fiscal 2023, 2022 and 2021. The Company will continue to use significant judgment in evaluating the expected term, volatility, and forfeiture rate related to its stock-based compensation. Restricted Shares 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 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted-Average ​ ​ Shares ​ Fair Value Unvested shares at December 29, 2021 495,780 ​ $ 13.92 Granted 356,610 ​ $ 10.37 Released ( 201,043 ) ​ $ 13.32 Forfeited, cancelled, or expired ( 105,867 ) ​ $ 12.91 Unvested shares at December 28, 2022 545,480 ​ $ 12.02 Granted 454,081 ​ $ 9.08 83 Table of Contents EL POLLO LOCO HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Released ( 190,415 ) ​ $ 12.25 Forfeited, cancelled, or expired ( 271,685 ) ​ $ 11.06 Unvested shares at December 27, 2023 537,461 ​ $ 9.94 ​ 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 . ​ ​ 12. EARNINGS PER SHARE Basic EPS is calculated using the weighted-average number of shares of common stock outstanding during the years ended December 27, 2023, December 28, 2022, and December 29, 2021. 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 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 84 Table of Contents 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. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Years Ended ​ ​ December 27, ​ December 28, ​ December 29, ​ 2023 2022 2021 Numerator: ​ ​ ​ Net income ​ $ 25,554 ​ $ 20,801 ​ $ 29,121 Denominator: ​ ​ ​ Weighted-average shares outstanding—basic ​ 34,253,542 ​ 36,350,579 ​ 35,973,892 Weighted-average shares outstanding—diluted ​ 34,374,706 ​ 36,575,904 ​ 36,446,756 Net income per share—basic ​ $ 0.75 ​ $ 0.57 ​ $ 0.81 Net income per share—diluted ​ $ 0.74 ​ $ 0.57 ​ $ 0.80 Anti-dilutive securities not considered in diluted EPS calculation ​ 972,181 ​ 535,574 ​ 136,397 ​ Below is a reconciliation of basic and diluted share counts. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Years Ended ​ December 27, December 28, December 29, ​ ​ 2023 ​ 2022 ​ 2021 Weighted-average shares outstanding—basic 34,253,542 36,350,579 35,973,892 Dilutive effect of stock options and restricted shares 121,164 225,325 472,864 Weighted-average shares outstanding—diluted 34,374,706 36,575,904 36,446,756 ​ ​ 13. COMMITMENTS AND CONTINGENCIES 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 Trimaran, under the caption Armen Galustyan v. Sather, et al. (Case No. 11676-VCL). The derivative complaint alleges that these defendants breached their fiduciary duties to Holdings and were unjustly enriched when they sold shares of Holdings at artificially inflated prices due to alleged misrepresentations and omissions regarding EPL’s comparable store sales in the second quarter of 2015. The Holdings shareholder’s requested remedies include an award of compensatory damages to Holdings, as well as a court order to improve corporate governance by putting forward for stockholder vote certain resolutions for amendments to Holdings’ Bylaws or Certificate of Incorporation. The Holdings shareholder voluntarily dismissed the action on October 7, 2020. A second purported Holdings shareholder filed a derivative complaint on or about September 23, 2016, under the caption Diep v. Sather, CA 12760-VCL in the Delaware Court of Chancery. The Diep action is also purportedly brought on behalf of Holdings, names the same defendants and asserts substantially the same claims on substantially the same alleged facts as does Galustyan. Defendants moved to stay or dismiss the Diep action. ​ On March 17, 2017, the Delaware court granted in part, and denied in part, the motion to stay the Diep action. The court denied defendants’ motion to dismiss the complaint for failure to state a claim. On January 17, 2018, the court entered an order granting the parties’ stipulation staying all proceedings in the Diep action for five months or until the completion of an investigation of the allegations in the action by a special litigation committee of the Holdings board of directors (the “SLC”). On September 25, 2020, after concluding its investigation, the SLC filed a motion to dismiss the Diep action and filed its investigative report under seal as an exhibit to the motion to dismiss. ​ 85 Table of Contents 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. Sather, Edward J. Valle, Douglas K. Ammerman, and Samuel N. Borgese (collectively, the “Settling Defendants”). 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. In connection with this settlement, the Company received $ 469,000 in insurance proceeds, which was recorded within general and administrative expenses in the Company’s statement of income for the year ended December 29, 2021. ​ On July 30, 2021, the court granted the SLC’s motion to dismiss with respect to the claims asserted against remaining defendant Trimaran. On October 4, 2021, Plaintiffs filed a notice of appeal of the court’s granting of the motion to dismiss against defendant Trimaran. Plaintiff filed its opening brief on December 6, 2021. SLC filed its answering brief on December 20, 2021 and the public version of the brief was filed on January 7, 2022. Plaintiffs filed the reply brief on January 4, 2022. The hearing on the appeal took place on March 30, 2022. On June 28, 2022, the court’s granting of the motion to dismiss against Trimaran was affirmed. ​ The Company is also involved in various other claims such as wage and hour and other legal actions that arise in the ordinary course of business. The outcomes of these actions are not predictable but the Company does not believe that the ultimate resolution of these other actions will have a material adverse effect on its financial position, results of operations, liquidity, or capital resources. A significant increase in the number of claims, or an increase in amounts owing under successful claims, could materially and adversely affect its business, consolidated financial condition, results of operations, and cash flows. Purchase Commitments The Company has long-term beverage supply agreements with certain major beverage vendors. Pursuant to the terms of these arrangements, marketing rebates are provided to the Company and its franchisees from the beverage vendors based upon the dollar volume of purchases for system-wide restaurants which will vary according to their demand for beverage syrup and fluctuations in the market rates for beverage syrup. These contracts have terms extending through the end of 2024. At December 27, 2023, the Company’s total estimated commitment to purchase chicken was $ 31.3 million. Contingent Lease Obligations As a result of assigning the Company’s interest in obligations under real estate leases in connection with the sale of company-operated restaurants to some of the Company’s franchisees, the Company is contingently liable on three lease agreements. These leases have various terms, the latest of which expires in 2038 . As of December 27, 2023, the potential amount of undiscounted payments the Company could be required to make in the event of non-payment by the primary lessee was $ 3.8 million. The present value of these potential payments discounted at the Company’s estimated pre-tax cost of debt at December 27, 2023 was $ 2.6 million. The Company’s franchisees are primarily liable on the leases. The Company has cross-default provisions with these franchisees that would put them in default of their franchise agreements in the event of non-payment under the leases. The Company believes that these cross-default provisions reduce the risk that payments will be required to be made under these leases. Employment Agreements 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. 86 Table of Contents EL POLLO LOCO HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Indemnification Agreements The Company has entered into indemnification agreements with each of its current directors and officers. These agreements require the Company to indemnify these individuals to the fullest extent permitted under Delaware law against liabilities that may arise by reason of their service to the Company and to advance expenses incurred as a result of any proceeding against them as to which they could be indemnified. The Company also intends to enter into indemnification agreements with future directors and officers. ​ 14. RELATED PARTY TRANSACTIONS 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. ​ ​ 15. REVENUE FROM CONTRACTS WITH CUSTOMERS Revenue Recognition Nature of products and services The Company has two revenue streams, company-operated restaurant revenue and franchise related revenue. See Note 2 “Summary of Significant Accounting Policies” for a description of the revenue recognition policies. 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 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) : ​ ​ ​ ​ ​ Company-operated restaurant revenue ​ $ 381,319 ​ $ 384,504 ​ $ 371,067 Franchise revenue ​ 19,805 ​ 17,953 ​ 16,062 Franchise advertising fee revenue ​ 13,520 ​ 13,223 ​ 12,017 Total core market ​ $ 414,644 ​ $ 415,680 ​ $ 399,146 Non-Core Market (2) : ​ ​ ​ Company-operated restaurant revenue ​ $ 17,118 ​ $ 18,714 ​ $ 23,666 Franchise revenue ​ 21,197 ​ 20,272 ​ 17,667 Franchise advertising fee revenue ​ 15,705 ​ 15,293 ​ 13,884 Total non-core market ​ $ 54,020 ​ $ 54,279 ​ $ 55,217 Total revenue ​ $ 468,664 ​ $ 469,959 ​ $ 454,363 87 Table of Contents 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. The following table presents the Company’s revenues disaggregated by geographic market for the years ended December 27, 2023, December 28, 2022 and December 29, 2021: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 27, 2023 December 28, 2022 December 29, 2021 Greater Los Angeles area market 71.3 % ​ 71.2 % ​ 70.9 % Other markets 28.7 % ​ 28.8 % ​ 29.1 % Total 100 % ​ 100 % ​ 100 % ​ Contract balances The following table provides information about the change in the franchise contract liability balances during the year ended December 27, 2023 and December 28, 2022 (in thousands): ​ ​ ​ ​ ​ December 29, 2021 $ 6,328 Revenue recognized - beginning balance ​ ( 744 ) Additional contract liability ​ 793 December 28, 2022 ​ $ 6,377 Revenue recognized - beginning balance ​ ( 791 ) Additional contract liability ​ 1,411 December 27, 2023 ​ $ 6,997 ​ The Company’s franchise contract liability includes development fees, initial franchise and license fees, franchise renewal fees, lease subsidies and royalty discounts and is included within other accrued expenses and current liabilities and other noncurrent liabilities within the accompanying consolidated balance sheets. The Company receives area development fees from franchisees when they execute multi-unit area development agreements. Initial franchise and license fees, or franchise renewal fees, are received from franchisees upon the execution of, or renewal of, a franchise agreement. 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 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: ​ 2024 ​ $ 600 2025 ​ 555 2026 ​ 533 2027 ​ 513 2028 ​ 484 Thereafter ​ 4,312 Total ​ $ 6,997 88 Table of Contents 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 ​ $ 526 ​ $ 687 ​ $ 900 Revenue deferred ​ 2,065 ​ 2,754 ​ 2,677 Revenue recognized ​ ( 1,904 ) ​ ( 2,915 ) ​ ( 2,890 ) Loyalty rewards liability, ending balance ​ $ 687 ​ $ 526 ​ $ 687 ​ The Company expects all loyalty points revenue related to performance obligations unsatisfied as of December 27, 2023 to be recognized within one year . Gift Cards 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 ​ $ 4,877 ​ $ 4,667 ​ 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 $ 1,064 ​ $ 1,145 ​ $ 1,218 ​ Contract Costs The Company does not currently incur costs to obtain or fulfill a contract that would be considered contract assets under Topic 606. ​ ​ 16. 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. ​ 89 Table of Contents 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. ​ 90 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ​