Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark one)


FORM 10-K
(Mark one)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 27, 2017

28, 2022

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to

Commission file number 001-36556

EL POLLO LOCO HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware

20-3563182

Delaware20-3563182

State or other jurisdiction of

(I.R.S. Employer

incorporation or organization

(I.R.S. Employer

Identification No.)

3535 Harbor Blvd., Suite 100, Costa Mesa, California

92626

(Address of principal executive offices)

(Zip Code)

(714)

(714) 599-5000

Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock,, par value $0.01 per share

LOCO

The NASDAQNasdaq Stock Market LLC

Securities registered pursuant to section 12(g) of the Act:

None

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes      No  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes      No  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes     No  

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

   (Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).   Yes      No  

As of June 28, 2017,29, 2022, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s common equity held by non-affiliates was approximately $308$193 million, deeming purely for purposes of this calculation all directors and executive officers and Trimaran Pollo Partners, L.L.C. to be affiliates.

The determination of affiliate status is not necessarily a conclusive determination for any other purpose.

As of February 27, 2018,March 3, 2023, there were 38,661,850

36,705,173 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III hereof incorporates by reference certain portions of the registrant’s definitive proxy statement for its 20182023 annual meeting of stockholders to be filed not later than 120 days after the end of the registrant’s 20172022 fiscal year.





Table of Contents

TABLE OF CONTENTS

PART I

PART I

Item 1. Business

2

Item 1A. Risk Factors

Item 1B. Unresolved Staff Comments

26

Item 2. Properties

26

Item 3. Legal Proceedings

27

Item 4. Mine Safety Disclosures

27

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

27

Item 6. Selected Financial Data[Reserved]

29

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

29

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

50

Item 8. Financial Statements and Supplementary Data

51

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

88

Item 9A. Controls and Procedures

88

Item 9B. Other Information

91

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

91

PART III

PART III

Item 10. Directors, Executive Officers and Corporate Governance

92

Item 11. Executive Compensation

92

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

92

Item 13. Certain Relationships and Related Transactions, and Director Independence

92

Item 14. Principal AccountingAccountant Fees and Services

92

PART IV

Item 15. Exhibits and Financial Statement Schedules

93

Item 16. Form 10-K Summary

97

Signatures

Exhibit Index

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FORWARD-LOOKING STATEMENTS

Certain

This report contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this report are forward-looking. Thoseforward-looking statements. Forward-looking statements reflectdiscuss our current views with respectexpectations and projections relating to our business,financial condition, results of operations, plans, objectives, future events, financial performance and our industry in general. Statements thatbusiness. You can identify forward-looking statements because they do not relate strictly to historical or current facts. These statements may include the words such as “aim,” “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “outlook,” “potential,” “project,” “projection,” “plan,” “intend,” "strive," “plan,” “believe,” “project,” “forecast,” “estimate,“seek,” “may,” “could,” “would,” “will,” “should,” “can,” “can have,” “likely,” the negatives thereof and “anticipate” may be forward-looking. We baseother words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. They appear in a number of places throughout this report and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the industry in which we operate. All forward-looking statements on history, experience, expectations, and projections. Forward-looking statements address matters that involveare subject to risks and uncertainties. Weuncertainties that could cause actual results to differ materially from those that we expected.

While we believe that our assumptions are reasonable, we caution you therefore notthat it is very difficult to place undue reliance on forward-looking statements. We make no guarantees regarding outcomes,predict the impact of known factors, and assume no obligationsit is impossible for us to update theanticipate all factors that could affect our actual results. All forward-looking statements herein, except pursuant to law. A non-exhaustive listare expressly qualified in their entirety by these cautionary statements. You should evaluate all forward-looking statements made in this report in the context of the factors that could cause outcomes to differ materially from our expectations includes:

the adverse impactexpectations. These factors include, but are not limited to, those listed under “Item 1A. Risk Factors” of economic conditions on our (i) operating results and financial condition, (ii) abilitythis report, as such risk factors may be amended, supplemented or superseded from time to complytime by other reports we file with the termsSecurities and covenantsExchange Commission.

We caution you that the important factors included in this report may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences we anticipate or affect us or our operations in the ways that we expect. The forward-looking statements included in this report are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as required by law. If we do update one or more forward-looking statements, no inference should be made that we will make additional updates with respect to those or other forward-looking statements. We qualify all of our debt agreements, and (iii) ability to pay or refinance our existing debt or to obtain additional financing;

vulnerability to changes in consumer preferences and economic conditions;
vulnerability to conditions in the greater Los Angeles area;
vulnerability to natural disasters given the geographic concentration and real estate intensive nature of our business;
ability to open new restaurants in new and existing markets, including difficulty in finding sites and in negotiating acceptable leases;
delayed or canceled future restaurant openings;
restaurant closures, due to financial performance or otherwise;
increases in chicken and other input costs;
negative publicity, whether or not valid;
concerns about food safety and quality and about food-borne illness, particularly avian flu;
dependence on frequent and timely deliveries of food and supplies;
problems with our primary distributor;
our history of net losses, including the possibility of future net losses;
our ability to service our level of indebtedness;
our ability to compete successfully with other quick-service and fast casual restaurants;
underperformance of new menu items, advertising campaigns, and restaurant designs and remodeling activity;
our reliance on our franchisees, who may incur financial hardships, lose access to credit, close restaurants, or declare bankruptcy;
our limited control over our franchisees;
potential liability for franchisee acts;
ability to protect our name and logo and other proprietary intellectual property;
loss of the abilities, experience, and knowledge of current directors and officers;
difficulties in acclimating a new Chief Executive Officer ("CEO");
matters relating to employment and labor laws;
impact from litigation such as wage and hour class action lawsuits;
labor shortages and increased labor costs;
our ability and the ability of our franchisees to renew leases at the end of their terms;
status of our relationships with franchisees;
impact from federal, state, and local regulations relating to preparation and sale of food, zoning and building codes, and employee, environmental, taxation and other matters;
impact from our income tax receivable agreement (the “TRA”);
conflicts of interest with our largest stockholders;

forward-looking statements by these cautionary statements.

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that El Pollo Loco Holdings, Inc. is a holding company with no operations that relies on its operating subsidiaries to provide it with funds;
timing of our emerging growth company eligibility under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”);
the impact of any security breaches of confidential customer information in connection with our electronic process of credit and debit card transactions;
the impact of any failure of our information technology system or any breach of our network security;
changes in accounting standards; and
other risks described under Risk Factors.

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PART I

Unless otherwise specified in this Annual Report on Form 10-K (“Annual Report”), or the context otherwise requires, terms “El Pollo Loco,” “the Company,” “our company,” “we,” “us,” and “our” mean El Pollo Loco Holdings, Inc. (“Holdings”), together with its subsidiaries.

ITEM 1.BUSINESS

ITEM 1.BUSINESS

Our Company

El Pollo Loco is Spanish for “The Crazy Chicken.” We opened our first location on Alvarado Street in Los Angeles, California, in 1980, and have grown our restaurant system to 490 restaurants, comprised of 188 company-operated and 302 franchised restaurants as of December 28, 2022. Our restaurants are located in California, Arizona, Nevada, Texas, Utah, Colorado and Louisiana. Our typical restaurant is a free-standing building with drive-thru service that ranges in size from 2,200 to 3,000 square feet with seating for approximately 50-70 people.

El Pollo Loco is a differentiated and growing restaurant concept that specializes in fire-grilling citrus-marinated chicken and operates in the limited service restaurant (“LSR”) segment. We strive to offer food that integrates the qualityculinary traditions of food and dining experience typicalMexico with the healthier lifestyle of fast casual restaurants while providing the speed, convenience, and value typical of traditional quick-service restaurants (“QSRs”), a combination that we call “QSR+”, and to provide a value-oriented fast casual dining experience.Los Angeles. Our distinctive menu features our signature product—product, citrus-marinated fire-grilled chicken—andchicken, as well as a variety of Mexican-inspiredMexican and LA-inspired entrees that we create from our chicken. Every day in every restaurant, we marinate and fire-grill our chicken over open flames, and slice whole tomatoes, avocados, serrano peppers, and cilantro to make our salsas, guacamole, and cilantro dressings from scratch. The design of our kitchens reveals our Mexican-inspired cooking process and allows our customers to watch our Grill Masters and team members fire-grill and hand-cut our signature chicken, as well as team members make burritos, salads, tostadas, bowls, stuffed quesadillas, and chicken entrees.

We offer our customers healthier alternatives to traditional food on the go, served by our team members in a colorful, bright, and contemporary restaurant environment. We serve individual and family-sized chicken meals, a variety of Mexican-inspiredMexican and LA-inspired entrees and sides, and, throughout the year, on a limited-time basis, additional proteins like shrimp and beef. Our entrees include favorites such as our Chicken Avocado Burrito, Under 500 CaloriePollo Fit entrees, Doublechicken tostada salads, and Pollo Bowl, and Stuffed Chicken Avocado Quesadilla.Bowls. Our famous Creamy Cilantro dressings and salsas are prepared fresh daily, allowing our customers to create their favorite flavor profiles to enhance their culinary experience. Our distinctive menu with “better for you” and more affordable healthier alternatives appeals to consumers across a wide variety of socio-economic backgrounds and drives our balanced composition of sales throughout the day (our “day-part mix”), including at lunch and dinner.
El Pollo Loco is Spanish for “The Crazy Chicken.” We were organized as a Delaware corporation in 2005. We opened our first location on Alvarado Street in Los Angeles, California, in 1980, and have grown our restaurant system to 477 restaurants, comprised of 212 company-operated and 265 franchised restaurants as of December 27, 2017. Our restaurants are located in California, Arizona, Nevada, Texas, and Utah. Our typical restaurant is a free-standing building with drive-thru service that ranges in size from 2,200 to 3,000 square feet with seating for approximately 50-70 people.

The Company operates in one operating segment. All significant revenues relate to retail sales of food and beverages through either company or franchised restaurants. Financial information about our operations, including our revenues and net incomeexpenses for fiscal 2017, 20162022, 2021 and 2015,2020, and our total assets as of the end of fiscal 20172022 and 2016,2021, is included in our consolidated financial statements“Audited Consolidated Financial Statements” and accompanying notes, see Item 8, "Financial“Notes to Consolidated Financial Statements” in this Annual Report. See “Item 8. Financial Statements and Supplementary Data."

Market Trends and Uncertainties

We may face future business disruption and related risks resulting from the ongoing COVID-19 pandemic or from another pandemic, epidemic or infectious disease outbreak, or from broader macroeconomic trends, any of which could have a significant impact on our business. During the year ended December 28, 2022, we incurred $3.3 million in COVID-19 related expenses, comprised of $2.3 million due to overtime primarily related to the first quarter and $1.0 million due to leaves of absence related to the remaining three quarters. During the year ended December 29, 2021 and December 30, 2020, we incurred $3.9 million and $4.9 million, respectively, in COVID-19 related expenses, primarily due to leaves of absence and overtime pay. In addition, while all of our restaurants had dining rooms open as of December 28, 2022, we continue to experience staffing challenges, including higher wage inflation, overtime costs and other labor related costs. Labor costs could also be adversely impacted as a result of California Assembly Bill No. 257, the Fast Food Accountability and Standards Recovery Act (“FAST Act”), which was signed into law in September 2022 and authorizes the creation of a council to set minimum standards for industry workers in California, including minimum wages. The FAST Act, which will take effect if approved by voters in November 2024, could result in increased labor cost at our California restaurants thereby potentially impacting the profitability of our California restaurants. Further, this bill could prompt similar legislation in other states. We also continue to experience inflationary pressures, which resulted in increased commodity prices and impacted our business and results of operations during the year ended December 28, 2022. We expect these pressures to continue during fiscal year 2023.

Due to the fluidity of the COVID-19 pandemic and current macroeconomic environment, we cannot determine the ultimate impact that the COVID-19 pandemic (and its related economic impacts) and the current macroeconomic environment will have on our consolidated financial condition, liquidity, and future results of operations, and therefore

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any prediction as to the ultimate materiality of the adverse impact on our consolidated financial condition, liquidity, and future results of operations is uncertain.

Our Industry

The restaurant industry is divided into two segments: full service and limited service. Full service is comprised of the casual dining, mid-scale, and fine dining sub-segments. Limited service is comprised of the QSR and fast casual sub-segments. QSRs are traditional fast food restaurants with average check sizes of $3.00 to $8.00. Fast casual is a limited or self-service format with average check sizes of $8.00 to $12.00 that offers food prepared to order within a generally more upscale and developed establishment.

We operate within the broader LSR segment, and we strive to offer the food and dining experience of a fast casualfast-casual restaurant and the speed, value, and convenience of a QSR.quick-service restaurant (“QSR”). We strive to offer menu options that are made with fresh ingredients and provide a “better for you” alternative to typical fast food, which are also inspired by the methodculinary and cultural traditions of preparation, qualityMexico and our hometown of food, and dining experience typical of fast casual restaurants.
Los Angeles.

Our Competitive Strengths

We believe that the following strengths differentiate us from our competitors and serve as the foundation for our continued growth:

Differentiated Restaurant Concept with Broad Appeal. We believe that our food, which combines the culinary traditions of Mexico with the healthier lifestyle of Los Angeles, served in contemporary restaurant environments at reasonable prices, positions us well to satisfy the needs of a large segment of time-pressured mainstream food enthusiastsour core Hispanic family market and appeal to the broader general market who seek real food, real fast,convenient and high-quality meals at reasonable prices. We provide our customers with the opportunity to enjoy citrus-marinated, fire-grilled chicken and Mexican-inspired entrees containing distinctive ingredients such as avocados, mangos,organic greens and serrano peppers at price points that appeal to a broad consumer base. We believe that our entree prices are typically lower


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than the fast casualfast-casual segment, and a slight premium to the QSR segment. We prepare our entrees to order in approximately four minutes and allow our customers the option to create their favorite flavor profiles using our freshly-prepared salsas before they enjoy their meals in our dining rooms or take their meals to go from the counter or the drive-thru. We also believe that our concept, which integrates the complexity of creating real food in real kitchens with the speed of our service model and the skill of our trained Grill Masters, provides a layer of competitive insulation around our restaurant model. We believe that our positioning appeals to a broad customer base, and that our brand crosses over traditional age, ethnic, and income demographics, giving consumers the best of both the fast casualfast-casual and QSR segments. We seek to position ourselves as a differentiated QSR+ business,restaurant concept, which we believe sources traffic from both dining segments and, as a result, we expect it to drive transaction growth in the future.

Mexican-Inspired, Fresh-Made Fire-Grilled Chicken and Entrees. Our signature product is our chicken, marinated with a proprietary recipe of citrus juice, garlic, and spices, which serves as the foundation of our distinctive menu of flavorful bone-in chicken meals and Mexican-inspired entrees.entrees inspired by Mexico and LA. With menu items such as our Chicken Avocado Burrito,signature individual chicken meals, family dinners, Chicken Tostada Salad, Pollo Bowl®, and Chicken Avocado Stuffed Quesadilla,Burrito, and Double Chicken Avocado Salad, we believe that we offer our customers a healthier“better for you” alternative to traditional food on-the-go. Our entrees are prepared using fresh ingredients with recipes inspired by Mexican cuisine. The majority of our menu items are made from scratch,prepared in-restaurant using fresh ingredients, including our bone-in chicken and chicken breasts,breast filets, rice, salsas, and cilantro dressing, meaning that we make them without pre-prepared ingredients.dressing. These items start with our chicken, which is marinated in our restaurants daily. From there, our Grill Masters fire-grill and hand-chop our chicken forming the foundation for our entrees. To complement our entrees, ourto order. Our team members preparecreate our salsas, and cilantro dressings with fresh tomatoes, avocados, serrano peppers, and cilantro to create our salsas, and cilantro dressings.cilantro. In addition, our rice is seasoned and simmered in our restaurants daily.

throughout each day.

Our bone-in chicken meals and Mexican-inspired entrees accounted for 46%44% and 54%50% of our company-operated restaurant sales in 2022, respectively, 46% and 48%, respectively, in 2017.2021, and 46% and 47%, respectively, in 2020. Our individual and family-sized chicken meals appeal to customers looking to dine at the restaurant or take out during dinnertime, while our more-portable Mexican-inspired entrees draw traffic from customers at lunchtime or for an afternoon snack, thereby enabling us to generate sales split almost equally between lunch and dinner. We believe that our family-sized chicken meals provide a healthier“better for you” and more convenient alternative for mothers and families looking to solve the “dinnertime dilemma” of providing their families with high-quality meals without investing significant time or money. In 2017,2022 approximately 28% of our company-operated sales were generated from family-sized meals.

Inviting Experience that Welcomes Our Customers. We believe that our restaurant design creates an inviting restaurant environment. The interiors of our restaurants feature large, open kitchens that allow customersmeals, compared to watch our Grill Masters prepare our fire-grilled chicken. Our restaurants also feature complimentary self-serve salsa bars showcasing our variety of fresh salsas. The salsa bars invite customers to customize their meals with several salsas prepared31% in our kitchens every day. Our dining rooms include comfortable boothsboth 2021 and chairs, while large windows and soft lighting fill our restaurants with light and warmth.
We believe that the atmosphere and quality of service that we strive to provide to our customers encourages repeat visits and brand advocacy and drives increased sales. Our team members are trained to engage with our customers in a genuine way to provide a personalized experience, and strive to make each experience in our restaurant better than the last.
Well-Developed 2020.

Operations Infrastructure that Allows for Real-Time Control, Fast Feedback, and Innovation. We believe that satisfying our customers’ dining needs is the foundation for our business, and we have a well-developedan operations platform that allows us to measure our performance in meeting and exceeding those needs. We utilize an operations dashboard that aggregates

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real-time, restaurant-level information for many aspects of our business. The dashboard provides corporate and field management, as well as restaurant-level operators, with insight into how we are performing both from the customer’s perspectiveperspective. In addition, all company operated restaurants utilize digital “communication boards,” which communicate sales, cost and also through the eyes of experienced third-party auditors.

consumer data in real time to our restaurant managers.

Developing High Average Unit Volumes (“AUVs”) and Strong Unit Economics One Chicken at a Time. We seek to position ourselves as a differentiated QSR+LSR business, which we believe drives restaurant operating results that are competitive with other leading restaurant concepts in both the fast casualfast-casual and QSR industry segments. We believe that our restaurant model is designed to generate strong cash flow, consistent restaurant-level financial results, and high returns on invested capital. In 2017,2022, our company-operated restaurants generated average annual sales per restaurant of approximately $1.8$2.1 million and restaurant-level contribution margins of 19.8%13.2%.

Experienced Leadership. OurMost of our senior management team has extensive operating experience with an average of over 20 years of experience each in the restaurant industry. Effective March 12, 2018, we will be led by our new President and Chief Executive Officer, Bernard Acoca. Our current CEO, Stephen J. Sather will retire as CEO effective March 12, 2018. Mr. Sather will serve in an advisory role for a short period of time to help facilitate the transition. See "Recent Developments."

Other membersMembers of the senior leadership team include Larry Roberts as our Chief Executive Officer and President, Ira Fils as our Chief Financial Officer, Ed ValleMaria Hollandsworth as our Chief Operating Officer, Anne Jollay as our Chief Legal Officer, Rosanne Setoguchi as our Chief People Officer, Brian Carmichall as our Chief Development Officer and Andy Rebhun as our Chief Marketing Officer and Gus Siade as our Senior Vice President, Operations.

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Officer.

Our Growth Strategy

We believe that we are well-positioned for sales growth because of our QSR+ strategy, signature fire-grilled chicken,strong appeal to our core Hispanic family market, appeal to the broader general market, disciplined business model, and strong unit economics. Through 2019, our system experienced annual comparable restaurant sales growth for eight consecutive years. Our system comparable restaurant sales in fiscal 2020 declined 2.4%, which we believe was largely attributable to the COVID-19 pandemic. In 2022 and 2021, our comparable restaurant sales grew 5.9% and 12.1%, respectively. We plan to continue to expand our business, drive restaurant sales growth maintain strong margins, and enhance our competitive positioningincrease company profits by executing onour Transformation Agenda, which consists of the following four key strategies:

Expand Our Restaurant Base. As discussed below under “—Site Selection and Expansion—New Restaurant Development,” we plan to continue to expand

Embed our restaurant base.

While most of our growth in 2017 was derived from the expansion of our company-operated restaurant base, we will continue to strategically develop our franchisee relationships and grow our franchised portfolio within existing and new markets.
Unique El Pollo Loco Culture.We believe that success in the restaurant industry is highly correlated with employee engagement, which is dependent upon hiring, retaining, developing and motivating employees. We invest in competitive pay and leadership training to ensure that our restaurant modelmanagers have the tools they need to be effective leaders and motivating coaches. We continue to build a culture centered around our mission, which is designed to generate strong cash flow, attractive restaurant-level financial results,“Feed the Love that Makes Us All Feel Like Family” and high returns“Heart-Centered Leadership,” which is predicated on invested capital. Our current investment model targets an average new unit cash investment of approximately $0.8 to $1.7 million, net of tenant allowances,servant-led leadership, employee recognition and community involvement. We believe that executing on our mission will result in a restaurant’s third full better and more meaningful work experience for our employees.

An important part of our culture is to provide greater support to the communities in which we operate. In 2004, we created El Pollo Loco Charities, a non-profit charity, to support the communities surrounding our restaurants. El Pollo Loco Charities, together with the Company, have provided over 15,000 meals per year to underprivileged families, through organizations like Food on Foot, Habitat for Humanity, Children’s Institute, and Court Appointed Special Advocates. For example, in 2019 we enhanced our community outreach through several initiatives, including (i) implementing a food donation program with Food Donation Connection and donating 75,000 tacos as part of operations,our “Buy One, Feed Many” initiative, (ii) celebrating Caesar Chavez Day by recruiting 500 company employees, franchisees and customers to refresh a high school located in south Los Angeles and (iii) entering into a relationship with an AUVOrange County-based organization to provide job opportunities for the homeless. In 2020, we provided funds to 13 Latina owned businesses that were heavily impacted by the COVID-19 pandemic. In 2021, we launched a campaign called ValenKIND’s Day, which provided 10,000 meals to community members in our hometown of approximately $1.8 millionLos Angeles who are struggling with hunger and homelessness. For Mother’s Day, we issued $80,000 in grants to help moms in our communities and moms who are restaurant team members pursue their dreams in our “Strong Like A Madre” campaign. During 2022, we launched our first Round Up for Charity campaign benefiting Feeding America. El Pollo Loco Charities committed to match the first 100,000 customer round ups in our effort to reach our goal of raising $400,000 for the charity. In addition, in 2022, we donated 15,000 meals to Food on Foot’s Sunday Program, which serves people experiencing homelessness and food insecurity. Further, during the holidays in 2022, we participated in toy drives for various local charitable organizations including California Highway Patrol’s CHiPs for Kids. Lastly, we also continued a cash-on-cash return2019 commitment to street artists in excessour communities by commissioning three new murals on the exterior walls of 20%, although there is no guarantee that these targets will be met. New restaurant performanceour restaurants in outer markets, which include San Francisco/San Jose, Sacramento, Phoenix, Houstonthe Los Angeles area in celebration of Cesar Chavez Day, Mother’s Day, and Dallas have been mixed, but are currently belowDay of the Dead.

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Build Awareness and Own our expectations overall.

Increase Our Comparable Restaurant Sales. Our system has experienced annual comparable restaurant sales growth for seven consecutive years through our fiscal year ended December 27, 2017.Lane. We aim to build on this momentum by increasing customer frequency, attracting new customers, and improving per-person spend. Furthermore, we believe that we are welluniquely positioned to benefit from shifting culinary and demographic trends inwithin the United States.
Menu Strategy and Evolution.LSR restaurant space. We will continue to adapt our menu to create family-sized dinner options and lunch entrees that complement our signature fire-grilled chicken, and that reinforcesare inspired by the culinary and cultural traditions of Mexico and our QSR+ strategy.hometown of Los Angeles. We believe that we have opportunities for menu innovation as we look to increase customer frequency.frequency and target the dinner segment. In addition, we will continue to tap in tointo the need for healthier offerings by building on the success of our popular “Under 500 Calorie” menufire-grilled chicken and other “better for you” products. Our marketing and operations teams collaborate to ensure that the items developed in our test kitchen can be executed to our high standards in our restaurants with the speedconvenience and value that our customers have come to expect.
Increase Brand Awareness and Consumer Engagement.

We engage customers through our 9-moduleseasonal product calendar, which features seasonal favorites fromnew, unique limited time offers and variations of menu items like our “Under 500 Calorie” low calorie menu toShredded Beef Birria, Overstuffed Fire-Grilled Chicken Tostada Salads, and StuffedShredded Beef, and Avocado Quesadillas. Our key points of differentiation are communicated through our advertising campaign, which highlights the brand'sbrand’s authenticity, and our Grill Masters' expertise“better for you” menu options and dedication to high-quality grilled chicken.ingredients. We tailor our message from television and direct mail, which garners broad exposure, to our Loco Rewards loyalty program and social media platform where we engage in one-to-onemore personalized marketing.

The

We believe that investing in consumer-facing technology is critical to further differentiating our brand and reaching customers for whom convenience and value are key decision factors. Our Loco Rewards loyalty program was launched on June 13, 2017.offers rewards that incentivize customers to visit our restaurants more each month. As of December 27, 2017,28, 2022, there were 512,8423.2 million members in the Loco Rewards loyalty program. The program, whom we target with segmented, dynamic campaigns with special offers one pointtailored to each customer segment with the goals of increasing visit frequency and growing overall spend.

In June 2018, we implemented delivery through DoorDash, a third-party delivery provider. In September 2019, we added Postmates and Uber Eats, and in February 2020 we added GrubHub, as additional marketplace delivery providers. For meals ordered through these market place platforms, restaurants incur a fee based on a percentage of the ticket. As of December 28, 2022, DoorDash maintained exclusivity for every dollardelivery orders placed directly with our restaurants. For orders placed directly from the restaurant, no fee is charged to the restaurant as the full delivery cost is borne by the customer.

In total, during fiscal 2022, delivery orders constituted 7.8% of our total sales mix. As of December 28, 2022, all company-operated and franchise restaurants offered integrated delivery through a third-party service.

We plan to continue investing in our loyalty and delivery programs as well as other technology platforms to continue making it easier for customers spendto access our food.

Deliver Exceptional Service – Profitably. We believe that the key to building sustainable, consistent restaurant operations is through the development of restaurant leader bench, including area managers, general managers, assistant managers and shift leaders. To that end, we have put a $10 reward when they achieve 100 points. Customers earn points primarily by scanningrenewed focus on leadership development, not only to benefit our current restaurant base, but also to ensure we have the leaders necessary for the continued growth of the El Pollo Loco app on Apple iOS or Androidbrand. In addition to leadership development, at the pointteam member level, we have completed the roll-out of purchase, or byan enhanced E-Learning platform across the system.

We also believe that simplifying our restaurant operations will further enhance our ability to attract and retain the best employees and further improve customer service. In 2022, we continued to implement initiatives to make it easier for our employees to operate our restaurants. These included eliminating a number of menu items as well as purchasing pre-chopped serrano peppers and fresh cilantro. Initiatives currently in test include soak tanks for cleaning grill hoods and broilers, and blenders to simplify salsa production. These and other initiatives are intended to enable our restaurant employees to increase their focus on customers and speed of service. We believe that this continued focus, combined with renewed emphasis on providing an exceptional customer experience, will lead to higher sales over the longer term.

Accelerate Development. We believe that execution of our first three strategies will enable us to grow our restaurant base. Our restaurant model is designed to generate strong cash flow, attractive restaurant-level financial results and high returns on invested capital. In 2020, we finalized a new restaurant design that we believe will clearly differentiate and communicate our brand, both on the exterior and interior. In addition, we redesigned the back-of-house to make it easier for employees to operate the restaurant. We believe that our remodels using this new design will result in higher restaurant revenue and a strengthened brand. During fiscal 2022, we completed six company-operated restaurants remodels using the appnew design. In 2022, our franchisees completed 16 remodels using the new design. In 2023, we plan to scan the barcodecontinue our standard practices for remodels, including 10-15 company-operated and 20-30 franchised restaurants.

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We expect future new unit development to be led by franchisees, with company development being focused on their paper receipt anytime within 24 hours of their purchase. We build segmented dynamic campaigns with the goals of reducing the number of days lapsed since each customer's last visit, increasing visit frequency and increasing overall spend.

Within our restaurants we continueexisting markets. In order to engage our customers with point-of-purchase marketing material at various points along their path to purchase to further drive our differentiation.
Restaurant Design. In 2016 we launched our newest restaurant design called Vision. The Vision design elevates the brand image with exterior and interior features that embrace the brand’s authentic roots with warm textures, rustic elements and a focus on the signature open kitchen layout established in previous designs. As of December 27, 2017, includingexpand into new builds and remodels, we had 44 restaurants open with the Vision design in our system.
Maintain Strong Margins.Since 2011, we have increased our restaurant contribution margin by 113 basis points. While rising labor costs as a result of tighter labor markets, and rising minimum wages, along with moderate commodity inflation, continue to challenge unit profitability, we believe that we can maintain strong margins through a combination of growing sales, price increases, labor efficienciesneed to source new franchisees and, other cost savings.
therefore, we expect to invest more resources in sourcing and onboarding them in the future.

Site Selection and Expansion

Restaurant Development

We believe that our restaurant model is designed to generate strong cash flow, attractive restaurant-level financial results, and high returns on invested capital, which we believe provide us with a strong foundation for unit growth over the long-term. In


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2017, we opened 16 2022, four new company-operated restaurants were opened, two in Nevada and 7two in California, and nine new franchised restaurants. New restaurant performancerestaurants were opened, seven in outer markets, which include San Francisco/San Jose, Sacramento, Phoenix, Houston and Dallas has been mixed, but is currently below our expectations overall.
In 2014, we opened our first Houston restaurant and by the end of 2017, we had 12 company locations, and two franchised locationsCalifornia, one in Houston.  Additionally, in 2016, we launched the El Pollo Loco brand in the Dallas-Fort Worth market, where we ended 2017 with seven company-operated and four franchised restaurants. We have previously announced that sales and profit performance in the Houston and Dallas-Fort Worth markets are below our expectations. While we continue to execute operations and marketing initiatives to improve the sales and profit performance, we are slowing our growth in Houston and Dallas-Fort Worth. As a result, we expect that overall unit development in 2018 will be lower than 2017. During 2017, we closed four restaurants in TexasColorado, and one restaurant in Arizona. For a discussion of the impairment of these restaurants, see Item 1A, Risk Factors—Risks Related to Our Business and Industry—We have incurred, and may continue to incur, significant impairment of certain of our assets, in particular in our new markets.
Utah.

In fiscal 2018,2023, we intend to open 6four to 8six new company-operated and 6eight to 8twelve new franchised restaurants. There is no guarantee that we will be able to open new company-operated or franchised restaurants, or to increase the overall number of our restaurants. We may be unsuccessful in expanding within existing or into new markets for a variety of reasons as described below in Item 1A, “Risk“Item 1A. Risk Factors,” including competition for customers, sites, franchisees, employees, licenses, and financing.

Site Selection Process

We consider the location of a restaurant to be a critical variable in its long-term success and as such, we devote significant effort to the investigation and evaluation of potential restaurant locations. Our in-house development team has extensive experience building such brands as Taco Bell, Starbucks, Hardee's, Jack-in-the-Box,The Habit Burger Grill, Carl’s Jr., Baskin Robbins, Wendy’s, Denny's, Johnny RocketsDenny’s and Dunkin’ Brands. We use a combination of our in-house development team and outside real estate consultants to locate, evaluate, and negotiate new sites using various criteria, including demographic characteristics, daytime population thresholds, and traffic patterns, along with the potential visibility of, and accessibility to, the restaurant. The process for selecting locations incorporates management’s experience and expertise and includes extensive data collection and analysis. Additionally, we use information and intelligence gathered from managers and other restaurant personnel that live in or near the neighborhoods that we are considering.

Based on our experience and results, we are currently focused on developing freestanding sites with drive-thrus.drive-thrus along with select in-line locations. Our restaurants perform well in a variety of neighborhoods, which gives us greater flexibility and lowers operating risk when selecting new restaurant locations.

We approve new restaurants only after formal review by our real estate site approval committee, which includes most of our senior management, and we monitor restaurants’ on-going performances to inform future site selection decisions.

Restaurant Construction

After identifying a lease site, we commence our restaurant build-out. Our new restaurants are either ground-up prototypes or retail space conversions. We estimate that each ground-up build-out of a restaurant requires an average total cash investment of approximately $1.6 to $1.7 million, net of tenant allowances. We estimate that each conversion requires a total cash investment of approximately $0.8 to $1.1 million. On average, it takes approximately 12 to 1824 months from specific site identification to restaurant opening. Our restaurants are constructed in approximately 10 to 15 weeks. In order to maintain consistency of food and customer service, as well as our colorful, bright, and contemporary restaurant environment, we have set processes and timelines to follow for all restaurant openings.

Our restaurants are constructed in approximately 12 to 15 weeks, and the development and construction of our new sites is the responsibility of our development department. A conversion typically takes approximately two months to complete. One real estate manager and one real estate director are responsible for locating and leasing potential restaurant sites. Construction managers are then responsible for building our restaurants, and several staff members manage purchasing, budgeting, scheduling, and other related administrative functions.

Restaurant Management and Operations

Service

We are extremely focused on customer service. We aim to provide fast, friendly service on a solid foundation of dedicated, driven team members and managers. Our cashiers are trained on the menu items that we offer and offer customers thoughtful suggestions to enhance the ordering process. Our team members and managers are responsible for our service and dining room environment with a focus on hospitality, teamhospitality. Team members seek to engage in conversation with our customers to ensure satisfaction. In addition, constant monitoring of the dining room occurs to ensure the fresh salsa bar and beverage station areis clean and supplied with products.


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Operations

We utilize systems that are aimed at measuring our ability to deliver a “best in class” experience for our customers. These systems include customer surveys, mystery shopper scores,social media ratings and speed-of-service performance trends. The operational results from all of these sources are then presented on an operations dashboard that displays the measures in an easy-to-read online format that corporate and restaurant-level management and franchisees can utilize in order to identify strengths and opportunities and to develop specific plans for continuous performance improvement.

In addition, all company operated restaurants utilize digital “communication boards”, which communicate sales, costs and consumer data in real time to our restaurant managers.

We have food safety and quality assurance programs designed to maintain the highest standards for the food and the food preparation procedures that are used by both company-operated and franchised restaurants. We have a quality assurance team and employ third-party auditors that perform our work place and food safety restaurant audits.

Managers and Team Members

Each of our restaurants typically has a general manager an assistant manager, and two to three shift leaders.leaders and some restaurants have an assistant manager. There are between 2015 and 35 team members per restaurant who prepare our food fresh daily and provide customer service. To lead our restaurant management teams, we have area leaders, each of whom is responsible for eight7 to 129 restaurants. Overseeing the area leaders are three directorsRegional Directors of operationsOperations who report up to a senior director of operations. An additional senior director of operations oversees our area leaders in Texas. Our franchiseChief Operating Officer. Franchise operations are supported by three directors of franchise and a Senior Vice President, Franchise, who reported to the Chief Development Officer during 2022 and starting in 2023 will report to a vice president of franchise operations. the Chief Operating Officer. The restaurant development team is supported by four directors who also currently report to the Chief Development Officer.

Training

Our senior vice president of operations leads our company-operated restaurants, managing sales, profitability, customer service targets, and franchise operations support.

Training
Our peopleteam members are the centerheart of the El Pollo Loco, customer experience. Creating a culture of constant learning has been essential in equippingand it is our peopleresponsibility to equip them with the skills and knowledge necessary to deliver our high standards and commitments to our gueststhe customer and employees.team member experience. We strive to find ways to simplify our methodology and invest in elevating our people.team members and leaders. In a rapidly evolving landscape, effective training isdepends not only dependent on the quality of content but also on method of delivery.delivery methods. We believe in a blended approach to training to capture all audiences by integrating digital technology and traditional hands-on training activities. To engage our growing base of millennialmulti-generational employees, we employ a Learning Management System called Pollo Zone, oura tablet-based interactive learning tool. This platform is a central hub for all training efforts and features individual learner profiles to support engagement and accountability on our path toward investing in our people and their growth.

Franchise Program

We use a franchising strategy to increase new restaurant growth in certain markets, leveraging the ownership of entrepreneurs with specific local market expertise and requiring a relatively minimal capital commitment by us. As of December 27, 2017, there were28, 2022, we had a total of 265302 franchised restaurants. Franchisees range in size from single-restaurant operators to theour largest franchisee, which owned 6168 restaurants as of December 27, 2017.28, 2022. Our existing franchise base consists of many successful, longstanding, multi-unit restaurant operators. As of December 27, 2017,28, 2022, approximately 75%89% of franchised restaurants were owned and operated by franchisees that had been with us for over 20 years.

We believe that the franchise revenue generated from our franchise base has historically served as an important source of stable and recurring cash flows to us, and we accordingly plan to expand our base of franchised restaurants. In existing markets, we encourage growth from current franchisees. In our expansion markets, we seek highly-qualified and experienced new franchisees for multi-unit development opportunities.

We believe that creating a foundation of initial and on-going support is important for future success, both for our franchisees and for our brand. Therefore, we have structured our corporate staff, programs, and communication systems to ensure that we are delivering high-quality support to our franchisees.

Our franchise training program is a key element in ensuring our franchise owners and their managers are equipped with the knowledge and skills necessary for success. The program introduces new franchise members to El Pollo Loco with hands-on training in the operation and management of our restaurants. This foundational training is conducted by a

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general training manager who has been certified by our operations group. Training must be successfully completed before a trainee can be assigned to a restaurant as a manager.

Once introductory training has been completed, we offer a path toward constant learning for all crew members by providing instructional materials that span management training, operations, new product introductions, food safety and a number of other essential restaurant functions. Many of these programs are distributed through Pollo Zone as a central hub for all training efforts and features individual learner profiles that will provideprovides our franchise owners with real-time access to the progress of learning in their restaurants.


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Marketing and Advertising

We strive to distinguish the El Pollo Loco brand by building a brand equity that we believe not only accentuates our strengths but also deepens the strong emotional connections we have with our customers. We promote our restaurants and products by emphasizing our points of differentiation, fromwhich include our Mexican and LA heritages, our fresh ingredients and scratchmade-from-scratch preparation, toand the cooking of our citrus-marinated chicken on open fire grills in full view in our kitchens.

kitchens, as well as the convenience and quality we offer for families.

We use multiple marketing channels, including television, digital,radio and print, to broadly drive brand awareness and purchases of our featured products.digital. We advertise on local broadcast and cable television.

Over the past year, we have significantly increased our percentage of media dedicated towards digital advertising.

Through our public relations efforts, we engage notable food editors, influencers and bloggers on a range of topics to help promote our products. In addition, we engage in one-on-one conversations using a portfolio of social media platforms, including Facebook, TikTok, Instagram and Twitter. We also use social media as a research and customer service tool, and apply insights gained to future marketing efforts.


Our Loco Rewards loyalty program uses points, rewards, and offers to build engagement and sales by campaigning to customers on a one-to-one basis.with our customers. Customers access the program on elpolloloco.com and the El Pollo Loco iOS Apple and Android app. We build segmented dynamic campaigns with special offers tailored to each customer segment with the goals of reducing the number of days lapsed since each customer’s last visit, increasing visit frequency and increasinggrowing overall spend. To keep customers engaged with the program, unannounced offers, called "Surprise“Surprise and Delights"Delights” are awarded based on that customer’s transaction history. We communicate offers, pointsloyalty updates and other Loco Rewards campaigns to customers via in-app messaging, mobile phone push notifications and email.


Our online ordering program makes it easy for customers to skip the line and order ahead. Available forat every location and accessible from elpolloloco.com or the El Pollo Loco mobile app, any order can be placed and paid for before arriving at the restaurant. For additional convenience, as of December 27, 2017, 66 company and 38 franchise locations offered integrated delivery through third party services such as Uber Rush. The delivery fee, which on average is $7.67, is passed through to the customer.


In September 2017, El Pollo Loco participated in Share our Strength’s No Kid Hungry campaign at participating locations.
Through point-of-purchase marketing, social mediahas partnered with DoorDash, UberEats and public relations, we campaignedGrubhub as additional methods for customers to donate $1, $5 or any other amount to the charity. For a $1 donation a free churro certificate was given to the customer valid on their next visit. Customers donating $5 received a coupon book with over $35 dollars in savings on future visits to El Pollo Loco. During the 5 week promotion, we raised approximately $0.2 million for the campaign, which aims to reduce childhood hunger by funding breakfasts and lunches for children in need throughout the United States. In 2004 we createdordering. El Pollo Loco Charities, a non-profit charity, to supportalso operates direct delivery via elpolloloco.com or the communities surrounding our restaurants. El Pollo Loco Charities has provided over 10,000 meals per year to underprivileged families, through organizations like Food on Foot, Habitat for Humanity, Children’s Institute, and Court Appointed Special Advocates (“CASA”). In 2017, El Pollo Loco Charities also provided donations for Hurricane Harvey and Hurricane Maria disaster relief.
Rewards App, which is exclusively fulfilled by DoorDash.

Purchasing and Distribution

Maintaining a high degree of quality in our restaurants depends in part on our ability to acquire fresh ingredients, and other necessary supplies that meet our specifications, from reliable suppliers. We regularly inspect our vendors to ensure that products purchased conform to our standards and that prices offered are competitive. We have a quality assurance team and third partythird-party accredited auditors that perform comprehensive supplier audits on a frequency schedule based on the potential food safety risk for each product. We contract with McLane Company (our “primary distributor”), a major foodservice distributor, for substantially all of our food and supplies, including the poultry that our restaurants receive from suppliers. Our primary distributor delivers supplies to most of our restaurants three times per week. Our restaurants in Texas, Louisiana and Colorado utilize regional distributors for produce. Our franchisees are required to use our primary distributor or an approved regional distributor, and franchisees must purchase food and supplies from approved suppliers. Poultry is our largest product cost item and represented approximately 40%38% of our total food and paper costs for 2017.2022. Fluctuations in supply and in price can significantly impact our restaurant service and profit performance. We actively manage cost volatility for poultry by negotiating with multiple suppliers and entering into what we believe are the most favorable contract terms given existing market conditions. In the past, we have entered into contracts ranging from two monthsone to threetwo years depending on current and expected market conditions. We currently source poultry from six suppliers, with two accounting for approximately 75%79% of our planned purchases for fiscal 2018. We have fixed prices for 100%2022. More than half of our poultry supplypurchases have a fixed price through the end of 2018.2023.

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Intellectual Property

We have registered El Pollo Loco ® , Pollo Bowl ® , The Crazy Chicken ® , and certain other names used by our restaurants as trademarks or service marks with the U.S. Patent and Trademark Office, (the “PTO”), and El Pollo Loco ® in approximately 42


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43 foreign countries.countries and the European Union. In addition, the El Pollo Loco logo, website name and address, Facebook, Twitter, Instagram and YouTube accounts are our intellectual property. Our policy is to pursue and maintain registration of service marks and trademarks in those countries where business strategy requires us to do so, and to oppose vigorously any infringement or dilution of the service marks or trademarks in those countries. We maintain the recipe for our chicken marinade, as well as certain proprietary standards, specifications, and operating procedures, as trade secrets or as confidential proprietary information.

Competition

We operate in the restaurant industry, which is highly competitive and fragmented. The number, size, and strength of competitors varies by region. Our competition includes a variety of locally-owned restaurants and national and regional chains that offer dine-in, carry-out, and delivery services. Our competition from the broadest perspective includes restaurants, pizza parlors, convenience food stores, delicatessens, supermarkets, and club stores. There are no significant direct competitors with respect to menus that feature marinated, fire-grilled chicken. However, we indirectly compete with fast casual restaurants, including Chipotle, Panera, Qdoba, Rubio’s, and Taco Cabana, among others, and with chicken-specialty QSRs and Mexican QSRs, such as Chick-fil-A, Church’s Chicken, KFC, Popeyes Louisiana Kitchen, and Taco Bell, among others.

We believe that competition within the fast casualfast-casual restaurant segment is based primarily on ambience, price, taste, quality, and freshness of menu items, as well as on the convenience of drive-thru service. We also believe that QSR competition is based primarily on quality, taste, speed of service, value, brand recognition, restaurant location, and customer service. In addition, we compete with franchisors of other restaurant concepts for prospective franchisees.

Environmental Matters

Our operations are also subject to federal, state, and local laws and regulations relating to environmental protection, including regulation of discharges into the air and water, storage and disposal of liquid and solid waste, and clean-up of contaminated soil and groundwater. Under various federal, state, and local laws, an owner or operator of real property may be liable for the cost of removal or remediation of hazardous or toxic substances on, in, or emanating from that property. Such liability may be imposed without regard to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances.

Certain of our properties may be located on sites that we know or suspect have been used by prior owners or operators as retail gasgasoline stations. Such properties previously contained underground storage tanks (“USTs”), for gasoline storage, and while we are not aware of any sites with USTs remaining, it is possible that some of these properties may currently contain abandoned USTs. We are aware of contamination from a release of hazardous materials by a previous owner or operator at two of our owned properties and one of our leased properties. We do not believe that we have contributed to the pre-existing contamination at any of these properties. The appropriate state agencies have been notified, and these issues are being handled without disruption to our business. It is possible that petroleum products and other contaminants may have been released at other properties into the soil or groundwater. Under applicable federal and state environmental laws, we, as the current owner or operator of these sites, may be jointly and severally liable for the costs of investigation and remediation for anycertain contamination. Although we lease most of our properties, and, when we own, we obtain certain assurances from the prior owner or often obtain indemnity agreements from third parties, we cannot assure you that we will notmay nonetheless be liable for environmental conditions relating to our prior, existing,current, or future restaurants or restaurant sites. If we were found liable for the cost of remediation of contamination at, or emanating from, any of our properties, our operating expenses would likely increase and our operating results would likely be adversely affected and, in extraordinary circumstances, our operating results could be materially and adversely affected.

Since 2000, we have obtained “Phase One” environmental reportsEnvironmental Site Assessments (assessing whether current or historical property uses have impacted soil or groundwater beneath the property, posing a threat to the environment and/or human health) for new restaurants. Where warranted, we obtain updated reports, and, if necessary, in rare cases, we obtain “Phase Two” reports.Environmental Site Assessments (evaluating the presence or absence of petroleum products or hazardous substances via soil and/or groundwater sampling). We have not conducted a comprehensive subsurface environmental review of all of our properties or operations. No assurance can be given that we have identified all of the potential environmental liabilities at our properties or that such liabilities will not have a material adverse effect on our financial condition.

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Regulation and Compliance

We and our franchisees are subject to various federal, state and local laws and regulations that govern our business operations, including those governing:

employment and wage and hour practices, including, but not limited to, minimum wage rates, overtime, meal and rest periods, prevention of discrimination, harassment, and retaliation, employment of minors, paid and family leave, unemployment tax rates, workers’ compensation rates, suitable seating, and citizen requirements, and other working conditions;
privacy and data security, including the collection, maintenance and use of information regarding employees and guests;
compliance with the Americans with Disabilities Act and similar laws affording various protections and accommodations to employees and guests with disabilities;
environmental practices, including the discharge, storage, handling, release and disposal of hazardous or toxic substances; regulation of discharges into the air, water and soils, storage and disposal of liquid and solid waste, and clean-up of contaminated soil and groundwater, and regulations restricting the use of straws, utensils and the certain packaging materials;
compliance with Federal Trade Commission and laws that govern the franchisor-franchisee relationship, including the offer and sale of franchises and certain disclosures to franchisees;
the preparation, sale and labeling of food, including regulations of the Food and Drug Administration, which oversees the safety of the entire food system, including inspections and mandatory food recalls, menu labeling and nutritional content;
working conditions, health, sanitation, safety and fire standards, building and zoning requirements, public accommodations and safety conditions, environmental matters, and data privacy;
building and zoning requirements, including state and local licensing and regulation governing the design and operation of facilities and land use;
health and sanitation and public safety; and
restaurant operations related to COVID-19.

We require each of our franchise partners to comply with all federal, state and local laws and regulations. We have processes in place to monitor our own compliance with the numerous, complex, applicable laws and regulations governing our operations.

We are subject to extensivenew, varied and ever-changing rules and regulations regarding the current COVID-19 pandemic, which have materially impacted our earnings and resulted in significant capital expenditures. New federal, state and local government regulations regarding COVID-19 are issued and existing regulations are frequently revised, which materially affected, and continues to affect, our operations. Such regulations govern, for example, employee leave, opening and closing of restaurants and dining rooms, business hours, sanitation practices, guest spacing within dining rooms and other social distancing practices and personal protective equipment.

Other than as described above, the Company’s compliance with federal, state or local laws and regulations, including thoseenvironmental laws, is not expected to materially affect our earnings or competitive position or result in material capital expenditures. However, we cannot predict what laws will be enacted in the future, or how existing or future laws will be administered, interpreted or enforced. We also cannot predict the amount of future expenditures that we may need to make to comply with, or to satisfy claims and lawsuits relating to, among other things, public healththese various laws and safety,regulations. Further, more stringent and varied requirements of local government bodies with respect to zoning, land use and fire codes,environmental factors could delay construction and franchising. Failures to obtain or retain food or other licenses and registrations, or exemptions thereto, would adversely affect the operations ofincrease development costs for new restaurants. AlthoughMoreover, although we have not experienced, and do not anticipate, any significant problems in obtaining required licenses, permits, or approvals, any difficulties, delays, or failures in obtaining such licenses, permits, registrations, exemptions, or approvals could delay or prevent the opening of, or adversely impact the viability of, a restaurant in a particular area.

The development and construction of additional restaurants will be subject to compliance with applicable zoning, land use and environmental regulations. We believe that federal and state environmental regulations have not had Additionally, a material effect on

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operations, but more stringent and varied requirements of local government bodies with respect to zoning, land use, and environmental factors could delay construction and increase development costs for new restaurants.
We are also subject to the Fair Labor Standards Act, the Immigration Reform and Control Act of 1986, and various federal, state and local laws governing such matters as minimum wages, overtime, unemployment tax rates, workers’ compensation rates, citizenship requirements, and other working requirements and conditions. A significant portion of our hourly staff is paid at minimum wage rates consistent with the applicable federal, state, or local minimum wagelaws and, accordingly, increases in the applicable minimum wage will increase our labor costs. We are also subject to the Americans with Disabilities Act, which prohibits discrimination on the basis of disability in public accommodations and employment, and which may require us to design or modify our restaurants to make reasonable accommodations for disabled individuals.

For

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See Item 1A “Risk Factors” and “Environmental Matters” above in this Form 10-K for a discussion of the various regulatoryrisks relating to federal, state, local and compliance risks that we face, see Item 1A, “Risk Factors.”

regulation of our business.

Management Information Systems

All of our company-operated and franchised restaurants use computerized point-of-sale and back-office systems, which we believe can scale to support our long-term growth plans. Our point-of-sale system provides a touch-screen interface and is integrated with segmented EMVEuropay, Mastercard and Visa tokenized high speed credit and gift card processing hardware. Our point-of-sale system is used to collect daily transaction data, which provides daily sales and product mix information that we actively analyze.

Our in-restaurant back-office computer system is designed to assist in the management of our restaurants and to provide labor and food cost management tools. The system also provides corporate headquarters and restaurant operations management quick access to detailed business data, and reduces the time spent by restaurant managers on administrative needs. The system further provides sales, bank deposit, and variance data to our accounting department on a daily basis. For company-operated restaurants, we use this data to generate weekly consolidated reports regarding sales and other key measures, as well as preliminary weekly profit and loss statements for each location, with final reports following the end of each period.

Employees

Human Capital

As of December 27, 2017,28, 2022, we had approximately 5,6374,931 employees, of whom approximately 5,4774,766 were hourly restaurant employees comprised of 4,5363,883 crewmembers, 204191 general managers/acting general managers, 231108 assistant managers, 378542 shift leaders, and 12842 employees in limited-time roles as acting managers or as managers in training. The remaining 160165 employees were corporate and office personnel. None of our employees are part of a collective bargaining agreement, and we believe that our relationships with our employees are satisfactory.

We believe our efforts to maintain solid relationships with our employees are effective and are grounded in our company values. Our primary human capital objective is employee engagement, which is dependent upon hiring, retaining, developing and motivating employees. We strive to build a culture centered around our mission, which is to “Feed the Love that Makes Us All Feel Like Family” and “Heart-Centered Leadership.” We believe this mission is predicated on servant-led leadership, employee recognition and community involvement. We offer our employees both online and on-the-job training. Restaurant management trainees participate in comprehensive, multi-week training programs touching on all aspects of the operations, including restaurant leadership. We provide key restaurant leadership roles with a quarterly cash-based performance bonus awards. Our corporate employees are provided an annual performance bonus award. We also have an equity incentive compensation plan to provide certain management-level or other key employees with stock-based awards. We monitor our progress with metrics such as employee performance measures, turnover rates and restaurant customer surveys.  

The health and well-being of our employees and guests have always been and continues to be our top priority. We have maintained enhanced safety measures and continue to monitor cases of COVID-19 to help protect the health and well-being of all of our employees. In 2022, we also continued to provide extended sick leave benefits to employees impacted by COVID-19.

Seasonality

Seasonal factors, including weather and the timing of holidays, cause our revenue to fluctuate from quarter to quarter. Our revenue per restaurant is typically lower in the first and fourth quarters due to reduced January and December transactions and higher in the second and third quarters. As a result of seasonality, our quarterly and annual results of operations and key performance indicators such as company restaurant revenue and comparable restaurant sales may fluctuate.

Recent Developments
As disclosed in our Current Report on Form 8-K filed on February 28, 2018, our board of directors appointed Bernard Acoca as the Company's President and CEO and as a Director of the Board, effective March 12, 2018. Mr. Acoca will serve as a Class I director, which class will stand for re-election at the 2018 annual meeting of stockholders. Mr. Acoca will succeed Steve Sather, who previously announced his intent to retire during fiscal 2017. Mr. Sather has agreed to remain as an employee of the Company in the capacity as Special Advisor through March 31, 2018 in order to assist the Company with the transition to the new CEO
On February 15, 2018, we entered into an employment agreement with Mr. Acoca,, filed herewith as Exhibit 10.29, which sets forth the terms and conditions under which he will serve as the Company’s President and CEO. The term of the agreement will commence on March 12, 2018 and will expire on the fifty-month anniversary thereof, provided that the term will automatically extend for an additional one-year period on each expiration date thereof (with non-renewal thereof by us treated the same as termination without cause). Mr. Acoca will receive an initial annual base salary of $550,000, a target annual bonus equal to 100% of base salary and, starting in 2019, an annual discretionary equity grant, as determined by the Board of Directors. During the term of the employment agreement Mr. Acoca will be entitled to employee benefits on the same basis as those generally available to other senior executives. Mr. Acoca will also be entitled to at least four weeks of vacation per year and an automobile allowance substantially similar to that provided to other similarly situated senior executives.

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The employment agreement provides that in connection with his hiring Mr. Acoca will receive a one-time sign-on grant of approximately $750,000 worth of time-vested options (vesting ratably over four years), approximately $1,000,000 worth of time-vested restricted stock units or restricted shares (vesting ratably over four years) and approximately $750,000 worth of performance-vested restricted stock units or restricted shares (50% vesting upon achievement of $15 stock price and 50% upon achievement of $20 stock price, in each case during a minimum of 20 consecutive trading days prior to the 5th anniversary of grant or, if earlier, in connection with the occurrence of a change in control, as such term is defined in the employment agreement). Mr. Acoca will also be entitled to a one-time lump sum payment equal to $250,000, provided that Mr. Acoca is obligated to repay such amount if his employment is terminated without good reason or for cause, as such terms are defined in the employment agreement, within one year of March 12, 2018 and he will repay half of such amount if his employment is terminated without good reason or for cause between the twelve and eighteen month anniversaries of March 12, 2018. Mr. Acoca is also entitled to a $100,000 lump sum payment in order to assist with relocation expenses.
The employment agreement provides that in the event that Mr. Acoca’s employment is terminated due to death or disability he will be entitled to a prorated annual bonus for the year of termination based on actual performance. The employment agreement also provides that in the event that Mr. Acoca’s employment is terminated without cause or for good reason, then he will be entitled to receive a prorated annual bonus for the year of termination based on actual performance and continuation of payment of base salary for eighteen months, subject, in each case, to the execution of a general release and compliance with applicable restrictive covenants. In the event that Mr. Acoca’s employment is terminated without cause or for good reason within two years following a change in control, except for performance vesting awards with respect to which performance under their terms is tested at the time of a change in control,  Mr. Acoca will be entitled to accelerated vesting of his outstanding equity awards with performance vesting conditions deemed achieved at target, subject to the execution of a general release and compliance with applicable restrictive covenants.
The employment agreement contains a perpetual confidentiality covenant, a one-year post-termination non-interference covenant applicable to the Company’s relationships with suppliers, customers and partners and a one-year post-termination non-solicitation covenant applicable to Company employees. Mr. Acoca is being indemnified under the Company’s standard director and officer indemnification agreement
On February 28, 2018, we entered into a retirement agreement with Mr. Sather, filed herewith as Exhibit 10.30. Under the terms of the agreement, Mr. Sather agreed to remain as Special Advisor through March 31, 2018; Mr. Sather will continue to receive his standard compensation and benefits until March 31, 2018; and we agreed to accelerate the vesting of his options which would have otherwise vested in May 2018 (options with respect to 33,545 shares) and to extend the exercise ability of all of his vested and outstanding options until the expiration of the original term of such options (i.e., disregarding the termination of his employment). Mr. Sather will continue to abide by all of his restrictive covenants and has agreed to provide us with ongoing cooperation in certain matters for which he has knowledge prior to his termination.

Available Information

We make available free of charge on our Internet website our annual reports on Form 10-K,Annual Reports, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (15 U.S.C. 78m(a) or 78o(d)), as soon as reasonably practicable after we

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electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”). Our Internet address is www.elpolloloco.com. The contents of our Internet website are not part of this annual report, and are not incorporated by reference. Our Internet address is provided as an inactive textual reference only.

The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE., Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically with the SEC, at http://www.sec.gov.



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ITEM 1A.RISK FACTORS

ITEM 1A.RISK FACTORS

You should carefully consider the following risk factors, as well as other information contained in this report, including our financial statements and the notes related to those statements. The occurrence of any of the following risks could materially and adversely affect our business, prospects, financial condition, results of operations, and cash flow.

Risks Related to Our BusinessOperations

The COVID-19 pandemic and Industry

Ameasures intended to prevent its spread has had, and may continue to have, a significant negative impact on our business, sales, results of operations and financial condition, and any future pandemic, epidemic or public health emergency may result in similar adverse effects.

COVID-19 has disrupted, and may continue to disrupt, our restaurant operations, including by causing temporary closures of some restaurants, closures of dining rooms, limited capacity restrictions and/or decreased operating hours for some restaurants due to government mandates and/or staffing shortages. Any future pandemic, epidemic or public health emergency may result in similar closures or restrictions that negatively impact our business.

If additional surges of COVID-19 at a significant number of our locations require us to temporarily close those locations for disinfection or result in a large number of our employees becoming ill with COVID-19 or quarantined and being unable to work, our business and results of operations could be further adversely affected, which may also impact our financial condition. Further, any shutdowns, closures or disruptions in the operations of our suppliers caused by COVID-19 outbreaks or federal, state or local mandates to limit the spread of outbreaks of COVID-19 or other diseases could limit the ability of suppliers to supply us and our franchisees with the products needed to operate our business, which would negatively impact our business. COVID-19 or other public health crises may also adversely affect our ability to implement our growth plans, including delays in the opening or construction of new restaurants or the remodel of existing restaurants.

As the duration and severity of the COVID-19 pandemic, including the severity and transmission rates of COVID-19 variants, resurgences of COVID-19 that may continue to occur, and the efficacy of COVID-19 vaccines, continues to be uncertain at this time, it is difficult to forecast any long-term impacts on our future operating results. However, if the COVID-19 pandemic continues for a sustained period of time or if conditions worsen, our sales and operating costs may be materially adversely affected, which could impact our asset values, including goodwill, derivative instruments and long-lived assets, as well as our ability to meet certain covenant provisions in our debt arrangementsin future periods, and have a material adverse effect on our financial results, future operations and liquidity.

Even after the COVID-19 pandemic has subsided, we may continue to experience negative impacts to our financial results due to COVID-19’s impact on the economy in general, globally, nationally and in the locate markets in which we operate, including the availability of credit generally, adverse impacts on our liquidity, and/or decreases in consumer discretionary spending that depress demand for our products. The global effects of the pandemic may also contribute to a prolonged economic downturnslowdown or recession. In addition, even after the COVID-19 pandemic has subsided, the perceived risk of infection or a resurgence or concern of a resurgence of COVID-19 or other diseases may continue to adversely affect traffic to our restaurants and, in turn, may have a material adverse effect on our business, liquidity, financial condition and results of operations. We are also subject to all of the foregoing risks in connection with the outbreak of other diseases, epidemics or pandemics, or similar public threats or fear of such events.

We may be unsuccessful in opening new company-operated or franchised restaurants or in establishing new markets, which could materiallyadversely affect usour growth.

One of the key means to achieving our growth strategy is and will be through opening new restaurants and operating those restaurants on a profitable basis. We opened four new company-operated restaurants in fiscal 2022 and plan to

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open four to six in fiscal 2023. Our franchisees opened nine new restaurants in fiscal 2022 and plan to open eight to twelve in fiscal 2023.

The ability to open new restaurants is dependent upon a number of factors, many of which are beyond our control, including our and our franchisees’ abilities to: identify available and suitable restaurant sites; compete for restaurant sites; reach acceptable agreements regarding the lease or purchase of locations; obtain or have available the financing required to acquire and operate a restaurant, including construction and opening costs; respond to unforeseen engineering or environmental problems with leased premises; avoid the impact of inclement weather and natural and man-made disasters; hire, train, and retain the skilled management and other employees necessary to meet staffing needs; obtain, in a timely manner and for an acceptable cost, required licenses, permits, and regulatory approvals; respond effectively to any changes in local, state, and federal law and regulations that adversely affect our and our franchisees’ costs or abilities to open new restaurants; and control construction and equipment cost increases for new restaurants.

If we are unable to successfully manage these risks and open new restaurants or sign new franchisees as anticipated, or if restaurant openings are significantly delayed, we could face increased costs and lower than anticipated sales and earnings in future periods.

As part of our longer-term growth strategy, we may enter into geographic markets in which we have little or no prior operating or franchising experience, including through company-operated restaurant growth and franchise development agreements. The challenges of entering new markets include (i) difficulties in hiring and training experienced personnel, (ii) unfamiliarity with local real estate markets and demographics, (iii) consumer unfamiliarity with our brand, and (iv) competitive and economic conditions, consumer tastes, and discretionary spending patterns that are different from and more difficult to predict or satisfy than in our existing markets. Any failure on our part to recognize or respond to these challenges may adversely affect the success of any new restaurants. Expanding our franchise system could require the implementation, expense, and successful management of enhanced business support systems, management information systems, and financial controls, as well as additional staffing, franchise support, and capital expenditures and working capital.

Due to brand recognition and logistical synergies, as part of our growth strategy, we also intend to open new restaurants in areas where we have existing restaurants. The operating results and comparable restaurant sales for our restaurants could be adversely affected due to increasing proximity among our restaurants and due to market saturation.

We may not be able to compete successfully, including with other quick-service and fast casual restaurants.

The food service industry, and particularly its QSR and fast casual segments, is intensely competitive. Competition in our industry is primarily based on price, convenience, quality of service, brand recognition, restaurant location, and type and quality of food, and our market position is based on balancing price and quality. These competitive factors are particularly applicable in markets in which we have expanded relatively rapidly and relatively recently, such as Texas. In addition, the greater Los Angeles area, the primary market in which we compete, consists of what we believe to be the most competitive Mexican-inspired QSR and fast casual market in the future.

United States. We expect competition in this market and in each of our other markets to continue to be intense, because consumer trends are favoring LSRs that offer healthier menu items made with better-quality products, and many LSRs are responding to these trends. Moreover, we may also compete with companies outside the QSR and fast casual segment of the restaurant industry. For example, competitive pressures can come from deli sections and in-store cafés of several major grocery store chains, including those targeted at consumers who want higher-quality food, as well as from convenience stores, cafeterias and other dining outlets. Meal kit delivery companies and other eat-at-home options also present some degree of competition for our restaurants. If our company-operated and franchised restaurants cannot compete successfully, especially with other QSR and fast casual restaurants, in new and existing markets, we could lose customers and our revenue could decline, which may materially and adversely affect our business, financial condition, and results of operations.

We are vulnerable to changes in political and economic conditions and consumer preferences.

The restaurant industry is dependent upon consumer discretionary spending. A prolongedspending, which may be affected by general global economic downturnconditions or an economic recession could impactother business conditions that may affect the public’sdesire or ability of our customers to purchase our products, including recessions or inflationary pressures, which have caused, and desiremay continue to spendcause, increased labor, commodity and utilities costs. In addition, we may be affected by higher consumer debt and interest rates, adverse

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conditions in the mortgage housing markets, high unemployment levels, increases in gas prices, declines in median income growth, lower consumer confidence, lower consumer discretionary dollars as a result of job losses, home foreclosures, significantly-reduced home values, investment losses, bankruptcies,spending and reduced accessuncertainties due to credit, which could result in lower levels of customer transactionsgeopolitical turmoil and lower average check sizes in our restaurants.potential national or international security concerns, including the conflict between Russia and Ukraine. If the economy experiences anothera significant decline, our business, results of operations, our ability to access the capital markets and our ability to comply with the terms of our secured revolving credit facility could be materially and adversely affected, and we and our franchisees might decelerate the number and timing of new restaurant openings. Deterioration in customer transactions openings and/or a reduction in average check size would negatively impact our revenues and our profitability and could result in further reductions in staff levels, additional impairment charges, and potentialthe number of planned restaurant closures.

We are vulnerable to changes in consumer preferences and economic conditions that couldremodels. In addition, political developments regarding U.S. relations with Mexico may harm our business, financial condition, results of operations, and cash flow.
Food service businesses depend on consumer discretionary spending and are often affected by changes in consumer tastes, national, regional, and local economic conditions, and demographic trends. Factors such as traffic patterns, weather, fuel prices, local demographics, and the type, number, and locations of competing restaurants may adversely affect the performances of individual locations. In addition, economic downturns, inflation, or increased food or energy costs could harm the restaurant industry in general and our locations in particular. Adverse changes in any of these factors could reduce consumer transactions or impose practical limits on pricing that could harm our business, financial condition, results of operations, and cash flow. There can be no assurance that consumers will continue to regard chicken-based or Mexican-inspired food favorably or that we will be able to develop new products that appeal to consumer preferences. Our business, financial condition, and results of operations depend in part on our ability to anticipate, identify, and respond to changing consumer preferences and economic conditions.
Political and social factors, including regarding trade, immigration or customer preferences, could negatively impact our business.
Our success is dependent upon continued customer acceptance of our Mexican-inspired food. Increases in tariffs, restrictions on trade, or other deterioration in American political or economic relations with Mexico or a decrease in American consumers’ interest in Mexican-inspired food, could harm our brand and profitability. Additionally, changesChanges in trade, labor, or immigration policy could raise our input prices, or reduce the supply of immigrants, who are in many cases our customers or employees, diminishing our sales and increasing our labor costs.
An actual or feared outbreak of disease, epidemic or pandemic, changes to regional or local economic conditions affecting consumer spending, or increased food or energy costs could also reduce consumer transactions or impose practical limits on pricing that could harm our business, financial condition, results of operations, and cash flow.

Additionally, changes in consumer health perceptions or trends in eating habits may also adversely affect our business if we are unable to effectively adapt our menu offerings. Our success is dependent upon continued customer acceptance of our Mexican-inspired food and customer health perceptions regarding our products. A decrease in American consumers’ interest in Mexican-inspired food or chicken-based food, or changes in customer health perceptions of our food could harm our brand and profitability. We cannot make any assurances regarding our ability to effectively respond to changes in consumer preferences or our ability to develop new products that appeal to consumer preferences.

If we are unable to attract, develop, assimilate, and retain employees, we may not be able to grow or successfully operate our business.

Our success depends in part upon our ability to attract, train, assimilate, and retain a sufficient number of employees, including crewmembers, managers and shift leaders, who understand and appreciate our culture, are able to represent our brand effectively and establish credibility with our customers. If we are unable to hire and retain restaurant employees capable of consistently providing a high level of customer service, understanding of our customers, and knowledge of our offerings, our ability to open new restaurants may be impaired, the performance of our existing and new restaurants could be adversely affected, and our brand image may be negatively impacted. Our growth strategy will require us to attract, train, and assimilate even more restaurant employees. Our ability to do so may be adversely affected by labor shortages due to, among other things, the COVID-19 pandemic and the cost of related overtime pay requirements.

Our business is geographically concentrated in the greater Los Angeles area, and we could be negatively affected by conditions specific to that region.

regional geographic concentrations.

Our company-operated and franchised restaurants in the greater Los Angeles area generated, in the aggregate, approximately 73%71.2% of our revenue in fiscal 20172022 and approximately 75%70.9% in fiscal 2016.2021. Adverse changes in demographic, unemployment, economic, or regulatory conditions in the greater Los Angeles area or in the State of California, including, but not limited to, enforcement policies for and changes in immigration law, have had and may continue to have material adverse effects on our business.

We believe that an increase in unemployment would have a negative impact on transactions in our restaurants. As a result of our concentration in the greater Los Angeles area, we have been disproportionately affected by the above adverse economic conditions as compared to other national chain restaurants.

Our business is vulnerable to natural disasters given its geographic concentration and real estate intensive nature.
Since our business is geographically concentrated in the greater Los Angeles area, we couldalso may be negatively affected by weather conditions specific to thatthe Los Angeles region, including fires, earthquakes, or other natural disasters. Additionally, outside of Los Angeles, many of our restaurants are clustered around major cities in Northern California, Texas, and elsewhere, and prolonged or severe inclement weather could affect our sales at restaurants in locations that experience such conditions. Localized disasters, especially exacerbated by climate change, including wildfires, hurricanes, and flooding, could impair our assets and operations in those areas. Any other events disrupting businesses, consumer discretionary spending or our employee population in the greater Los Angeles area could also have an outsized negative impact on our business or results of operations. For example, innear the third quarterend of 2017,fiscal 2021 and the Houston metropolitan areabeginning of 2022, the Los Angeles market was impacted by Hurricane Harvey and

resultant flooding. This caused for us, among other effects, temporary store closures and food spoilage. We may also suffer unexpected losses resulting from natural disastersa spike in COVID-19 cases, which disproportionately impacted our business due to our high concentration in this market. If the Los Angeles or other catastrophic events affectingmarkets experience another severe outbreak of COVID-19 or its variants, we may experience further disruptions to our areas of operation, such as earthquakes, fires, droughts, local strikes, terrorist attacks, increases in energy prices, explosions, or other natural or man-made disasters. The incidence and severity of catastrophes are inherently unpredictable, and our losses from catastrophesbusiness that could be substantial.material.

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Our growth strategylong-term success depends in part on openingour ability to effectively identify and secure appropriate sites for new restaurants.

In order to build new restaurants, we must first identify markets where we can enter or expand our footprint, taking into account numerous factors, including the location of our current restaurants, local economic trends, population density, area demographics, cost of construction and real estate and geography. Then we must secure appropriate restaurant sites, which is one of our biggest challenges. There are numerous factors involved in identifying and securing an appropriate restaurant site, including: evaluating size of the site, traffic patterns, local retail, residential and business attractions and infrastructure that will drive high levels of customer traffic and sales; competition in new markets, including competition for restaurant sites; financial conditions affecting developers and potential landlords, such as the effects of macro-economic conditions and the credit market (including the potential for rising interest rates), which could lead to these parties delaying or canceling development projects (or renovations of existing projects), in turn reducing the number of appropriate restaurant sites available; developers and potential landlords obtaining licenses or permits for development projects on a timely basis; proximity of potential restaurant sites to existing restaurants; anticipated commercial, residential and infrastructure development near the potential restaurant site; and availability of acceptable lease terms and arrangements, including construction costs.

In addition, competition for restaurant sites in our target markets can be intense, and development and leasing costs are increasing. Given the numerous factors involved, we may not be able to successfully identify and secure attractive restaurant sites in existing, and new markets and expanding our franchise system. We may be unsuccessful in opening new company-operatedadjacent or franchised restaurants or in establishing new markets, which could adversely affect our growth.

One of the key means to achieving our growth strategy is and will be through opening new restaurants and operating those restaurantshave a material adverse effect on a profitable basis. We opened 16 new company-operated restaurants in fiscal 2017 and plan to open 6 to 8 in fiscal 2018. Our franchisees opened 7 new restaurants in fiscal 2017 and plan to open 6 to 8 in fiscal 2018. The ability to open new restaurants is dependent upon a number of factors, many of which are beyond our control, including our and our franchisees’ abilities to:
identify available and suitable restaurant sites;
compete for restaurant sites;
reach acceptable agreements regarding the lease or purchase of locations;
obtain or have available the financing required to acquire and operate a restaurant, including construction and opening costs;
respond to unforeseen engineering or environmental problems with leased premises;
avoid the impact of inclement weather and natural and man-made disasters;
hire, train, and retain the skilled management and other employees necessary to meet staffing needs;
obtain, in a timely manner and for an acceptable cost, required licenses, permits, and regulatory approvals;
respond effectively to any changes in local, state, and federal law and regulations that adversely affect our and our franchisees’ costs or abilities to open new restaurants; and
control construction and equipment cost increases for new restaurants.
There is no guarantee that a sufficient number of suitable restaurant sites will be available in desirable areas or on terms that are acceptable to us in order to achieve our growth plan. If we are unable to open new restaurants or sign new franchisees, or if restaurant openings are significantly delayed, our earnings or revenue growth and our business could be materially and adversely affected, as we expect a portion of our growth to come from new locations.
As part of our longer-term growth strategy, we may enter into geographic markets in which we have little or no prior operating or franchising experience, through company-operated restaurant growth and franchise development agreements. The challenges of entering new markets include (i) difficulties in hiring experienced personnel, (ii) unfamiliarity with local real estate markets and demographics, (iii) consumer unfamiliarity with our brand, and (iv) competitive and economic conditions, consumer tastes, and discretionary spending patterns that are different from and more difficult to predict or satisfy than in our existing markets. Consumer recognition of our brand has been important for our success in our existing markets. In addition, restaurants that we open in new markets may take longer to reach expected sales and profit levels on a consistent basis, and may have higher construction, occupancy, and operating costs, than restaurants that we open in existing markets, thereby affecting our overall profitability. Any failure on our part to recognize or respond to these challenges may adversely affect the success of any new restaurants. Expanding our franchise system could require the implementation, expense, and successful management of enhanced business support systems, management information systems, and financial controls, as well as additional staffing, franchise support, and capital expenditures and working capital.
At the end of fiscal 2009, we had 21 system-wide restaurants, all originally developed by franchisees, open east of the Rocky Mountains. However, by 2012, all of these restaurants had been closed. We may encounter similar issues with our current growth strategy, which could materially and adversely affect our business, financial condition and results of operations, and cash flow.
Due to brand recognition and logistical synergies, as part of our growth strategy, we also intend to open new restaurants in areas where we have existing restaurants. The operating results and comparable restaurant sales for our restaurants could be adversely affected due to increasing proximity among our restaurants and due to market saturation.

operations.

We have incurred, and may continue to incur, significant impairment of certain of our assets, in particular in our new markets.

During fiscal 2017, we determined that

The recognition of impairment charges may adversely affect our future operations and results. In assessing the carrying value of the assets of 21 restaurants, in Arizona, California and Texas, may not be recoverable. Additionally, we made a strategic decision to close two additional restaurants in Texas. As a result, we recorded a $32.6 million impairment expense. The impairment expense for fiscal 2017 includes an impairment expense of $27.7 million, representing the entire remaining value of capitalized assets of allrecoverability of our company-operated restaurantslong-lived assets, we consider changes in Texas, neteconomic conditions and make assumptions regarding estimated future cash flows and other factors. There is uncertainty in the projected undiscounted future cash flows used in our impairment review analysis, which requires the use of previously recorded depreciation. Factors which led toestimates and assumptions. If actual performance does not achieve the impairment of our Texas restaurants include recent results, which indicates thatprojections, or if the restaurants have not achievedassumptions used change in the sales volumesfuture, we may be required to generate positive cash flows or improve profitabilityrecognize impairment charges in the Texas market, along with the related future cash flow assumptions, including comparable sales rate growthperiods, and restaurant operating costs, over the remaining lease terms and the age of the restaurants in Texas. The restaurants in Texas began opening in late 2014, causing a higher net book value at the time of impairment testing, and increased difficulty projecting results for newer restaurants in newer markets.such charges could be material. Given the difficulty in projecting results for newer restaurants in newer markets, as well as the impact of the COVID-19 pandemic, we are also monitoringmonitor the recoverability of the carrying value of the assets of several other restaurants on an ongoing basis, including those in the Arizona and Northern California markets. For those restaurants, if expected performance improvements are not realized, an impairment charge may be recognized in future periods, and such charge could be material.basis. Asset impairments outside of Texas, or impairments to new units or future capital expenditures could present additional exposure. Closures could also require additional expenditures. Furthermore, franchised unit closings could result in the loss of franchise revenue and have other adverse effects on us.

Changes in food, and supply costs, especially for chicken, labor, construction and utilities could adversely affect our business, financial condition, and results of operations.

Our profitability depends in part on our ability to anticipate and react to changes in the cost of food, supplies, labor, construction and supply costs. Weutilities. In 2022, the costs of commodities, labor, energy and other inputs necessary to operate our restaurants have significantly increased. In addition, we are susceptible to increases in food costs as a result of factors beyond our control, such as general economic conditions, seasonal economic fluctuations, weather conditions, global demand, food shortages, food safety concerns, infectious diseases, fluctuations in the U.S. dollar, cyber-attacks, transportation issues, product recalls, and government regulations, including tariffs and other import restrictions on foreign produce and other goods. At times the costsIn 2021 and continuing into 2022, for example, we experienced inflationary pressures due to supply chain disruptions that adversely impacted and may continue to adversely impact our business and results of many foods for humans and animals, including corn, wheat, corn flour and other flour, rice, and cooking oil, have increased markedly, resulting in upward pricing pressures on almost all of our raw ingredients, including chicken and other meats, and increasing our food costs.operations. Environmental and weather-related issues, such as freezes, drought and climate change, may also lead to increases, temporary or permanent, or spikes in the prices of some ingredients, such as produce and meat. Issues affecting the availability of produce, poultry, or other proteins such as shrimp, including blight, disease, and overfishing, have in the past and may in the future also raise their prices. Any increase in the prices of the ingredients most critical to our menu, suchin particular chicken, as chicken,well as corn, cheese, avocados, beans, rice, and tomatoes, could adversely compress our margins, or cause us to raise our prices, reducing customer demand. Alternatively, in the event of cost increases with respect to one or more of our raw ingredients, we might choose to temporarily suspend serving menu items, such as guacamole or one or more of our salsas, rather than pay the increased cost. Additionally, as a substantial volume of produce and other items are procured from Mexico, and occasionally other countries including Chile and Peru, any new or increased import duties, tariffs or taxes, or other changes in U.S. trade or tax policy could result in higher food and supply costs that would adversely impact our financial results. Any such

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changes to our menu prices or available menu could negatively impact our restaurant transactions, business, and comparable restaurant sales during the shortage and thereafter.

Our principal food product is chicken. In fiscal 2017, 2016,2022, 2021, and 2015,2020, the cost of chicken included in our product cost was approximately 11.3%11.0%, 12.4%9.9%, and 13.4%10.5%, respectively, of our revenue from company-operated restaurants. Material increases in the cost of chicken could materially and adversely affect our business, operating results, and financial condition. Changes in the cost of chicken can result from a number of factors, including seasonality, increases in the cost of grain, disease, and other factors that affect domestic and international supply of and demand for chicken products. A major driver of the price of corn, which is the primary feed source for chicken, has been the increasing demand for corn by the ethanol industry as an alternative fuel source, as most ethanol plants in the United States primarily use corn to make ethanol. This increased demand on the nation’s corn crop has had and may continue to have an unfavorable impact on chicken prices. Additionally, environmental and animal rights regulations or voluntary programs could increase the cost or supply of chicken and other foods. We often ask our suppliers to use fixed price contracts or other financial risk management strategies to reduce potential price fluctuations in the cost of chicken and other commodities. We have implemented menu price increases in the past to significantly offset increased chicken prices, due to competitive pressures and compressed profit margins. We may not be able to offset all or any portion of increased food and supply costs, or labor, construction and utility costs through higher menu prices in the future. If we implement further menu price increases in the future to protect our margins, average check size and restaurant transactions could be materially and adversely affected, at both company-operated and franchised restaurants.

Social media and negative publicity could have a material adverse impact on our business.

Negative publicity, could reduce sales at some or all of our restaurants.

We are, from time to time, faced with negative publicityincluding information posted on social media platforms, at one or more of our restaurants relating to (i) food quality; (ii) the safety, sanitation, and welfare of chicken, which is our principal food product; (iii) restaurant facilities; (iv) customer complaintsemployee relationships or litigation alleging illness or injury; (v) health inspection scores; (vi) integrity of our or our suppliers’ food processing and other policies, practices, and procedures; (vii) employee relationships; or (viii) other matters. Negative publicity

matters can adversely affect us, regardless of whether an allegation is valid or whether we are held to be responsible. Adverse information posted on social media platforms can quickly reach a wide audience and resulting harm to our reputation may be immediate, without affording us an opportunity to correct or otherwise respond to the information. It is challenging to monitor and anticipate developments on social media in order to respond in an effective and timely manner. As a result, social media may exacerbate the risks we face related to negative publicity. In addition, the negative impact of any adverse publicity relating to one restaurant may extend far beyond the restaurant involved to affect some or all of our other restaurants, including our franchised restaurants. For example, we, or other chicken purveyors or restaurant companies generally, could come under criticism from animal rights and welfare activists for our business practices or those of our suppliers. Such criticisms could impair our brand, our restaurant sales, our hiring, our expansion plans, and the performance of our franchisees. If we changed our practices because of concerns about animal welfare, or in response to such criticisms, our costs might increase, or we might have to change our suppliers or our menu. The risk of negative publicity is particularly great with respect to our franchised restaurants, because we are limited in the manner in which we can regulate them, especially on a real-time basis. A similar risk exists with respect to food service businesses unrelated to us, if customers mistakenly associate those unrelated businesses with our operations.
Employee claims against us

A variety of additional risks associated with our use of social media include the possibility of improper disclosure of proprietary information, exposure of personally identifiable information of our employees or guests, fraud, or the publication of out-of-date information, any of which may result in material liabilities or reputational damage. Furthermore, any inappropriate use of social media platforms by our franchisees based on, among other things, wage and hour violations, discrimination, harassment, or wrongful termination mayemployees could also create not only legal and financial liability butresult in negative publicity that could damage our reputation, or lead to litigation that increases our costs.

Our ability to continue to expand our digital business, delivery orders and catering is uncertain, and these new business lines are subject to risks.

We rely on third-party providers to fulfill delivery orders, and the ordering and payment platforms used by these third parties, or our mobile app or online ordering system, could be damaged or interrupted by technological failures, user errors, cyber-attacks or other factors, which may adversely affectimpact our sales through these channels and could negatively impact our brand. Additionally, our delivery partners may make errors or fail to make timely deliveries, leading to customer disappointment that may negatively impact our brand. We also incur additional costs associated with using third-party service providers to fulfil these digital orders. Moreover, the third-party restaurant delivery business is intensely competitive, with a number of players competing for market share, online traffic, capital, and delivery drivers and other people resources. The third-party delivery services with which we work may struggle to compete effectively, and if they were to cease or curtail operations or fail to provide timely delivery services in a cost-effective manner, or if they give greater priority on their platforms to our competitors, our delivery business may be negatively impacted. We have also introduced catering offerings on both a pick-up and delivery basis, and customers may choose our competitors’ catering offerings over ours, be disappointed with their experience with our catering, or experience food safety problems if they do not serve our food in a safe manner, which may negatively impact us. Such delivery and catering offerings also increase the risk of illnesses associated with our food because the food is transported and/or served by third parties in conditions we cannot control.

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We do not have a long history with our catering offering and it is difficult for us to anticipate the level of sales they may generate. In addition, using third party providers to fulfill delivery orders may result in operational challenges, both in fulfilling orders made through these channels and divertin operating our financial and management resources that could otherwise be used to benefit the future performancerestaurants as we balance fulfillment of these orders with service of our operations.traditional in-restaurant guests. Any such operational challenges may negatively impact the customer experience associated with our digital, delivery or catering orders, the guest experience for our traditional in-restaurant business, or both. These types of employee claims could also be asserted against us, on a co-employer theory, by employees offactors may adversely impact our franchisees. A significant increase in the number of these claims, or an increase in the number of successful claims, could materiallysales and adversely affect our business, financial condition, results of operations, and cash flows.

brand reputation.

Food-borne illness and other food safety and quality concerns may negatively impact our business and profitability.

Incidents or reports of food- or water-borne illness or other food safety issues, food contamination or tampering, employee hygiene or cleanliness failures, or improper employee conduct at our restaurants could lead to product liability or other claims. Such incidents or reports could negatively affect our brand and reputation as well as our business, revenues, and profits. Similar incidents or reports occurring at quick-service restaurants unrelated to us could likewise create negative publicity, which could negatively impact consumer behavior towards us.

We cannot guarantee that our internal controls and training will be fully effective in preventing all food-borne illnesses.

Furthermore, our reliance on third-party food processors makes it difficult to monitor food safety compliance, and may increase the risk that a food-borne illness would affect multiple locations rather than a single restaurant. Some food-borne illness incidents could be caused by third-party food suppliers and transporters outside of our control. New illnesses resistant to our current precautions may develop in the future, or diseases with long incubation periods could arise that could cause claims or allegations on a retroactive basis. One or more instances of food-borne illness in one of our company-operated or franchised restaurants could negatively affect sales at all of our restaurants if highly publicized. This risk would exist even if it were later determined that an illness had been wrongly attributed to one of our restaurants. A number of other restaurant chains have experienced incidents related to food-borne illnesses that have had material adverse impacts on their operations, and we cannot guarantee that we could avoid a similar impact upon the occurrence of a similar incident at one of our restaurants.

Additionally, even if food-bornefood or water-borne illnesses or other food safety issues or incidents were not identified at El Pollo Loco restaurants, our restaurant sales could be adversely affected, both financially and otherwise, if instances of food-borne illnessessimilar incidents or reports at other QSRs or restaurant chains were highly publicized. In addition, our restaurant sales could be adversely affected by publicity regarding other high-profile illnesses such as avian flu that customers may associate with our food products.

We rely on only one company to distribute substantially all of our products to company-operated and franchised restaurants, and on a limited number of companies to supply chicken.

Failure to receive timely deliveries of food or other supplies could result in a loss of revenue and materially and adversely impact our operations.

Our and our franchisees’ ability to maintain consistent quality menu items and prices significantly depends upon our ability to acquire fresh food products, including the highest-quality chicken and related items, from reliable sources, in accordance with our specifications and on a timely basis. Shortages or interruptions in the supply of fresh food products, caused by unanticipated demand, problems in production, distribution or distribution,otherwise in the supply chain, including as a result of the COVID-19 pandemic and restrictions implemented to counter its spread, contamination of food products, an outbreak of poultry disease, inclement weather, or other conditions, could materially and adversely affect the availability, quality, and cost of ingredients, which would adversely affect our business, financial condition, results of operations, and cash flows. We have contracts with a limited number of suppliers for the chicken and other food and supplies for our restaurants. Further, increases in fuel prices could result in increased distribution costs. In addition, one company distributes substantially all of the products that we receive from suppliers to company-operated and franchised restaurants. If that distributor or any supplier fails to perform as anticipated or seeks to terminate agreements with us, or if there is any disruption in any of our supply or distribution relationships for any reason, including our ability to replace any lost distributor or supplier, our business, financial condition, results of operations, and cash flows could be materially and adversely affected. If we or our franchisees temporarily close a restaurant or remove popular items from a restaurant’s menu as a result of such a disruption, that restaurant may experience a significant reduction in revenue if our customers change their dining habits as a result.


We have a history of net losses, and may incur losses in the future.
Although we have exhibited positive net income in 2014 to 2017, before fiscal 2014, we incurred net losses in each of the preceding seven fiscal years. We may incur net losses in the future, and we cannot guarantee that we will sustain profitability.
The failure to comply with our debt covenants, and the volatile credit and capital markets, could have material adverse effects on our financial condition.
Our ability to manage our debt is dependent upon our level of positive cash flow from company-operated and franchised restaurants, net of costs. An economic downturn could negatively impact our cash flow. Credit and capital markets can be volatile, making it difficult for us to refinance our existing debt or to obtain additional debt or equity financings in the future. Such constraints could increase our costs of borrowing and could restrict our access to other potential sources of future liquidity. Our failure to comply with the debt covenants in our secured revolving credit facility or to have sufficient liquidity to make interest and other payments required by our debt could result in a default on our debt and acceleration of our borrowings, which would have a material adverse effect on our business and financial condition.

Our level of indebtedness, and restrictions under our credit facility, could materially and adversely affect our business, financial condition, and results of operations.

We have substantial debt service obligations. At December 27, 2017, our total debt was $93.3 million (including capital lease obligations), and we had $99.3 million of credit available under our secured revolving credit facility, which was reduced by $7.7 million from outstanding letters of credit.

Our level of indebtedness could have significant effects on our business, such as:

limiting our ability to borrow additional amounts to fund working capital, capital expenditures, acquisitions, debt service requirements, execution of our growth strategy, and other purposes;
requiring us to dedicate a portion of our cash flow from operations to pay interest on our debt, which could reduce availability of our cash flow to fund working capital, capital expenditures, acquisitions, execution of our growth strategy, and other general corporate purposes;
making us more vulnerable to

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adverse changes in general economic, industry, government regulatory, and competitive conditions in our business by limiting our ability to plan for and react to changing conditions;

placing us at a competitive disadvantage compared with our competitors with less debt; and
exposing us to risks inherent in interest rate fluctuations, because our borrowings are at variable rates of interest, which could result in higher interest expense in the event of increases in interest rates.

In addition, we may not be able to generate sufficient cash flow from our operations to repay our indebtedness when it becomes due and to meet our other cash needs. If we are not able to pay our debts as they become due, we will be required to pursue one or more alternative strategies, such as selling assets, refinancing or restructuring our indebtedness, or selling additional debt or equity securities. We may not be able to refinance our debt or sell additional debt or equity securities or our assets on favorable terms, if at all, and if we have to sell our assets, that sale may negatively affect our ability to generate revenue.

Our secured revolving credit facility contains a number of covenants that, among other things, restrict, subject to certain exceptions, our ability to (i) incur additional indebtedness, (ii) issue preferred stock, (iii) create liens on assets, (iv) engage in mergers or consolidations, (v) sell assets, (vi) make investments, loans, or advances, (vii) make certain acquisitions, (viii) engage in certain transactions with affiliates, (ix) authorize or pay dividends, and (x) change our lines of business or fiscal year. In addition, our secured revolving credit facility requires us (i) to maintain, on a consolidated basis, a minimum consolidated fixed charge coverage ratio and (ii) not to exceed a maximum lease adjusted consolidated leverage ratio. Our ability to borrow under our secured revolving credit facility depends on our compliance with these tests. Events beyond our control, including changes in general economic and business conditions, may affect our ability to meet these tests. We cannot guarantee that we will meet these tests in the future, or that our lenders will waive any failure to meet these tests.

We may not be able

Further, we are a holding company with no material direct operations. Our principal assets are the equity interests that we indirectly hold in our operating subsidiary, El Pollo Loco, Inc. (“EPL”), which owns our operating assets. As a result, we are dependent on loans, dividends, and other payments from EPL, our operating company and indirect wholly owned subsidiary, and from EPL Intermediate, Inc. (“Intermediate”), our direct wholly owned subsidiary, to compete successfully with other quick-servicegenerate the funds necessary to meet our financial obligations and fast casual restaurants. Intense competition in the restaurant industry could make it more difficult to expand our business, and could also have a negative impactpay dividends on our operating results, if customers favor our competitorscommon stock. Our subsidiaries are legally distinct from us and may be prohibited or if we are forcedrestricted from paying dividends or otherwise making funds available to change our pricing and other marketing strategies.

The food service industry, and particularly its quick-service and fast casual segments, is intensely competitive. In addition, the greater Los Angeles area, the primary market in which we compete, consists of what we believe to be the most competitive Mexican-inspired quick-service and fast casual market in the United States. We expect competition in this market and in each of our other markets to continue to be intense, because consumer trends are favoring limited service restaurants that offer healthier menu items made with better-quality products, and many limited service restaurants are responding to these trends. Competition

in our industry is primarily based on price, convenience, quality of service, brand recognition, restaurant location, and type and quality of food. If our company-operated and franchised restaurants cannot compete successfully with other quick-service and fast casual restaurants in new and existing markets, we could lose customers and our revenue could decline. Our market position is based on balancing price and quality, and drift in our competitive position, popular perception of our position, or popular interest in our position, could harm our sales, brand, and support among customers. Our company-operated and franchised restaurants compete with national and regional quick-service and fast casual restaurant chains for customers, restaurant locations, and qualified management and other staff. Compared with us some of our competitors have substantially greater financial and other resources, have been in business longer, have greater brand recognition, or are better-established in the markets where our restaurants are located or are planned to be located. These competitive factors are particularly applicable in markets in which we have expanded relatively rapidly and relatively recently, such as Texas. Any of these competitive factors may materially and adversely affect our business, financial condition, and results of operations.
under certain conditions.

Our marketing programs may not be successful, and our new menu items, advertising campaigns, and restaurant designs and remodels may not generate increased sales or profits.

We incur costs and expend other resources in our marketing efforts on new menu items, advertising campaigns, and restaurant designs and remodels, to raise brand awareness and to attract and retain customers. Our initiatives may not be successful, resulting in expenses incurred without the benefit of higher revenues. Further, if our marketing and advertising strategies are not successful, we may be forced to engage in additional promotional activities to attract and retain customers, including offers for free or discounted food, and any such additional promotional activities could adversely impact our profitability. Additionally, some of our competitors have greater financial resources than we do, enabling them to spend significantly more on marketing, advertising, and other initiatives. Should our competitors increase spending on marketing, advertising, and other initiatives, or our marketing funds decrease for any reason, or should our advertising, promotions, new menu items, and restaurant designs and remodels be less effective than those of our competitors or not resonate with our customers, there could be a material adverse effect on our results of operations and financial condition.

The challenging

Adverse changes in the economic environment may affect our franchisees, with adverse consequences to us.

We rely

Adverse changes in part onthe economic environment, including inflation and increased labor and supply costs, could result in our franchisees and the manner in which they operate their locations to develop and promote our business. As of December 27, 2017, our top 10 franchisees operated over 66% of our franchised restaurants and two franchisees operated over 35% of our franchised restaurants. Due to the continuing challenging economic environment, it is possible that some franchisees could filefiling for bankruptcy or becomebecoming delinquent in their payments to us, which could have significant adverse impacts on our business, due to loss or delay in payments of (i) royalties, (ii) information technology (“IT”) support service fees, (iii) contributions to our advertising funds, and (iv) other fees. Bankruptcies by our franchisees could (i) prevent us from terminating their franchise agreements, so that we could offer their territories to other franchisees, (ii) negatively impact our market share and operating results, as we might have fewer well-performing restaurants, and (iii) adversely impact our ability to attract new franchisees.

As

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Franchisees may not have access to the financial or management resources that they need to open the restaurants contemplated by their agreements with us, or be able to find suitable sites on which to develop those restaurants. Franchisees may not be able to negotiate acceptable lease or purchase terms for restaurant sites, obtain necessary permits and government approvals, or meet construction schedules. Any of these problems could slow our growth and reduce our franchise revenue. Additionally, our franchisees typically depend on financing from banks and other financial institutions, which may not always be available to them, in order to construct and open new restaurants. For these reasons, franchisees operating under development agreements may not be able to meet the new restaurant opening dates required under those agreements. Also, we sublease certain restaurants to some existing California franchisees. If any such franchisees cannot meet their financial obligations under their subleases, or otherwise fail to honor or default under the terms of their subleases, especially where state franchise laws may limit our ability to terminate or modify these franchise arrangements, we will be financially obligated under a master lease and could be materially and adversely affected. In the past, franchisees have entered bankruptcy or receivership, which can lead to sale or closure of franchises, cause underperformance or underinvestment in capital expenditures, or lead to nonpayment of us or other creditors, and these circumstances could recur in the future.


We have limited control with respect to the operations of our franchisees, which could have a negative impact on our business.

As of December 28, 2022, approximately 62% of our restaurants were franchised restaurants, therefore, our success relies on the financial success and cooperation of our franchisees, yet we have limited influence over their operations. Franchisees are independent business operators. They are not our employees, and we do not exercise control over the day-to-day operations of their restaurants. We provide training and support to franchisees, and set and monitor operational standards, but the quality of franchised restaurants may be diminished by any number of factors beyond our control. Consequently, franchisees may fail to operate their restaurants in fashions consistent with our standards and requirements, or to hire and train qualified managers and other restaurant personnel. If franchisees do not operate to our expectations, our image and reputation, and the images and reputations of other franchisees, may suffer materially, and system-wide sales could decline significantly.

If our relations with existing or potential franchisees deteriorate, restaurant performance and our development pipeline could suffer.

Our growth depends on maintaining amicable relations with our franchisees. Franchisees, as independent business operators, may from timefranchisees, including their participation in and adherence to time disagree with us and our strategies regarding the business orrestaurant operating guidelines. Because our interpretation ofability to control our respective rights and obligations under the franchise agreement. Disagreementfranchisees is limited, disagreement may lead to inaction by our franchisees with respect to our initiatives, or even disputes with our franchisees, and we expect suchin court, arbitration or otherwise, including disputes related to an actual or alleged violation of contractual, statutory or common law obligations. Such disputes occur from time to time as we continue to offer franchises. Disputes between usfranchises due to our size and our franchisees, whether in

court or otherwise, could relate to either party’s violationthe general nature of its contractual obligations.the franchisor-franchisee relationship. Unfavorable judgments, awards or settlements
relating to franchisee disputes could result in monetary or injunctive relief against us, including the voiding of non-compete,
territorial exclusivity, or other development-related provisions upon which we rely. For example, inrely to protect our brand, that could have a recent suit where a
franchisee challenged the enforceabilitymaterial adverse effect on our business and results of the territorial exclusivity clause in its franchise agreementoperations. Disputes with us, a jury found in
favor of the franchisee. Although we intend to vigorously appeal the judgement, if this or similar clauses were held unenforceable, we and other franchisors could be materially negatively impacted. To the extent that we have such disputes,franchisees also divert the attention, time, and financial resources of our management and our franchisees will be diverted from our restaurants, which could have a material adverse effect on our (and our franchisees’) business, financial condition, results of operations, and cash flows.flows, as well as our ability to attract new franchisees. Even our success in franchisee disputes could damage our franchisees'(or our franchisees’) finances or operations, oras well as our relationships with them.
our franchisees and our ability to attract new franchisees given the negative connotations of any franchisor-franchisee disputes.

Our self-insurance programs may expose us to significant and unexpected costs and losses.

We currently maintain employee health insurance coverage on a self-insured basis. We do maintain stop loss coverage which sets a limit on our liability for both individual and aggregate claim costs.

We currently record a liability for our estimated cost of claims incurred and unpaid as of each balance sheet date. Our estimated liability is recorded on an undiscounted basis and includes a number of significant assumptions and factors, including historical trends, expected costs per claim, actuarial assumptions, and current economic conditions. Our history of claims activity for all lines of coverage is closely monitored, and liabilities are adjusted as warranted based on changing circumstances. It is possible, however, that our actual liabilities may exceed our estimates of loss. We may also experience an unexpectedly large number of claims that result in costs or liabilities in excess of our projections, and

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therefore we may be required to record additional expenses. For these and other reasons, our self-insurance reserves could prove to be inadequate, resulting in liabilities in excess of our available insurance and self-insurance. If a successful claim is made against us and is not covered by our insurance or exceeds our policy limits, our business may be negatively and materially impacted.

Information technology system failures or breaches of our network security could interrupt our operations and adversely affect our business.
We rely on our computer systems and network infrastructure across our operations, including point-of-sale processing at our restaurants. Our operations depend upon our ability to protect our computer equipment and systems against damage from physical theft, fire, power loss, telecommunications failure, and other catastrophic events, as well as from internal and external security breaches, viruses, and other disruptive problems. Any damage or failure of our computer systems or network infrastructure that causes an interruption in our operations could have a material adverse effect on our business and subject us to litigation or to actions by regulatory authorities. Moreover, these systems, infrastructures, and operations rely upon third-party software and vendors, and we may therefore have a limited ability to guard against, learn about, or remedy problems that could harm us, including bugs and glitches, system outages, and hacks that exploit security vulnerabilities to steal or ransom information.
If we are unable to protect our customers’ payment method data, we could be exposed to data loss, litigation, liability, and reputational damage.
We accept electronic payment cards from our customers in our restaurants. For the fiscal year ended December 27, 2017, approximately 53% of our sales were attributable to credit/debit card transactions, and credit/debit card usage could continue to increase. A number of restaurant operators and retailers have experienced actual or potential security breaches in which credit/debit card information may have been stolen. While we have taken reasonable steps to prevent the occurrence of security breaches in this respect, we may in the future become subject to claims for purportedly fraudulent transactions arising out of the

actual or alleged theft of credit/debit card information, and we may also be subject to lawsuits or other proceedings in the future relating to these types of incidents. Proceedings related to theft of credit/debit card information may be brought by payment card providers, banks, and credit unions that issue cards, cardholders (either individually or as part of a class action lawsuit), and federal and state regulators. Any such proceedings could distract our management team members from running our business and cause us to incur significant unplanned losses and expenses.
We also sell and accept for payment El Pollo Loco gift cards, and our loyalty rewards program provides points that can be redeemed for purchases. Like credit and debit cards, gift cards and rewards points are vulnerable to theft, whether physical or electronic. We believe that our gift cards are primarily vulnerable to physical theft, as we have implemented gift card policies such as requiring a physical card to be presented when redeeming value from a gift card; however, there could be instances of non-compliance with these policies. We believe that, due to their electronic nature, rewards points are primarily vulnerable to hacking. Customers affected by any loss of data or funds could litigate against us, and security breaches or even unsuccessful attempts at hacking could harm our reputation, and guarding against or responding to hacks could require significant time and resources.
We also receive and maintain certain personal information about our customers and team members. The use of this information by us is regulated at the federal and state levels. If our security and information systems are compromised or our team members fail to comply with these laws and regulations and this information is obtained by unauthorized persons or used inappropriately, it could adversely affect our reputation, as well as the results of operations, and could result in litigation against us or the imposition of penalties. In addition, our ability to accept credit/debit cards as payment in our restaurants and online depends on us maintaining our compliance status with standards set by the PCI Security Standards Council. These standards, set by a consortium of the major credit card companies, require certain levels of system security and procedures to protect our customers’ credit/debit card information as well as other personal information. Privacy and information security laws and regulations change over time, and compliance with those changes may result in cost increases due to necessary system and process changes.
The failure to enforce and maintain our trademarks and protect our other intellectual property could materially and adversely affect our business, including our ability to establish and maintain brand awareness.
We have registered El Pollo Loco ®, Pollo Bowl ®, The Crazy Chicken ®, and certain other names used by our restaurants as trademarks or service marks with the PTO and El Pollo Loco® in approximately 42 foreign countries. In addition, the El Pollo Loco logo, website name and address, and Facebook, Twitter, Instagram and YouTube accounts are our intellectual property. The success of our business strategy depends on our continued ability to use our existing trademarks and service marks in order to increase brand awareness and further develop our branded products. If our efforts to protect our intellectual property are inadequate, or if any third party misappropriates or infringes upon our intellectual property, whether in print, on the Internet, or through other media, our brands and branded products could fail to maintain or achieve market acceptance and the value of our brands could be harmed, materially and adversely affecting our business. There can be no assurance that all of the steps that we have taken to protect our intellectual property in the United States and in foreign countries will be adequate. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as do the laws of the United States.
We maintain the recipe for our chicken marinade, as well as certain proprietary standards, specifications, and operating procedures, as trade secrets or confidential proprietary information. We may not be able to prevent the unauthorized disclosure or use of our trade secrets or proprietary information, despite the existence of confidentiality agreements and other measures. While we try to ensure that the quality of our brands and branded products is maintained by all of our franchisees, we cannot be certain that these franchisees will not take actions that adversely affect the value of our intellectual property or reputation. If any of our trade secrets or proprietary information were to be disclosed to or independently developed by a competitor, our business, financial condition, and results of operations could be materially and adversely affected.
We depend upon our board of directors, executive officers, and key employees.
We rely upon the accumulated knowledge, skills, and experience of the members of our board of directors, our executive officers, and our key employees. If they were to leave us or become incapacitated, we might suffer in our planning and execution of business strategy and operations, impacting our brand and financial results. We also do not maintain any key man life insurance policies for any of our employees.
If we do not successfully manage the transition associated with the resignation of our former CEO and the appointment of a
new CEO, it could be viewed negatively by our customers and shareholders and could have an adverse impact on our
business.
Stephen J. Sather will resign from his position as the Company’s President Chief Executive Officer and from the Board
effective March 12, 2018. Bernard Acoca has been appointed as the Company’s President and CEO, effective March 12, 2018.
Such leadership transitions can be inherently difficult to manage, and an inadequate transition of our CEO may cause disruption

to our business, including to our relationships with customers, vendors and employees. It may also make it more difficult to
retain and hire key employees.
Matters relating to employment and labor law may adversely affect our business.
Various federal, state and local labor laws govern our relationships with our employees and affect operating costs. These laws include employee classifications as exempt or non-exempt, minimum wage requirements, unemployment tax rates, workers’ compensation rates, citizenship requirements, and other wage and benefit requirements for employees classified as non-exempt. Significant additional government regulations and new laws mandating increases in minimum wages or benefits such as health insurance could materially affect our business, financial condition, operating results, and cash flow. Furthermore, the unionization of our employees and of the employees of our franchisees could materially affect our business, financial condition, operating results, and cash flow.
We are also subject in the ordinary course of business to employee claims against us based, among other things, on discrimination, harassment, wrongful termination, or violation of wage and labor laws. Such claims could also be asserted against us by employees of our franchisees. These claims may divert our financial and management resources that would otherwise be used to benefit our operations. The on-going expense of any resulting lawsuits, and any substantial settlement payment or damage award against us, could adversely affect our business, brand image, employee recruitment, financial condition, operating results, or cash flows.
Restaurant companies have been the targets of class action lawsuits and other proceedings alleging, among other things, violations of federal and state workplace and employment laws. Proceedings of this nature are costly, divert management attention, and, if successful, can result in payment of substantial damages or settlement costs.
Our business is subject to the risk of litigation by employees, consumers, suppliers, stockholders, and others through private actions, class actions, administrative proceedings, regulatory actions, and other litigation. The outcome of litigations, particularly class and regulatory actions, is difficult to assess or quantify. In recent years, restaurant companies, including us, have been subject to lawsuits, including class action lawsuits, alleging violations of federal and state laws regarding workplace and employment conditions, discrimination, and similar matters. A number of these lawsuits have resulted in payments of substantial damages by the defendants. Similar lawsuits have been instituted from time to time alleging violations of various federal and state wage and hour laws regarding, among other things, employee meal deductions, overtime eligibility of managers, and failure to pay for all hours worked. In the past, we have been a party to wage and hour class action lawsuits and are currently a party to such lawsuits on behalf of purported classes. See Item 3, “Legal Proceedings.”
Occasionally, our customers file complaints or lawsuits against us alleging that we are responsible for some illnesses or injuries that they suffered at or after a visit to one of our restaurants, including actions seeking damages resulting from food-borne illnesses or accidents in our restaurants. We are also subject to a variety of other claims from third parties arising in the ordinary course of our business, including contract claims. The restaurant industry has also been subject to a growing number of claims that the menus and actions of restaurant chains have led to the obesity of certain of their customers. We may also be subject to lawsuits from our employees, the U.S. Equal Employment Opportunity Commission, or others, alleging violations of federal or state laws regarding workplace and employment conditions, discrimination, and similar matters.
Regardless of whether any claims against us are valid and whether we are liable, claims may be expensive to defend against and divert time and money away from operations. In addition, claims may generate negative publicity, which could reduce customer traffic and sales. Although we maintain what we believe to be adequate levels of insurance, insurance may not be available at all or in sufficient amounts to cover any liabilities with respect to these or other matters. A judgment or other liability in excess of our insurance coverage for any claims, or any adverse publicity resulting from claims, could adversely affect our business and results of operations.
If we or our franchisees face labor shortages or increased labor costs, our results of operations and growth could be adversely affected.
Labor is a primary component in the cost of operating our company-operated and franchised restaurants. If we or our franchisees face labor shortages or increased labor costs, because of increased competition for employees, a decrease in the labor supply due to changes in immigration policy including barriers to immigrants entering, working in, or remaining in the United States, higher employee-turnover rates, unionization of restaurant workers, or increases in federal, state, or local minimum wages or in other employee benefits costs (including costs associated with health insurance coverage or workers’ compensation insurance), our and our franchisees’ operating expenses could increase, and our growth could be adversely affected.
We have a substantial number of hourly employees who are paid wage rates at or based on the applicable federal, state, or local minimum wage, and increases in the minimum wage will increase our labor costs and the labor costs of our franchisees. The California minimum wage rose to $10.50 per hour on January 1, 2017 and $11.00 per hour on January 1, 2018 and is scheduled

to rise to (i)$12.00 per hour on January 1, 2019, (ii) $13.00 per hour on January 1, 2020, (iii) $14.00 per hour on January 1, 2021, and (iv) $15.00 per hour on January 1, 2022, subject, in each case, to the governor’s ability to pause any scheduled increase (“off-ramp” provisions) for one year if either economy or budget conditions are met. Initial determinations are to be made by the governor by August 1 of each year prior to a January increase. The governor makes the final determination by September 1. Thereafter, the state minimum wage is to be indexed annually for inflation.
Local minimum wages may exceed or ramp up faster than state levels. In particular, the minimum wage in the City of Los Angeles and the unincorporated areas of the County of Los Angeles is scheduled to rise to $15.00 by July 1, 2020 in accordance with a June, 2015 ordinance: (i) from July 1, 2017, $12.00, (ii) from July 1, 2018, $13.25, (iii) from July 1, 2019, $14.25, (iv) from July 1, 2020, $15.00, (v) from July 1, 2022, indexed to inflation. On September 29, 2015, the Board of Supervisors of the County of Los Angeles adopted an ordinance amending the Los Angeles County Code and establishing a countywide minimum wage covering unincorporated areas of the county following the same schedule.
Other municipalities in the County of Los Angeles and elsewhere have followed and may continue to follow. For example:
On January 19, 2016, the City Council of the City of Long Beach approved a plan to raise the minimum wage on the following schedule: (i) from January 1, 2017, $10.50, (ii) from January 1, 2018, $12.00, and (iii) from January 1, 2019, $13.00. Thereafter, pursuant to further study, the minimum wage for the City of Long Beach could rise to $14.00 in 2020 and $15.00 in 2021.
In 2017, approximately 73% of our revenue came from company-operated and franchised restaurants in the greater Los Angeles area, including 11% from the City of Los Angeles, 42% from other incorporated cities in the County of Los Angeles, and 1% from unincorporated areas of the County of Los Angeles. Those restaurants that are not directly covered by these ordinances may be covered by future ordinances, may face competitive or political pressures to match these wage levels, or may suffer from any regional economic distress caused by these ordinances.
Federally-mandated, state-mandated, or locally-mandated minimum wages may be further raised in the future. We may be unable to increase our menu prices in order to pass future increased labor costs on to our customers, in which case our margins would be negatively affected. Also, reduced margins of franchisees could make it more difficult to sell franchises. And if menu prices were increased by us and our franchisees to cover increased labor costs, the higher prices could adversely affect sales and thereby reduce our margins and the royalties that we receive from franchisees.
In addition, our success depends in part upon our and our franchisees’ ability to attract, motivate, and retain a sufficient number of well-qualified restaurant operators, management personnel, and other employees. Qualified individuals needed to fill these positions can be in short supply in some geographic areas. In addition, limited service restaurants have traditionally experienced relatively high employee turnover rates. Although we have not yet experienced any significant problems in recruiting or retaining employees, our and our franchisees’ inability to recruit and retain qualified individuals could delay planned openings of new restaurants or result in higher employee turnover in existing restaurants, which could increase our and our franchisees’ labor costs and have a material adverse effect on our business, financial condition, results of operations, and cash flows. If we or our franchisees are unable to recruit and retain sufficiently qualified individuals, our business and our growth could be adversely affected. Competition for qualified employees could require us or our franchisees to pay higher wages, which could also result in higher labor costs.

We are locked into long-term and non-cancelable leases, and may be unable to renew leases at the ends of their terms.

Many of our restaurant leases are non-cancelable and typically have initial terms of up to 20 years andwith up to threefour renewal terms of five years that we may exercise at our option. Even if we close a restaurant, we may remain committed to perform our obligations under the applicable lease, which could include, among other things, payment of the base rent for the balance of the lease term. In addition, in connection with leases for restaurants that we will continue to operate, we may, at the end of the lease term and any renewal period for a restaurant, be unable to renew the lease without substantial additional cost, if at all. As a result, we may close or relocate the restaurant, which could subject us to construction and other costs and risks. Additionally, the revenue and profit, if any, generated at a relocated restaurant might not equal the revenue and profit generated at its prior location.

We

Risks Related to Information Technology and Data Security

Information technology system failures or breaches of our franchisees are subjectnetwork security could interrupt our operations and adversely affect our business.

From time to extensive government regulations that could resulttime, we experience security events within our networks and systems. These security events have included, and, may in claims leading to increased coststhe future include, those caused by physical or electronic break-ins, computer viruses, malware, worms, attacks by hackers or foreign governments, unauthorized access through the use of compromised credentials and restrict our ability to operatetampering, including through social engineering such as phishing attacks, coordinated denial-of-service attacks, exploitation of design flaws, bugs or sell franchises.

Wesecurity vulnerabilities and our franchisees are subject to extensive government regulations atsimilar breaches, or intentional or unintentional acts by employees or other insiders with access privileges. In the federal, state,past, these events have resulted in, and local levels, including, but not limited to, regulations relating to preparation and sale of food, zoning and building codes, franchising, land use, and employee, health, sanitation, and safety matters. We and our franchisees are required to obtain and maintain a wide variety of government licenses, permits, and approvals. Difficulty or failure in obtaining these in the future could result in, delayingamong other things, temporary system disruptions or cancelingshutdowns or unauthorized access to confidential information. These events could in the opening of new restaurants. Local authorities may suspend or deny renewalfuture also result in misappropriation of our government licenses if they determine that

or our customers’ proprietary or confidential information, breach of our legal, regulatory or contractual obligations, delays in our operations, do not meet their standards for initial grant or renewal. This risk will increase if there is a major change ininability to access or rely upon critical business records or systems. In some cases, it may be difficult to anticipate or immediately detect such incidents and the licensing requirements affecting our types of restaurants.
The Patient Protection and Affordable Care Act of 2010 (the “PPACA”) requires employers such as usdamage they cause. We may be required to provide adequate and affordable health insurance for all qualifying employeesexpend significant financial resources to protect against or to pay a monthly per-employee fee or penalty for non-compliance.remediate such security breaches. In past years, we experienced a marginal enrollment increase in our health plans with newly eligible employees as a result of the PPACA. In early 2017, the PPACA was undermined through executive and Congressional action and in March 2017, the U.S. House of Representatives introduced legislation known as the American Health Care Act, which, if enacted, would amend or repeal significant portions of the PPACA. It is uncertain when or if the provisions in the American Health Care Act will become law, or the extent to which any changes may impact our business. Any future cost increases may be material and could lead to future modifications to our business practices that may be disruptive toaddition, our operations and impactdepend upon our ability to attractprotect our computer equipment and systems against damage from physical theft, fire, power loss, telecommunications failure, and other catastrophic events and disruptive problems. Any unauthorized access of our systems or the information stored on such systems, damage or failure of our computer systems or network infrastructure that causes an interruption in our operations could damage our reputation, subject us to litigation or to actions by regulatory authorities, harm our business relations or increase our security and insurance costs, which could have a material adverse effect on our business, financial condition and results of operations. Moreover, these systems, infrastructures, and operations rely upon third-party software and vendors, and we may therefore have a limited ability to guard against, learn about, or remedy problems that could harm us, including bugs and glitches, system outages, and hacks that exploit security vulnerabilities to obtain information.

If we are unable to protect our customers’ payment method data or personal information, we could be exposed to data loss, litigation, liability, and reputational damage.

We collect and retain personnel.

internal and customer data, including personally identifiable information of our employees and customers. It is possible that measures we have taken to prevent the occurrence of security breaches may not be adequate and we may in the future become subject to claims or proceedings for purportedly fraudulent transactions arising out of the actual or alleged theft of credit/debit card information. Any such claims or proceedings could distract our management team members from running our business, adversely affect our reputation, and cause us to incur significant unplanned losses and expenses.

We are also subject to regulationfederal and state laws regulating the collection and use of personal information of our employees and customers, including the California Consumer Privacy Act (“CCPA”), which took effect January 1, 2020, and the California Privacy Rights Act (“CPRA”), which was approved in November 2020, and beginning in January 2023 will

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impose additional data protection obligations on companies doing business in California. In addition, our ability to accept credit/debit cards as payment in our restaurants and online depends on us maintaining our compliance status with standards set by the Federal Trade CommissionPCI Security Standards Council, which require certain levels of system security and subjectprocedures to state laws that governprotect our customers’ credit/debit card information as well as other personal information. Compliance with these standards and regulations may impose significant costs on us. Further, while we have implemented policies and procedures to ensure compliance with the offer, sale, renewal,CCPA, the manner in which the California Attorney General may interpret and terminationenforce the CCPA is uncertain. The potential effects of franchisesthe CCPA and CRPA are far-reaching and may require us to modify our relationships with our franchisees. Failuredata processing practices and policies and incur substantial costs and expenses in an effort to comply with these lawsregulations. There is also the potential for increased regulatory enforcement by the state agencies empowered to enforce these laws. Noncompliance with the CCPA, CRPA and regulations in any jurisdiction or to obtain required approvalsother privacy laws could result in a ban on injunctions, fines and/or temporary suspension of franchise sales, fines,proceedings against us by governmental agencies or the requirement that we make a rescission offerothers. There could also be uncertainty surrounding compliance with privacy laws in other jurisdictions such as state-specific laws which may conflict with existing legislation or future laws and regulations.

Risks Related to Intellectual Property

The failure to enforce and maintain our franchisees, any of which could affecttrademarks and protect our ability to open new restaurants in the future and thusother intellectual property could materially and adversely affect our business, including our ability to establish and maintain brand awareness.

The success of our business strategy depends on our ability to use our existing trademarks and service marks in order to increase brand awareness and further develop our branded products. If our efforts to protect our intellectual property are inadequate, or if any third-party misappropriates or infringes upon our intellectual property, whether in print, on the Internet, or through other media, our brands and branded products could fail to maintain or achieve market acceptance and the value of our brands could be harmed, materially and adversely affecting our business. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as do the laws of the United States. Any litigation to enforce our intellectual property rights will likely be costly and may not be successful.

We maintain the recipe for our chicken marinade, as well as certain proprietary standards, specifications, and operating results.procedures, as trade secrets or confidential proprietary information. We may not be able to prevent the unauthorized disclosure or use of our trade secrets or proprietary information, despite the existence of confidentiality agreements and other measures. While we try to ensure that the quality of our brands and branded products is maintained by all of our franchisees, we cannot be certain that these franchisees will not take actions that adversely affect the value of our intellectual property or reputation. If any of our trade secrets or proprietary information were to be disclosed to or independently developed by a competitor, our business, financial condition, and results of operations could be materially and adversely affected.

In addition, we may face claims of infringement that could interfere with our ability to market our restaurants and promote our brand. Any such failurelitigation may be costly and could divert resources from our business. Moreover, if we are unable to successfully defend against such claims, we may be prevented from using our trademarks or service marks in the future and may be liable for damages, which in turn could have a material adverse effect on our business, financial condition and results of operations.

Risks Related to Government Regulation and Litigation

Matters relating to employment and labor law may adversely affect our business.

Various federal, state and local labor laws govern our relationships with our employees and affect operating costs. These laws include employee classifications as exempt or non-exempt, minimum wage requirements, unemployment tax rates, workers’ compensation rates, citizenship requirements, and other wage and benefit requirements for employees classified as non-exempt. Significant additional government regulations and new laws mandating increases in minimum wages or benefits such as health insurance could materially affect our business, financial condition, operating results, and cash flow. In particular, our labor and regulatory compliance costs could be adversely impacted as a result of the FAST Act, which was signed into law in September 2022. The FAST Act, which will take effect if approved by voters in November 2024, authorizes the creation of a council to set minimum standards for workers in the industry, including for wages, working hours, and other health and safety conditions. The implementation of the FAST Act could result in increased labor cost at our California restaurants thereby potentially impacting the profitability of our California restaurants. Further, this bill could prompt similar legislation in other states. In addition, the unionization of our

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employees and of the employees of our franchisees could materially affect our business, financial condition, operating results, and cash flow.

Employee claims against us or our franchisees based on, among other things, wage and hour violations, discrimination, harassment, or wrongful termination may also create not only legal and financial liability but negative publicity that could adversely affect us and divert our financial and management resources that could otherwise be used to benefit the future performance of our operations. These types of employee claims could also subjectbe asserted against us, to liability toon a co-employer theory, by employees of our franchisees.

A significant increase in the number of these claims, or an increase in the number of successful claims, could materially and adversely affect our business, brand image, employee recruitment, financial condition, results of operations, or cash flows.

We are increasinglyfrom time to time the target of class action lawsuits and other claims proceedings, which could adversely affect our business and results of operations.

Our business is subject to environmental regulations,the risk of litigation by employees, customers, suppliers, stockholders, and others through private actions, class actions, administrative proceedings, regulatory actions, and other litigation, including actions regarding workplace and employment conditions, discrimination, and similar matters, and we are currently a party to wage and hour class action lawsuits. See additional information presented in Note 13 “Commitments and Contingencies—Legal Matters” in the accompanying “Notes to Consolidated Financial Statements” in this Annual Report. Occasionally, our customers file complaints or lawsuits against us alleging that we are responsible for some illnesses or injuries that they suffered at or after a visit to one of our restaurants, including actions seeking damages resulting from food-borne illnesses or accidents in our restaurants. We are also subject to a variety of other claims from third parties arising in the ordinary course of our business, including contract claims. The restaurant industry has also been subject to a growing number of claims that the menus and actions of restaurant chains have led to the obesity of certain of their customers. We may also be subject to lawsuits from our employees, the U.S. Equal Employment Opportunity Commission, or others alleging violations of federal or state laws regarding workplace and employment conditions, discrimination, and similar matters.

Regardless of whether any claims against us are valid and whether we are liable, claims may be expensive to defend against and divert time and money away from operations. In addition, claims may generate negative publicity, which could reduce customer traffic and sales. Insurance may increasenot be available at all or in sufficient amounts to cover any liabilities with respect to these or other matters. A judgment or other liability in excess of our cost of doinginsurance coverage for any claims, or any adverse publicity resulting from claims, could adversely affect our business and affect the manner in whichresults of operations.

If we operate. Environmental regulations could increase the level ofor our taxation and future regulations could impose restrictionsfranchisees face labor shortages or increase theincreased labor costs, associated with food, food packaging, and other supplies, transportation costs, and utility costs. Complying with environmental regulations may cause our results of operations and growth could be adversely affected.

Labor is a primary component in the cost of operating our company-operated and franchised restaurants. Labor shortages and increased labor costs are subject to suffer. We cannot predict what environmental regulationsnumerous internal and external factors, including higher employee-turnover rates, changes in immigration policy including barriers to immigrants entering, working in, or legislation willremaining in the United States, regulatory changes, prevailing wage rates, including increases in federal, state, or local minimum wages or in other employee benefit costs (including costs associated with health insurance coverage or workers’ compensation insurance), and increased competition we face from other companies for qualified employees. During 2022, we continued to experience a competitive and tight labor market. This was attributed to, among other things, increased federal unemployment subsidies, including unemployment benefits offered in response to the ongoing COVID-19 pandemic, costs associated with COVID-19 related overtime pay and other government regulations. A sustained labor shortage could lead to increased costs, such as increased overtime incurred to meet the demands of our customers and increased wage rates to attract and retain employees. Any failure to meet our staffing needs or any material increases in employee turnover rates could adversely affect our business and results of operations, including our ability to grow our restaurant base. See also our risk factor titled “The COVID-19 pandemic and measures intended to prevent its spread has had, and may continue to have, a significant negative impact on our business, sales, results of operations and financial condition, and any future pandemic, epidemic or public health emergency may result in similar adverse effects” above for labor shortage risks we may face in connection with the COVID-19 pandemic.

Federally-mandated, state-mandated, or locally-mandated minimum wages have recently increased in several jurisdictions, including the State of California and Los Angeles County, and may be enactedfurther raised in the future, how existing orincluding as a result of the FAST Act in California. We may be unable to sufficiently increase our menu prices in order

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to pass future environmental laws willincreased labor costs on to our customers, in which case our margins would be administered or applied, ornegatively affected. Also, reduced margins of franchisees could make it more difficult to sell franchises. In addition, increases in menu prices by us and our franchisees to cover increased labor costs could have the leveleffect of costslowering sales, which would thereby reduce our margins and the royalties that we may incurreceive from franchisees.

We are subject to extensive laws, government regulation, and other legal requirements and our failure to comply with existing or satisfy claimsnew laws and regulations could adversely affect our operational efficiencies, ability to attract and retain talent and results of operations.

Our business is subject to extensive federal, state and local laws and regulations, including those relating to suchthe preparation, sale and labeling of food and beverages, labor and employment practices and working conditions, health, sanitation, safety and fire standards, building and zoning requirements, registration, offer, sale, termination and renewal of franchises, public accommodations and safety conditions, environmental matters, and consumer protection and privacy obligations. See Item 1 “Business—Regulation and Compliance” for further information. We are also subject to laws and regulations.

regulations concerning our compliance as a public company, including disclosure and governance matters, including accounting and tax regulations, SEC and The Nasdaq Stock Market LLC (“Nasdaq”) disclosure requirements.

Compliance with these laws and regulations, and future new laws or changes in these laws or regulations that impose additional requirements, can be costly. Any failure or perceived failure to comply with these laws or regulations could result in, among other things, revocation of required licenses, administrative enforcement actions, fines and civil and criminal liability.

Changes in health, safety, construction, labor, environmental, or other laws or regulations, including changes to or repeal of the PPACA,Patient Protection and Affordable Care Act (“PPACA”), could impose costs upon us, including transition costs. Such transition costs could include uncertainties about how the new laws or regulations might be interpreted, enforced, or litigated by either regulators or private parties. Such changes could also have economic implications for our customers. For example, changes to health insurance law could diminish our customers’ disposable incomes and thus reduce their frequency of eating or ordering out, even from QSR or fast casual restaurants, including us.

Legislation and regulations requiring the display and provisionregarding certain of nutritional information for our menu offerings, new information or attitudes regarding diet and health, or adverse opinions about the health effects of consuming our menu offerings, could affect consumer preferences and negatively impact our results of operations.

Government

Further, certain government authorities have adopted or may adopt laws and regulations regarding trans-fats, sodium, sodas or other ingredients or products used or sold by our restaurants. While only a small number of our ingredients contain trans-fats in trace amounts, these regulations may require us to limit or remove ingredients from our products, which could affect product tastes, customer satisfaction levels, and sales volumes. Transitioning to higher-cost ingredients may also hinder our ability to operate in certain markets and proposed tax increases on certain products, such as sodas, may affect sales volumes of those products. Changes in government regulation and consumer eating habits may impact our business as a result of changes in attitudes regarding diet and health or new information regarding the health effects of consuming our menu offerings. These changes have resulted in, and may continue to result in, the enactment of laws and regulations that impact the ingredients and nutritional content of our menu offerings, or laws and regulations requiringrequire us to disclose the nutritional content of our foodmenu offerings.

The PPACA establishes a uniform, federal requirement for certain restaurants to post certain nutritional information on their menus. Specifically, the PPACA amended the Federal Food, Drug, and Cosmetic Act to require that chain restaurants with 20 or more locations, operating under the same name and offering substantially the same menus, publish the total number of calories of standard menu items on menus and menu boards, along with a statement that puts this calorie information in the context of a total daily calorie intake. The PPACA also requires covered restaurants to provide to consumers, upon request, a written summary of detailed nutritional information for each standard menu item, and to provide a statement on menus and menu boards about the availability of this information. The PPACA further permits the U.S. Food and Drug Administration to require covered restaurants to make additional nutrient disclosures, such as disclosure of trans-fat content. An unfavorable report on, or reaction to, our menu ingredients, the size of our portions, or the nutritional content of our menu items could negatively influence the demand for our offerings. Currently, it is uncertain how proposed legislative changes will impact the PPACA or the extent to which any changes may impact our business.
Furthermore, For example, a number of states, counties, and cities have enacted menu labeling laws requiring multi-unit restaurant operators to disclose certain nutritional information to customers,customers. Furthermore, the Affordable Care Act requires chain restaurants to publish calorie information on their menus and menu boards. These and other requirements may increase our expenses, slow customers’ ordering process, or have enacted legislation restrictingnegatively influence the usedemand for our offerings; all of certain types of ingredients in restaurants. California, our largest market, is one of these, although its menu labeling law has been superseded by the PPACA.
While we believe that our food is generally healthier than that of our peers, customers may disagree or change their dining habits to avoid QSR-like restaurants altogether.

Compliance with current and future laws and regulations regarding the ingredients and nutritional content of our menu items may be costly and time-consuming. Additionally, if consumer health regulations or consumer eating habits change significantly, we may be required to modify or discontinue certain menu items, and we may experience higher costs associated with the implementation of those changes. Additionally, some government authorities are increasing regulations regarding trans-fats and sodium, which may require us to limit or eliminate trans-fats and sodium in our menu offerings, or switch to higher-cost ingredients, or which may hinder our ability to operate in certain markets. Some jurisdictions have banned certain cooking ingredients, such as trans-fats, which a small number of our ingredients contain in trace amounts, or have discussed banning certain products, such as large sodas. Removal of these products and ingredients from our menus could affect product tastes, customer satisfaction levels, and sales volumes, whereas if we were to fail to comply with these laws or regulations, our business could experience a material adverse effect.
We cannot make any assurances regarding our ability to effectively respond to changes in consumer health perceptions, to successfully implement nutritional content disclosure requirements, or to adapt our menu offerings to trends in eating habits. The imposition of additional menu labeling laws couldcan have an adverse effect on our results of operations and financial position, as well as on the restaurant industry in general.

We may become subject to liabilities arising from environmental laws that could likely increase our operating expenses and materially and adversely affect our business and results of operations.

We are subject to federal, state, and local laws, regulations, and ordinances that:

govern activities or operations that may have adverse environmental effects, such as discharges into the air, water and soils, as well as waste handling and disposal practices for solid and hazardous wastes and waste water; and
govern activities or operations that may have adverse environmental effects, such as discharges into the air and water, as well as waste handling and disposal practices for solid and hazardous wastes; and

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impose liability for the costs
impose liability for the costs of remediating, and the damage resulting from, past spills, disposals, or other releases of petroleum products and hazardous materials.

In particular, under applicable environmental laws, we may be responsible for remediation of environmental conditions and subject to associated liabilities, including liabilities for clean-upcleanup costs, personal injury, or property damage, relating to our restaurants and the land on which our restaurants are located, regardless of whether we lease or own the restaurants or land in question and regardless of whether such environmental conditions were created by us or by a prior owner or tenant. If we are found liable for the costs of remediation of contamination at any of our properties, our operating expenses would likely increase and our results of operations wouldcould be materially and adversely affected. See Item 1, “Business—above under “Item 1. Business—Environmental Matters.”

We are required to pay our pre-IPO owners for certain tax benefits, which amounts are expected to be material.
We have entered into an income tax receivable agreement (the “TRA”) with our pre-IPO stockholders, which provides for payment by us to our pre-IPO stockholders of 85% of the amount of cash savings, if any, in federal, state, local, and foreign income tax that we and our subsidiaries actually realize (or are deemed to realize in the case of an early termination by us or a change of control) as a result of the utilization of our net operating losses and other tax attributes attributable to periods prior to July 2014 together with interest accrued at a rate of LIBOR plus 200 basis points from the date the applicable tax return is due (without extension) until paid.
Our payments under the TRA may be material. As of December 27, 2017, we had an accrued payable related to this agreement of approximately $22.0 million. In fiscal 2017, we paid $11.1 million to our pre-IPO stockholders under the TRA.
TRA payment obligations are obligations of Holdings and not of its subsidiaries. The actual amounts and utilization of net operating losses and other tax attributes, as well as the amounts and timing of any payments under the TRA, will vary depending upon a number of factors, including the amount, character, and timing of Holdings’ and its subsidiaries’ taxable income in the future.
Our counterparties under the TRA will not reimburse us for any benefits that are subsequently disallowed, although any future payments would be adjusted to the extent possible to reflect the result of such disallowance. As a result, in such circumstances, we could make payments under the TRA greater than our actual cash tax savings.
If we undergo a change of control as defined in the TRA, the TRA will terminate, and we will be required to make a payment equal to the present value of expected future payments under the TRA, which payment would be based on certain assumptions, including assumptions related to our future taxable income. Additionally, if we or a direct or indirect subsidiary transfer any asset to a corporation with which we do not file a consolidated tax return, we will be treated as having sold that asset for its fair market value in a taxable transaction for purposes of determining the cash savings in income tax under the TRA. Any such payment resulting from a change of control or asset transfer could be substantial and could exceed our actual cash tax savings.

Risks Related to OwnershipCertain of Our Common Stock

our Stockholders

If the ownership of our common stock continues to be highly concentrated, it may prevent you and other minority stockholders from influencing significant corporate decisions and may result in conflicts of interest.

As of December 28, 2022, Trimaran Pollo Partners, L.L.C. (“LLC”), owns approximately 43.3%30.3% of our outstanding common stock. This large position means that LLC and its majority owners—which are predecessors and affiliates of, and certain funds managed by, Trimaran Capital Partners and Freeman Spogli & Co. (collectively, “Trimaran” and “Freeman Spogli,” respectively))—possess significant influence when stockholders vote on matters such as election of directors, mergers, consolidations and acquisitions, the sale of all or substantially all of our assets, decisions affecting our capital structure, amendments to our certificate of incorporation or our by-laws, and our winding up and dissolution. So longIn addition, as LLC maintains at least 40% ownership, (i) any member of December 28, 2022, certain affiliates of Freeman Spogli & Co., FS Equity Partners V, L.P. and FS Affiliates V, L.P. (“Freeman Spogli”), own collectively approximately 15.0% of our outstanding common stock, which they received in August 2022 following a distribution by the board of directors may be removed at any time without cause by affirmative voteLLC of a majorityportion of its shares to Freeman Spogli.

Further, two of our common stock, and (ii) stockholders representing 40% or greater ownership may cause special stockholder meetings to be called. Currently, three of our nineeleven directors, including our chairman, are affiliated with Trimaran orand one of our directors is affiliated with Freeman Spogli.

This concentration of ownership may delay, deter, or prevent acts that would be favored by our other stockholders. While our board has determined that director John Roth, a general partner of Freeman Spogli and its CEO, satisfies the criteria for an independent director under NASDAQ rules, the The interests of Trimaran and Freeman Spogli, either individually or collectively, may not always coincide with our interests or the interests of our other stockholders. This concentrationWhile Trimaran and Freeman Spogli act separately with respect to their respective ownership of our shares, their significant ownership may also have the effect of delaying, deterring, or preventing acts that would be favored by our other stockholders, including a change in control of us. Also, Trimaran andand/or Freeman Spogli may seek to cause us to take courses of action that, in their judgments, could enhance their investments in us, but that might involve risks to our other stockholders or adversely affect us or our other stockholders. As a result, the market price of our common stock could decline, or stockholders might not receive a premium over the then-current market price of our common stock upon a change in control. In addition, this concentration of ownership may adversely affect the trading price of our common stock, because investors may perceive disadvantages in owning shares of a company with significant stockholders.

The interests of Trimaran and Freeman Spogli may conflict with ours or our stockholders’ in the future.

Trimaran and Freeman Spogli engage in a range of investing activities, including investments in restaurants and other consumer-related companies in particular. While our board has determined that director John Roth, a general partner of Freeman Spogli and its CEO, satisfies the criteria for an independent director under NASDAQ rules, inIn the ordinary course of their business activities, Trimaran and Freeman Spogli may engage in activities where their interests conflict with our interests or those of our stockholders. Our amended and restated certificate of incorporation provides that none of LLC or any of its officers, directors, employees, agents, shareholders, members, partners, principals, affiliates and managers (including, inter alia, Trimaran and Freeman Spogli) has a duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we operate. For example, in the third quarter of 2017, Cafe Rio, a high-growth, fast-casual Mexican restaurant company, announced that Freeman Spogli had acquired a majority interest in it. Trimaran and Freeman Spogli also may pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. In addition, Trimaran and Freeman Spogli may have an interest in pursuing acquisitions, divestitures, and other transactions that, in their judgment, could enhance their investment in us, even though those transactions might involve risks to you, such as debt-financed acquisitions.

We are a holding company with no operations, and we rely on our

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Risks Related to Ownership of Our Common Stock

Our quarterly operating subsidiariesresults may fluctuate significantly due to provide us with the funds necessary to meet our financial obligations and to pay dividends.

We are a holding company with no material direct operations. Our principal assets are the equity interests that we indirectly hold in our operating subsidiary, El Pollo Loco, Inc. (“EPL”), which owns our operating assets. As a result, we are dependent on loans, dividends,seasonality and other payments from EPL,factors, some of which are beyond our operating company and indirect wholly owned subsidiary, and from EPL Intermediate, Inc. (“Intermediate”), our direct wholly owned subsidiary, to generate the funds necessary to meet our financial obligations and to pay dividends on our common stock. Our subsidiaries are legally distinct from us and may be prohibited or restricted from paying dividends or otherwise making funds available to us under certain conditions. Although we do not expect to pay dividends on our common stock for the foreseeable future, if we are unable to obtain funds from our subsidiaries, we may be unable to, or our board may exercise its discretion not to, pay dividends.
Under our secured revolving credit facility, Holdings may not make certain payments such as cash dividends, except that it may, inter alia, (i) pay up to $1.0 million per year to repurchase or redeem qualified equity interests of Holdings held by our past or present officers, directors, or employees (or their estates) upon death, disability, or termination of employment, (ii) make payments under the 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 and officers, provided that those equity interests represent a portion of the consideration of the exercise price of those stock options, (b) pay up to $2.5 million per year pursuant to stock option plans, employment agreements, or incentive plans, (c) make up to $5.0 million in other restricted payments per year, and (d) make other restricted payments, provided that such payments would not cause, in each

case, on a pro forma basis, (x) its lease-adjusted consolidated leverage ratio to equal or exceed 4.25 times and (y) its consolidated fixed charge coverage ratio to be less than 1.75 times.
We do not anticipate paying any dividends on our common stock in the foreseeable future.
We do not expect to declare or pay any cash or other dividends in the foreseeable future on our common stock, because we intend to use cash flow generated by operations to grow our business. Our secured revolving credit facility restricts our ability to pay cash dividends on our common stock. We may also enter into other credit agreements or other borrowing arrangements in the future that restrict or limit our ability to pay cash dividends on our common stock.
As a public company, we incur significant costs to comply with the laws and regulations affecting public companies,control, which could harm our business and results of operations.
As a public company, we are subject to the reporting requirements of the Exchange Act and of the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”), to the listing requirements of the NASDAQ Global Select market (the “NASDAQ”), and to other applicable securities statutes and regulations. These statutes and regulations have increased, and will continue to increase, our legal, accounting, and financial compliance costs, and have made, and will continue to make, some activities more time-consuming and costly, particularly after we cease to be an “emerging growth company,” as defined in the JOBS Act. For example, these statutes and regulations could make it more difficult and costly for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or to incur substantial costs to maintain the same or similar coverage. These statutes and regulations could also make it more difficult for us to attract and retain qualified individuals to serve on our board of directors, on board committees, or as executive officers. Our management and other personnel devote a substantial amount of time to compliance initiatives. As a result, management’s attention may be diverted from other business concerns, which could harm our business and operating results. Although we have hired additional employees to comply with these requirements, we may need to hire more employees in the future, which will increase our costs and expenses.
Our management team and other personnel devote a substantial amount of time to new compliance initiatives, and we may not successfully or efficiently manage our transition to being a public company. To comply with the requirements of being a public company, including the Sarbanes–Oxley Act, we may need to undertake various actions, such as implementing new internal controls and procedures, and hiring accounting or internal audit staff, which would require us to incur additional expenses, and could harm our results of operations.
For as long as we are an emerging growth company, we will not be required to comply with certain reporting requirements, including those relating to accounting standards and disclosure about our executive compensation, that apply to other public companies.
We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the JOBS Act. As such, we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes–Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and of stockholder approval of any golden parachute payments not previously approved. We may take advantage of some of these exemptions. If we do, we do not know if some investors will find our common stock less attractive as a result. The result may be a less-active trading market for our common stock and increased stock price volatility.
In addition, Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
We can remain an “emerging growth company” for up to five years from our IPO, or until the earliest of (a) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (b) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (c) the date on which we have issued more than $1 billion in non-convertible debt securities in the preceding three-year period.
We were not previously required to assess the effectiveness of our internal control over financial reporting; we have and may continue to identify deficiencies as we do so.

Section 404(a) of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of internal control over financial reporting, starting with our second annual report. Prior to our second annual report, we were not subject to this requirement. Accordingly, as we continue to mature as a public company and follow the necessary procedures and practices related to internal control over financial reporting, we may identify deficiencies.
In particular, as disclosed under Item 9A, “Controls and Procedures,” in the Form 10-K for 2016, in the process of evaluating the effectiveness of our internal control over financial reporting, we identified material weaknesses, in our internal control over financial reporting as of December 28, 2016. These and future deficiencies or weaknesses, whether or not identified or remediated, or failure to achieve and maintain an effective internal control environment generally, could have a material adverse effect on our business, our finances and financial reporting, and our stock price.
The market price and trading volume of our common stock have been and may be volatile, which could result in rapid and substantial losses for our stockholders.
The market price of our common stock has fluctuated and may continue to fluctuate, or may decline significantly in the future. Shares of our common stock were sold in our IPO in July 2014 at a price of $15.00 per share, and our common stock has subsequently traded as high as $41.70 and as low as $9.25. Some of the factors that could negativelyadversely affect our share price or result in fluctuations in the price or trading volume of our common stock include:
variations in our quarterly or annual operating results;
changes in our earnings estimates, if provided, or differences between our actual financial and operating results and those expected by investors and analysts;
the contents of published research reports about us or our industry, or the failure of securities analysts to cover our common stock;
additions or departures of key management personnel;
any increased indebtedness that we may incur in the future;
announcements by us or others and developments affecting us;
actions by institutional stockholders;
litigation and governmental investigations;
legislative or regulatory changes;
judicial pronouncements interpreting laws and regulations;
changes in government programs;
changes in market valuations of similar companies;
speculation or reports by the press or investment community with respect to us or our industry in general;
announcements by us or our competitors of significant contracts, acquisitions, dispositions, strategic relationships, joint ventures, or capital commitments; and
general market, political, and economic conditions, including local conditions in the markets in which we operate.
These broad market and industry factors may decrease the market price of our common stock, regardlessstock.

Our quarterly operating results may fluctuate significantly because of our actual operating performance. The stock market in general has from time to time experienced extreme price and volume fluctuations,several factors, including recently. In addition, in the past, following periods of volatility in the overall marketbut not limited to: increases and decreases in sales; profitability of our restaurants; labor availability and costs for personnel; changes in interest rates; macroeconomic conditions, both nationally and locally; negative publicity relating to the marketconsumption of products we serve; changes in consumer preferences and competitive conditions; impairment of long-lived assets and any loss on and exit costs associated with restaurant closures; expansion to new markets; the timing of new restaurant openings and related expense; restaurant operating costs for our newly-opened restaurants; increases in infrastructure costs; and fluctuations in commodity prices.

Seasonal factors, including weather disruptions, and the timing of holidays also cause our revenue to fluctuate from quarter to quarter. Our revenue per restaurant is typically lower in the first and fourth quarters due to reduced January and December transactions and higher in the second and third quarters. As a result of seasonality, our quarterly and annual results of operations and key performance indicators such as company restaurant revenue and comparable restaurant sales may fluctuate. Accordingly, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for any year and comparable restaurant sales for any particular future period may decrease. In the future, operating results may fall below the expectations of securities analysts and investors. In that event, the price of a company’s securities, securities class action litigation has often been instituted against that company. We are currently defending against such litigation. See Item 3, “Legal Proceedings”. Such litigation could result in substantial costs and a diversion of our management’s attention and resources.

common stock would likely decrease.

Future offerings of debt or equity securities by us may adversely affect the market price of our common stock.

In the future, we may attempt to obtain financing, or to further increase our capital resources, by issuing additional shares of our common stock or by offering other equity securities, or debt, including senior or subordinated notes, debt securities convertible into equity, or shares of preferred stock. Opening new company-operated restaurants in existing and new markets could require substantial additional capital in excess of cash from operations. We would expect to finance the capital required for new company-operated restaurants through a combination of additional issuances of equity, corporate indebtedness, and cash from operations.


Issuing additional shares of our common stock or other equity securities or securities convertible into equity may dilute the economic and voting rights of our existing stockholders, reduce the market price of our common stock, or both. In a liquidation, holders of any such debt securities or preferred stock, and lenders with respect to other borrowings, could receive distributions of our available assets prior to the holders of our common stock. Debt securities convertible into equity could be subject to adjustments in their conversion ratios under certain circumstances, increasing the number of equity securities issuable upon conversion. Preferred stock, if issued, could have a preference with respect to liquidating distributions, or a preference with respect to dividend payments that could limit our ability to pay dividends to the holders of our common stock. Our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control that may adversely affect the amount, timing, or nature of our future offerings. Thus, holders of our common stock bear the risk that our future offerings may reduce the market price of our common stock and dilute their stockholdings in us.

The market price of our common stock could be negatively affected by sales of substantial amounts of our common stock in the public markets.

markets, including shares of our common stock currently held by LLC.

The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market or the perception that such sales could occur. No lock-up agreements presently are in effect.As of December 28, 2022, LLC, presently ownsFS Equity Partners V, L.P. and FS Affiliates V, L.P. own approximately 43.3%30.3%, 14.8% and 0.2%, respectively, of our outstanding common stock. FS Equity V and FS Affiliates V, which previously indirectly held shares of our common stock through LLC, received shares directly on August 31, 2022, upon LLC’s pro rata distribution in kind of shares of our common stock to FS Equity V and FS Affiliates V. LLC, FS Equity Partners V, L.P. and FS Affiliates V, L.P. could sell stock publicly either if the stock were registered or if the exemption requirements of Rule 144 were satisfied.

No lock-up agreements presently are in effect.

Pursuant to our stockholdersstockholders’ agreement, LLC and, in certain instances, Freeman Spogli, may require us to file registration statements under the Securities Act at our expense, covering resales of our common stock held by them or

25

LLC or piggyback on a registration statement in certain circumstances. Pursuant to the stockholders’ agreement, on December 29, 2022, LLC exercised these demand registration rights with respect to the shares of our common stock held by it. On February 15, 2023, we filed a registration statement on Form S-3 with the SEC allowing for the resale of the shares of our common stock held by LLC, which registration statement was declared effective on March 1, 2023. Any such sales by the LLC or Freeman Spogli, or the prospect of any such sales, could materially impact the market price of our common stock.

The future issuance

Further, pursuant to the terms of additionalthe LLC’s limited liability company operating agreement (the “LLC Agreement”), the LLC Agreement can terminate, in which case the LLC will begin the process of dissolving and winding up its affairs, at the earlier of (i) the election of the managing member, or (ii) six years following the completion of our IPO, or July 27, 2020. If the process of winding up the LLC and distribution of shares of our common stock in connection with our incentive plan, acquisitions,begins and all or otherwise will dilute all other stockholdings.

As of February 27, 2018, we had an aggregate of 158,472,763 shares of common stock authorized, unissued, and not reserved for incentive plan issuance. We may issue alla substantial portion of these shares are sold into the public markets, or if it is perceived that they will be resold, the trading price of our common stock without any action or approval by our stockholders, subject to certain exceptions. Any common stock issued in connection with our incentive plan, the exercise of outstanding stock options, or otherwise would dilute the percentage ownership held by all other stockholders.
could decline.

Delaware law, our organizational documents, and our existing and future debt agreements may impede or discourage a takeover, depriving our investors of the opportunity to receive a premium for their shares.

We are a Delaware corporation, and the anti-takeover provisions of Delaware law impose various impediments to the ability of a third partythird-party to acquire control of us, even if a change of control would be beneficial to our existing stockholders. In addition, provisions of our amended and restated certificate of incorporation and by-laws may make it difficult for, or prevent, a third partythird-party from acquiring control of us without the approval of our board of directors. Among other things, these provisions:

provide for a classified board of directors with staggered three-year terms;
do not permit cumulative voting in the election of directors, which would allow a minority of stockholders to elect director candidates;
delegate the sole power to a majority of the board of directors to fix the number of directors;
provide the power to our board of directors to fill any vacancy on our board of directors, whether such vacancy occurs as a result of an increase in the number of directors or otherwise;
authorize the issuance of “blank check” preferred stock without any need for action by stockholders;
eliminate the ability of stockholders to call special meetings of stockholders;
establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings; and
provide that, on or after the date that LLC ceases to beneficially own at least 40% of the total votes eligible to be cast in the election of directors, a 75% supermajority vote will be required to amend or repeal provisions relating to, among other things, the classification of the board of directors, the filling of vacancies on the board of directors, and the advance notice requirements for stockholder proposals and director nominations.

In addition, our secured revolving credit facility imposes, and we anticipate that documents governing our future indebtedness may impose, limitations on our ability to enter into change of control transactions. Under our secured revolving credit facility, the occurrence of a change of control transaction can constitute an event of default permitting acceleration of the debt, thereby impeding our ability to enter into change of control transactions.


The foregoing factors, as well as significant common stock ownership by Trimaran and Freeman Spogli, could impede a merger, takeover, or other business combination, or discourage a potential investor from making a tender offer for our common stock, which, under certain circumstances, could reduce the market value of our common stock.

ITEM 1B.UNRESOLVED STAFF COMMENTS

ITEM 1B.UNRESOLVED STAFF COMMENTS

None.

ITEM 2.PROPERTIES

ITEM 2.PROPERTIES

As of December 27, 2017,28, 2022, our restaurant system consisted of 477490 restaurants, comprised of 212188 company-operated restaurants and 265302 franchised restaurants, located in California, Nevada, Arizona, Nevada, Texas, Utah, Louisiana and Utah.Colorado. In addition, we currently license our brand to twofive restaurants in the Philippines. We have not included these twothis licensed restaurants

26

restaurant as part of our unit count as presented in this annual report. The table below sets forth the locations (by state) for all restaurants in operation.

State
Company-
Operated
 Franchised Total
California163
 216
 379
Nevada22
 5
 27
Arizona7
 20
 27
Texas19
 20
 39
Utah1
 4
 5
Total212
 265
 477
operation as of December 28, 2022.

    

Company- 

    

    

State

    

Operated

    

Franchised

    

Total

California

 

152

 

237

 

389

Nevada

 

26

 

5

 

31

Arizona

 

 

27

 

27

Texas

 

9

 

22

 

31

Utah

 

1

 

8

 

9

Louisiana

 

 

2

 

2

Colorado

1

1

Total

 

188

 

302

 

490

Our restaurants are either free-standing facilities, typically with drive-thru capability, or in-line. A typical restaurant generally ranges from 2,200 to 3,000 square feet, with seating for approximately 50-70 people. For a majority of our company-operated restaurants, we lease land on which our restaurants are built. Our leases generally have terms of 20 years, with two or threeup to four renewal terms of five years.

Restaurant leases provide for a specified annual rent, and some leases call for additional or contingent rent based on revenue above specified levels. Generally, our leases are “net” leases that require us to pay a pro rata share of taxes, insurance, and maintenance costs. We own 15 properties, of which we currently operatingoperate 12 and licensinglicense three to franchisees. In addition, we operate 200176 company-operated restaurants on leased real estate, an ownedwe own one operating unit with additional parking on leased real estate, and we have another 1539 leased sites that are subleased or assigned to franchisees who operate El Pollo Loco restaurants. We also have sixthree closed units, and two unitsof which are subleased for uses other than El Pollo Loco.

We also sublease a surplus property of an operating location to a third party.

We lease our headquarters, consisting of approximately 29,880 square feet in Costa Mesa, California, for a term expiring in 2023,2024, plus one three-year extension option. Our headquarters is located at 3535 Harbor Boulevard, Suite 100, Costa Mesa, California 92626, and our telephone number is (714) 599-5000. We believe that our current office space is suitable and adequate for its intended purposes and our near-term expansion plans.

ITEM 3.LEGAL PROCEEDINGS
On or about February 24, 2014, a former employee filed a class action

ITEM 3.LEGAL PROCEEDINGS

For information regarding our material legal proceedings, see Note 13 “Commitments and Contingencies—Legal Matters” in the Superior Court of the State of California, County of Orange, under the caption Elliott Olvera, et al v. El Pollo Loco, Inc., et al (Case No. 30-2014-00707367-CU-OE-CXC) on behalf of all putative class members (all hourly employees from 2010accompanying “Notes to the present) alleging certain violations of California labor laws, including failure to pay overtime compensation, failure to provide meal periods and rest breaks, and failure to provide itemized wage statements. The putative lead plaintiff’s requested remedies include compensatory and punitive damages, injunctive relief, disgorgement of profits, and reasonable attorneys’ fees and costs. No specific amount of damages sought was specifiedConsolidated Financial Statements” in the complaint. The parties executed a Stipulation of Class Settlement and Releasethis Annual Report, which the court refused to approve on the grounds that it did not provide sufficient compensation for the putative class members. Further settlement discussions were not successful, and the litigationinformation is moving forward with the filing deadline for plaintiff’s class certification motion postponed until May 4, 2018. Purported class actions alleging wage and hour violations are commonly filed against California employers. The Company has similar cases pending that overlap in part with the Olvera action and fully expects to have to defend against similar lawsuits in the future.

Daniel Turocy, et al. v. El Pollo Loco Holdings, Inc., et al. (Case No. 8:15-cv-01343) was filed in the United States District Court for the Central District of California on August 24, 2015, and Ron Huston, et al. v. El Pollo Loco Holdings, Inc., et al. (Case No. 8:15-cv-01710) was filed in the United States District Court for the Central District of California on October 22, 2015. The two lawsuits have been consolidated, with co-lead plaintiffs and class counsel.  A consolidated complaint was filed

on January 29, 2016, on behalf of co-lead plaintiffs and others similarly situated, alleging violations of federal securities laws in connection with Holdings common stock purchased or otherwise acquired and the purchase of call options or the sale of put options, between May 1, 2015 and August 13, 2015 (the “Class Period”). The named defendants are Holdings; Stephen J. Sather, Laurance Roberts, and Edward J. Valle (collectively, the “Individual Defendants”); and LLC, Trimaran Capital Partners, and Freeman Spogli & Co. (collectively, the “Controlling Shareholder Defendants”). Among other things, Plaintiffs allege that, in 2014 and early 2015, Holdings suffered losses due to rising labor costs in California and, in an attempt to mitigate the effects of such rising costs, removed a $5 value option from the Company's menu, which resulted in a decrease in traffic from value-conscious consumers. Plaintiffs further allege that during the Class Period, Holdings and the Individual Defendants made a series of materially false and misleading statements that concealed the effect that these factors were having on store sales growth, resulting in Holdings stock continuing to be traded at artificially inflated prices. As a result, Plaintiffs and other members of the putative class allegedly suffered damages in connection with their purchase of Holdings’ stock during the Class Period. In addition, Plaintiffs allege that the Individual Defendants and Controlling Shareholder Defendants had direct involvement in, and responsibility over, the operations of Holdings, and are presumed to have had, among other things, the power to control or influence the transactions giving rise to the alleged securities law violations. In both cases, Plaintiffs seek an unspecified amount of damages, as well as costs and expenses (including attorneys’ fees).
On July 25, 2016, the Court issued an order granting, without prejudice, Defendants’ Motion to Dismiss plaintiff’s complaint for failure to state a claim. Plaintiffs were granted leave to amend their complaint, and filed an amended complaint on August 22, 2016. Defendants moved to dismiss the amended complaint, and on March 20, 2017, the Court dismissed the amended complaint and granted Plaintiffs leave to file another amended complaint.  Plaintiffs filed another amended complaint on April 17, 2017. Defendants filed a motion to dismiss the amended complaint on or about May 17, 2017. The Court denied Defendants' motion to dismiss the third amended complaint on August 4, 2017. On December 8, 2017, Plaintiffs filed a motion for class certification, and Defendants’ opposition was filed on March 8, 2018. Defendants intend to continue to defend against the claims asserted.
In addition, on September 16, 2015, Holdings and certain of its officers and directors received an informal, non-public inquiry from the SEC requesting voluntary production of documents and information. All parties cooperated fully with the SEC's request. On July 15, 2016, Holdings was informed that the SEC was closing its inquiry as to all parties.
On or about November 5, 2015, a purported Holdings shareholder filed a derivative complaint on behalf of Holdings in the Court of Chancery of the State of Delaware against certain Holdings officers, directors and Trimaran Pollo Partners, L.L.C., under the caption Armen Galustyan v. Sather, et al. (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 governanceincorporated herein by putting forward for stockholder vote certain resolutions for amendments to Holdings’ Bylaws or Certificate of Incorporation. The parties have stipulated to, which the court has ordered, a stay of these proceedings pending the outcome of Turocy v. El Pollo Loco Holdings, Inc., discussed above. A second purported Holdings shareholder filed a derivative complaint on or about September 23, 2016, under the caption Diep v. 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 pending an investigation of the allegations in the action by a special litigation committee of the Holdings board of directors.

Janice P. Handlers-Bryman and Michael D. Bryman v. El Pollo Loco, Inc., Los Angeles Superior Court (Case No. MC026045) (the “Lancaster Lawsuit”) was filed on February 9, 2016.   Existing El Pollo Loco franchisees, Janice P. Handlers-Bryman and Michael D. Bryman, as individuals and in their capacities as trustees of Ethe Handlers Bryman Trust (collectively, “Plaintiffs”), filed suit against us alleging, among other things, that we “imposed unreasonable time limitations” on their development of additional restaurant locations in Lancaster, California, and that we thereafter developed  company-owned El Pollo Loco restaurants in the “market area” of Plaintiffs’ existing El Pollo Loco restaurant in Lancaster. Plaintiffs’ asserted claims against us for, among other things, (i) breach of the covenant of good faith and fair dealing, (ii) intentional interference with prospective business, and (iii) unfair business practices. In addition to an unspecified amount of damages and costs of the lawsuit, Plaintiffs sought reformation of the contract, declaratory relief, disgorgement of alleged revenues and profits, injunctive relief, and a judicial mandate requiring us to either transfer the company-owned locations to Plaintiffs or to continuously disgorge to Plaintiffs the unjust enrichment allegedly obtained by us through the operation of the company-owned

29



restaurants in Lancaster. We denied Plaintiffs’ allegations  as the franchise agreement did not grant Plaintiffs any exclusive territorial rights and, instead, expressly reserved for us the right to open and operate and the right to grant others the right to open and operate - El Pollo Loco restaurants “in the immediate vicinity of or adjacent to” Plaintiffs’ restaurant in Lancaster. On June 7, 2016, we filed a cross-complaint against Plaintiffs for breach of the franchise agreement due to Plaintiffs’ failure to pay to us liquidated damages in connection with their solicitation and/or hiring of our general manager. This counterclaim was voluntarily dismissed by us, without prejudice, on February 27, 2017 but continued in a related action before the San Bernardino Superior Court titled El Pollo Loco, Inc. v. EPL 3766, Inc.  On April 24, 2017, four days before the commencement of trial, Plaintiffs filed a voluntary dismissal, without prejudice, of the Lancaster Lawsuit without any payment or other concession by us. The corresponding dismissal was entered by the court on April 25, 2017.  On   May 22, 2017, Plaintiffs filed a motion for relief from the dismissal which was granted by the court on  June 29, 2017.  The trial in the case was bifurcated between the liability and damages phases.   The liability phase went forward on November 16, 2017.  The only cause of action that the court allowed to go to the jury was the cause of action for breach of the covenant of good faith and fair dealing.  The court elected not to present the cause of action for intentional interference with prospective business to the jury.  (The causes of action for  reformation due to mistake and unconscionability, unfair business practices under California Business & Professions Code §§ 17200 et seq. , and declaratory relief were not presented to the jury as these types of equitable claims are to be decided by the court as a matter of law.).  On December 11, 2017, the jury returned a verdict in favor of Plaintiffs on the cause of action for breach of the covenant of good faith and fair dealing.  

The December 11, 2017 verdict did not include a determination of damages. The damages phase of the trial is currently scheduled to begin on April 20, 2018. 
The Court has recently allowed Plaintiffs to reopen discovery on damages related to new claims involving the opening of a second company-owned location in Lancaster, California and that El Pollo Loco did not offer the new restaurant locations to Plaintiffs.  Experts will be allowed to update their damages calculations to account for the updated information and these new claims.  These unknown variables preclude us from providing a reasonable estimation of the range of damages that may be awarded.  Although we cannot predict the ultimate outcome of this lawsuit, the Company believes the jury’s verdict is in error due to express language of the franchise agreement and prejudicial and reversible errors in either earlier phases of the litigation or during the liability phase of the trial.  El Pollo Loco intends to file a motion challenging the verdict, a motion for new trial and, if unsuccessful, will appeal the verdict and various other rulings in the case.
The Company is also involved in various other claims and legal actions that arise in the ordinary course of business. The Company does not believe that the ultimate resolution of these other actions will have a material adverse effect on its financial position, results of operations, liquidity, or capital resources. 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.

reference.

��

ITEM 4.MINE SAFETY DISCLOSURE

ITEM 4.MINE SAFETY DISCLOSURES

None.



30



PART II

ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock has been listed on the NASDAQThe Nasdaq Stock Market LLC under the symbol “LOCO” since July 25, 2014.

The following table sets forth, for the periods indicated, the high and low intraday sale prices for our common stock on the NASDAQ, as reported by the NASDAQ. Such quotations represent interdealer prices without retail markup, markdown, or commission, and may not necessarily represent actual transactions.
 Low High
Fiscal 2016: 
  
First Quarter (December 31, 2015-March 30, 2016)$10.21
 $15.44
Second Quarter (March 31, 2016-June 29, 2016)$10.50
 $14.98
Third Quarter (June 30, 2016-September 28, 2016)$12.16
 $14.61
Fourth Quarter (September 29, 2016-December 28, 2016)$10.08
 $13.50
Fiscal 2017: 
  
First Quarter (December 29, 2016-March 29, 2017)$10.75
 $13.55
Second Quarter (March 30, 2017-June 28, 2017)$11.50
 $14.85
Third Quarter (June 29, 2017-September 27, 2017)$11.00
 $14.35
Fourth Quarter (September 28, 2017-December 27, 2017)$9.55
 $12.55

As of February 27, 2018, the closing price per share of our common stock on the NASDAQ was $9.85.

As of February 27, 2018,March 3, 2023, there were approximately 5059 holders of record of our common stock. The number of holders of record is based upon the actual number of holders registered at such date and does not include holders of shares in “street name” or persons, partnerships, associates, corporations, or other entities in security position listings maintained by depositories. As

27

Dividends

In fiscal 2022, the same date, there were approximately 20,000 registeredBoard of Directors declared a special cash dividends of $1.50 per share on our common stock. The special dividend was paid on November 9, 2022, to stockholders of record, including holders of restricted stock, at the close of business on October 24, 2022. Our dividend is subject to the discretion and beneficial accounts.

Dividend Policy
We did not pay dividends in 2017approval of our Board of Directors and 2016our compliance with applicable law, and depends upon, among other things, our results of operations, financial condition, level of indebtedness, capital requirements, contractual restrictions, and other factors that our Board of Directors may deem relevant. We do not expectanticipate paying any such dividends for the foreseeable future. Any determination to pay dividends in the foreseeable future because we intend to use cash flow generated by operations to grow our business. Any future determination otherwise will be at the discretion of our boardBoard of directorsDirectors and will depend upon our financial condition, results of operations, capital requirements,financial condition, restrictions imposed by applicable law and our financing agreements and other factors. In addition, the 2014 Revolver (defined below) restrictsfactors that our ability to pay dividends. See Item 7, “Management’s Discussion and AnalysisBoard of Financial Condition and Results of Operations-Liquidity and Capital Resources-Debt and Other Obligations-Current Credit Agreement, “Item 1A, “Risk Factors—Risks Related to Ownership of Our Common Stock,” and Note 1 to our consolidated financial statements included elsewhere in this report.
Directors deems relevant.

Issuer Purchases of Equity Securities

In

During the quarterly period ended December 27, 2017, neither28, 2022, we nor any affiliated purchaser made or had made onacquired shares of our or its behalf any purchasescommon stock held by our employees to satisfy tax withholding obligations in connection with the vesting of equity securities, includingpreviously issued restricted stock. The number of shares of common stock acquired and the average price paid per share for exercise price and tax withholdings related to awards under our compensation plans.each month in the fourth quarter ended December 28, 2022 are as shown in the table below.

Total Number of 

Average Price 

Shares Purchased

Paid Per Share

September 29, 2022 to October 26, 2022

 

4,590

$

10.94

 

October 27, 2022 to November 23, 2022

 

2,637

$

10.95

 

November 24, 2022 to December 28, 2022

 

$

 

Total

 

7,227

 

Recent Sales

28

None.

Stock Performance Graph

The following graph and table illustrate the total cumulative shareholder return from July 25, 2014, through December 27, 2017, for (i) our common stock, (ii) the NASDAQNasdaq Composite Total Return Index and (iii) the Standard and Poor’s Composite 1500 Restaurants Index (formerly called the S&P Supercomposite Restaurants Index, assumingIndex), for the five years ended December 28, 2022. The graph assumes the investment of $100 at the beginning of the period (at the closing price of our common stock on our first day of trading of $24.03),December 27, 2017) and the reinvestment of dividends, and no transaction costs.


31



all dividends. Specifically, the graph assumes that the $1.50 per share special cash dividend paid to shareholders was reinvested in 2022. Stockholder returns over the indicated period should not be considered indicative of future stockholder returns.

The stock performance graph and table are furnished andshall not be deemed soliciting material or to be filed with the SEC and are notor subject to Regulation 14A or 14C under the Exchange Act or to the liabilities of Section 18 of the Exchange Act, nor shall it be incorporated by reference into any other filing. They are notpast or future filing under the Securities Act of 1933, as amended (the “Securities Act”) or the Exchange Act, except to the extent we specifically request that it be treated as soliciting material or specifically incorporate it by reference into a forecast of future performance.

DateLOCO 
NASDAQ
Composite
 
S&P Supercomposite
Restaurants Index
July 25, 2014$100.00
 $100.00
 $100.00
September 24, 2014$148.65
 $102.61
 $99.36
December 31, 2014$83.10
 $107.02
 $105.22
April 1, 2015$104.91
 $110.61
 $112.22
July 1, 2015$85.19
 $113.95
 $119.52
September 30, 2015$44.86
 $105.30
 $121.36
December 30, 2015$52.77
 $115.81
 $127.95
March 30, 2016$55.97
 $111.68
 $133.22
June 29, 2016$52.73
 $109.97
 $128.46
September 28, 2016$54.35
 $122.74
 $127.33
December 28, 2016$52.43
 $125.90
 $136.03
March 29, 2017$49.94
 $136.91
 $141.62
June 28, 2017$59.09
 $145.13
 $157.36
September 27, 2017$49.94
 $150.61
 $150.68
December 27, 2017$41.61
 $162.38
 $165.58
filing under the Securities Act or the Exchange Act.

Graphic

    

    

    

S&P Composite

Nasdaq 

1500

Date

    

LOCO

    

Composite

    

Restaurants

December 27, 2017

$

100.00

$

100.00

$

100.00

December 26, 2018

$

151.00

$

94.45

$

105.35

December 24, 2019

$

150.50

$

129.02

$

129.03

December 30, 2020

$

182.10

$

185.46

$

150.33

December 29, 2021

$

140.10

$

227.20

$

181.96

December 28, 2022

$

114.60

$

147.18

$

163.07

ITEM 6.SELECTED FINANCIAL DATA
The following tables contain selected historical consolidated financial data as of and for the last five fiscal years, derived from

32



our audited consolidated financial statements. Not all periods shown are discussed in this Annual Report. You should read these tables in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our audited consolidated financial statements and the notes thereto.
 Fiscal Year
 2017 2016 2015 2014 2013
Statements of Income Data:         
Revenue         
Company-operated restaurant revenue$376,615
 $355,468
 $332,040
 $322,516
 $294,327
Franchise revenue25,086
 24,655
 23,017
 22,345
 20,400
Total revenue401,701
 380,123
 355,057
 344,861
 314,727
Cost of operations         
Food and paper costs109,898
 107,218
 105,917
 102,611
 93,589
Labor and related expenses106,584
 97,471
 84,231
 80,646
 75,669
Occupancy and other operating expenses85,631
 78,263
 69,977
 68,538
 63,150
Gain on recovery of insurance proceeds, lost profits
 (502) 
 
 
Company restaurant expenses302,113
 282,450
 260,125
 251,795
 232,408
General and administrative expenses38,523
 34,661
 28,997
 29,519
 25,506
Franchise expenses3,335
 3,823
 3,456
 3,704
 3,841
Depreciation and amortization18,128
 16,053
 13,092
 11,538
 10,213
Loss on disposal of assets799
 674
 471
 646
 868
Expenses related to fire loss
 48
 
 
 
Gain on recovery of insurance proceeds, property,
   equipment and expenses

 (741) 
 
 
Recovery of securities lawsuits related legal expenses(1,666) 
 
 
 
Asset impairment and closed-store reserves33,645
 8,554
 92
 1,033
 (101)
Total expenses394,877
 345,522
 306,233
 298,235
 272,735
Gain on disposition of restaurants
 28
 
 2,658
 400
Income from operations6,824
 34,629
 48,824
 49,284
 42,392
Interest expense, net3,278
 3,155
 3,707
 18,062
 36,334
Early extinguishment of debt
 
 
 9,718
 21,530
Expenses related to selling shareholders
 
 50
 667
 
Income tax receivable agreement (income) expense(5,570) 352
 156
 41,382
 
Income (loss) before (provision) benefit for income taxes9,116
 31,122
 44,911
 (20,545) (15,472)
(Provision) benefit for income taxes(497) (12,783) (20,857) 63,008
 (1,401)
Net income (loss)$8,619
 $18,339
 $24,054
 $42,463
 $(16,873)
Per Share Data:         
Net income (loss) per share         
Basic$0.22
 $0.48
 $0.63
 $1.32
 $(0.59)
Diluted$0.22
 $0.47
 $0.62
 $1.24
 $(0.59)
Weighted average shares used in computing net income (loss) per share         
Basic38,453,347
 38,357,805
 37,949,316
 32,285,484
 28,712,622
Diluted39,086,676
 39,026,950
 39,039,558
 34,346,241
 28,712,622
Consolidated Statements of Cash Flows Data:         
Net cash provided by operating activities$53,671
 $49,299
 $57,971
 $26,085
 $19,700
Net cash used in investing activities$(36,238) $(35,202) $(30,835) $(21,401) $(13,787)
Net cash used in financing activities$(11,051) $(18,030) $(32,534) $(10,200) $(10,385)

33



 Fiscal Year
 2017 2016 2015 2014 2013
Balance Sheet Data—Consolidated (at period end): 
  
    
  
Cash and cash equivalents$8,550
 $2,168
 $6,101
 $11,499
 $17,015
Net property (1)
$102,794
 $118,470
 $102,421
 $82,090
 $68,641
Total assets$442,711
 $471,305
 $461,028
 $455,306
 $416,942
Total debt (2)
$93,316
 $104,461
 $123,638
 $165,846
 $289,242
Total stockholders’ equity$274,950
 $265,182
 $244,633
 $210,400
 $48,536
(1)Net property consists of property owned, net of accumulated depreciation and amortization.
(2)Total debt consists of borrowings under the 2014 Revolver, 2013 Credit Agreements, and 2011 Financing Agreements (each, as defined in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Debt and Other Obligations”), and our capital lease obligations.

ITEM 6. [RESERVED]

ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with Item 6, “Selectedour “Audited Consolidated Financial Data,”Statements” and our consolidated financial statements and the notes theretoaccompanying “Notes to Consolidated Financial Statements” included elsewhere in this report.Annual Report. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties, and assumptions that could cause actual results to differ materially from management’s expectations. See “Forward-Looking“Forward-

29

Looking Statements” and Item 1A, “Risk Factors.”“Item 1A. Risk Factors” included elsewhere in this Annual Report. We assume no obligation to update any of these forward-looking statements.

Basis of Presentation

We use a 52- or 53-week fiscal year ending on the last Wednesday of each calendar year. Fiscal 2017, 2016,2022, 2021, and 20152020 ended on December 27, 2017,28, 2022, December 28, 201629, 2021 and December 30, 2015,2020, 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 2017, 2016,2020 was a 53-week fiscal year. Fiscal 2022 and 20152021 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. Fiscal years are identified in this report according to the calendar years in which they ended. For example, references to fiscal 20172022 refer to the fiscal year ended December 27, 2017.

28, 2022.

Overview

El Pollo Loco is a differentiated and growing restaurant concept that specializes in fire-grilling citrus-marinated chicken and operates in the limited service restaurant (“LSR”)LSR segment. We strive to offer food that integrates the qualityculinary traditions of food and dining experience typicalMexico with the healthier lifestyle of fast casual restaurants while providing the speed, convenience, and value typical of traditional quick-service restaurants (“QSRs”), a combination that we call “QSR+” and to provide a value-oriented fast casual dining experience.Los Angeles. Our distinctive menu features our signature product—citrus-marinatedproduct--citrus-marinated fire-grilled chicken—andchicken--and a variety of Mexican-inspiredMexican and LA-inspired entrees that we create from our chicken. We offer our customers healthier alternatives to traditional food on the go, served by our team members in a contemporary restaurant environment. We serve individual and family-sized chicken meals, a variety of Mexican-inspiredMexican and LA-inspired entrees, and sides, and, throughout the year, on a limited-time basis, additional proteins like shrimp and beef. Our entrees include favorites such as our Chicken Avocado Burrito, Under 500 CaloriePollo Fit entrees, Doublechicken tostada salads, and Pollo Bowl, and Stuffed Chicken Avocado Quesadilla.Bowls. Our famous Creamy Cilantro dressings and salsas are prepared fresh daily, allowing our customers to create their favorite flavor profiles to enhance their culinary experience. Our distinctive menu with healthier“better for you” and more affordable alternatives appeals to consumers across a wide variety of socio-economic backgrounds and drives our balanced day-part mix.

composition of sales throughout the day (our “day-part mix”), including at lunch and dinner.

Market Trends and Uncertainties

We may face future business disruption and related risks resulting from the ongoing COVID-19 pandemic or from another pandemic, epidemic or infectious disease outbreak, or from broader macroeconomic trends, any of which could have a significant impact on our business. During the year ended December 28, 2022, we incurred a total of $3.3 million in COVID-19 related expenses, comprised of $2.3 million due to overtime primarily related to the first quarter and $1.0 million due to leaves of absence related to the remaining three quarters. During the year ended December 29, 2021 and December 30, 2020, we incurred $3.9 million and $4.9 million, respectively, in COVID-19 related expenses, primarily due to leaves of absence and overtime pay. In addition, while all of our restaurants had dining rooms open as of December 28, 2022, we continue to experience staffing challenges, including higher wage inflation, overtime costs and other labor related costs. Labor costs could also be adversely impacted as a result of the FAST Act, which was signed into law in September 2022 and authorizes the creation of a council to set minimum standards for industry workers in California, including minimum wages. The FAST Act, which will take effect if approved by voters in November 2024, could result in increased labor cost at our California restaurants thereby potentially impacting the profitability of our California restaurants. Further, this bill could prompt similar legislation in other states. We also continue to experience inflationary pressures, which resulted in increased commodity prices and impacted our business and results of operations during the year ended December 28, 2022. We expect these pressures to continue during fiscal year 2023.

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

Growth Strategies and Outlook

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

expand our restaurant base;

strategies:

embed our unique El Pollo Loco culture;
34

30



increase our comparable restaurant sales; and
build awareness and own our lane;
deliver exceptional service – profitably; and
accelerate development.
enhance operations and leverage our infrastructure.

As of December 27, 2017,28, 2022, we had 477490 locations in fiveseven states. In fiscal 2017,2022, we opened 16four new company-operated restaurants, two in Nevada and 7two in California, and our franchisees opened nine new franchised restaurants, across Arizona,seven in California, Nevada, Utahone in Colorado and Texas.one in Utah. In fiscal 2016, 2021, we opened 18two new company-operated restaurants, one in Nevada and 13one in California, and our franchisees opened two new franchised restaurants, across Arizona, California, Nevada, Utahone in Texas and Texas. one in Louisiana.

In 2018,2023, we intend to open 6four to 8six new company-operated and 6eight to 8twelve new franchised restaurants in Arizona, California, Nevada, Utah and Texas.restaurants. To increase comparable restaurant sales, we plan to increase customer frequency, attract new customers, and improve per-person spend.

Highlights and Trends

Comparable Restaurant Sales

In fiscal 2022, comparable restaurant sales system-wide increased 5.9%. In fiscal 2021, comparable restaurant sales system-wide increased 12.1%. In fiscal 2020, comparable restaurant sales system-wide decreased 2.4%. Comparable restaurant sales growth/decline reflects the change in year-over-year sales for the comparable restaurant base. A restaurant enters our comparable restaurant base the first full week after its 15-month anniversary. System-wide comparable restaurant sales include restaurant sales at all comparable company-operated restaurants and at all comparable franchised restaurants, as reported by franchisees. Comparable restaurant sales at company-operated restaurants increased 3.7% in fiscal 2022, increased 7.6% in fiscal 2021, and decreased 3.0% in fiscal 2020. For company-operated restaurants in 2022, the change in comparable restaurant sales consisted of a 7.3% increase in average check size due to increases in menu prices partially offset by a 3.3% decrease in transactions. In fiscal 2021, the increase in company-operated comparable restaurant sales consisted of a 6.3% increase in average check size and a 1.2% increase in transactions. In fiscal 2020, the decrease in company-operated comparable restaurant sales was primarily the result of a decrease in transactions of 15.8%, partially offset by a 15.3% increase in average check size. In fiscal 2022, comparable restaurant sales at franchised restaurants increased 7.4%. In fiscal 2021, comparable restaurant sales at franchised restaurants increased 15.3%, and in fiscal 2020, comparable restaurant sales at franchised restaurants decreased 2.0%.

31

Restaurant Development

In fiscal 2022, we opened four company-operated restaurants, and our franchisees opened nine new restaurants. From time to time, we and our franchisees close restaurants. In fiscal 2022, we closed two company-operated restaurants. Our franchisees closed one restaurant. Our restaurant counts at the beginning and end of each of the last three years were as follows:

    

Fiscal Year Ended

    

2022

    

2021

    

2020

Company-operated restaurant activity:

  

  

  

Beginning of period

189

196

195

Openings

4

2

1

Restaurant sale to franchisee

(3)

(8)

Closures

(2)

(1)

Restaurants at end of period

188

189

196

Franchised restaurant activity:

  

  

  

Beginning of period

291

283

287

Openings

9

2

3

Restaurant sale to franchisee

3

8

Closures

(1)

(2)

(7)

Restaurants at end of period

302

291

283

System-wide restaurant activity:

  

  

  

Beginning of period

480

479

482

Openings

13

4

4

Closures

(3)

(3)

(7)

Restaurants at end of period

490

480

479

In 2020, we finalized a new restaurant design that we believe will clearly differentiate and communicate our brand, both on the exterior and interior. We believe that our remodels using this new design will result in higher restaurant revenue and a strengthened brand. During the year ended December 28, 2022, we completed six company-operated restaurant remodels and 16 franchise remodels using the new asset design. In fiscal 2023, we plan to continue our standard practices for remodels, which includes completing a total of 10-15 company and 20-30 franchise remodels using the new design. Remodeling is a use of cash and has implications for our net property and depreciation line items on our consolidated balance sheets and statements of income, among others. The cost of our restaurant remodels varies depending on the scope of work required, but on average the investment is $0.3 to $0.4 million per restaurant.

Loco Rewards

Our Loco Rewards loyalty program offers rewards that incentivize customers to visit our restaurants more often each month. Customers earn points for each dollar spent and 50 points can be redeemed for a $5 reward to be used for a future purchase. If a customer does not earn or use points within a one-year period, their account is deactivated and all points expire. Additionally, if a reward is not used within six months, it expires. When a customer is part of the rewards program, the obligation to provide future discounts related to points earned is considered a separate performance obligation, to which a portion of the transaction price is allocated. 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 on a pro-rata basis, based on stand-alone selling price, as determined by menu pricing and loyalty point’s terms.

In addition, customers can earn additional points and free entrées for a variety of engagement activities. As points are available for redemption past the quarter earned, a portion of the revenue associated with the earned points will be deferred until redemption or expiration. As of December 28, 2022, the amount of revenue deferred related to the earned points, net of redemptions, is $0.5 million. We had more than 3.2 million members in the Loco Rewards loyalty program as of December 28, 2022.

32

Key Financial Definitions

Revenue

Our revenue is derived from three primary sources: (i)company-operated restaurant revenue, (ii) franchise revenue, which is comprised primarily of franchise royalties and, to a lesser extent, franchise fees and sublease rental income, and (iii) franchise advertising fee revenue. See Note 15 “Revenue from Contracts with Customers”in the accompanying “Notes to Consolidated Financial Statements” in this Annual Report for further details regarding our revenue recognition policy.

Food and Paper Costs

Food and paper costs include the direct costs associated with food, beverage and packaging of our menu items. The components of food and paper costs are variable in nature, change with sales volume, are impacted by menu mix, and are subject to increases or decreases in commodity costs. We expect food and paper costs, particularly those items not subject to purchasing commitments, to increase in the short-term due to current inflationary pressures.

Labor and Related Expenses

Labor and related expenses include wages, payroll taxes, workers’ compensation expense, benefits, and bonuses paid to our restaurant management teams. Like other expense items, we expect labor costs to grow proportionately as our restaurant revenue grows. Factors that influence labor costs include minimum wage and payroll tax legislation, state labor laws (which, in California, may include the FAST Act), overtime, wage inflation, the frequency and severity of workers’ compensation claims, health care costs, and the performance of our restaurants.

Occupancy Costs and Other Operating Expenses

Occupancy costs include rent, common area maintenance (“CAM”), and real estate taxes. Other restaurant operating expenses include the costs of utilities, advertising, credit card processing fees, restaurant supplies, repairs and maintenance, and other restaurant operating costs.

General and Administrative Expenses

General and administrative expenses are comprised of expenses associated with corporate and administrative functions that support the development and operations of our restaurants, including compensation and benefits, travel expenses, stock compensation costs, legal and professional fees, and other related corporate costs. Also included are pre-opening costs, and expenses above the restaurant level, including salaries for field management, such as area and regional managers, and franchise field operational support.

Legal Settlements

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

Franchise Expenses

Franchise expenses are primarily comprised of rent expenses incurred on properties leased by us and then sublet to franchisees, and expenses incurred in support of franchisee information technology systems. Additionally, franchise expenses also include all expenses of the advertising fund representing the franchised restaurants portion of advertising expenses.

Depreciation and Amortization

Depreciation and amortization primarily consist of the depreciation of property and equipment, including leasehold improvements and equipment.

33

Loss on Disposal of Assets

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

Impairment and Closed-Store Reserves

We review long-lived assets such as property, equipment, and intangibles on a unit-by-unit basis for impairment when events or circumstances indicate the carrying value of the assets may not be recoverable. We determine if there is impairment at the restaurant level by comparing undiscounted future cash flows from the related long-lived assets to their respective carrying values and record an impairment charge when appropriate. In determining future cash flows, significant estimates are made by us with respect to future operating results of each restaurant over its remaining lease term, including sales trends, labor rates, commodity costs and other operating cost assumptions. If assets are determined to be impaired, the impairment charge is measured by calculating the amount by which the assets’ carrying amount exceeds its fair value. This process of assessing fair values requires the use of estimates and assumptions, including our ability to sell or reuse the related assets and market conditions, which are subject to a high degree of judgment. If these assumptions change in the future, we may be required to record impairment charges for these assets and these charges could be material.

When we close a restaurant, we will evaluate the right-of-use (“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, in addition to property tax and CAM charges for closed restaurants.

(Gain) Loss on Disposition of Restaurants

(Gain) loss on disposal of restaurants includes the (gain) loss on the sale of restaurants to franchisees, or other third parties, and includes the difference between carrying value and sales price of leasehold improvements, equipment and other assets included in the sale.

Interest Expense, Net

Interest expense, net, consists primarily of interest on our outstanding revolving debt. Debt issuance costs are amortized on a straight-line basis over the life of the related debt.

Provision for Income Taxes

Provision for income taxes consists of federal and state tax expense on our income, and changes to our deferred tax asset and deferred tax liability.

34

Results of Operations

Fiscal Year 2022 Compared to Fiscal Year 2021

Our operating results for the fiscal years ended December 28, 2022 and December 29, 2021, in absolute terms and expressed as a percentage of total revenue, with the exception of cost of operations and company restaurant expenses, which are expressed as a percentage of company-operated restaurant revenue, are compared below:

    

Fiscal Year

 

2022

2021

 

 (52-Weeks)

 (52-Weeks)

Increase / (Decrease)

    

($,000)

    

(%)

    

($,000)

    

(%)

    

($,000)

    

(%)

 

Statements of Income Data:

 

  

 

  

 

  

 

  

 

  

 

  

Revenue

 

  

 

  

 

  

 

  

 

  

 

  

Company-operated restaurant revenue

$

403,218

 

85.8

$

394,733

 

86.9

$

8,485

 

2.1

Franchise revenue

 

38,225

 

8.1

 

33,729

 

7.4

 

4,496

 

13.3

Franchise advertising fee revenue

 

28,516

 

6.1

 

25,901

 

5.7

 

2,615

 

10.1

Total revenue

 

469,959

 

100.0

 

454,363

 

100.0

 

15,596

 

3.4

Cost of operations

 

  

 

  

 

  

 

  

 

  

 

  

Food and paper costs (1)

 

117,774

 

29.2

 

104,394

 

26.4

 

13,380

 

12.8

Labor and related expenses (1)

 

130,773

 

32.4

 

120,308

 

30.5

 

10,465

 

8.7

Occupancy and other operating expenses (1)

 

101,543

 

25.2

 

97,557

 

24.7

 

3,986

 

4.1

Company restaurant expenses (1)

 

350,090

 

86.8

 

322,259

 

81.6

 

27,831

 

8.6

General and administrative expenses

 

39,093

 

8.3

 

39,852

 

8.8

 

(759)

 

(1.9)

Franchise expenses

 

36,169

 

7.7

 

32,831

 

7.2

 

3,338

 

10.2

Depreciation and amortization

 

14,418

 

3.1

 

15,176

 

3.3

 

(758)

 

(5.0)

Loss on disposal of assets

 

165

 

0.0

 

289

 

0.1

 

(124)

 

(42.9)

Impairment and closed-store reserves

 

752

 

0.2

 

1,087

 

0.2

 

(335)

 

(30.8)

(Gain) loss on disposition of restaurants

(848)

(0.2)

1,534

0.3

(2,382)

(155.3)

Total expenses

 

439,839

 

93.6

 

413,028

 

90.9

 

26,811

 

6.5

Income from operations

 

30,120

 

6.4

 

41,335

 

9.1

 

(11,215)

 

(27.1)

Interest expense, net

 

1,677

 

0.4

 

1,824

 

0.4

 

(147)

 

(8.1)

Income tax receivable agreement (income) expense

 

(436)

 

(0.1)

 

58

 

0.0

 

(494)

 

(851.7)

Income before provision for income taxes

 

28,879

 

6.1

 

39,453

 

8.7

 

(10,574)

 

(26.8)

Provision for income taxes

 

8,078

 

1.7

 

10,332

 

2.3

 

(2,254)

 

(21.8)

Net income

$

20,801

 

4.4

$

29,121

 

6.4

$

(8,320)

 

(28.6)

(1)Percentages for line items relating to cost of operations and company restaurant expenses are calculated with company-operated restaurant revenue as the denominator. All other percentages use total revenue.

Company-Operated Restaurant Revenue

In fiscal 2022, company-operated restaurant revenue increased $8.5 million, or 2.1%. The increase in company-operated restaurant sales was primarily due to an increase in company-operated comparable restaurant revenue of $14.3 million, or 3.7%. The company-operated comparable restaurant sales increase consisted of an approximately 7.3% increase in average check size due to increases in menu prices, partially offset by a 3.3% decrease in transactions. In addition, company-operated restaurant revenue was favorably impacted by $3.5 million of additional sales from the opening of six restaurants during or subsequent to the first quarter of 2021. This company-operated restaurant sales increase was partially offset by a $9.0 million decrease in revenue from the closure of three restaurants during or subsequent to the first quarter of 2021, the eleven company-operated restaurants sold by the Company to existing franchisees during or subsequent to the first quarter of 2021.

Franchise Revenue

In fiscal 2022, franchise revenue increased $4.5 million, or 13.3%. This increase was primarily due to a franchise comparable restaurant sales increase of 7.4%, the opening of eleven restaurants during or subsequent to the first quarter of 2021 and revenue generated from eleven company-operated restaurants sold by the Company to existing franchisees

35

during or subsequent to the first quarter of 2021. This franchise revenue increase was partially offset by the closure of three franchise locations during the same period.

Franchise Advertising Fee Revenue

Franchise advertising fee revenue increased $2.6 million, or 10.1% from the comparable period in the prior year. As advertising fee revenue is a percentage of franchisees’ revenue, the year-to-date fluctuation was due to the increases noted in franchise revenue above.

Food and Paper Costs

Food and paper costs increased $13.4 million, or 12.8%, in fiscal 2022. The increase in food and paper costs resulted primarily from commodity inflation, partially offset by lower transactions. In addition, the increase in food and paper costs resulted from a $1.1 million increase from restaurants opened during the current or prior year. These increases were partially offset by a reduction of $1.5 million for restaurant locations sold to franchisees during the current or prior year. Food and paper costs as a percentage of company-operated restaurant revenue were 29.2% in fiscal 2022, up from 26.4% in fiscal 2021 primarily due to commodity inflation, partially offset by an increase in pricing.

Labor and Related Expenses

Labor and related expenses increased $10.5 million, or 8.7%, in fiscal 2022. The increase was primarily due to a $8.2 million increase primarily related to minimum wage increases in California during fiscal 2022 and other labor wage increases as a result of competitive pressure. Further, the increase for the year-to-date period was due to recognizing a $3.4 million Employee Retention Credit which was recorded as an offset to the corresponding payroll tax expense and was classified as part of the labor and other operating expenses on the consolidated statements of income during the year ended December 29, 2021. In addition, the labor and related expenses were impacted by a $1.3 million increase from restaurants opened during or after the first quarter of the prior year and $1.0 million in higher payroll taxes primarily associated with the labor increases above. The increase in labor and related expenses for the year-to-date period was partially offset by a $2.1 million reduction in labor related to the eleven locations sold to existing franchisees during the current or prior year and a $1.2 million reduction in restaurants closed during the current or prior year. Labor and related expenses as a percentage of company-operated restaurant revenue were 32.4% in fiscal 2022, up from 30.5% in fiscal 2021 primarily due to the cost increases highlighted above, partially offset by the higher menu prices.

Occupancy and Other Operating Expenses

Occupancy and other operating expenses increased $4.0 million, or 4.1%, in fiscal 2022. The increase was primarily due to a $2.4 million increase in utilities costs primarily due to increases in natural gas and electricity costs, a $0.6 million increase in market place delivery fees, a $0.4 million increase in freight fuel costs, a $0.3 million increase in repairs and maintenance and a $0.3 million increase in advertising expense. Occupancy and other operating expenses as a percentage of company-operated restaurant revenue were 25.2% in fiscal 2022, up from 24.7% in fiscal 2021 primarily due to the cost increases highlighted above.

General and Administrative Expenses

General and administrative expenses decreased $0.8 million, or 1.9%, in fiscal 2022. The decrease was due primarily to a $1.1 million decrease in labor related costs, primarily related to a decrease in management bonus expense and a $0.4 million decrease in legal-related expenses. The decrease in general and administrative expenses was partially offset by a $0.6 million increase in other general and administrative expenses.

General and administrative expenses as a percentage of total revenue were 8.3% in fiscal 2022, down from 8.8% in fiscal 2021. This decrease is primarily due to the cost decreases described above and leverage on higher sales.

Franchise Expenses

Franchise expenses increased $3.3 million, or 10.2%, in fiscal 2022. The increase was primarily due to an increase in advertising expenses, primarily resulting from higher franchise revenue, higher franchise services expense and higher

36

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

Impairment and Closed-Store Reserves

During fiscal 2022, we recorded a $0.5 million non-cash impairment charge primarily related to the carrying value of the ROU assets of one restaurant in California that closed in 2021 and the long-lived assets of two restaurants in California. During fiscal 2021, we recorded a $0.7 million non-cash impairment charge primarily related to the carrying value of the ROU assets of one restaurant in Texas that closed in 2019, the carrying value of one restaurant in California that closed in 2021 and the long-lived assets of three restaurants in California.

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

Gain and Loss on Disposition of Restaurants

During fiscal 2022, we completed the sale of three company-operated restaurants within the Orange County area to an existing franchisee. We determined that these restaurant dispositions represent multiple element arrangements, and as a result, the cash consideration received was allocated to the separate elements based on their relative standalone selling price. Cash proceeds included upfront consideration for the sale of the restaurants and franchise fees. The cash consideration per restaurant related to franchise fees is consistent with the amounts stated in the related franchise agreements, which are charged for separate standalone arrangements. The Company initially defers and subsequently recognizes the franchise fees over the term of the franchise agreement. This sale resulted in cash proceeds of $1.0 million and a net gain on sale of restaurants of $0.8 million for the fiscal year ended December 28, 2022. These restaurants are included in the total number of franchised El Pollo Loco restaurants.

During fiscal 2021, we completed the sale of eight company-operated restaurants within the Sacramento area to an existing franchisee. We 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. This sale resulted in cash proceeds of $4.6 million and a net loss on sale of restaurants of $1.5 million for the fiscal year ended December 29, 2021. These restaurants are included in the total number of franchised El Pollo Loco restaurants.

Interest Expense, Net

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

Income Tax Receivable Agreement

On July 30, 2014, we entered into the tax receivable agreement (the “TRA”) liability. The TRA calls for us to pay to our pre-IPO stockholders 85% of the savings in cash that we realize in our taxes as a result of utilizing our net operating losses and other tax attributes attributable to preceding periods. In fiscal 2022 and fiscal 2021 we recognized income tax receivable agreement income of $0.4 million and expense of less than $0.1 million, respectively. In fiscal 2022 and 2021, we paid $0.4 million and $1.7 million, respectively, to our pre-IPO stockholders under the TRA.

Provision for Income Taxes

In fiscal 2022, we recorded an income tax expense of $8.1 million, compared to income tax expense of $10.3 million in fiscal 2021, reflecting an estimated effective tax rate of 28.0% and 26.2%, respectively. The difference between the 21.0% statutory rate and the Company’s effective tax rate of 28.0% for the year ended December 28, 2022 is primarily a result of state taxes, the change in valuation allowance against certain state credits, a tax shortfall related to equity compensation and non-deductible executive compensation, partially offset by a Work Opportunity Tax Credit benefit.

37

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

Fiscal Year 2021 Compared to Fiscal Year 2020

Year-to-year comparisons of fiscal 2021 and fiscal 2020 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 on our Annual Report on Form 10-K for the year ended December 29, 2021, which was filed with the SEC on March 11, 2022.

Key Performance Indicators

To evaluate the performance of our business, we utilize a variety of financial and performance measures. These key measures include company-operated restaurant revenue, system-wide sales, comparable restaurant sales, company-operated average unit volumes (“AUV”), restaurant contribution, restaurant contribution margin, new restaurant openings, EBITDA, and Adjusted EBITDA. In fiscal 2017,2022, our restaurants generated company-operated restaurant revenue of $376.6$403.2 million and system-wide sales of $841.8$1,039.0 million, and system comparable sales increased 1.5%growth of 5.9%, consisting of company-operated restaurant comparable sales growth of 1.0%3.7% and franchised comparable sales growth of 1.8%7.4%. The company-operated comparable sales increase consisted of a 1.9%7.3% increase in average check growth,size due to increases in menu prices and partially offset by a 0.9% transaction decrease.3.3% decrease in transactions. In fiscal 2017,2022, for company-operated restaurants, our annual Average Unit Volume ("AUV")AUV was $1.8$2.1 million, restaurant contribution margin was 19.8%13.2%, and Adjusted EBITDA was $65.3$48.7 million.

Company-Operated Restaurant Revenue

Company-operated restaurant revenue consists of sales of food and beverages in company-operated restaurants net of promotional allowances, employee meals, and other discounts. Company-operated restaurant revenue in any period is directly influenced by the number of operating weeks in such period, the number of open restaurants, and comparable restaurant sales.

Seasonal factors and the timing of holidays cause our revenue to fluctuate from quarter to quarter. Our revenue per restaurant is typically lower in the first and fourth quarters due to reduced January and December transactions and higher in the second and third quarters. As a result of seasonality, our quarterly and annual results of operations and key performance indicators such as company-operated restaurant revenue and comparable restaurant sales may fluctuate.

System-Wide Sales

System-wide sales are neither required by, nor presented in accordance with, accounting principles generally accepted in the United States of America (“GAAP”). System-wide sales are the sum of company-operated restaurant revenue and sales from franchised restaurants. Our total revenue in our consolidated statements of income is limited to company-operated restaurant revenue and franchise revenue from our franchisees. Accordingly, system-wide sales should not be considered in isolation or as a substitute for our results as reported under GAAP. Management believes that the presentation of system-wide sales are an important figure forprovides useful information to investors because they areit is a measure that is widely used in the restaurant industry, including by our management, to evaluate brand scale and market penetration.

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The following table reconciles system-wide sales to company-operated restaurant revenue and total revenue.

 Fiscal Year
(Dollar amounts in thousands)2017 2016 2015
Company-operated restaurant revenue$376,615
 $355,468
 $332,040
Franchise revenue25,086
 24,655
 23,017
Total Revenue401,701
 380,123
 355,057
Franchise revenue(25,086) (24,655) (23,017)
Sales from franchised restaurants465,149
 439,973
 421,344
System-wide sales$841,764
 $795,441
 $753,384

35



revenue:

Fiscal Year

2022

2021

2020

(Dollar amounts in thousands)

(52-Weeks)

(52-Weeks)

    

(53-Weeks)

Company-operated restaurant revenue

$

403,218

$

394,733

$

374,064

Franchise revenue

38,225

33,729

 

29,418

Franchise advertising fee revenue

28,516

25,901

 

22,605

Total Revenue

469,959

454,363

 

426,087

Franchise revenue

(38,225)

(33,729)

 

(29,418)

Franchise advertising fee revenue

(28,516)

(25,901)

(22,605)

Sales from franchised restaurants

635,819

578,497

 

505,559

System-wide sales

$

1,039,037

$

973,230

$

879,623

Comparable Restaurant Sales

Comparable restaurant sales reflect year-over-year sales changes for comparable company-operated, franchised, and system-wide restaurants. A restaurant enters our comparable restaurant base the first full week after it has operated for fifteen months. Comparable restaurant sales exclude restaurants closed during the applicable period. At December 27, 2017,28, 2022, December 28, 201629, 2021 and December 30, 2015,2020, there were 424, 409,464, 464 and 397465 comparable restaurants, 181, 169,184, 187 and 160190 company-operated and 243, 240280, 276 and 237275 franchised, respectively. Comparable restaurant sales indicate the performance of existing restaurants, since new restaurants are excluded. Comparable restaurant sales growth can be generated by an increase in the number of meals sold and/or by increases in the average check amount,size, resulting from a shift in menu mix and/or higher prices resulting from new products or price increases.

Because other companies may calculate this measure differently than we do, comparable restaurant sales as presented herein may not be comparable to similarly titled measures reported by other companies. Management believes that comparable restaurant sales is a valuable metric for investors to evaluate the performance of our store base, excluding the impact of new stores and closed stores.

Company-Operated Average Unit Volumes

We measure company-operated AUVs on both a weekly and an annual basis. Weekly AUVs consist of comparable restaurant sales over a seven-day period from Thursday to Wednesday. Annual AUVs are calculated using the following methodology:a step process. First, we divide our total net sales for all company-operated restaurants for the fiscal year by the total number of restaurant operating weeks during the same period. Second, we annualize that average weekly per-restaurant sales figure by multiplying it by 52. An operating week is defined as a restaurant open for business over a seven-day period from Thursday to Wednesday. This measurement allows management to assess changes in consumer spending patterns at our restaurants and the overall performance of our restaurant base.

Restaurant Contribution and Restaurant Contribution Margin

Restaurant contribution and restaurant contribution margin are neither required by, nor presented in accordance with, GAAP. Restaurant contribution is defined as company-operated restaurant revenue less company restaurant expenses which includes food and paper cost, labor and related expenses and occupancy and other operating expenses, where applicable. Restaurant contribution therefore excludes franchise revenue, franchise advertising fee revenue and franchise expenses as well as certain other costs, such as general and administrative expenses, franchise expenses, depreciation and amortization, impairment and closed-store reserve, loss on disposal of assets and other costs that are considered corporate-level expenses and are not considered normal operating costs of our restaurants. Accordingly, restaurant contribution is not indicative of overall Company results and does not accrue directly to the benefit of shareholders because of the exclusion of certain corporate-level expenses. Restaurant contribution margin is defined as restaurant contribution as a percentage of net company-operated restaurant revenue.

Restaurant contribution and restaurant contribution margin are supplemental measures of operating performance of our restaurants, and our calculations thereof may not be comparable to those reported by other companies. Restaurant contribution and restaurant contribution margin have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. Management believes that restaurant contribution and restaurant contribution margin are important tools for investors, because they are widely-used metrics within the restaurant industry to evaluate restaurant-level productivity, efficiency, and performance. Management uses restaurant contribution and restaurant contribution margin as key metrics to evaluate the profitability of incremental sales at our restaurants, to evaluate our restaurant performance across periods, and to evaluate our restaurant financial performance compared with

39

our competitors.

Management believes that restaurant contribution and restaurant contribution margin are important tools for investors, because they are widely-used metrics within the restaurant industry to evaluate restaurant-level productivity, efficiency, and performance. Restaurant contribution and restaurant contribution margin may also assist investors in evaluating our business and performance relative to industry peers and provide greater transparency with respect to the Company’s financial condition and results of operation.

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

 Fiscal Year
(Dollar amounts in thousands)2017 2016 2015
Company-operated restaurant revenue$376,615
 $355,468
 $332,040
Company restaurant expenses302,113
 282,450
 260,125
Restaurant contribution$74,502
 $73,018
 $71,915
Restaurant contribution margin (%)19.8% 20.5% 21.7%

    

Fiscal Year

 

(Dollar amounts in thousands)

    

2022
(52-Weeks)

    

2021
(52-Weeks)

    

2020
(53-Weeks)

 

Restaurant contribution:

Income from operations

$

30,120

$

41,335

$

33,556

Add (less):

 

  

 

  

 

  

General and administrative expenses

 

39,093

 

39,852

 

35,918

Legal settlements

 

 

 

2,566

Franchise expenses

 

36,169

 

32,831

 

28,761

Depreciation and amortization

 

14,418

 

15,176

 

16,878

Loss on disposal of assets

 

165

 

289

 

189

Franchise revenue

 

(38,225)

 

(33,729)

 

(29,418)

Franchise advertising fee revenue

 

(28,516)

 

(25,901)

 

(22,605)

Recovery of securities lawsuits related legal expenses and other insurance claims

 

 

 

(123)

Impairment and closed-store reserves

 

752

 

1,087

 

4,691

(Gain) loss on disposition of restaurants

 

(848)

 

1,534

 

Restaurant contribution

$

53,128

$

72,474

$

70,413

Company-operated restaurant revenue:

 

  

 

  

 

  

Total revenue

$

469,959

$

454,363

$

426,087

Less:

 

  

 

  

 

  

Franchise revenue

 

(38,225)

 

(33,729)

 

(29,418)

Franchise advertising fee revenue

 

(28,516)

 

(25,901)

 

(22,605)

Company-operated restaurant revenue

$

403,218

$

394,733

$

374,064

Restaurant contribution margin (%)

 

13.2

%  

 

18.4

%  

 

18.8

%

New Restaurant Openings

The number of restaurant openings reflects the number of new restaurants opened by us and our franchisees during a particular reporting period. Before a new restaurant opens, we and our franchisees incur pre-opening costs, as described below. New restaurants often open with an initial start-up period of higher than normal sales volumes, which subsequently decrease to stabilized levels. New restaurants typically experience normal inefficiencies in the form of higher food and paper, labor, and other direct operating expenses and, as a result, restaurant contribution margins are generally lower during the start-up period of operation. The average start-up period after which our new restaurants’ revenue and expenses normalize is approximately fourteen weeks. When we enter new markets, we may be exposed to start-up times and restaurant contribution margins that are longer and lower than reflected in our average historical experience.


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EBITDA and Adjusted EBITDA

EBITDA represents net income (loss) before interest expense, provision (benefit) for income taxes, depreciation, and amortization. Adjusted EBITDA represents net income (loss) before interest expense, provision (benefit) for income taxes, depreciation, amortization, and items that we do not consider representative of our on-going operating performance, as identified in the reconciliation table below.

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EBITDA and Adjusted EBITDA as presented in this Annual Report are supplemental measures of our performance that are neither required by, nor presented in accordance with, GAAP. EBITDA and Adjusted EBITDA are not measurements of our financial performance under GAAP and should not be considered as alternatives to net income, operating income, or any other performance measures derived in accordance with GAAP, or as alternatives to cash flow from operating activities as a measure of our liquidity. In addition, in evaluating EBITDA and Adjusted EBITDA, you should be aware that in the future we will incur expenses or charges such as those added back to calculate EBITDA and Adjusted EBITDA. Our presentation of EBITDA and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items.

EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation, or as substitutes for analysis of our results as reported under GAAP. Some of these limitations are (i) they do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments, (ii) they do not reflect changes in, or cash requirements for, our working capital needs, (iii) they do not reflect interest expense, or the cash requirements necessary to service interest or principal payments, on our debt, (iv) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements, (v) they do not adjust for all non-cash income or expense items that are reflected in our statements of cash flows, (vi) they do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our on-going operations, and (vii) other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures.

We compensate for these limitations by providing specific information regarding the GAAP amounts excluded from such non-GAAP financial measures. We further compensate for the limitations in our use of non-GAAP financial measures by presenting comparable GAAP measures more prominently.

We believe

Management believes that EBITDA and Adjusted EBITDA facilitate operating performance comparisons from period to period by isolating the effects of some items that vary from period to period without any correlation to core operating performance or that vary widely among similar companies. These potential differences may be caused by variations in capital structures (affecting interest expense), tax positions (such as the impact on periods or companies of changes in effective tax rates or net operating losses) and the age and book depreciation of facilities and equipment (affecting relative depreciation expense). We also present EBITDA and Adjusted EBITDA because (i) we believemanagement believes that these measures are frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry, (ii) we believemanagement believes that investors will find these measures useful in assessing our ability to service or incur indebtedness, and (iii) we use EBITDA and Adjusted EBITDA internally as benchmarks to compare our performance to that of our competitors.


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41



The following table sets forth reconciliations of our net income to EBITDA and Adjusted EBITDA to our net income:

EBITDA:

    

Fiscal Year

(Amounts in thousands)

    

2022
(52-Weeks)

    

2021
(52-Weeks)

    

2020
(53-Weeks)

Net income

$

20,801

$

29,121

$

24,474

Non-GAAP adjustments:

 

 

 

Provision for income taxes

 

8,078

 

10,332

 

5,651

Interest expense, net of interest income

 

1,677

 

1,824

 

3,292

Depreciation and amortization

 

14,418

 

15,176

 

16,878

EBITDA

$

44,974

$

56,453

$

50,295

Stock-based compensation expense (a)

 

3,491

 

3,220

 

3,093

Loss on disposal of assets (b)

 

165

 

289

 

189

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

(123)

Impairment and closed-store reserves (d)

 

752

 

1,087

 

4,691

(Gain) loss on disposition of restaurants (e)

 

(848)

 

1,534

 

Income tax receivable agreement (income) expense (f)

 

(436)

 

58

 

139

Securities class action legal expense (g)

 

443

 

495

 

604

Legal settlements (h)

(541)

2,566

Special legal expenses (i)

350

Pre-opening costs (j)

 

326

 

259

 

141

Adjusted EBITDA

$

48,676

$

63,395

$

61,595

 Fiscal Year
 2017 2016 2015
Net income$8,619
 $18,339
 $24,054
Non-GAAP adjustments: 
  
  
Provision for income taxes497
 12,783
 20,857
Interest expense, net3,278
 3,155
 3,707
Depreciation and amortization18,128
 16,053
 13,092
EBITDA$30,522
 $50,330
 $61,710
Stock based compensation expense (a)
1,056
 1,063
 539
Loss on disposal of assets (b) (c)
799
 674
 471
Expenses related to fire loss (c)

 48
 
Gain on recovery of insurance proceeds, property, equipment,
   and expenses
(c)

 (741) 
Recovery of securities lawsuits related legal expense(d)(1,666) 
 
Asset impairment and closed-store reserves (e)
33,645
 8,554
 92
Gain on disposition of restaurants (f)

 (28) 
Expense related to selling shareholders (g)

 
 50
Income tax receivable agreement (income) expense (h)
(5,570) 352
 156
Securities class action legal expense (i)
4,236
 2,696
 993
Pre-opening costs (j)
1,981
 2,624
 1,456
Executive transition costs(k)284
 
 
Adjusted EBITDA$65,287
 $65,572
 $65,467
(a)Includes non-cash, stock-based compensation.
(b)Loss on disposal of assets includes the loss on disposal of assets related to retirements and replacement or write-off of leasehold improvements or equipment.
(c)In November 2015, one of the Company’s restaurants incurred damage resulting from a fire. In fiscal 2016, we incurred costs directly related to the fire of less than $0.1 million, disposed of assets of an additional $0.1 million and recognized gains of $0.7 million, related to the reimbursement of property and equipment and expenses incurred and $0.5 million related to the reimbursement of lost profits. The reimbursement of lost profits is included in the accompanying consolidated statements of income, for fiscal 2016, as a reduction of company restaurant expenses. The Company received from the insurance company cash of $1.4 million, net of the insurance deductible, during fiscal 2016. In fiscal 2015, the Company disposed of $0.1 million of assets related to the fire. The restaurant was reopened for business on March 14, 2016.
(d)In fiscal 2017,2020, we received insurance proceeds of $1.7$0.1 million related to the reimbursement of certain legal expenses paid in prior years for the defense of securities lawsuits. See the Notes to the Condensed Consolidated Financial Statements, Note 13, Commitments and Contingencies, Legal Matters.a property claim.
(d)
(e)Includes costs related to impairment of long-lived and ROU assets and closing restaurants. During fiscal 2017,2022, we determined thatrecorded non-cash impairment charges of $0.5 million, primarily related to the carrying value ofof the ROU assets of 21one restaurant in California that closed in 2021 and the long-lived assets of two restaurants in Arizona, California and Texas, may not be recoverable. Additionally,California. During fiscal 2022, we made a strategic decision to close two additional restaurants in Texas. As a result, we recorded a $32.6recognized $0.3 million of closed-store reserve expense, primarily related to the impairmentamortization of theROU assets, of the restaurantsproperty taxes and includes expense of $27.7 million, representing the entire remaining value of capitalized assets of all ofCAM payments for our company-operated restaurants in Texas, net of previously recorded depreciation. During fiscal 2017, we closed four restaurants in Texas, one of which was fully impaired during the fourth quarter of 2016, one of which was impaired during the third quarter of 2016 and the other two were impaired in fiscal 2017. Additionally, we closed one restaurant in Arizona, which was fully impaired in the third quarter of 2016. These closures resulted in closed-store reserve expenses of $1.1 million during fiscal 2017.locations.

In fiscal 2021, we recorded non-cash impairment charges of $0.7 million for the year ended December 29, 2021, primarily related to the carrying value of one restaurant in Texas closed in 2019, the ROU assets of one restaurant in California closed in 2021, and the long-lived assets of three restaurants in California. During fiscal 2016,2021, we recognized $0.4 million of closed-store reserve expense, primarily related to the Company determined thatamortization of ROU assets, property taxes and CAM payments for our closed locations.

In fiscal 2020, we recorded impairment charges of $3.5 million for the year ended December 30, 2020, primarily related to the carrying value of the ROU assets of nineone restaurant in Texas and the long-lived assets of four restaurants in Arizona, California and Texas, may not be recoverable. As a result, the Company recorded $8.3California. During fiscal 2020, we recognized $1.2 million of closed-store reserve expense, primarily related to the impairmentamortization of theROU assets, of the nine restaurants.


38



The Company continues to monitor the recoverability of the carrying value of the assets of several other restaurants.
property taxes and CAM payments for our closed locations.

(e)
(f)On June 16, 2016,During fiscal 2022, we completed the sale of three company-operated restaurants within the Orange County area to an agreement to sell one company-operated restaurant in Tucson, Arizona to a franchisee, resultingexisting franchisee. This sale during 2022 resulted in cash proceeds of $1.5$1.0 million and a net gain of less than $0.1 million, which is recorded as a gain on dispositionsale of restaurants of $0.8 million for the year ended December 28, 2022. During fiscal 2021, we completed the sale of our eight restaurants within Sacramento area to an existing franchisee. This sale resulted in cash proceeds of $4.6 million during the accompanying consolidated statementyear ended December 29, 2021 and a net loss on sale of income. This restaurant is now included in our franchised restaurant totals.restaurants of $1.5 million for the year ended December 29, 2021.
(f)
(g)Costs related to the sale, in the second quarter of 2015, of 5.4 million shares of common stock in a block trade to various investors, by our largest shareholder, which was at that time our majority shareholder, pursuant to Rule 144 under the Securities Act. This shareholder owns stock in us not registered under the Securities Act. Under our stockholders agreement, this shareholder may require us to register stock in us that it owns, under the Securities Act. In that event, we are responsible for all registration expenses. In lieu of the shareholder’s exercise of its registration rights, we agreed to bear the expenses incident to the shareholder’s sale of these shares using Rule 144.
(h)On July 30, 2014, we entered into the TRA. This agreement calls for us to pay to our pre-IPO stockholders 85% of the savings in cash that we realize in our taxes as a result of utilizing our net operating losses and other tax attributes

42

attributable to preceding periods. For the years ended December 27, 2017,28, 2022, December 28, 2016,29, 2021 and December 30, 2015,2020, income tax receivable agreement (income) expense consisted of the amortization of interest expense and changes in estimates for actual tax returns filed, related to our total expected TRA payments. For fiscal 2017, the income tax receivable agreement income was primarily due to the Tax Act, and the resulting changes to the Federal corporate income tax rate.
(g)
(i)Consists of costs related to the defense of securities lawsuits. SeeDuring the Notesyear ended December 29, 2021, we received $0.5 million in insurance proceeds, net of legal expenses, related to the Condensedderivative complaint. See Note 13 “Commitments and Contingencies—Legal Matters” in the accompanying “Notes to Consolidated Financial Statements, Note 13, Commitments and Contingencies, Legal Matters.Statements” in this Annual Report.
(h)Fiscal 2020 consists of an expense of $2.6 million related to resolution of the longstanding lawsuit involving a contract dispute with one of the Company’s franchisees concerning asserted territory rights, as well as amounts incurred related to the payment of the final settlement amounts for consolidated wage and hour class action lawsuits resolved during fiscal 2020. For additional information on legal settlements, see Note 13 “Commitments and Contingencies—Legal Matters” in the accompanying “Notes to Consolidated Financial Statements” in this Annual Report.
(i)Consists of costs related to a special dividend declaration. On October 11, 2022, the Board of Directors declared a special dividend of $1.50 per share on the common stock of the Company. The special dividend was paid on November 9, 2022, to stockholders of record, including holders of restricted stock, at the close of business on October 24, 2022.
(j)Pre-opening costs are a component of general and administrative expenses, and consist of costs directly associated with the opening of new restaurants and incurred prior to opening, including management labor costs, staff labor costs during training, food and supplies used during training, marketing costs, and other related pre-opening costs. These are generally incurred over the three to five months prior to opening. Pre-opening costs also include occupancy costs incurred between the date of possession and the opening date for a restaurant.
(k)Includes costs associated with the transition of our CEO, such as executive recruiting costs.

Liquidity and Capital Resources

Our primary sources of liquidity and capital resources have been cash provided from operations, cash and cash equivalents, and the 2022 Revolver (as defined below). Our primary requirements for liquidity and capital are new restaurants, existing restaurant capital investments (remodels and maintenance), legal defense costs, lease obligations, interest payments on our debt, working capital and general corporate needs. Our working capital requirements are not significant, since our customers pay for their purchases in cash or by payment card (credit or debit) at the time of sale. Thus, we are able to sell many of our inventory items before we have to pay our suppliers. Our restaurants do not require significant inventories or receivables. We believe that these sources of liquidity and capital are sufficient to finance our continued operations, including planned capital expenditures, for at least the next 12 months and beyond from the issuance of the consolidated financial statements.

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

Cash Flows

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

    

Fiscal Year

(Amounts in thousands)

    

2022
(52-Weeks)

    

2021
(52-Weeks)

    

2020
(53-Weeks)

Net cash provided by (used in)

  

  

  

Operating activities

$

38,549

$

52,099

$

40,547

Investing activities

 

(18,915)

 

(12,485)

 

(6,690)

Financing activities

 

(29,187)

 

(22,787)

 

(28,708)

Net (decrease) increase in cash

$

(9,553)

$

16,827

$

5,149

43

Highlights and Trends
Comparable Restaurant Sales

Operating Activities

In fiscal 2017, 2016,2022, net cash provided by operating activities decreased by $13.6 million compared to fiscal 2021. This decrease was due primarily to lower profitability and 2015, comparable restaurant sales system-wideunfavorable working capital fluctuations during fiscal 2022.

In fiscal 2021, net cash provided by operating activities increased 1.5%, 0.9%,by $11.6 million compared to fiscal 2020. This increase was due primarily to an increase in profitability after non-cash items and 2.2%, respectively. Comparable restaurant sales growth reflects the change in year-over-year salesfavorable working capital fluctuations for the comparable restaurant base. A restaurant enters our comparable restaurant baseyear ended December 29, 2021.

Investing Activities

In fiscal 2022, net cash used in investing activities increased by $6.4 million compared to fiscal 2021. This increase was due primarily to opening four new company-operated restaurants during fiscal 2022 compared to opening two new company-operated restaurants during fiscal 2021. This was partially offset by cash proceeds of $1.0 million received during fiscal 2022 related to the first full week after its 15-month anniversary. System-wide comparable restaurant sales include restaurant sales at all comparablesale of three restaurants within the Orange County area to an existing franchisee compared to cash proceeds of $4.6 million received during fiscal 2021 related to the sale of eight restaurants within the Sacramento area to an existing franchisee.

In fiscal 2021, net cash used in investing activities increased by $5.8 million compared to fiscal 2020. This increase was due primarily to opening two new company-operated restaurants and at all comparable franchisedremodeling ten restaurants as reportedduring the year ended December 29, 2021 compared to opening one new company-operated restaurant and completing two new remodels during the year ended December 30, 2020. This was partially offset by franchisees. Comparable restaurant sales at company-operatedcash proceeds of $4.6 million received during the year ended December 29, 2021 related to the sale of eight restaurants within the Sacramento area to an existing franchisee.

Financing Activities

In fiscal 2022, net cash used in financing activities increased 1.0%by $6.4 million compared to fiscal 2021. This change was due primarily to a special dividend payout of $56.0 million during fiscal 2022 partially offset by net borrowings on the 2022 Revolver of $26.0 million, compared to net pay downs of $22.8 million in fiscal 2017, 0.6%2021. Additionally, this change was due to a $1.7 million cash inflow related to option exercises during the year ended December 28, 2022, compared to a $0.9 million cash inflow during the year ended December 29, 2021.

In fiscal 2021, net cash used in financing activities decreased by $5.9 million compared to fiscal 2020. This decrease was due primarily to $22.8 million of net pay downs on the 2018 Revolver during fiscal 2021, compared to net pay downs of $34.2 million in fiscal 2016, and 1.0% in fiscal 2015. In fiscal 2017, the increase in company-operated comparable restaurant sales2020. The change was primarily the result of an increase in average check size of 1.9% , partially offset by a decrease of $5.0 million in transactionsproceeds received from the issuance of 0.9%common stock upon exercise of stock options in fiscal 2021 compared to fiscal 2020.

Debt and other Obligations

The Company, as a guarantor, is a party to a credit agreement (the “2022 Credit Agreement”) among EPL, as borrower, Intermediate, as a guarantor, Bank of America, N.A., as administrative agent, swingline lender, and letter of credit issuer, the lenders party thereto, and the other parties thereto, which provides for a $150.0 million five-year senior secured revolving credit facility (the “2022 Revolver”). In fiscal 2016,The 2022 Revolver, which is available pursuant to the increase in company-operated comparable restaurant sales was primarily2022 Credit Agreement, 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 result2022 Credit Agreement and related loan documents are guaranteed by Holdings and Intermediate. The obligations of an increase in average check size of 0.3%Holdings, EPL and an increase in transactions of 0.3%. In fiscal 2015,Intermediate under the increase in company-operated comparable restaurant sales was driven by an increase in average check size of 2.9% offset2022 Credit Agreement and related loan documents are secured by a decreasefirst 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 our past or present officers, directors, or employees (or their estates) upon death, disability, or termination of employment, (ii) pay under its TRA, and (iii) so long as no default or event of default has occurred and is continuing, (a) make non-cash repurchases of equity interests in transactionsconnection with the exercise of 1.9%stock options by directors, officers and management,

44

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 (c) Term SOFR with a term of one-month SOFR plus 1.00%. In fiscal 2017, 2016, and 2015, comparable restaurant sales at franchised restaurants increased 1.8%, 1.1%For Term SOFR loans, the margin is in the range of 1.25% to 2.25%, and 3.1%, respectively.

Restaurant Development
Since 2011,for base rate loans the margin is in a range of 0.25% to 1.25%. Borrowings under the 2022 Revolver may be repaid and reborrowed. For borrowings under the 2022 Revolver and 2018 Revolver during fiscal 2022, the interest rate range was 1.4% to 6.0%. For borrowings under the 2018 Revolver during fiscal 2021, the interest rate range was 1.3% to 1.6%. The interest rate under the 2022 Revolver was 5.7% at December 28, 2022 and 1.4% under the 2018 Revolver at December 29, 2021.

The 2022 Credit Agreement contains certain financial covenants. We were in compliance with the financial covenants as of December 28, 2022.

At December 28, 2022, $9.8 million of letters of credit and $66.0 million of the revolving line of credit were outstanding. The amount available under the revolving line of credit was $74.2 million at December 28, 2022.

During the year ended December 28, 2022, we have focused on repositioningrefinanced and terminated our brand, improving operational efficiency and brand awareness, strengthening our management team, and refinancing our indebtedness in preparation for future growth. New restaurant development is expected to be a key driver of our long-term growth strategy. In fiscal 2017, we opened 16 company-operated restaurants, and our franchisees opened seven new restaurants. From time to time, we and our franchisees close restaurants. In fiscal 2017,credit agreement (the “2018 Credit Agreement”) among EPL, as borrower, the Company closed five restaurants and our franchisees closed one restaurants. Our restaurant counts atIntermediate, as guarantors, Bank of America, N.A., as administrative agent, swingline lender, and letter of credit issuer, the beginninglenders party thereto, and end of each of the last three years were as follows:


39



 Fiscal Year
 2017 2016 2015
Company-operated restaurant activity: 
  
  
Beginning of period201
 186
 172
Openings16
 18
 14
Restaurant sale to franchisee
 (1) 
Closures(5) (2) 
Restaurants at end of period212
 201
 186
Franchised restaurant activity: 
  
  
Beginning of period259
 247
 243
Openings7
 13
 5
Restaurant sale to franchisee
 1
 
Closures(1) (2) (1)
Restaurants at end of period265
 259
 247
Total restaurant activity: 
  
  
Beginning of period460
 433
 415
Openings23
 31
 19
Closures(6) (4) (1)
Restaurants at end of period477
 460
 433
Restaurant Remodeling
Weother parties thereto, which provided for a $150.0 million five-year senior secured revolving credit facility (the “2018 Revolver”) and our franchisees commenced our remodeling program in 2011entered into the 2022 Credit Agreement. On July 29, 2022, we made a $20.0 million payment to the 2022 Revolver and the outstanding balance as of December 27, 2017, together28, 2022 was $66.0 million. See Note 6 “Long Term Debt” in the accompanying “Notes to Consolidated Financial Statements” in this Annual Report for additional information.

In connection with our entry into the 2022 Credit Agreement, we had remodeled 120 company-operatedterminated the interest rate swap on July 28, 2022 which was previously used to hedge interest rate risk. Prior to the interest rate swap termination, the swap was a highly effective cash flow hedge. In settlement of this swap, we received approximately $0.6 million and 196 franchised restaurants, or 316 system-wide, over 75%derecognized the corresponding interest rate swap asset. The remaining amount in accumulated other comprehensive (loss) income (“AOCI”) related to the hedging relationship will be reclassified into earnings when the hedged forecasted transaction is reported in earnings.

Material Cash Requirements

Our total capital expenditures for 2022 were $19.9 million. In 2022, we spent approximately $8.1 million on the development and construction of our restaurant system duenew restaurants. The remaining $11.8 million of capital expenditures during 2022 were related to investments in existing restaurants, including new equipment andhardware, technology to optimize efficiencies, remodeling and similar improvements. In 2023, we expect to incur between $27.0 million and $31.0 million in total capital expenditures, of which we expect $11.0 million to $13.0 million will be related to our construction of new restaurants, and $14.0 million to $16.0 million will be related to investments in existing restaurants, including new equipment andhardware, technology to optimize efficiencies, remodeling and similar improvements. Finally, we expect a portion of our incurred capital expenditures in 2023 to be remodeled. This includes 14 company-operatedfor additional corporate initiatives, including investments in

45

technology for support centers to boost innovation, enhancing the customer experience, and 3 franchised restaurants that have been remodeled usingimproving operations. We expect to fund these capital expenditures primarily with operating cash flows.

The following table summarizes our newest Vision restaurant design. The Vision design elevates the brand image with exteriorother current and interior features that embrace the brand’s authentic roots with warm textures, rustic elements and a focus on the signature open kitchen layout established in previous designs. Aslong-term material cash requirements as of December 27, 2017, including new builds and remodels,28, 2022, which we had 44 restaurants openexpect to fund primarily with the Vision design in our system. Remodeling is a use ofoperating cash and has implications for our net property and depreciation line items on our consolidated balance sheets and statements of income, among others. The cost of our restaurant remodels varies depending on the scope of work required, but on average the investment is $0.3 to $0.4 million per restaurant. We believe that our remodeling program will result in higher restaurant revenue and a strengthened brand.flows:

    

Payments Due by Period

    

    

    

2024 -

    

2026 -

    

2028 and

(Amounts in thousands)

Total

2023

2025

2027

 thereafter

Operating leases (1)

$

236,459

$

27,876

$

49,616

$

41,401

$

117,566

Finance leases (1)

 

2,146

 

151

 

298

 

218

 

1,479

Long-term debt (2)

 

76,959

 

3,529

 

6,938

 

66,492

 

Income tax receivable agreement (3)

 

672

 

263

 

409

 

 

Purchasing commitments—chicken(4)

 

40,866

 

40,866

 

 

 

Total

$

357,102

$

72,685

$

57,261

$

108,111

$

119,045

(1)Operating and Finance Leases Represents future minimum lease payments for our restaurants andthe principal payments during the lease terms, respectively. Refer to Note 5 “Leases”in the accompanying “Notes to Consolidated Financial Statements” in this Annual Report for further details regarding our obligations and the timing of expected payments.
(2)Long-Term Debt — Represents our contractual debt obligations. Includes expected interest expenses, calculated based on applicable interest rates at December 28, 2022. Refer to Note 6 “Long-Term Debt”in the accompanying “Notes to Consolidated Financial Statements” in this Annual Report for further details regarding our obligations and the timing of expected payments.
(3)Income Tax Receivable Agreement — Represents paymentsto our pre-IPO stockholders under the TRA. Refer to Note 9 “Income Taxes”in the accompanying “Notes to Consolidated Financial Statements” in this Annual Report for further details regarding our obligations and the timing of expected payments.
(4)Purchasing Commitments (Chicken) — Reflects contractual purchase commitments for goods related to restaurant operations. Refer to Note 13 “Commitments and Contingencies”in the accompanying “Notes to Consolidated Financial Statements” in this Annual Report for further details regarding our obligations.

Critical Accounting Policies and Use of Estimates

The preparation of our consolidated financial statements in accordance with GAAP requires us to make estimates and judgments that affect our reported amounts of assets, liabilities, revenue, and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under current circumstances in making judgments about the carrying value of assets and liabilities that are not readily available from other sources. We evaluate our estimates on an on-going basis. Actual results may differ from these estimates under different assumptions or conditions.

Accounting policies are an integral part of our financial statements. A thorough understanding of these accounting policies is essential when reviewing our reported results of operations and our financial position. Management believes that the critical accounting policies and estimates discussed below involve the most difficult management judgments, due to the sensitivity of the methods and assumptions used. Our significant accounting policies are described in Note 2 “Summary of Significant Accounting Policies” in the accompanying “Notes to our consolidated financial statements included elsewhereConsolidated Financial Statements” in this report.

Annual Report.

Revenue Recognition

We record revenue from company-operated restaurants as food and beverage products are delivered to customers and payment is tendered at the time of sale. We present sales net of sales-related taxes and promotional allowances. In the case of gift card sales, we record revenue when the gift card is redeemed by the customer. We record royalties from

46

franchised restaurant sales based on a percentage of restaurant revenues in the period that the related franchised restaurants’ revenues are earned. FranchiseThe 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 area developmentsubsequent renewal fees, are recognized as income when all material servicesover the franchise, or conditions relating to the sale of the


40



franchise have been substantially performed or satisfied by us. Both franchise fees and area development fees generally are recognized as income upon the opening of a franchised restaurant or upon termination of the related agreements.
renewal, term, which is typically 20 years.

Goodwill and Indefinite-Lived Intangible Assets, Net

Intangible assets consist primarily of goodwill and trademarks.

We do not amortize our goodwill and indefinite-lived intangible assets. We perform an annual impairment test for goodwill during the fourth fiscal quarter of each year, or more frequently if impairment indicators arise. For our annual goodwill impairment assessment at December 27, 2017, we performed a qualitative assessment and concluded that the fair value of the reporting unit to which goodwill was assigned exceeded our book equity. Accordingly, we did not identify any goodwill impairment.

We perform an annual impairment test for indefinite-lived intangible assets during the fourth fiscal quarter of each year, or more frequently if impairment indicators arise. For ourAn impairment test for indefinite-lived intangible assets at December 27, 2017, we performedconsists of either a qualitative assessment and concluded thator a comparison of the fair value of an intangible asset with its carrying amount. The excess of the indefinite-livedcarrying amount of an intangible assets exceeded their carryingasset over its fair value and that there was no impairment.

is its impairment loss.

These assumptions used in our estimates of fair value are generally consistent with past performance and are also consistent with the projections and assumptions that we use in our forward-looking operating plans. These assumptions are subject to change as a result of changing economic and competitive conditions. Changes in these estimates and assumptions could materially affect our determinations of fair value and impairment.

We determined that there were no indicators of potential impairment of our goodwill and indefinite-lived intangible assets during fiscal 2022 and 2021. Accordingly, we did not record any impairment to goodwill or indefinite-lived intangible assets during the year ended December 28, 2022. The ultimate severity and longevity of the COVID-19 pandemic and the extent and duration of any economic downturn is unknown, and therefore, it is possible that impairments could be identified in future periods, and such amounts could be material.

Upon the sale or refranchising of a restaurant, we evaluate whether there is a decrement of goodwill. The amount of goodwill included in the cost basis of the asset sold is determined based on the relative fair value of the portion of the reporting unit disposed of compared to the fair value of the reporting unit retained. The fair value of the portion of the reporting unit disposed of in a refranchising is determined by reference to the discounted value of the future cash flows expected to be generated by the restaurant and retained by the franchisee, which includes a deduction for the anticipated, future royalties the franchisee will pay us 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. We did not record any decrement to goodwill related to the disposition of restaurants in fiscal 2022, 2021 and 2020.

Long-Lived and ROU Assets

We state the value of our property and equipment, including primarily leasehold improvements and restaurant equipment, furniture, and fixtures, at cost, minus accumulated depreciation and amortization. We calculate depreciation using the straight-line method of accounting over the estimated useful lives of the related assets. We amortize our leasehold improvements using the straight-line method of accounting over the shorter of the lease term (including reasonably assured renewal periods) or the estimated useful lives of the related assets. We expense repairs and maintenance as incurred, but capitalize major improvements and betterments. We make judgments and estimates related to the expected useful lives of those assets that are affected by factors such as changes in economic conditions and changes in operating performance. If we change our assumptions in the future, we may be required to record impairment charges for these assets.

The Company reviews its long-lived and ROU assets for impairment on a restaurant-by-restaurant basis whenever events or changes in circumstances indicate that the carrying value of certain assets may not be recoverable. The Company considers a triggering event to have occurred related to a specific restaurant if the restaurant’s cash flowsAUV for the last twelve months are less than a minimum threshold or if consistent levels of undiscounted cash flows for the remaining

47

lease period are less than the carrying value of the restaurant’s assets. If the Company concludes that the carrying value of certain assets will not be recovered based on expected undiscounted future cash flows, an impairment write-down is recorded to reduce the assets to their estimated fair value. The fair value is measured on a nonrecurring basis using unobservable (Level 3) inputs. There is uncertainty in the projected undiscounted future cash flows used in our impairment review analysis. If actual performance does not achieve the projections, we may recognize impairment charges in future periods, and such charges could be material.

Insurance Reserves

We are responsible for workers’ compensation, general, and health insurance claims up to a specified amount. We maintain a reserve for estimated claims both reported and incurred but not reported, based on historical claims experience and other assumptions. In estimating our insurance accruals, we utilize independent actuarial estimates of expected losses, which are based on statistical analyses of historical data. Our actuarial assumptions are closely monitored and adjusted when warranted by changing circumstances. Should claims occur or medical costs increase in greater amounts than we have expected, accruals may not be sufficient, and we may record additional expenses.

Accounting for Lease Obligations

We lease a substantial number of our restaurant properties. At the inception of each lease, we evaluate the property and the lease to determine whether the lease is an operating lease or a capitalfinance lease. This lease accounting evaluation may require significant judgment in determining the fair value and useful life of the leased property and the appropriate lease term. The lease term used


41



for the evaluation includes renewal option periods only in instances in which the exercise of the renewal option can be reasonably assured because failure to exercise such an option would result in an economic penalty. Such an economic penalty would typically result from our having to abandon a building or fixture with remaining economic value upon vacating a property.
Franchise Operations

We subleasemake significant assumptions and judgments related to determination of whether a numbercontract contains a lease and the discount rate used for the lease. In determining if any of restaurant propertiesour contracts contain a lease, we make assumptions and judgments related to our franchisees. As such,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. We also make significant assumptions and judgments in determining an appropriate discount rate for property leases. These include 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. We utilize a third-party valuation firm to assist in determining the discount rate, based on the above assumptions. For all other leases, we remain principally liable foruse the underlying leases. If sales trendsdiscount rate implicit in the lease, or economic conditions worsen for our franchisees, their financial health may worsen, our collection rates may decline, and we may be required to assume the responsibility for additional lease payments on what are presently franchised restaurants.

Company’s incremental borrowing rate.

Income Taxes

We use the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are determined based on temporary differences between the financial carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which the temporary differences are expected to reverse. As of December 27, 2017,28, 2022, we had no federal and less than $0.1 million state net operating loss (“NOL”(NOL) carryforwards of $55.8 million and $20.1 million, respectively.carryforwards. These Federal and State NOLs expire beginning in 2030 and 2025, respectively.

2029.

A valuation allowance is required when there is significant uncertainty as to whether certain deferred tax assets can be realized. The ability to realize deferred tax assets is dependent upon our ability to generate sufficient taxable income within the carryforward periods provided for in the tax law for each tax jurisdiction. We have considered the following possible sources of taxable income when assessing the realization of our deferred tax assets:

future reversals of existing taxable temporary differences;
future taxable income or loss, exclusive of reversing temporary differences and carryforwards;
tax-planning strategies; and
taxable income in prior carryback years.
future reversals of existing taxable temporary differences;
future taxable income or loss, exclusive of reversing temporary differences and carryforwards;
tax-planning strategies; and
taxable income in prior carryback years.

We will continue to reevaluate the continued need for either a valuation allowance. Relevant factors include:

current financial performance;
current financial performance;

48

our ability to meet short-term and long-term financial and taxable income projections;
the overall market environment; and
the volatility and trends in the industry in which we operate.
our ability to meet short-term and long-term financial and taxable income projections;
the overall market environment; and
the volatility and trends in the industry in which we operate.

All of the factors that we consider in evaluating treatment of a deferred tax asset valuation allowance involve significant judgment. For example, there are many different interpretations of “cumulative losses in recent years” that can be used. Also, significant judgment is involved in making projections of future financial and taxable income, especially because our financial results are significantly dependent upon industry trends. Any change in our valuation allowance will significantly impact our financial results in the period of that change.

When there are uncertainties related to potential income tax benefits, in order to qualify for recognition, the position we take 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 responsible authorities. The term “more likely than not” means a likelihood of more than 50%. Otherwise, we may not recognize any of the potential tax benefits associated with that position. We recognize 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 to be realized upon its effective resolution. Unrecognized tax benefits involve our judgment regarding the likelihood of a benefit being sustained. The final resolutions of uncertain tax positions could result in adjustments to recorded amounts and affect our results of operations, financial position, and cash flows. However, we anticipate that any such adjustments would not materially impact our financial statements.

In fiscal 2017, President Trump signed into law "the Tax Act”. The Tax Act provides for significant changes in the U.S. Internal Revenue Code of 1986, as amended. The Tax Act contains provisions with separate effective dates but is generally effective for taxable years beginning after December 31, 2017.

42



The Tax Act had the following effects on our income tax expense for the year ended December 27, 2017:
Under Financial Accounting Standards Board Accounting Standards Codification (ASC) Topic 740, Income Taxes (“ASC 740”), we are required to revalue any deferred tax assets or liabilities in the period of enactment of change in tax rates. The Tax Act lowers the corporate income tax rate from 35% to 21%. We have estimated the impact of the revaluation of our deferred tax assets and liabilities, which resulted in a decrease to our net deferred income tax liability by $1.4 million and is reflected as a decrease in our income tax expense in our results for fiscal 2017.
The reduced corporate tax rate, also resulted in a Tax Receivable Agreement “TRA” benefit to the provision for income tax expense for fiscal 2017 in the amount of $2.0 million.
The Tax Act is generally effective for tax years beginning after December 31, 2017. As such, the reduction in the corporate income tax rate from 35% to 21% will be effective for the fiscal year ended December 26, 2018.

On July 30, 2014, we entered into the TRA. The TRA calls for us to pay to our pre-IPO stockholders 85% of the cash savings in cash that we realize in our taxes as a result of utilizing our net operating lossesNOLs and other tax attributes attributable to preceding periods. We are permittedThe TRA charge expense (benefit) is a permanent add-back to makeour taxable income. TRA payments under the 2014 Revolver. In fiscal 2017 a benefit of $5.6 million andresulted in and fiscal 2016, we incurred a charge of $0.4 million of income in fiscal 2022 and less than $0.1 million of expense in fiscal 2021 as a result of the amortization of interest expense related to the amortization of the present value of the TRA obligation, the impact of the Tax Act on the corporate tax rate on future years, and an adjustment to thetotal expected TRA liability, duepayments and changes in estimates for actual tax returns filed and future forecasted taxable income and $0.1 million of expense in fiscal 2020 as a result of changes to future forecasted results and deduction on 2018 legal settlement accrual. In fiscal 2022, 2021 and 2020, we paid $0.4 million, $1.7 million and $5.2 million, respectively, to our pre-IPO stockholders under the expected realization of various pre-IPO tax credits.

TRA.

In addition, in fiscal 2014, we applied for various tax credits that resulted in $6.7 million of additional deferred tax assets and tax benefits. As of fiscal 2017,2022, the deferred asset balance forrelated to these various tax credits, net of valuation allowance was $5.4$0.5 million. The fiscal 20172022 provision includes a $4.3$6.7 million valuation allowance against our deferred tax asset, resulting from certain tax credits that may not be realizable prior to the time the credits expire. Also,

During fiscal 2020, we received a Notice of Proposed Adjustment for the years ended December 27, 2017 and December 28, 2016, related to our methodology regarding our ordering of NOL. Resolution of this NOPA resulted in fiscal 2017, federal work opportunity tax credits (“WOTC”)a payment of approximately $0.4 million, were generated.

and the audit is closed. As a result of the CARES Act, this amount was immediately refundable upon filing of a Form 1139. We filed the Form 1139 during the year ended December 30, 2020 and received a refund totaling $0.5 million.

Stock-Based Compensation

We measure and recognize compensation expense for the estimated fair value of equity instruments for employees and non-employee directors based on the grant-date fair value of the award. For awards that are based on a service requirement, the cost is recognized on a straight-line basis over the requisite service period, usually the vesting period. We granted 372,958 options during fiscal 2022. In fiscal 2017, the Company2022, we granted 135,036 stock options and 181,292356,610 restricted stock awards, with an exercise price equal to the fair market value of the common stock on the date of grant. The awards granted in fiscal 2017, 20162022, 2021 and 20152020 had a four-year vesting period for employees and three-year vesting period for directors. For options that were based on performance requirements, costs were recognized over the periods to which the performance criteria related. On November 15, 2016, the board of directors modified the vesting of the remaining performance based stock options to instead vest based solely on time. As of December 27, 2017, there were no remaining performance based stock options outstanding. In order to calculate the grant date fair value for our stock options’ fair values and the associated compensation costs for share-based awards,options, we utilize the Black–Scholes option pricing model.

Recent Accounting Pronouncements
Recent accounting pronouncements are described in Note 2 toThe model involves several assumptions including the expected term of the option, expected volatility and risk-free interest rate. The volatility and the expected life assumptions were based on our consolidated financial statements included elsewhere in this report.
Key Financial Definitions
Revenue
Our revenue is derived from two primary sources: company-operated restaurant revenue and franchise revenue, the latterhistorical data. If we changed our assumptions of which is comprised primarily of franchise royalties and, to a lesser extent, franchise fees and sublease rental income.
Food and Paper Costs
Food and paper costs include the direct costs associated with food, beverage and packagingstock price volatility or expected lives of our menu items. The components of food and paper costs are variable in nature, change with sales volume, are impacted by menu mix, and are subject to increases or decreases in commodity costs.

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Labor and Related Expenses
Labor and related expenses include wages, payroll taxes, workers’ compensation expense, benefits, and bonuses paid tostock options, our restaurant management teams. Like other expense items, we expect labor costs to grow proportionately as our restaurant revenue grows. Factors that influence labor costs include minimum wage and payroll tax legislation, the frequency and severity of workers’ compensation claims, health care costs, and the performance of our restaurants.
Occupancy Costs and Other Operating Expenses
Occupancy costs include rent, common area maintenance, and real estate taxes. Other restaurant operating expenses include the costs of utilities, advertising, credit card processing fees, restaurant supplies, repairs and maintenance, and other restaurant operating costs.
General and Administrative Expenses
General and administrative expenses are comprised of expenses associated with corporate and administrative functions that support the development and operations of our restaurants, including compensation and benefits, travel expenses, stock compensation costs, legal and professional fees, and other related corporate costs. Also included are pre-opening costs, and expenses above the restaurant level, including salaries for field management, such as area and regional managers, and franchise field operational support.
Franchise Expenses
Franchise expenses are primarily comprised of rent expenses incurred on properties leased by us and then sublet to franchisees, and expenses incurred in support of franchisee information technology systems.
Depreciation and Amortization
Depreciation and amortization primarily consist of the depreciation of property and equipment, including leasehold improvements and equipment.
Loss on Disposal of Assets
Loss on disposal of assets includes the loss on disposal of assets related to retirements and replacement or write-off of leasehold improvements or equipment.
Asset Impairment and Closed-Store Reserves
We review long-lived assets such as property, equipment, and intangibles on a unit-by-unit basis for impairment when events or circumstances indicate a carrying value of the assets that may not be recoverable, and record an impairment charge when appropriate. Closure costs include non-cash restaurant charges such as up-front expensing the net present value of unpaid rent remaining on the life of a lease offset by assumed sublease income.
Interest Expense, Net
Interest expense, net, consists primarily of interest on our outstanding debt. Debt issuance costs are amortized at cost over the life of the related debt.
Provision for Income Taxes
Provision for income taxes consists of federal and state taxes on our income, and changes to our deferred tax asset and deferred tax liability.

44



Results of Operations
Fiscal Year 2017 Compared to Fiscal Year 2016
Our operating results for the fiscal years ended December 27, 2017, and December 28, 2016, in absolute terms and expressed as a percentage of total revenue, with the exception of cost of operations and company restaurant expenses, which are expressed as a percentage of company-operated restaurant revenue, are compared below:
 Fiscal Year
 
2017
(52-Weeks)
 
2016
(52-Weeks)
 Increase / (Decrease)
 ($ ,000) (%) ($ ,000) (%) ($ ,000) (%)
Statements of Income Data: 
  
  
  
  
  
Revenue 
  
  
  
  
  
Company-operated restaurant revenue$376,615
 93.8
 $355,468
 93.5
 $21,147
 5.9
Franchise revenue25,086
 6.2
 24,655
 6.5
 431
 1.7
Total revenue401,701
 100.0
 380,123
 100.0
 21,578
 5.7
Cost of operations 
  
  
  
  
  
Food and paper costs (1)
109,898
 29.2
 107,218
 30.2
 2,680
 2.5
Labor and related expenses (1)
106,584
 28.3
 97,471
 27.4
 9,113
 9.3
Occupancy and other operating expenses (1)
85,631
 22.7
 78,263
 22.0
 7,368
 9.4
Gain on recovery of insurance proceeds, lost profits (1)

 
 (502) (0.1) 502
 (100.0)
Company restaurant expenses (1)
302,113
 80.2
 282,450
 79.5
 19,663
 7.0
General and administrative expenses38,523
 9.6
 34,661
 9.1
 3,862
 11.1
Franchise expenses3,335
 0.8
 3,823
 1.0
 (488) (12.8)
Depreciation and amortization18,128
 4.5
 16,053
 4.2
 2,075
 12.9
Loss on disposal of assets799
 0.2
 674
 0.2
 125
 18.5
Expenses related to fire loss
 
 48
 0.0
 (48) (100.0)
Gain on recovery of insurance proceeds, property,
   equipment and expenses

 
 (741) (0.2) 741
 (100.0)
Recovery of securities lawsuits related legal expenses(1,666) (0.4) 
 
 (1,666) NA
Asset impairment and closed-store reserves33,645
 8.4
 8,554
 2.3
 25,091
 293.3
Total expenses394,877
 98.3
 345,522
 90.9
 49,355
 14.3
Gain on disposition of restaurants
 0.0
 28
 0.0
 (28) (100.0)
Income from operations6,824
 1.7
 34,629
 9.1
 (27,805) (80.3)
Interest expense, net3,278
 0.8
 3,155
 0.8
 123
 3.9
Income tax receivable agreement (income) expense(5,570) (1.4) 352
 0.1
 (5,922) (1,682.4)
Income before provision for income taxes9,116
 2.3
 31,122
 8.2
 (22,006) (70.7)
Provision for income taxes(497) (0.1) (12,783) (3.4) 12,286
 (96.1)
Net income$8,619
 2.1
 $18,339
 4.8
 $(9,720) (53.0)
(1)Percentages for line items relating to cost of operations and company restaurant expenses are calculated with company-operated restaurant revenue as the denominator.  All other percentages use total revenue.

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Company-Operated Restaurant Revenue
In fiscal 2017, company-operated restaurant revenue increased $21.1 million, or 5.9%, due to $20.9 million of additional sales from new restaurants. In addition, company-operated revenue was favorably impacted by an increase in company-operated comparable restaurant sales of $3.4 million, or 1.0%. The growth in company-operated comparable restaurant sales was due primarily to an increase in average check size of 1.9%, partially offset by a decline in transactions of 0.9%, compared to the prior year. The increase in company-operated restaurant revenue was partially offset by $2.7 million of net impact of lost sales from closed restaurants in fiscal 2017 and 2016, and $0.5 million of other revenue.
Franchise Revenue
In fiscal 2017, franchise revenue increased $0.4 million, or 1.7%. This increase was due primarily to an increase in franchised comparable restaurant sales of 1.8%, and $1.0 million in higher sales revenue, resulting from additional franchise units. This was partially offset by a decline in franchise agreement and development agreement fees and lower fees received from franchised restaurants related to their use of our point-of-sales system.
Food and Paper Costs
Food and paper costs increased $2.7 million in fiscal 2017, due to a $1.6 million increase in food costs and a $1.1 million increase in paper costs. This increase was due primarily to higher restaurant revenue, and increased food waste, partially offset by lower commodity costs related to chicken. Food and paper costs as a percentage of company-operated restaurant revenue were 29.2% in fiscal 2017, compared to 30.2% in fiscal 2016. This decrease in percentage was due primarily to the lower commodity costs, noted above, and increases in prices.
Labor and Related Expenses
Payroll and benefit expenses increased $9.1 million in fiscal 2017. This increase was due primarily to additional labor needs arising from the opening of 16 new restaurants in fiscal 2017 and 18 new restaurants in fiscal 2016, minimum wage increases in California, and higher workers' compensation expense due to increased claims activity. This was partially offset by lower group insurance costs due to lower claims activity. Payroll and benefit expenses as a percentage of company-operated restaurant revenue were 28.3% in fiscal 2017, compared to 27.4% in fiscal 2016. This increase was primarily due to the minimum wage increases and incremental labor required for the new restaurant openings, noted above, partially offset by higher restaurant revenue.
Occupancy and Other Operating Expenses
Occupancy and other operating expenses increased $7.4 million in fiscal 2017. This increase for the year-to-date period was due to a $3.7 million increase in occupancy costs, due primarily to additional rent and property tax, a $1.3 million increase in utilities costs, a $0.7 million increase in advertising costs, and a $1.7 million increase in other operating expenses, resulting primarily from an increase in credit card fees, restaurant security expenses and repair and maintenance costs. The increases in fiscal 2017 resulted primarily from the new restaurants opened during or after the first quarter of 2016. Occupancy and other operating expenses as a percentage of company-operated restaurant revenue was 22.7% in fiscal 2017, compared to 22.0% in fiscal 2016. This increase resulted primarily from rent expense, relative to revenue volume generated, and other incremental costs related to opening new restaurants in 2016 and fiscal year 2017.
General and Administrative Expenses
General and administrative expenses increased $3.9 million in fiscal 2017. The increase was due primarily to (i) a $2.6 million increase in legal expense related primarily to the securities class action as discussed under Item 3, "Legal Proceedings" and franchise related litigation, (ii) a $2.0 million increase in payroll expense due primarily to an increase in our accrual for our annual bonus program and an increase in the number of corporate employees and (iii) a $0.5 million increase in other general and administrative costs, primarily related to an increase in recruiting costs. These increases were partially offset by a $0.6 million decrease in new restaurant opening costs and a $0.6 million decrease in travel related costs. General and administrative expenses as a percentage of total revenue were 9.6% in fiscal 2017, compared to 9.1% in fiscal 2016. This increase is primarily due to the higher costs noted above.
Gain on Recovery of Insurance Proceeds

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In November 2015, one of the Company’s restaurants incurred damage resulting from a fire. In fiscal 2016, we incurred costs directly related to the fire of less than $0.1 million, disposed of assets of an additional $0.1 million and recognized gains of $0.7 million, related to the reimbursement of property and equipment and expenses incurred and $0.5 million related to the reimbursement of lost profits. The reimbursement of lost profits is included in the accompanying consolidated statements of income as a reduction of company restaurant expenses, for fiscal 2016. The Company received from the insurance company cash of $1.4 million, net of the insurance deductible, during fiscal 2016.
Asset Impairment and Closed-Store Reserves
During fiscal 2017, we determined that the carrying value of the assets of 21 restaurants, in Arizona, California and Texas, may not be recoverable. Additionally, we made a strategic decision to close two additional restaurants in Texas. As a result, we recorded a $32.6 million impairment expense.The impairment expense for fiscal 2017 includes an impairment expense of $27.7 million, representing the entire remaining value of capitalized assets of all of our company-operated restaurants in Texas, net of previously recorded depreciation. Factors which led to the impairment of our Texas restaurants include recent results , which indicates that the restaurants have not achieved the sales volumes required to generate positive cash flows or improve profitability in the Texas market, along with the related future cash flow assumptions, including comparable sales rate growth and restaurant operating costs, over the remaining lease terms and the age of the restaurants in Texas. The restaurants in Texas began opening in late 2014, causing a higher net book value at the time of impairment testing, and increased difficulty projecting results for newer restaurants in newer markets. During fiscal 2017, we closed four restaurants in Texas, one of which was fully impaired during the fourth quarter of 2016, one of which was fully impaired during the third quarter of 2016 and the other two were fully impaired in fiscal 2017. Additionally, we closed one restaurant in Arizona, which was fully impaired in the third quarter of 2016. These closures resulted in closed-store reserve expenses of $1.1 million during fiscal 2017.
During fiscal 2016, the Company determined that the carrying value of the assets of nine restaurants, in Arizona, California and Texas, may not be recoverable. As a result, the Company recorded $8.3 million of expense related to the impairment of the assets of the nine restaurants.
The Company continues to monitor the recoverability of the carrying value of the assets of several other restaurants.
Gain on Disposition of Restaurants
On June 16, 2016, we completed an agreement to sell one company-operated restaurant in Tucson, Arizona to a franchisee, resulting in cash proceeds of $1.5 million and a net gain of less than $0.1 million, which is recorded as a gain on disposition of restaurants in the accompanying consolidated statements of income. This restaurant is now included in our franchised restaurant totals.
Interest Expense, Net
For fiscal 2017, interest expense, net was comparable with the same periods of the prior year.
Income Tax Receivable Agreement
In fiscal 2017 we recognized income tax receivable agreement income of $5.6 million and in 2016 we incurred income tax receivable agreement expense of $0.4 million, resulting from the amortization of interest expense related to our total expected TRA payments, changes in estimates for actual tax returns filed, the reduction of the expected TRA liability as a result of the impact of the Tax Act on the corporate tax rate on future years, and expected realization of various pre-IPO tax credits. We are permitted to make TRA payments under the 2014 Revolver. In fiscal 2017 and 2016, we paid $11.1 million and $3.2 million, respectively, to our pre-IPO stockholders under the TRA.
Provision for Income Taxes
In fiscal 2017, we recorded an income tax expense of $0.5 million, compared to income tax expense of $12.8 million in fiscal 2016, reflecting an estimated effective tax rate of 5.5% and 41.1%, respectively. The lower effective tax rate resulted primarily from the Tax Act enacted on December 22, 2017. The Tax Act had the following effects on our income tax expense for the year ended December 27, 2017:
Under Financial Accounting Standards Board Accounting Standards Codification (ASC) Topic 740, Income Taxes (“ASC 740”), we are required to revalue any deferred tax assets or liabilities in the period of enactment of change in tax rates. The Tax Act lowers the corporate income tax rate from 35% to 21%. We have estimated the impact of the

47



revaluation of our deferred tax assets and liabilities, which resulted in a decrease to our net deferred income tax liability by $1.4 million and is reflected as a decrease in our income tax expense in our results for fiscal 2017.
The reduced corporate tax rate, also resulted in a Tax Receivable Agreement “TRA” benefit to the provision for income tax expense for fiscal 2017 in the amount of $2.0 million.
The Tax Act is generally effective for tax years beginning after December 31, 2017. As such, the reduction in the corporate income tax rate from 35% to 21% will be effective for the fiscal year ended December 26, 2018.
In addition, there was a $3.3 million valuation allowance against our deferred tax assets recorded in fiscal 2016, compared to an additional valuation allowance of $1.0 million recorded in fiscal 2017. The valuation allowance against our deferred tax assets resulted from certain tax credits that may not be realizable prior to the time the credits expire.

48



Fiscal Year 2016 Compared to Fiscal Year 2015
Our operating results for the fiscal years ended December 28, 2016, and December 30, 2015, in absolute terms and expressed as a percentage of total revenue, with the exception of cost of operations and company restaurant expenses, which are expressed as a percentage of company-operated restaurant revenue, are compared below:
 Fiscal Year
 
2016
(52-Weeks)
 
2015
(52-Weeks)
 Increase / (Decrease)
 ($ ,000) (%) ($ ,000) (%) ($ ,000) (%)
Statements of Income Data: 
  
  
  
  
  
Revenue 
  
  
  
  
  
Company-operated restaurant revenue$355,468
 93.5
 $332,040
 93.5
 $23,428
 7.1
Franchise revenue24,655
 6.5
 23,017
 6.5
 1,638
 7.1
Total revenue380,123
 100.0
 355,057
 100.0
 25,066
 7.1
Cost of operations 
  
  
  
  
  
Food and paper costs (1)
107,218
 30.2
 105,917
 31.9
 1,301
 1.2
Labor and related expenses (1)
97,471
 27.4
 84,231
 25.4
 13,240
 15.7
Occupancy and other operating expenses (1)
78,263
 22.0
 69,977
 21.1
 8,286
 11.8
Gain on recovery of insurance proceeds, lost profits (1)
(502) (0.1) 
 
 (502) N/A
Company restaurant expenses (1)
282,450
 79.5
 260,125
 78.3
 22,325
 8.6
General and administrative expenses34,661
 9.1
 28,997
 8.2
 5,664
 19.5
Franchise expenses3,823
 1.0
 3,456
 1.0
 367
 10.6
Depreciation and amortization16,053
 4.2
 13,092
 3.7
 2,961
 22.6
Loss on disposal of assets674
 0.2
 471
 0.1
 203
 43.1
Expenses related to fire loss48
 0.0
 
 
 48
 N/A
Gain on recovery of insurance proceeds, property,
   equipment and expenses
(741) (0.2) 
 
 (741) N/A
Asset impairment and closed-store reserves8,554
 2.3
 92
 0.0
 8,462
 9,197.8
Total expenses345,522
 90.9
 306,233
 86.2
 39,289
 12.8
Gain on disposition of restaurants28
 0.0
 
 
 28
 100.0
Income from operations34,629
 9.1
 48,824
 13.8
 (14,195) (29.1)
Interest expense, net3,155
 0.8
 3,707
 1.0
 (552) (14.9)
Expenses related to selling shareholders
 
 50
 0.0
 (50) (100.0)
Income tax receivable agreement expense352
 0.1
 156
 0.0
 196
 125.6
Income before provision for income taxes31,122
 8.2
 44,911
 12.6
 (13,789) (30.7)
Provision for income taxes(12,783) (3.4) (20,857) (5.9) 8,074
 (38.7)
Net income$18,339
 4.8
 $24,054
 6.8
 $(5,715) (23.8)
(1)Percentages for line items relating to cost of operations and company restaurant expenses are calculated with company-operated restaurant revenue as the denominator.  All other percentages use total revenue.
Company-Operated Restaurant Revenue
In fiscal 2016, company-operated restaurant revenue increased $23.4 million, or 7.1%, due to $25.0 million of additional sales from new restaurants. In addition, company-operated revenue was favorably impacted by an increase in company-operated comparable restaurant sales of $1.8 million, or 0.6%. The growth in company-operated comparable restaurant sales was due primarily to an increase in average check size of 0.3% and an increase in transactions of 0.3% compared to the prior year. The increase in company-operated restaurant revenue was partially offset by $3.4 million of lost sales from closed restaurants.

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Franchise Revenue
In fiscal 2016, franchise revenue increased $1.6 million, or 7.1%. This increase was due primarily to an increase in franchised comparable restaurant sales of 1.1%, and $0.6 million in higher point of sales revenue, resulting primarily from additional franchise units.
Food and Paper Costs
Food and paper costs increased $1.3 million in fiscal 2016, due to a $0.9 million increase in food costs and a $0.4 million increase in paper costs. This increase was due primarily to higher restaurant revenue, partially offset by lower commodity costs, resulting primarily from lower chicken expense. Food and paper costs as a percentage of company-operated restaurant revenue were 30.2% in fiscal 2016, compared to 31.9% in fiscal 2015. This decrease in percentage was due primarily to the lower commodity costs, noted above, and increases in average check size, due to menu price increases at the end of 2015 and during 2016.
Labor and Related Expenses
Payroll and benefit expenses increased $13.2 million in fiscal 2016. This increase was due primarily to additional labor needs arising from the opening of 18 new restaurants in fiscal 2016 and 14 new restaurants in fiscal 2015, and minimum wage increases in California in January 2016 and Los Angeles in July 2016. This was partially offset by lower workers compensation expense due to lower claims activity. Payroll and benefit expenses as a percentage of company-operated restaurant revenue were 27.4% in fiscal 2016, compared to 25.4% in fiscal 2015. This increase was primarily due to the minimum wage increases and incremental labor required for the new restaurant openings, noted above, partially offset by lower worker’sstock-based compensation expense and higher restaurant revenue.
Occupancy and Other Operating Expenses
Occupancy and other operating expenses increased $8.3 million in fiscal 2016. This increase was primarily due to (i) a $3.3 million increase in other operating expenses, resulting primarily from the new restaurants opened in fiscal 2016 and 2015, and an increase in travel and restaurant security costs, (ii) a $3.2 million increase in occupancy costs, largely related to additional rent due to the additional stores, (iii) a $0.9 million increase in advertising and (iv) a $0.9 million increase in repair and maintenance costs. Occupancy and other operating expenses as a percentageresults of company-operated restaurant revenue was 22.0% in fiscal 2016, compared to 21.1% in fiscal 2015. This increase was primarily related to the higher costs noted above, partially offset by higher restaurant revenue.
Gain on Recovery of Insurance Proceeds
In November 2015, one of the Company’s restaurants incurred damage resulting from a fire. In fiscal 2016, we incurred costs directly related to the fire of less than $0.1 million, disposed of assets of an additional $0.1 million and recognized gains of $0.7 million, related to the reimbursement of property and equipment and expenses incurred and $0.5 million related to the reimbursement of lost profits. The reimbursement of lost profits is included in the accompanying consolidated statements of income, for fiscal 2016, as a reduction of company restaurant expenses. The Company received from the insurance company cash of $1.4 million, net of the insurance deductible, during fiscal 2016. In 2015, the Company disposed of $0.1 million of assets related to the fire. The restaurant was reopened for business on March 14, 2016.
General and Administrative Expenses
General and administrative expenses increased $5.7 million in fiscal 2016. The increase was due primarily to (i) a $2.0 million increase in legal expense related primarily to the securities class action litigation, (ii) a $1.2 million increase in restaurant pre-opening costs, (iii) a $0.9 million increase in payroll expense, due primarily to an increase in corporate employees, partially offset by a reduction in the accrual for the expected payments related to the Company’s annual bonus program and (iv) a $1.6 million increase in other general and administrative costs primarily related to increases in professional fees, stock option expense, dead-site costs and travel. General and administrative expenses as a percentage of total revenue were 9.1% in fiscal 2016, compared to 8.2% in fiscal 2015. This increase was due primarily to the higher costs, noted above, partially offset by higher restaurant revenue.

operations may be materially different.

50

49



Asset Impairment and Closed-Store Reserves
Liquidity and Capital Resources
Our primary sources of liquidity and capital resources have been cash provided from operations, cash and cash equivalents, and our secured revolving credit facility. Our primary requirements for liquidity and capital are new restaurants, existing restaurant capital investments (remodels and maintenance), legal defense costs, lease obligations, interest payments on our debt, working capital and general corporate needs. Our working capital requirements are not significant, since our customers pay for their purchases in cash or by payment card (credit or debit) at the time of sale. Thus, we are able to sell many of our inventory items before we have to pay our suppliers. Our restaurants do not require significant inventories or receivables. We believe that these

51



sources of liquidity and capital are sufficient to finance our continued operations and expansion plans for at least the next 12 months from the issuance of the consolidated financial statements.
The following table presents summary cash flow information for the years indicated (in thousands).
 Fiscal Year
(Amounts in thousands)2017 2016 2015
Net cash provided by (used in) 
  
  
Operating activities$53,671
 $49,299
 $57,971
Investing activities(36,238) (35,202) (30,835)
Financing activities(11,051) (18,030) (32,534)
Net increase (decrease) in cash and cash equivalents$6,382
 $(3,933) $(5,398)
Operating Activities
In fiscal 2017, net cash provided by operating activities increased by $4.4 million compared to fiscal 2016. This was due primarily to favorable working capital fluctuations, partially offset by lower profitability and an increased payment of the TRA.
In fiscal 2016, net cash provided by operating activities decreased by $8.7 million compared to fiscal 2015. This was due primarily to lower profitability, payment of the TRA, and other unfavorable working capital fluctuations.
Investing Activities
In fiscal 2017, net cash used in investing activities increased by $1.0 million compared to fiscal 2016. This was primarily due to $1.5 million in proceeds from the sale of a restaurant and $0.7 million in insurance proceeds relating to the property and equipment fire damage incurred at one of our restaurants in November 2015, received in 2016. This was partially offset by a decrease of $1.2 million in capital expenditure spending, due to opening 16 new company restaurants in fiscal 2017, compared to 18 new restaurants in fiscal 2016. In fiscal 2017, we incurred capital expenditures of approximately $36.2 million, consisting of $24.1 million related to new restaurants, $5.7 million related to the remodeling of existing restaurants, and $6.4 million related to major maintenance and other corporate capital expenditures. Capital expenditures for these periods exclude unpaid purchases of property and equipment.
In fiscal 2016, net cash used in investing activities increased by $4.4 million compared to fiscal 2015. This was due primarily to capital expenditures of approximately $37.4 million, consisting of $29.9 million related to new restaurants, $1.6 million related to the remodeling of existing restaurants, and $5.9 million related to major maintenance and other corporate capital expenditures. Capital expenditures for these periods exclude unpaid purchases of property and equipment. This was partially offset by $1.5 million in proceeds from the sale of a restaurant and $0.7 million in insurance proceeds relating to the property and equipment fire damage incurred at one of our restaurants in November 2015.
Financing Activities
In fiscal 2017, net cash used by financing activities decreased by $7.0 million compared to fiscal 2016. This was due primarily to a decrease in net pre-payments on the 2014 Revolver of $8.0 million in fiscal 2017 compared to fiscal 2016.
In fiscal 2016, net cash used by financing activities decreased by $14.5 million compared to fiscal 2015. This was due primarily to the pre-payment of $19.0 million on the 2014 Revolver in 2016 compared to a pre-payment of $42.0 million in 2015, partially offset by the receipt of $3.3 million less related to the exercise of stock options in 2016 compared to 2015 and a decrease of $5.3 million in excess income tax benefit related to share-based compensation plans.
Debt and Other Obligations
Current Credit Agreement
On December 11, 2014, we refinanced our debt, with EPL, Intermediate, and Holdings entering into a credit agreement with 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 the 2014 Revolver. The 2014 Revolver includes a sub limit of $15.0 million for letters of credit and a sub limit of $15.0 million for swingline loans. At December 27, 2017, $7.7 million of letters of credit were outstanding and $99.3 million was available to borrow under the revolving line of credit. The 2014 Revolver will mature on or about December 11, 2019.
Borrowings under the 2014 Revolver (other than any swingline loans) bear interest, at the borrower’s option, at rates based upon either LIBOR or a base rate, plus, for each rate, a margin determined in accordance with a lease-adjusted consolidated leverage ratio-based pricing grid. The base rate is calculated as the highest of (a) the federal funds rate plus 0.50%, (b) the

52



prime rate of Bank of America, or (c) LIBOR plus 1.00%. For LIBOR loans, the margin is in the range of 1.75% to 2.50%, and for base rate loans the margin is in the range of 0.75% to 1.50%. The interest rate range was 2.4% to 3.3% during fiscal 2017 and 2.0% to 2.4% during fiscal 2016 and was 3.3% and 2.4% at December 27, 2017 and December 28, 2016, respectively.
The 2014 Revolver includes a number of negative and financial covenants, including, among others, the following (all subject to certain exceptions): a maximum lease-adjusted consolidated leverage ratio covenant, a minimum consolidated fixed charge coverage ratio, and limitations on indebtedness, liens, investments, asset sales, mergers, consolidations, liquidations, dissolutions, restricted payments, and negative pledges. The 2014 Revolver also includes certain customary affirmative covenants and events of default. We were in compliance with all such covenants at December 27, 2017.
Under the 2014 Revolver, Holdings may not make certain payments such as cash dividends, except that it may, inter alia, (i) pay up to $1.0 million per year to repurchase or redeem qualified equity interests of Holdings held by past or present officers, directors, or employees (or their estates) of the Company upon death, disability, or termination of employment, (ii) pay under the 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 and officers, provided that those equity interests represent a portion of the consideration of the exercise price of those stock options, (b) pay up to $2.5 million per year pursuant to stock option plans, employment agreements, or incentive plans, (c) make up to $5.0 million in other restricted payments per year, and (d) make other restricted payments, provided that such payments would not cause, in each case, on a pro forma basis, (x) its lease-adjusted consolidated leverage ratio to equal or exceed 4.25 times and (y) its consolidated fixed charge coverage ratio to be less than 1.75 times.
Hedging Arrangements
In connection with our credit agreements, we entered into two interest rate caps with Wells Fargo Bank, N.A. The first interest rate cap was for a notional amount of $30.0 million, with a cap rate of 3.0% based on 1 month USD LIBOR, which terminated on December 1, 2015. The second interest rate cap was for a notional amount of $120.0 million, with a cap rate of 3.0% based on 1 month USD LIBOR, which terminated on December 1, 2016. As of December 28, 2016, the amounts included in other assets in our consolidated balance sheets, related to these interest rate caps, were not material to our financial position or results of operations. There were no amounts included in other assets as of December 27, 2017.
Contractual Obligations
The following table represents our contractual commitments (which include expected interest expense, calculated based on current interest rates) to make future payments pursuant to our debt and other obligations disclosed above and pursuant to our restaurant operating leases outstanding as of December 27, 2017:
 Payments Due by Period
(Amounts in thousands)Total 2018 
2019-
2020
 
2021-
2022
 
2023 and
thereafter
Operating leases$298,149
 $25,270
 $48,921
 $44,376
 $179,582
Capital leases420
 172
 149
 99
 
Long-term debt102,196
 3,054
 99,142
 
 
Income tax receivable agreement21,975
 8,281
 8,528
 3,950
 1,216
Purchasing commitments—chicken30,835
 30,835
 
 
 
Total$453,575
 $67,612
 $156,740
 $48,425
 $180,798
Off-Balance Sheet Arrangements
At December 27, 2017, December 28, 2016, and December 30, 2015, we had $7.7 million, $8.1 million, and $7.2 million, respectively, of borrowing capacity on the 2014 Revolver pledged as collateral to secure outstanding letters of credit.
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

On July 27, 2022, we refinanced the 2018 Revolver and entered into the 2022 Credit Agreement, which provides for a $150 million five-year senior secured revolving facility. In connection with the refinancing, the 2018 Credit Agreement was terminated. We are exposed to market risk from changes in interest rates on our debt, which bears interest at USD LIBORSOFR plus a margin between 1.75%1.25% and 2.50%2.25%. As of December 27, 2017,28, 2022, we had outstanding borrowings of $93.0$66.0 million and another $7.7under our 2022 Revolver, $9.8 million of letters of credit in support of our insurance programs.programs, and the applicable margin on outstanding borrowings under 2022 Revolver was 1.5%. A 1.0% increase in the effective interest rate applied to theseour 2022 Revolver borrowings would result in a pre-tax interest expense increase of $0.9$0.7 million on an annualized basis.

We manage

During the year ended December 28, 2022, we borrowed $26.0 million net of pay downs of $20.0 million on our 2022 Revolver and the outstanding balance as of December 28, 2022 was $66.0 million. Borrowings under the 2022 Credit Agreement (other than any swingline loans) bear interest, at the borrowers’ option, at rates based upon either SOFR or a base rate, risk through normal operating and financing activities and, whenplus, for each rate, a margin determined appropriate, through the use of derivative financial instruments.


53



To mitigate exposure to fluctuationsin accordance with a lease-adjusted consolidated leverage ratio-based pricing grid. If future rates based upon SOFR are higher than SOFR rates as currently determined, we may experience potential increases in interest rates inon our variable rate debt, which could adversely impact our interest expense, results of operations and cash flows.

In connection with our entry into the past, when2022 Credit Agreement, we have determined it appropriate, we have entered intoterminated the interest rate caps, as discussed above under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Debt and Other Obligations—Hedging Arrangements.” At this time, due to reduced debt burden and the lowered rates of interest on our debt in recent years, we are not continuingswap previously used to hedge our interest rate exposure.

risk. In settlement of this swap, we received approximately $0.6 million. The remaining amount in AOCI related to the hedging relationship will be reclassified into earnings when the hedged forecasted transaction is reported in earnings.

Inflation

Inflation has an impact on food, paper, construction, utility, labor and benefits, general and administrative, and other costs, all of which can materially impact our operations. We have a substantial number of hourly employees who are paid wage rates at or based on the applicable federal, state, or local minimum wage, and increases in the minimum wage will increase our labor costs. Since January 1, 2017, the State of California (where most of our restaurants are located) has had a minimum wage of $10.50 per hour. We also do substantial business in locales such as the City of Los Angeles and the County of Los Angeles that may have higher minimum wages. For details, see Item 1A, “Risk Factors-Risks Related to Our Business and Industry—If we or our franchisees face labor shortages or increased labor costs, our results of operations and growth could be adversely affected.” In general, we have been able to substantially offset cost increases resulting from inflation by increasing menu prices, managing menu mix, improving productivity, or making other adjustments. We may not be able to offset cost increases in the future.

In addition, we have a substantial number of hourly employees who are paid wage rates at or based on the applicable federal, state, or local minimum wage, and increases in the minimum wage will increase our labor costs.

Commodity Price Risk

We are exposed to market price fluctuation in food product prices. Given the historical volatility of certain of our food product prices, including chicken, other proteins, grains, produce, dairy products, and cooking oil, these fluctuations can materially impact our food and beverage costs. While our purchasing commitments partially mitigate the risk of such fluctuations, there is no assurance that supply and demand factors such as disease or inclement weather will not cause the prices of the commodities used in our restaurant operations to fluctuate. In periods wherewhen the prices of commodities drop, we may pay higher prices under our purchasing commitments. In rapidly-fluctuatingrapidly fluctuating commodities markets, it may prove difficult for us to adjust our menu prices in accordance with input price fluctuations. Therefore, to the extent that we do not pass along cost increases to our customers, our results of operations may be adversely affected. At this time, we do not use financial instruments to hedge our commodity risk. See Item 1A, “Risk Factors—Risks Related to Our Business and Industry—Changes in food and supply costs, especially for chicken, could adversely affect our business, financial condition and results

50

ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

EL POLLO LOCO HOLDINGS, INC. AND SUBSIDIARIES

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS



54

51



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”) and subsidiaries as of December 27, 201728, 2022 and December 28, 2016,29, 2021, the related consolidated statements of income, changes incomprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 27, 2017,28, 2022, and the related notes (collectively referred to as the "consolidated“consolidated financial statements"statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 27, 201728, 2022 and December 28, 2016,29, 2021, and the results of theirits operations and theirits cash flows for each of the three years in the period ended December 27, 2017,28, 2022, in conformity with accounting principles generally accepted in the United States of America.


Change

We also have audited, in accordance with the standards of the Public Company Accounting Method Related to Deferred Income TaxesOversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 28, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and Stock Compensation


As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for balance sheet classification of income taxes in 2017 due to the retrospective adoption of Accounting Standards Update (“ASU”) 2015-17 and the Company has also changed its method of accounting for excess tax benefits related to stock compensation in 2017 due to the prospective adoption of ASU 2016-09.
our report dated March 10, 2023 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 Public Company Accounting Oversight Board (United States) (“PCAOB”)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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

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: (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Impairment of Restaurant Property and Equipment

As discussed in Notes 2 and 3 to the consolidated financial statements, the Company reviews its long-lived assets related to restaurants held and used in the business, including property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The net balance of property and equipment was $78.6 million as of December 28, 2022. For certain restaurants, indicators of impairment of the related property and equipment were present. As such, for these restaurants, management compared the projected undiscounted cash flow to the carrying value to determine whether an impairment loss should be measured.

52

We identified the Company’s evaluation of projected future cash flows to determine the impairment of restaurant property and equipment as a critical audit matter. The future cash flows used in certain of the Company's property and equipment impairment analysis requires management to develop estimates and assumptions about future revenue transaction growth rates, pricing changes, and restaurant operating margins, which are made more uncertain by the impact of the current inflationary pressures on the Company’s business. Auditing these significant assumptions involved especially challenging auditor judgment due to the nature and extent of audit effort required to addresses these matters.  

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

Evaluating the completeness and accuracy of data used in the projected cash flow models, including recalculating the projected cash flows for selected restaurants with impairment indicators.
Evaluating the reasonableness of management’s assumptions over the future revenue transaction growth rates, pricing changes, and restaurant operating margin assumptions for select restaurants by (i) comparing them to historical information for both company-owned and franchised restaurants in the same market, (ii) comparing them to recent trends by restaurant, considering the changes in the Company’s business model and uncertainties related to the impact of the current inflationary pressures, and (iii) comparing them to restaurant industry revenue growth rates based on market data to determine if contradictory evidence existed.

/s/ BDO USA, LLP

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

Costa Mesa, California

March 9, 2018


10, 2023

55

53



EL POLLO LOCO HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)

 December 27, 2017 December 28, 2016
Assets 
  
Current assets: 
  
Cash and cash equivalents$8,550
 $2,168
Restricted cash
 125
Accounts and other receivables, net7,212
 6,919
Inventories2,289
 2,112
Prepaid expenses and other current assets2,679
 3,104
Total current assets20,730
 14,428
Property and equipment owned, net102,794
 118,470
Property held under capital lease, net40
 64
Goodwill248,674
 248,674
Trademarks61,888
 61,888
Other intangible assets, net377
 484
Deferred tax assets7,167
 25,905
Other assets1,041
 1,392
Total assets$442,711
 $471,305
Liabilities and Stockholders’ Equity 
  
Current liabilities: 
  
Current portion of obligations under capital leases$132
 $144
Accounts payable12,307
 11,637
Accrued salaries and vacation7,339
 5,754
Accrued insurance5,851
 5,444
Accrued income taxes payable35
 120
Accrued interest110
 198
Current portion of income tax receivable agreement payable8,281
 12,349
Other accrued expenses and current liabilities13,270
 9,672
Total current liabilities47,325
 45,318
Revolver loan93,000
 104,000
Obligations under capital leases, net of current portion184
 317
Deferred taxes
 18,488
Other intangible liabilities, net786
 1,012
Income tax receivable agreement payable, net of current portion13,694
 26,306
Other noncurrent liabilities12,772
 10,682
Total liabilities167,761
 206,123
Commitments and contingencies

 

Stockholders’ Equity 
  
Preferred stock, $0.01 par value—100,000,000 shares authorized; none issued or
   outstanding

 
Common stock, $0.01 par value—200,000,000 shares authorized; 38,661,850 and
  38,473,772 shares issued and outstanding
387
 385
Additional paid-in capital372,990
 371,843
Accumulated deficit(98,427) (107,046)
Total stockholders’ equity274,950
 265,182
Total liabilities and stockholders’ equity$442,711
 $471,305

    

December 28,

    

December 29,

    

2022

    

2021

Assets

  

Current assets:

  

  

Cash and cash equivalents

$

20,493

$

30,046

Accounts and other receivables, net

 

10,084

 

13,407

Inventories

 

2,442

 

2,318

Prepaid expenses and other current assets

 

3,662

 

3,732

Income tax receivable

 

768

 

Total current assets

 

37,449

 

49,503

Property and equipment, net

 

78,644

 

75,668

Property and equipment held under finance lease, net

 

1,532

 

1,635

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

 

165,584

 

171,981

Goodwill

 

248,674

 

248,674

Trademarks

 

61,888

 

61,888

Deferred tax assets

 

512

 

2,245

Other assets

 

2,935

 

2,192

Total assets

$

597,218

$

613,786

Liabilities and Stockholders’ Equity

 

  

 

  

Current liabilities:

 

  

 

  

Current portion of obligations under finance leases

$

110

$

143

Current portion of obligations under operating leases

 

19,995

 

19,959

Accounts payable

 

12,741

 

10,626

Accrued salaries and vacation

 

8,873

 

11,539

Accrued insurance

 

11,120

 

11,193

Accrued income taxes payable

 

 

889

Accrued interest

 

291

 

86

Current portion of income tax receivable agreement payable

 

263

 

437

Other accrued expenses and current liabilities

 

15,120

 

19,710

Total current liabilities

 

68,513

 

74,582

Revolver loan

 

66,000

 

40,000

Obligations under finance leases, net of current portion

 

1,626

 

1,712

Obligations under operating leases, net of current portion

 

165,149

 

171,651

Deferred taxes

 

8,517

 

5,464

Income tax receivable agreement payable, net of current portion

 

409

 

1,101

Other noncurrent liabilities

 

5,856

 

8,653

Total liabilities

 

316,070

 

303,163

Commitments and contingencies (Note 13)

 

  

 

  

Stockholders’ equity

 

  

 

  

Preferred stock, $0.01 par value, 100,000,000 shares authorized; none issued or outstanding

 

 

Common stock, $0.01 par value, 200,000,000 shares authorized; 37,008,061 and 36,601,648 shares issued and outstanding as December 28, 2022 and December 29, 2021, respectively

 

370

 

365

Additional paid-in-capital

 

292,244

 

342,941

Accumulated deficit

 

(11,592)

 

(32,393)

Accumulated other comprehensive income (loss)

 

126

 

(290)

Total stockholders’ equity

 

281,148

 

310,623

Total liabilities and stockholders’ equity

$

597,218

$

613,786

See notes to consolidated financial statements.


56

54



EL POLLO LOCO HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except share data)

For the Years EndedDecember 27, 2017 December 28, 2016 December 30, 2015
Revenue 
  
  
Company-operated restaurant revenue$376,615
 $355,468
 $332,040
Franchise revenue25,086
 24,655
 23,017
Total revenue401,701
 380,123
 355,057
Cost of operations 
  
  
Food and paper costs109,898
 107,218
 105,917
Labor and related expenses106,584
 97,471
 84,231
Occupancy and other operating expenses85,631
 78,263
 69,977
Gain on recovery of insurance proceeds, lost profits
 (502) 
Company restaurant expenses302,113
 282,450
 260,125
General and administrative expenses38,523
 34,661
 28,997
Franchise expenses3,335
 3,823
 3,456
Depreciation and amortization18,128
 16,053
 13,092
Loss on disposal of assets799
 674
 471
Expenses related to fire loss
 48
 
Gain on recovery of insurance proceeds, property,
   equipment and expenses

 (741) 
Recovery of securities lawsuits related legal expenses(1,666) 
 
Asset impairment and closed-store reserves33,645
 8,554
 92
Total expenses394,877
 345,522
 306,233
Gain on disposition of restaurants
 28
 
Income from operations6,824
 34,629
 48,824
Interest expense—net of interest income of $25, $28, and $49 for the years
   ended December 27, 2017, December 28, 2016, and December 30, 2015,
   respectively
3,278
 3,155
 3,707
Expenses related to selling shareholders
 
 50
Income tax receivable agreement (income) expense(5,570) 352
 156
Income before provision for income
   taxes
9,116
 31,122
 44,911
Provision for income taxes(497) (12,783) (20,857)
Net income$8,619
 $18,339
 $24,054
Net income per share: 
  
  
Basic$0.22
 $0.48
 $0.63
Diluted$0.22
 $0.47
 $0.62
Weighted average shares used in computing net income per share: 
  
  
Basic38,453,347
 38,357,805
 37,949,316
Diluted39,086,676
 39,026,950
 39,039,558

For the Fiscal Years Ended

    

December 28, 2022

    

December 29, 2021

    

December 30, 2020

Revenue

 

  

 

  

 

  

Company-operated restaurant revenue

$

403,218

$

394,733

$

374,064

Franchise revenue

 

38,225

 

33,729

 

29,418

Franchise advertising fee revenue

 

28,516

 

25,901

 

22,605

Total revenue

 

469,959

 

454,363

 

426,087

Cost of operations

 

  

 

  

 

  

Food and paper cost

 

117,774

 

104,394

 

98,774

Labor and related expenses

 

130,773

 

120,308

 

114,455

Occupancy and other operating expenses

 

101,543

 

97,557

 

92,422

Gain on recovery of insurance proceeds, lost profits

(2,000)

Company restaurant expenses

 

350,090

 

322,259

 

303,651

General and administrative expenses

 

39,093

 

39,852

 

35,918

Legal settlements

 

 

 

2,566

Franchise expenses

 

36,169

 

32,831

 

28,761

Depreciation and amortization

 

14,418

 

15,176

 

16,878

Loss on disposal of assets

 

165

 

289

 

189

Recovery of securities lawsuits related legal expenses and other insurance claims

 

 

 

(123)

(Gain) loss on disposition of restaurants

(848)

1,534

Impairment and closed-store reserves

 

752

 

1,087

 

4,691

Total expenses

 

439,839

 

413,028

 

392,531

Income from operations

 

30,120

 

41,335

 

33,556

Interest expense, net

 

1,677

 

1,824

 

3,292

Income tax receivable agreement (income) expense

 

(436)

 

58

 

139

Income before provision for income taxes

 

28,879

 

39,453

 

30,125

Provision for income taxes

 

8,078

 

10,332

 

5,651

Net income

$

20,801

$

29,121

$

24,474

Net income per share

 

  

 

  

 

  

Basic

$

0.57

$

0.81

$

0.70

Diluted

$

0.57

$

0.80

$

0.68

Weighted-average shares used in computing net income per share

 

  

 

  

 

  

Basic

 

36,350,579

 

35,973,892

 

35,193,325

Diluted

 

36,575,904

 

36,446,756

 

35,796,406

See notes to consolidated financial statements.



57

55



EL POLLO LOCO HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

For the Fiscal Years Ended

    

December 28,

    

December 29,

    

December 30,

2022

2021

2020

Net income

$

20,801

$

29,121

$

24,474

Other comprehensive income (loss)

 

  

 

  

 

  

Changes in derivative instruments

 

  

 

  

 

  

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

 

862

 

257

 

(1,762)

Reclassifications of (gains) losses into net income

 

(296)

 

486

 

278

Income tax (expense) benefit

 

(150)

 

(200)

 

398

Other comprehensive income (loss), net of taxes

 

416

 

543

 

(1,086)

Comprehensive income

$

21,217

$

29,664

$

23,388

See notes to consolidated financial statements.

56

EL POLLO LOCO HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Amounts in thousands, except share data)

 Common Stock 
Additional
Paid-in Capital
 Accumulated Deficit 
Total
Stockholders’ Equity
 Shares Amount   
Balance, December 31, 201437,420,450
 $374
 $359,465
 $(149,439) $210,400
Stock based compensation
 
 539
 
 539
Issuance of common stock upon exercise of stock options863,985
 9
 4,211
 
 4,220
Excess income tax benefit related to share-based
   compensation plans

 
 5,420
 
 5,420
Net income
 
 
 24,054
 24,054
Balance, December 30, 201538,284,435
 383
 369,635
 (125,385) 244,633
Stock based compensation
 
 1,063
 
 1,063
Issuance of common stock related to restricted shares41,611
 
 
 
 
Issuance of common stock upon exercise of stock options147,726
 2
 976
 
 978
Excess income tax benefit related to share-based
   compensation plans

 
 169
 
 169
Net income
 
 
 18,339
 18,339
Balance, December 28, 201638,473,772
 385
 371,843
 (107,046) 265,182
Stock based compensation
 
 1,056
 
 1,056
Issuance of common stock related to restricted shares170,417
 2
 (2) 
 
Issuance of common stock upon exercise of stock options17,661
 

 93
 
 93
Net income
 
 
 8,619
 8,619
Balance, December 27, 201738,661,850
 $387
 $372,990
 $(98,427) $274,950

    

    

    

    

    

Accumulated

    

  

    

    

    

Additional

    

    

Other

    

Total

Common Stock

Paid-in

Accumulated

Comprehensive

Stockholders’

    

Shares

    

Amount

    

Capital

    

Deficit

    

Income (Loss)

    

Equity

Balance, December 26, 2019

35,126,582

$

351

$

330,950

$

(85,988)

$

253

$

245,566

Stock-based compensation

 

 

3,093

 

 

 

3,093

Issuance of common stock related to restricted shares, net

439,061

 

4

 

(4)

 

 

 

Issuance of common stock upon exercise of stock options

970,736

 

10

 

5,856

 

 

 

5,866

Shares repurchased for employee tax withholdings

(23,407)

 

 

(335)

 

 

 

(335)

Forfeiture of common stock related to restricted shares

(89,467)

 

(1)

 

1

 

 

 

Other comprehensive income, net of income tax

(1,086)

(1,086)

Net income

 

 

 

24,474

 

 

24,474

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

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

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

See notes to consolidated financial statements.


58

57



EL POLLO LOCO HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

For the Years EndedDecember 27, 2017 December 28, 2016 December 30, 2015
Cash flows from operating activities 
  
  
Net income$8,619
 $18,339
 $24,054
Adjustments to reconcile changes in net income to net cash provided by operating activities: 
  
  
Depreciation and amortization18,128
 16,053
 13,092
Stock-based compensation expense1,056
 1,063
 539
Fire insurance proceeds for expenses paid and lost profit
 611
 
Income tax receivable agreement (income) expense(5,570) 352
 156
Gain on disposition of restaurants
 (28) 
Loss on disposal of assets799
 674
 471
Gain on recovery of insurance proceeds, property, equipment and expenses
 (741) 
Gain on recovery of insurance proceeds, lost profits
 (502) 
Impairment of property and equipment32,594
 8,400
 181
Closed-store reserves1,051
 154
 (89)
Amortization of deferred financing costs304
 304
 304
Amortization of favorable and unfavorable leases, net(119) (82) (156)
Excess income tax benefit related to share-based compensation plans
 (169) (5,420)
Deferred income taxes, net250
 12,390
 15,249
Changes in operating assets and liabilities: 
  
  
Accounts and other receivables, net(294) (844) (427)
Inventories(177) (221) 1
Prepaid expenses and other current assets425
 (448) 2,452
Income taxes receivable/payable(85) 222
 5,589
Other assets47
 107
 91
Accounts payable1,088
 (4,579) 2,317
Accrued salaries and vacation1,585
 (939) (1,311)
Accrued insurance407
 423
 1,203
Payment related to tax receivable agreement(11,109) (3,236) 
Other accrued expenses and liabilities4,547
 1,996
 (325)
Restricted cash125
 
 
Net cash provided by operating activities53,671
 49,299
 57,971
Cash flows from investing activities 
  
  
Proceeds from disposition of restaurant
 1,465
 
Proceeds from fire insurance for property and equipment
 743
 
Purchase of property and equipment(36,238) (37,410) (30,835)
Net cash flows used in investing activities(36,238) (35,202) (30,835)
Cash flows from financing activities 
  
  
Proceeds from borrowings on revolver and term loans8,000
 
 
Payments on revolver loan(19,000) (19,000) (42,000)
Proceeds from issuance of common stock upon exercise of stock options, net of expenses93
 978
 4,254
Payment of obligations under capital leases(144) (177) (208)
Excess income tax benefit related to share-based compensation plans
 169
 5,420
Net cash flows used in financing activities(11,051) (18,030) (32,534)
Increase (decrease) in cash and cash equivalents6,382
 (3,933) (5,398)
Cash and cash equivalents, beginning of year2,168
 6,101
 11,499
Cash and cash equivalents, end of year$8,550
 $2,168
 $6,101
Supplemental cash flow information 
  
  
Cash paid for interest, net of capitalized interest$3,314
 $3,086
 $3,487
Cash paid during the year for income taxes, net$336
 $171
 $18
Noncash investing and financing activity 
  
  
Unpaid purchases of property and equipment$4,741
 $5,158
 $3,201
Cashless stock option exercise$
 $
 $34

For the Fiscal Years Ended

    

December 28,

    

December 29,

    

December 30,

    

2022

    

2021

    

2020

Cash flows from operating activities:

  

  

  

Net income

$

20,801

$

29,121

$

24,474

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

 

  

 

  

 

  

Depreciation and amortization

 

14,418

 

15,176

 

16,878

Bad debt expense

190

Stock-based compensation expense

 

3,491

 

3,220

 

3,093

Income tax receivable agreement (income) expense

 

(436)

 

58

 

139

(Gain) loss on disposition of restaurants

(848)

1,534

Loss on disposal of assets

 

165

 

289

 

189

Impairment of property and equipment

 

481

 

711

 

3,498

Amortization of deferred financing costs

 

340

 

251

 

252

Deferred income taxes, net

 

4,600

 

957

 

4,008

Changes in operating assets and liabilities:

 

  

 

  

 

  

Accounts and other receivables

 

3,323

 

(3,444)

 

(1,155)

Inventories

 

(125)

 

(218)

 

(92)

Prepaid expenses and other current assets

 

71

 

133

 

1,853

Income taxes (receivable) payable

 

(1,657)

 

3,410

 

(2,145)

Other assets

 

(240)

 

(1,052)

 

(13)

Accounts payable

 

3,977

 

2,533

 

666

Accrued salaries and vacation

 

(2,667)

 

1,373

 

1,548

Accrued insurance

 

(73)

 

777

 

976

Payment related to tax receivable agreement

 

(430)

 

(1,658)

 

(5,237)

Other accrued expenses and liabilities

 

(6,642)

 

(1,072)

 

(8,575)

Net cash flows provided by operating activities

 

38,549

 

52,099

 

40,547

Cash flows from investing activities:

 

  

 

  

 

  

Proceeds from disposition of restaurants

 

1,002

 

4,556

 

Purchase of property and equipment

 

(19,917)

 

(17,041)

 

(6,690)

Net cash flows used in investing activities

 

(18,915)

 

(12,485)

 

(6,690)

Cash flows from financing activities:

 

  

 

  

 

  

Proceeds from borrowings on revolver and swingline loans

 

46,000

 

 

59,500

Payments on revolver and swingline loan

(20,000)

(22,800)

(93,700)

Minimum tax withholdings related to net share settlements

(322)

(705)

(335)

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

 

1,713

 

866

 

5,866

Common stock dividends paid

(55,574)

Payment of obligations under finance leases

 

(162)

 

(148)

 

(39)

Deferred financing costs for revolver loan

 

(842)

 

 

Net cash flows used in financing activities

 

(29,187)

 

(22,787)

 

(28,708)

(Decrease) increase in cash and cash equivalents

 

(9,553)

 

16,827

 

5,149

Cash and cash equivalents, beginning of period

 

30,046

 

13,219

 

8,070

Cash and cash equivalents, end of period

$

20,493

$

30,046

$

13,219

For the Fiscal Years Ended

    

December 28,

    

December 29,

    

December 30,

2022

    

2021

    

2020

Supplemental cash flow information

 

  

 

  

 

  

Cash paid during the period for interest

$

1,450

$

1,066

$

2,956

Cash paid during the period for income taxes

$

5,100

$

5,968

$

4,225

Unpaid purchases of property and equipment

$

1,333

$

2,454

$

1,925

See notes to consolidated financial statements.


59

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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 known as “we,” “us” or 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 Utah,Louisiana, specialize in flame-grilledfire-grilling citrus-marinated chicken in a wide variety of contemporary Mexican-influencedMexican and LA-inspired entrees, including specialty chicken burritos, chicken quesadillas, chicken tostada salads, chicken tortilla soup, variations on our Pollo Bowl®, Pollo Salads and our Pollo Salads.Fit entrees. At December 27, 2017,28, 2022, the Company operated 212 (141188 (138 in the greater Los Angeles area) and franchised 265 (138302 (141 in the greater Los Angeles area) El Pollo Loco restaurants. In addition, the Company currently licenses twofive restaurants in the Philippines. The Company’s largest stockholder is Trimaran Pollo Partners, L.L.C. (“LLC”), which is controlled by affiliates of Trimaran Capital, L.L.C. LLC acquired Chicken Acquisition Corp. (“CAC”), a predecessor of Holdings, on November 17, 2005 (the “Acquisition”) and has a 43.3% ownership interest as. As of December 27, 2017.28, 2022, LLC, FS Equity Partners V, L.P. and FS Affiliates V, L.P. own approximately 30.3%, 14.8% and 0.2%, respectively, of the Company’s outstanding common stock. FS Equity V and FS Affiliates V, which previously indirectly held shares of the Company’s common stock through LLC, received shares directly on August 31, 2022, upon LLC’s pro rata distribution in kind of shares of the Company’s common stock to FS Equity V and FS Affiliates V. LLC’s only material asset is its investment in Holdings.

On April 22, 2014, CAC, itsthe LLC’s wholly owned subsidiary, Chicken Subsidiary Corp (“CSC”) and CSC’s wholly owned subsidiary, the former El Pollo Loco Holdings, Inc. (“Old Holdings”) entered into the following reorganization transactions: (i) Old Holdings merged with and into CSC with CSC continuing as the surviving corporation; (ii) CSC merged with and into CAC with CAC continuing as the surviving corporation and (iii) CAC renamed itself El Pollo Loco Holdings, Inc.

Holdings has no material assets or operations. Holdings and Holdings’ direct subsidiary, EPL Intermediate, Inc. (“Intermediate”), guarantee EPL’s 20142022 Revolver (see Note 6)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.

Under the 2014 Revolver, Holdings may not make certain payments such as cash dividends, except that it may, inter alia, (i) pay up to $1.0 million per year to repurchase or redeem qualified equity interests of Holdings held by past or present officers, directors, or employees (or their estates) of the Company upon death, disability, or termination of employment, (ii) pay under its income tax receivable agreement (the “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 and officers, provided that those equity interests represent a portion of the consideration of the exercise price of those stock options, (b) pay up to $2.5 million per year pursuant to stock option plans, employment agreements, or incentive plans, (c) make up to $5.0 million in other restricted payments per year, and (d) make other restricted payments, provided that such payments would not cause, in each case, on a pro forma basis, (x) its lease-adjusted consolidated leverage ratio to equal or exceed 4.25 times and (y) its consolidated fixed charge coverage ratio to be less than 1.75 times.

The Company operates in one operating segment. All significant revenues relate to retail sales of food and beverages to the general public through either company or franchised restaurants.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Liquidity

The Company’s principal liquidity and capital requirements are to servicenew restaurants, existing restaurant capital investments (remodel and maintenance), interest payments on its debt, lease obligations and meetworking capital expenditureand general corporate needs. At December 27, 2017,28, 2022, the Company’s total debt (including capital lease liabilities) was $93.3$66.0 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 $8.6$20.5 million at December 27, 2017,28, 2022, and available borrowings under the 20142022 Revolver (which availability was $99.3 million at December 27, 2017)(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 2017, 2016,2022, 2021, and 20152020 ended on December 27, 2017,28, 2022, December 28, 201629, 2021 and December 30, 2015,2020, 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

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Table of Contents

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

each include 13 weeks of


60


EL POLLO LOCO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


operations and the fourth quarter includes 14 weeks of operations. Approximately every six or seven years a 53-week fiscal year occurs. Fiscal 2017, 20162022 and 20172021 were 52-week fiscal years. Fiscal 2020 was a 53-week fiscal year. 53-week years may cause revenues, expenses, and other results of operations to be higher due to the additional week of operations.
Certain amounts in prior years have been reclassified to conform with the fiscal 2022 presentation.

Principles of Consolidation

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. Certain prior year amounts have been reclassified to conform to the current year presentation.

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 termination liabilities, closed-store reserves,accounting matters, stock-based compensation, income tax receivable agreement (the “TRA”) liability, contingent liabilities and income tax valuation allowances.

COVID-19 and Macroeconomic Conditions

The Company may face future business disruption and related risks resulting from the ongoing COVID-19 pandemic or from another pandemic, epidemic or infectious disease outbreak, or from broader macroeconomic trends, any of which could have a significant impact on our business. During fiscal 2022, the Company incurred $3.3 million in COVID-19 related expenses, comprised of $2.3 million due to overtime primarily related to the first quarter and $1.0 million due to leaves of absence related to the remaining three quarters. During fiscal 2021, the Company incurred $3.9 million in COVID-19 related expenses, primarily due to leaves of absence and overtime pay. During fiscal 2020, the Company incurred $4.9 million in COVID-19 related expenses, primarily due to leaves of absence and overtime pay. While all of the Company’s restaurants had dining rooms open as of December 28, 2022, the Company continues to experience staffing challenges, including higher wage inflation, overtime costs and other labor related costs. Further, the Company continues to experience inflationary pressures, which resulted in increased commodity prices and impacted the Company’s business and results of operations during the year ended December 28, 2022. The Company expects these pressures to continue during fiscal 2023.

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

Cash and Cash Equivalents

The Company considers all highly-liquidliquid instruments with a maturity of three months or less at the date of purchase to be cash equivalents.

Restricted Cash
The Company’s restricted cash represents cash collateral

Subsequent Events

Subsequent to one commercial bank for Company credit cards. During the fiscal year ended 2017, the cash collateral was returned by the bank, andyear-end, the Company reclassified such amounts to cash and cash equivalents.

Subsequent Events
Subsequent to December 27, 2017, the Company completed one new store opening and two franchisees each completed a new store opening. Additionally, the Company received an additional $1.6 million of insurance proceeds related to the reimbursement of certain legal expenses paid in prior years for the defense of securities lawsuits and made andown $8.0 million pre-payment on the 2014its 2022 Revolver.
Subsequent to December 27, 2017, the Company decided to close two restaurants in Texas, which were previously impaired during the third quarter of 2017, and decided not to move forward with the development of a third location in Texas. The two restaurants closed in January, 2018 and the three locations are expected to result in a closed-store reserve of $3.0 million in the first quarter of 2018.
Subsequent to December 27, 2017, the Company's board of directors appointed Bernard Acoca as the Company's President and CEO and as a Director of the Board, effective March 12, 2018. Mr. Acoca will serve as a Class I director, which class will stand for re-election at the 2018 annual meeting of stockholders. Mr. Acoca will succeed Steve Sather, who previously announced his intent to retire during fiscal 2017. Mr. Sather has agreed to remain as an employee of the Company in the capacity as Special Advisor through March 31, 2018 in order to assist the Company with the transition to the new CEO. Additionally, the Company entered into an employment agreement with Mr. Acoca, which sets forth the terms and conditions under which he will serve as the Company’s President and CEO. Furthermore, the Company entered into a retirement agreement with Mr. Sather. As part of the retirement agreement, the Company modified the terms of Mr. Sather's stock options to accelerate the vesting of 33,545 shares, which would have otherwise vested in May 2018, and extend the exercise ability of all his vested and outstanding options until the expirationborrowings as of the original termMarch 9, 2023 were $58.0 million.

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Contents

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



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, 201728, 2022 totaled 14%41.7% of the Company’s accounts payable. As of December 28, 2016,29, 2021, the Company had one supplier for which amountsthe amount due totaled 16%26.1% of the Company’s accounts payable. Purchases from the Company’s largest supplier totaled 29%28.5% of the Company’s purchases for fiscal 2017, 33%2022, 27.1% for fiscal 20162021 and 36%26.9% for fiscal 2015. Purchases from the Company’s second largest supplier did not exceed 10% for fiscal 2017, 2016 and 2015. 2020 with no amounts payable at December 28, 2022 or December 29, 2021.

In fiscal 2017, 20162022, 2021 and 2015,2020, Company-operated and franchised restaurants in the greater Los Angeles area generated, in the aggregate, approximately 73%71.2%, 75%70.9%, and 79%71.3%, respectively, of total revenue.

One franchisee accounted for 12.9% of total accounts receivable as of December 28, 2022, and one franchisee accounted for 10.6% of total accounts receivable as of December 29, 2021.

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. Bad debt expense was immaterial for the years ended December 27, 2017, December 28, 2016, and December 30, 2015.

Inventories

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

Property and Equipment, Owned, Net

Property and equipment is statedare recorded at cost and isare 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 capitalfinance 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

Buildings

Land improvements

20

3—30 years

Land

Building improvements

3—3010 years

Building improvements

Restaurant equipment

3—10 years

Restaurant

Other equipment

3—

2—10 years

Other

Property/equipment held under finance leases

2—10 years
Leasehold improvements

Shorter of useful life or lease term

Leasehold improvements

Shorter of useful life or lease term

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EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company capitalizes certain directly attributable internal costs in conjunction with site selection that relate to specific sites for plannedthe 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 $0.5 million, $0.5 million andless than $0.1 million for each of the years ended December 27, 2017,28, 2022, December 28, 2016,29, 2021 and December 30, 2015, respectively.2020. The Company capitalized internal costs related to site selection and construction activities of $1.9$1.5 million, $1.6$1.4 million and $1.1$1.0 million for the years ended December 27, 2017,28, 2022, December 28, 2016,29, 2021 and December 30, 2015,2020, respectively. Capitalized internal interest costs related to site selection and construction activities were $0.2 million and $0.2 million for the years ended December 27, 2017 and December 28, 2016, respectively, and immaterial for the year ended December 30, 2015.

Impairment of Long-Lived and ROU Assets


62


EL POLLO LOCO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


The Company reviews its long-lived and right-of-use assets (“ROU assets”) for impairment on a restaurant-by-restaurant basis whenever events or changes in circumstances indicate that the carrying value of certain long-lived and ROU assets may not be recoverable. The Company considers a triggering event, related to long-lived assets or ROU assets in a net asset position, to have occurred related to a specific restaurant if the restaurant’s cash flowsAverage 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 28, 2022 and December 29, 2021, ROU assets related to closed or subleased restaurant locations totaled $30.7 million and $21.9 million, respectively. If the Company concludes that the carrying value of certain long-lived and ROU assets will not be recovered based on expected undiscounted future cash flows, an impairment write-downloss is recorded to reduce the long-lived 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'sCompany’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 28, 2022 that required an impairment review of the Company’s long-lived and ROU assets. Based on the results of this analysis, as well as the strategic decision to close two restaurants in Texas, the Company recorded non-cash impairment charges of $32.6$0.5 million for the year ended December 27, 2017,28, 2022, primarily related to the carrying value of the ROU assets of one restaurant in California that closed in 2021 and the long-lived assets of two restaurants in California.

In fiscal 2021, the Company recorded non-cash impairment charges of $0.7 million primarily related to the carrying value of the ROU assets of 23 restaurantsone restaurant in Arizona, California and Texas. In fiscal 2016 the company recorded a non-cash impairment charge of $8.4 million, primarily related toTexas that closed in 2019, the carrying value of nineone restaurant in Arizona, California that closed in 2021 and Texas.the long-lived assets of three restaurants in California. In in fiscal 20152020, the Company recorded a non-cash impairment charge of $0.2$3.5 million primarily related to the carrying value of the ROU assets of one restaurant in California. The impairment expense for fiscal 2017 includes an impairment expense of $27.7 million, representingTexas and the entire value of capitalizedlong-lived assets of all of the company-operatedfour restaurants in Texas, net of previously recorded depreciation. Factors which led to the impairment of the Texas restaurants include recent results, which indicates that the restaurants have not achieved the sales volumes required to generate positive cash flows or improve profitability in the Texas market, along with the related future cash flow assumptions, including comparable sales rate growth and restaurant operating costs, over the remaining lease terms and the age of the restaurants in Texas. The restaurants in Texas began opening in late 2014, causing a higher net book value at the time of impairment testing, and increased difficulty projecting results for newer restaurants in newer markets.California. Given the difficultyinherent uncertainty in projecting results for newer restaurants in newer markets, we are alsoas well as the impact of the COVID-19 pandemic (and related economic effects), the Company is monitoring the recoverability of the carrying value of the assets of several other restaurants on an ongoing basis, including those in the Arizona and Northern California market.basis. For these restaurants, if expected performance improvements areis 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 2022, the Company recognized $0.3 million of closed-store reserve expense related to the amortization of ROU assets, property taxes and CAM payments for its closed locations.

During fiscal 2021, the Company recognized $0.4 million of closed-store reserve expense related to the amortization of ROU assets, property taxes and CAM payments for its closed locations. During fiscal 2020, the Company recognized

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

Goodwill and Indefinite-Lived Intangible Assets

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 and from the acquisition of certain franchise locations.

Upon the sale or refranchising of a restaurant, the Company evaluates whether there is a decrement of goodwill. The amount of goodwill included in the cost basis of the asset sold is determined based on the relative fair value of the portion of the reporting unit disposed of compared to the fair value of the reporting unit retained.

The fair value of the portion of the reporting unit disposed of in a refranchising is determined by reference to the discounted value of the future cash flows expected to be generated by the restaurant and retained by the franchisee, which includes a deduction for the anticipated, future royalties the franchisee will pay the Company associated with the franchise agreement entered into simultaneously with the refranchising transition. The fair value of the reporting unit retained is based on the price a willing buyer would pay for the reporting unit and includes the value of franchise agreements. As such, the fair value of the reporting unit retained can include expected cash flows from future royalties from those restaurants currently being refranchised, future royalties from existing franchise businesses and company restaurant operations. The Company did not record any decrement to goodwill related to the disposition of restaurants in fiscal 2022, 2021 and 2020.

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

The Company reviews goodwill for impairment utilizing either a qualitative assessment or a two-step process.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 two-step process,fair value test, the first step of the goodwill impairment test is used to identify potential impairment by comparingCompany 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 and the second step of the impairment test is unnecessary.impaired. If the carrying amount of a reporting unit exceeds its fair value, the second step is performed to measureCompany will recognize an impairment charge for the amount of impairment by comparingwhich the carrying amount ofexceeds the goodwill to a determination ofreporting unit’s fair value; however, the implied value ofloss recognized cannot exceed the goodwill. If the carryingtotal amount of goodwill is greater than the implied value, an impairment charge is recognized for the difference.

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.


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Although

The Company determined that there were no indicators of potential impairment of its goodwill and indefinite-lived intangible assets during fiscal 2022. Accordingly, the Company recognized expense relateddid not record any impairment to the impairment of theits goodwill or indefinite-lived intangible assets of 23 restaurants during the year ended December 27, 2017, upon completion of the qualitative assessment, the Company did not identify any indicators of potential impairment for its goodwill or indefinite-lived intangible assets. Furthermore, the Company did not identify any indicators of potential impairment during the years ended December 28, 2016, or December 30, 2015, and thus no impairment was recorded.

Other Intangibles, Net—Definite Lived
Definite lived intangible assets and liabilities consist of the value allocated to the Company’s favorable and unfavorable leasehold interests that resulted from the Acquisition.
Favorable leasehold interest represents the asset in excess of the approximate fair market value of the leases assumed as of November 17, 2005, the date of the Acquisition. The amount is being reduced over the remaining life of the leases. This amount is shown as other intangible assets, net, on the accompanying consolidated balance sheets.
Unfavorable leasehold interest liability represents the liability in excess of the approximate fair market value of the leases assumed as of November 17, 2005, the date of the Acquisition. The amount is being reduced over the remaining life of the leases. This amount is shown as other intangible liabilities, net, on the accompanying consolidated balance sheets.
Intangible assets and liabilities with a definite life are amortized using the straight-line method over the remaining useful lives at the date of acquisition as follows:
Favorable leasehold interests1 to 18 years (remaining lease term)
Unfavorable leasehold interest liability1 to 20 years (remaining lease term)
2022. 

Deferred Financing Fees

Costs

Deferred financing feescosts are capitalized and amortized over the period of the loan on a straight-line basis, which approximates the effective interest method. Included in other assets are feesdeferred financing costs (net of accumulated amortization), related to the revolver, of $0.6$0.9 million and $0.9$0.4 million as of December 27, 201728, 2022 and December 28, 2016,29, 2021, respectively. Amortization expense for deferred financing costs was $0.3 million, $0.3 million andapproximately $0.3 million for each of the

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three years ended December 27, 2017,28, 2022, December 28, 2016,29, 2021, and December 30, 2015, respectively,2020, 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, 201728, 2022 and December 28, 2016,29, 2021, the Company had accrued $5.9$11.1 million and $5.4$11.2 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, 2017,28, 2022, December 28, 201629, 2021 and December 30, 2015,2020, totaled $6.8$8.7 million, $7.2$9.0 million, and $7.9$8.4 million, respectively. These amounts are included in labor and related expenses and general and administrative expenses on the accompanying consolidated statements of income.

Restaurant and Franchise 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 $8.9$7.5 million, $7.4$7.7 million and $7.4$7.5 million during the years ended December 27, 2017,28, 2022, December 28, 2016,29, 2021, and December 30, 2015,2020, respectively. Franchise revenue consists

The Company offers a loyalty rewards program, which awards a customer points for dollars spent. Customers earn points for each dollar spent and, as of franchise royalties, initial franchise fees, license fees due from franchisees, IT support servicesAugust 4, 2020, 50 points can be redeemed for a $5 reward to be used for a future purchase. Prior to August 4, 2020, 100 points could be redeemed for a $10 reward. If a customer does not earn or use points within a one-year period, their account is deactivated and rental income for leases and subleases to franchisees. Franchise royalties are based uponall points expire. Additionally, if a percentage of net salesreward is not used within six months, it expires. When a customer is part of the franchisee and are recorded as income as such sales arerewards program, the obligation to provide future discounts related to points earned byis considered a separate performance obligation, to which a portion of the franchisees. Initial franchise and license fees are recognized when all material obligations have been performed and conditionstransaction price is allocated. The performance obligation related to loyalty points is deemed to have been satisfied, typicallyand the amount deferred in the balance sheet is recognized as revenue, when operationsthe 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 franchised restaurant have commenced. Initial franchise fees recognized during the years ended December 27, 2017,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 28, 2016,2022 and December 30, 2015, totaled $0.3 million, $0.429, 2021, the revenue allocated to loyalty points that have not been redeemed was $0.5 million and $0.8$0.7 million, respectively. The Company recognizes renewal fees when a renewal agreement with a franchisee becomes effective.

Franchise Area Development Fees

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The Company receives area development fees from franchisees when they execute multi-unit area development agreements. The Company does not recognize revenue fromrespectively, which is reflected in the agreements until the related restaurants open or at the time the development agreements expire, if the required units are not opened. Unrecognized area development fees totaled $1.0 million and $0.9 million at both December 27, 2017 and December 28, 2016, and are included inCompany’s accompanying consolidated balance sheets within other accrued expenses and current liabilitiesliabilities. The Company expects the loyalty points to be redeemed and other noncurrent liabilities in the accompanying consolidated balance sheets. As of December 27, 2017, the Company had executed development agreements that represent commitments to open 55 franchised restaurants at various dates through 2022.
Advertising Costs
Advertising expense is recorded as the obligation to contribute to the advertising fund is created, generally when the associated revenue is recognized. Advertising expense, which isrecognized over a component of occupancy and other operating expenses, was $15.5 million, $14.7 million and $13.9 million for the years ended December 27, 2017, December 28, 2016, and December 30, 2015, respectively, and is in addition to $20.5 million, $19.3 million and $18.5 million, 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. Fees received in advance of provided services are included in other accrued expenses and current liabilities and were $1.0 million and nil at December 27, 2017 and December 28, 2016, respectively. Fees received subsequent to provided service are included in accounts receivable and current assets and were nil and $0.1 million at December 27, 2017 and December 28, 2016, respectively. Pursuant to the Company’s Franchise Disclosure Document, company-operated restaurants contribute to the advertising fund on the same basis as franchised restaurants. At December 27, 2017, the Company was obligated to spend $1.0 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. Preopening costs, which are included in general and administrative expenses on the accompanying consolidated statements of income, were $2.0 million, $2.6 million and $1.5 million for the years ended December 27, 2017, December 28, 2016, and December 30, 2015, respectively.
Gift Cards
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

Operating Leases

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subsequent renewal fees, are recognized over the franchise or renewal term, which is typically twenty years. As of December 28, 2022, the Company had executed development agreements that represent commitments to open 72 franchised restaurants at various dates through 2032.

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 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 28, 2022, 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 $16.4 million, $16.1 million and $15.3 million for the years ended December 28, 2022, December 29, 2021 and December 30, 2020, respectively. In addition, there was $28.5 million, $25.9 million and $22.6 million for the years ended December 28, 2022, December 29, 2021 and December 30, 2020, respectively, funded by the franchisees’ advertising fees.

Franchisees pay a monthly fee to the Company that ranges from 4% to 5% of their restaurants’ net sales as reimbursement for advertising, public relations and promotional services the Company provides, which is included

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within franchise advertising fee revenue. Fees received in advance of provided services are included in other accrued expenses and current liabilities and were $0.8 million and $3.6 million at December 28, 2022 and December 29, 2021, respectively. Company-operated restaurants contribute to the advertising fund on the same basis as franchised restaurants. At December 28, 2022, the Company was obligated to spend $0.8 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. Preopening costs, which are included in general and administrative expenses on the accompanying consolidated statements of income, were $0.3 million, $0.3 million and $0.1 million for the years ended December 28, 2022, December 29, 2021, and December 30, 2020, respectively.

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, isand are recorded on a straight-line basis over the expected lease term. The lease term beginsAdditionally, tenant incentives used to fund leasehold improvements are recognized when earned and reduce the Company has the rightright-of-use asset related to control the use of the leased property, which is typically before rent payments are due under the terms of the lease. Rent expense is included in occupancy and otherThese are amortized through the operating expenses on the consolidated statements of income. The difference between rent expense and rent paid is recorded as deferred rent, which is included in other noncurrent liabilities in the accompanying consolidated balance sheets. Percentage rent expenses are recorded based on estimated sales or gross margin for respective restaurants over the contingency period.

Any leasehold improvements that are funded by lessor incentives under operating leases are recorded as leasehold improvements and amortized over the expected lease term. Such incentives are also recorded as deferred rent and amortizedasset as reductions to rentof expense over the expected 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,


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In November 2015, one Lost Profits

During the year ended December 30, 2020, the Company received business interruption insurance proceeds of the Company’s restaurants incurred damage resulting from a fire. In fiscal 2016, we incurred costs directly$2.0 million, primarily related to restaurant sales losses and expenses related to the fire of less than $0.1 million, disposed of assets of an additional $0.1 millionCOVID-19 pandemic and recognized gains of $0.7 million, related to the reimbursement of property and equipment and expenses incurred and $0.5 million related to the reimbursement of lost profits. The reimbursement of lost profits is included in the accompanying consolidated statements of income, for fiscal 2016, as a reduction of company restaurant expenses. The Company received from the insurance company cash of $1.4 million, net of the insurance deductible, during fiscal 2016. In fiscal 2015, the Company disposed of $0.1 million of assets related to the fire. The restaurant was reopened for business on March 14, 2016.

resulting dining room closures.

Recovery of Securities Class Action Legal Expense

and Other Insurance Claims

During fiscal 2017,2020 the Company received insurance proceeds of $1.7$0.1 million related to the reimbursement of certain legal expenses paid in prior years for the defense of securities lawsuits.a property claim. See Note 13 Commitments“Commitments and Contingencies, Contingencies—Legal Matters.

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Gain (Loss) on Disposition of Restaurants

During fiscal 2022, the Company completed the sale of three company-operated restaurants within the Orange County area to an existing franchisee. During fiscal 2021, the Company completed the sale of eight restaurants within the Sacramento area to an existing franchisee. 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. 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.

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. If a derivative previously designated as a hedge is terminated, or no longer meets the qualifications for hedge accounting, any balances in AOCI will be reclassified to earnings immediately.

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 basisbases of assets and liabilities using enacted tax rates in effect in the years in which the temporary differences are expected to reverse. On a periodic basis, the Company assesses the probability that its net deferred tax assets, if any, will be recovered. If, after evaluating all of the positive and negative evidence, a conclusion is made that it is more likely than not that some portion or all of the net deferred tax assets will not be recovered, a valuation allowance is provided by a chargecharging to tax expense toa reserve for the portion of the 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 our 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, 201728, 2022 or December 28, 2016,29, 2021. During fiscal 2020, the

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Company recognized interest of $0.1 million related to the Notice of Proposed Adjustment (“NOPA”), discussed below. During fiscal 2022, fiscal 2021 and did not recognize interest or penalties during the years ended December 27, 2017, December 28, 2016, and December 30, 2015, sincefiscal 2020, there were no material unrecognized tax benefits. Management believes no materialsignificant change to the amount of unrecognized tax benefits will occur within the next twelve months.

On July 30, 2014, the Company entered into an Income Tax Receivable Agreement (the “TRA”). Thea 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. In fiscal 2015, the Company incurred a charge of approximately $41.4 million relating to the present value of its total expected TRA payments. As of December 27, 2017,28, 2022 and December 29, 2021, the Company had accrued $22.0$0.7 million and $1.5 million, respectively relating to expected TRA payments. In fiscal 20172022, 2021 and 2016, we2020, the Company paid $11.1$0.4 million, $1.7 million and $3.2$5.2 million, respectively, to ourits pre-IPO stockholders under the TRA. In

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law as a stimulus package, and contained several tax provisions, including a correction of a previous drafting error related to quality improvement property (“QIP”) and immediate refundability of all remaining alternative minimum tax (“AMT”) credits. The new provisions did not have a material impact on the Company’s consolidated financial statements.

During fiscal 2015 we paid nil2020, the Company received a NOPA for the years ended December 27, 2017 and December 28, 2016, related to our pre-IPO stockholdersthe Company’s methodology regarding its ordering of utilization of AMT NOLs. Resolution of this NOPA resulted in a payment of $0.4 million, and the audit is closed. As a result of the CARES Act, this amount was immediately refundable upon filing of a Form 1139. The Company filed the Form 1139 during the year ended December 30, 2020 and received a refund totaling $0.5 million.

The CARES Act also provides for the deferral of employer Social Security taxes that are otherwise owed for wage payment and the creation of refundable employee retention credits. The total amount deferred as of December 30, 2020 was $4.9 million, of which 50% was due by December 31, 2021 and another 50% was due by December 31, 2022. As of December 28, 2022, the Company made all deferred payroll tax payments and did not have any corresponding balances included in other non-current liabilities on the Company’s consolidated balance sheet.

Additionally, the Company assessed its eligibility for the business relief provision under the TRA.

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

Fair Value Measurements

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.
Level 1: Quoted prices for identical instruments in active markets.
Level 2: Quoted 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.

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As of December 27, 2017 and December 28, 2016,

During fiscal 2019, the Company had no assets and liabilitiesentered into an interest rate swap (used to hedge interest rate risk), which is required to be measured at fair value on a recurring basis.

The fair value was determined based on Level 2 inputs, which include valuation models, as reported by the Company’s counterparty. These valuation models use a discounted cash flow analysis on the cash flows of the derivative based on the terms of the contract and the forward yield curves adjusted for the Company’s credit risk. The key inputs for the valuation models are observable market prices, discount rates, and forward yield curves. In connection with the Company’s entry into the 2022 Credit Agreement (as defined in Note 6 “Long-Term Debt”), it terminated the interest rate swap in July 2022. In settlement of this swap, the Company received approximately $0.6 million. See Note 6 “Long-Term Debt” for further discussion regarding the Company’s interest rate swaps.

The following table presents fair value for the interest rate swap at December 29, 2021 (in thousands):

Fair Value Measurements Using

    

Fair Value

    

Level 1

    

Level 2

    

Level 3

    

Other non-current liabilities - Interest rate swap

$

396

$

$

396

$

Certain assets and liabilities are measured at fair value on a nonrecurring basis. In other words, the instrumentsthey are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment).

The following non-financial instruments were measured at fair value, on a nonrecurring basis, as of and for the year ended December 27, 2017 (in thousands):

   Fair Value Measurements Using  
 Total Level 1 Level 2 Level 3 Impairment Losses
Property and equipment owned, net$
 $
 $
 $
 $32,594
The following non-financial instrumentsassets were measured at fair value, on a nonrecurring basis, as of and for the year ended December 28, 20162022 reflecting certain property and equipment and ROU assets, for which an impairment loss was recognized during the corresponding periods, as discussed above under Impairment of Long-Lived and ROU Assets (in thousands):
   Fair Value Measurements Using  
 Total Level 1 Level 2 Level 3 Impairment Losses
Property and equipment owned, net$1,614
 $
 $
 $1,614
 $8,400

    

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 instrumentsassets were measured at fair value, on a nonrecurring basis, as of and for the year ended December 29, 2021 reflecting certain property and equipment and ROU assets for which an impairment loss was recognized during the corresponding periods, as discussed above under "Impairment of Long-Lived and ROU Assets" (in thousands):

    

Total

    

Level 1

    

Level 2

    

Level 3

 

Impairment Losses

Certain property and equipment, net

$

$

$

$

 

$

304

Certain ROU assets, net

$

411

$

$

$

411

$

407

The following non-financial assets were measured at fair value, on a nonrecurring basis, as of and for the year ended December 30, 20152020 for which an impairment loss was recognized during the corresponding periods, as discussed above under "Impairment of Long-Lived and ROU Assets" (in thousands):

   Fair Value Measurements Using  
 Total Level 1 Level 2 Level 3 Impairment Losses
Property and equipment owned, net$
 $
 $
 $
 $181
During fiscal 2017, 2016 and 2015, the Company recorded $32.6 million, $8.4 million and $0.2 million, respectively, of expenses related to the impairment of assets. This was primarily related to the carrying value of the assets of 21 restaurants in Arizona, California and Texas, as well as the strategic decision to close two restaurants in Texas, in fiscal 2017, nine restaurants in Arizona, California and Texas in fiscal 2016 and one restaurant in California, in fiscal 2015, which may not be recoverable. These impairment charges resulted primarily from our annual impairment testing of long-lived assets, except for the two noted above. The fair value measurements used in these impairment evaluations were based on discounted cash flow estimates using unobservable Level 3 inputs, based on market assumptions. 

    

Total

    

Level 1

    

Level 2

    

Level 3

    

Impairment Losses

Certain property and equipment, net

$

$

$

$

$

2,955

Certain ROU assets, net

$

902

$

$

$

902

$

543

Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, restricted cash, 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stock-Based Compensation

Accounting literature requires the recognition of

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 guidance also requires companies to estimate 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


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EL POLLO LOCO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


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 Adopted Accounting Pronouncements
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, accounting for forfeitures, and classification on the statements of cash flows. The Company adopted ASU 2016-09 in the first quarter of fiscal 2017. The Company elected to apply the amendments related to presentation of excess tax benefits on the statement of cash flows using the prospective transition method. The Company made an accounting policy election to continue its current practice of estimating forfeitures.
In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes” which requires that deferred tax liabilities and assets be classified as noncurrent in a classified balance sheet. Prior to the issuance of the standard, deferred tax liabilities and assets were required to be separately classified into a current amount and a noncurrent amount in the balance sheet. The Company adopted ASU 2015-17 retrospectively in the first quarter of fiscal 2017, resulting in the classification of all deferred tax assets as non-current. As the Company implemented this ASU retrospectively $21.5 million of deferred tax assets previously classified as current assets in fiscal year 2016 are now classified as noncurrent assets within the Company's condensed consolidated balance sheets.
Recent Accounting Pronouncements Not Yet Adopted
In May 2017, the FASB issued ASU 2017-09, which provides clarity, reduces diversity in practice, and reduces cost and complexity when applying the guidance in Topic 718 Compensation—Stock Compensation, regarding a change to the terms or conditions of a share-based payment award. Specifically, an entity is to account for the effects of a modification, unless all of the following are satisfied: (1) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (3) the classification of the modified award as an equity instrument or as a liability instrument is the same as the classification of the original award immediately before the original award is modified. ASU 2017-09 is effective for financial statements issued for annual periods beginning after December 15, 2017. The adoption of ASU 2017-09 is not expected to have a significant impact on the Company’s consolidated financial position or results of operations.
In January 2017, the FASB issued ASU 2017-04, simplifying the manner in which an entity is required to test for goodwill impairment by eliminating Step 2 from the goodwill impairment test. ASU 2017-04 is effective for financial statements issued for annual periods beginning after December 15, 2019. The adoption of ASU 2017-04 is not expected to have a significant impact on the Company’s consolidated financial position or results of operations.
In January 2017, the FASB issued ASU 2017-01, clarifying the definition of a business. ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for financial statements issued for annual periods beginning after December 15, 2017, including interim periods within those annual periods. After adoption, the Company will apply guidance in ASU 2017-01 to test for goodwill impairment.
In November 2016, the FASB issued ASU 2016-18, "Restricted Cash." ASU 2016-18 addresses the diversity in practice that exists regarding the classification and the presentation of changes in restricted cash on the statements of cash flows under Topic 230, Statements of Cash Flow, and other Topics. The amendments in ASU No. 2016-18 require that amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and the end-of-period total amounts set forth on the statements of cash flows. ASU 2016-18 is effective for financial statements issued for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The adoption of ASU 2016-18 is not expected to have a significant impact on the Company’s consolidated financial position or results of operations.

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EL POLLO LOCO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


In August 2016, the FASB issued ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments." ASU 2016-15 addresses how certain cash receipts and cash payments are presented and classified in the statements of cash flows under Topic 230, Statements of Cash Flow, and other Topics. ASU 2016-15 is effective for financial statements issued for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The adoption of ASU 2016-15 is not expected to have a significant impact on the Company’s consolidated financial position or results of operations.
In February 2016, the FASB issued ASU 2016-02, “Leases.” The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Although early adoption is permitted, the Company will adopt these provisions in the first quarter of 2019. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company has $298.1 million of operating lease obligations as of December 27, 2017, and upon adoption of this standard will record a ROU asset and lease liability equal to the present value of these leases, which will have a material impact on the consolidated balance sheet. However, the recognition of lease expense in the consolidated statement of income is not expected to change from the current methodology.
In January 2016, the FASB issued ASU 2016-01, "Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities." The pronouncement requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. These changes become effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The adoption of ASU 2016-01 is not expected to have a significant impact on the Company’s consolidated financial position or results of operations.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (ASU 2014-09)”, which supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP.
The revised revenue standard is effective for public entities for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures).
In addition, the FASB has issued the following Technical Corrections, Practical Expedients and Improvements to Topic 606, Revenue from Contracts with Customers: ASU 2017-14 in November 2017, ASU 2017-13 in September 2017, ASU No. 2016-20, in December 2016, ASU No. 2016-12, in May 2016, and ASU No. 2016-10, in April 2016. All amendments are effective for financial statements issued for annual periods beginning after December 15, 2017, including interim periods within those annual periods, and early application is permitted, but no earlier than fiscal years beginning after December 15, 2016.
The Company generates a substantial amount of its revenues from company-operated restaurants. This revenue stream is not expected to be impacted by the adoption of ASU No. 2014-09, or any of the subsequent related ASU’s. The Company has completed its analysis of the impact of the standard on franchise revenue.

Franchise revenue consists of franchise royalties, initial franchise fees, license fees due from franchisees and IT support services. Rental income for leases and subleases to franchisees are scoped out of the revenue standard and are within the scope of lease guidance. The revenue recognition for franchise royalties are not impacted, and will continue to be recognized when franchisee sales occur. However, revenue recognition for franchise and development fees that are not related to subsequent sales will be impacted. The Company's current accounting policy is to recognize initial franchise fees, development fees, and franchise agreement renewals when all material obligations have been performed and conditions have been satisfied, typically when operations of the franchised restaurant have commenced. In accordance with the new guidance, 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 will therefore be treated as a single performance obligation. As such, initial franchise and development fees received, and subsequent renewal fees, will be recognized over the franchise, or renewal, term. Additionally, the Company's current accounting policy is to


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EL POLLO LOCO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


recognize advertising funded by franchisees on a net basis in the consolidated statement of income, and as a liability within our consolidated balance sheet. In 2017, the Company recognized advertising funds from franchisees of $20.5 million, which was recorded as a reduction of the advertising expense. Under the new guidance, we expect to present advertising contributions received from franchisees as revenue and to record all expenses of the advertising fund, resulting in an increase in revenues and expenses on our consolidated statements of income, with no change to the consolidated balance sheet. Additionally, we do not anticipate this guidance to have a material change on revenue from gift cards, or the Company's loyalty program.
The Company has determined to take a modified retrospective approach of transition and will recognize an adjustment to retained earnings, related to the cumulative effect of adopting ASU 2014-09 at the date of adoption. The Company does not believe the adoption of ASU 2014-09 will have a material impact to its consolidated statement of income, and the cumulative catch-up adjustment to be recorded to retained earnings is expected to be approximately $3.5 million, or 1% of total assets. The Company is in the process of finalizing the disclosure requirements and will have this completed by the first quarter of 2018.
Franchise Development Option Agreement with Related Party

On July 11, 2014, EPL and LLC entered into a Franchise Development Option Agreement relating to development of our restaurants in the New York–Newark, NY–NJ–CT–PA Combined Statistical Area (the “Territory”). EPL granted LLC the exclusive option to develop and open 15 restaurants in the Territory over five years (the “Initial Option”), and, provided that the Initial Option is exercised, the exclusive option to develop and open up to an additional 100 restaurants in the Territory over ten years. The Franchise Development Option Agreement terminates (i) ten years after execution, or (ii) if the Initial Option is exercised, five years after that exercise. LLC may only exercise the Initial Option if EPL first determines to begin development of company-operated restaurants in the Territory or support the development of the Territory. We haveThe Company has no current intention to begin development in the Territory and as of December 28, 2022, no stores have been opened in the Territory.


3. PROPERTY AND EQUIPMENT

The costs and related accumulated depreciation and amortization of major classes of property are as follows (in thousands):

 December 27, 2017 December 28, 2016
Land$12,323
 $12,323
Buildings and improvements124,056
 125,159
Other property and equipment64,712
 65,831
Construction in progress8,225
 11,539
 209,316
 214,852
Less: accumulated depreciation and amortization(106,522) (96,382)
 $102,794
 $118,470

    

December 28, 2022

    

December 29, 2021

Land

$

12,323

$

12,323

Buildings and improvements

 

153,377

 

144,631

Other property and equipment

 

83,035

 

78,383

Construction in progress

 

3,196

 

5,333

 

251,931

 

240,670

Less: accumulated depreciation and amortization

 

(173,287)

 

(165,002)

$

78,644

$

75,668

Depreciation and amortization expense was $18.1$14.4 million, $16.1$15.2 million and $13.1$16.9 million for the years ended December 27, 2017,28, 2022, December 28, 2016,29, 2021, and December 30, 2015,2020, respectively. The gross value of assets under capital leases for buildings and improvements was $1.6 million at December 27, 2017 and December 28, 2016. Accumulated depreciation for assets under capital leases was $1.5 million for the years ended December 27, 2017 and December 28, 2016.

Based on the Company’s review of its long-lived assets for impairment, the Company recorded non-cash impairment charges of $32.6$0.4 million, $8.4$0.3 million and $0.2$3.0 million for the years ended December 27, 2017,28, 2022, December 28, 2016,29, 2021, and December 30, 2015,2020, respectively. See “Impairment of Long-Lived and ROU Assets” in Note 2 “Summary of Significant Accounting Policies” for additional information.

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4. TRADEMARKS, OTHER INTANGIBLE ASSETS AND LIABILITIES

Domestic trademarks consist of the following (in thousands):

 December 27, 2017 December 28, 2016
Beginning balance$120,700
 $120,700
Accumulated impairment charges(58,812) (58,812)
Ending balance$61,888
 $61,888

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EL POLLO LOCO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


Other intangible assets subject to amortization consist

December 28,

December 29,

    

2022

        

2021

Cost

$

120,700

$

120,700

Accumulated impairment charges

 

(58,812)

 

(58,812)

Trademarks, net

$

61,888

$

61,888

5. LEASES

Nature of the following (in thousands):

 December 27, 2017 December 28, 2016
Favorable leasehold interest$6,038
 $6,038
Less: accumulated amortization(5,661) (5,554)
Total favorable leasehold interest, net$377
 $484
Unfavorable leasehold interest liability$(9,156) $(9,156)
Less: accumulated amortization8,370
 8,144
Unfavorable leasehold interest liability, net$(786) $(1,012)
The estimated net amortization credits (net liability) for the Company’s favorable and unfavorable leasehold interests for each of the five succeeding fiscal years and thereafter is as follows (in thousands):
For the Years Ending
Favorable Leasehold
Interest
 
Unfavorable Leasehold
Interest
December 26, 2018$97
 $(144)
December 25, 201994
 (136)
December 30, 202085
 (123)
December 29, 202164
 (120)
December 28, 202237
 (107)
Thereafter
 (156)
Total$377
 $(786)
The aggregate amortization expense for the years ended December 27, 2017, December 28, 2016, and December 30, 2015 was $0.1 million, $0.1 million, and $0.2 million, respectively. The remaining weighted average amortization periods of the favorable leasehold interest and the unfavorable leasehold liability are three years and four years respectively.

5. LEASES
leases

The Company’s operations utilize property, facilities, equipment and vehicles owned by the Company or leased from others. BuildingsAdditionally, the Company has various contracts with vendors that have been determined to contain an embedded lease in accordance with Topic 842.

As of December 28, 2022, the Company had no leases that it had entered into, but had not yet commenced. The Company does not have control of the property until lease commencement.

Building and facility leases

The majority of the Company’s building and facilities leased from othersleases are primarily for restaurantsclassified as operating leases; however, the Company currently has one facility and support facilities. ten equipment leases that are classified as finance leases.

Restaurants are operated under lease arrangements that generally provide for a fixed base rent and, in some instances, contingent rent based on a percentage of gross operating profit or net revenues in excess of a defined amount. InitialAdditionally, 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 have terms of 20 years, exclusive of options to renew. LeasesThese leases typically have four 5-year renewal options, which have generally been excluded in the calculation of equipment primarily consistthe ROU asset and lease liability, as they are not considered reasonably certain to be exercised, unless (1) the renewal had already occurred as of restaurant equipment, computer systemsthe time of adoption of Topic 842, or (2) there have been significant leasehold improvements that have a useful life that extend past the original lease term. Furthermore, there are no residual value guarantees and vehicles. no restrictions imposed by the lease.

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.

During the year ended December 29, 2021, the Company reassessed the lease terms on 22 restaurants due to certain triggering events, such as the addition of significant leasehold improvements, the decision to terminate a lease, or the decision to renew. As a result of the reassessment, an additional $17.8 million of ROU assets and lease liabilities for the year ended December 29, 2021 were recognized, and will be amortized over the new lease term.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The reassessments had an impact on the original lease classification of one property during the year ended December 28, 2022 which represented $0.7 million of the $13.0 million total additional ROU asset and lease liabilities for fiscal 2022. There were no reassessments that impacted the original lease classification during the year ended December 29, 2021. 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 2022, the Company determined that the carrying value of an ROU assets at one restaurant was not recoverable. As a result, the Company recorded on a straight-line basis.


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. During fiscal 2020, the Company determined that the carrying value of ROU assets at one restaurant was not recoverable. As a result, the Company recorded a $0.5 million non-cash impairment charge for the year ended December 30, 2020 related to one restaurant in Texas, which was sold to a franchisee in the prior year.

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.

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EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


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

December 28, 2022

December 29, 2021

December 30, 2020

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

$

78

$

2

$

80

$

11

$

$

11

Interest on lease liabilities

42

3

 

45

 

58

1

 

59

27

27

Operating lease cost

 

26,537

 

1,005

 

27,542

 

26,501

 

1,122

 

27,623

 

26,578

 

1,227

 

27,805

Short-term lease cost

 

 

18

 

18

 

 

21

 

21

 

 

23

 

23

Variable lease cost

 

597

 

677

 

1,274

 

539

 

354

 

893

 

444

 

191

 

635

Sublease income

 

(4,555)

 

 

(4,555)

 

(3,823)

 

 

(3,823)

 

(3,251)

 

 

(3,251)

Total lease cost

$

22,694

$

1,705

$

24,399

$

23,353

$

1,500

$

24,853

$

23,809

$

1,441

$

25,250

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

  

December 28, 2022

  

December 29, 2021

December 30, 2020

Lease cost – Occupancy and other operating expenses

$

23,730

$

24,020

$

23,972

Lease cost – General & administrative

 

465

413

464

Lease cost – Depreciation and amortization

 

73

78

11

Lease cost – Interest expense

 

45

59

27

Lease cost – Closed-store reserve

 

86

283

776

Total lease cost

$

24,399

$

24,853

$

25,250

73


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EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

December 28, 2022

December 29, 2021

December 30, 2020

  

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

$

27,221

$

953

 

$

28,174

$

26,414

$

1,084

$

27,498

$

23,683

$

1,230

$

24,913

Financing cash flows used for finance leases

$

106

$

56

 

$

162

$

102

$

46

$

148

$

34

$

5

$

39

Non-cash investing and financing activities:

 

  

 

  

 

  

Operating lease ROU assets obtained in exchange for lease liabilities:

 

  

 

  

 

  

Operating lease ROU assets

$

12,978

$

92

 

$

13,070

$

17,763

$

$

17,763

$

5,850

$

13

$

5,863

Finance lease ROU assets obtained in exchange for lease liabilities:

Finance lease ROU assets

$

$

28

$

28

$

$

196

$

196

$

1,623

$

54

$

1,677

Derecognition of ROU assets due to terminations, impairment or modifications

$

(39)

$

(35)

 

$

(74)

$

(4,513)

$

(99)

$

(4,612)

$

(543)

$

(26)

$

(569)

Other Information

 

  

 

  

 

  

Weighted-average remaining years in lease term—finance leases

 

17.87

 

3.19

  

18.42

4.02

18.98

4.52

Weighted-average remaining years in lease term—operating leases

 

10.73

 

1.73

  

11.27

1.44

11.45

2.31

Weighted-average discount rate—finance leases

 

2.57

%  

 

1.53

%  

  

2.78

%  

1.54

%  

2.50

%  

1.68

%  

Weighted-average discount rate—operating leases

 

4.54

%  

 

3.80

%  

  

4.45

%  

3.89

%  

4.29

%  

3.93

%  

Information regarding the Company’s minimum future lease obligations at December 27, 201728, 2022 is as follows (in thousands):

Finance

Operating Leases

    

Minimum

    

Minimum

    

Minimum

Lease

Lease

Sublease

For the Years Ending

Payments

Payments

Income

December 27, 2023

$

151

$

27,876

$

4,040

December 25, 2024

 

151

 

25,887

 

3,685

December 31, 2025

 

147

 

23,729

 

3,207

December 30, 2026

 

114

 

21,595

 

2,881

December 29, 2027

 

104

 

19,806

 

2,829

Thereafter

 

1,479

 

117,566

 

20,403

Total

$

2,146

$

236,459

$

37,045

Less: imputed interest (1.53% - 4.54%)

 

(410)

 

(51,315)

 

  

Present value of lease obligations

 

1,736

 

185,144

 

  

Less: current maturities

 

(110)

 

(19,995)

 

  

Noncurrent portion

$

1,626

$

165,149

 

  

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

74

 Capital Leases Operating Leases
For the Years Ending
Minimum
Lease
Payments
 
Minimum
Sublease
Income
 
Minimum
Lease
Payments
 
Minimum
Sublease
Income
December 26, 2018$172
 $
 $25,270
 $932
December 25, 201995
 
 25,102
 728
December 30, 202054
 
 23,818
 455
December 29, 202154
 
 22,669
 466
December 28, 202245
 
 21,706
 466
Thereafter
 
 179,582
 1,158
Total$420
 $
 $298,147
 $4,205
Less: imputed interest (11.0% to 14.8%)(104)  
  
  
Present value of capital lease obligations316
  
  
  
Less: current maturities(132)  
  
  
Noncurrent portion$184
  
  
  
Net rent expense is as follows (in thousands):

Table of Contents

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years EndedDecember 27, 2017 December 28, 2016 December 30, 2015
Base rent$24,384
 $22,089
 $19,944
Contingent rent259
 209
 96
Less: sublease income(2,334) (2,540) (2,620)
Net rent expense$22,309
 $19,758
 $17,420
Base rent

of income on a straight-line basis over the lease term and contingent rent are included in occupancy and other operating expenses, while sublease income is included in franchise revenuevariable lease payments in the accompanying consolidated statements of income. Sublease income includes contingent rental income of $0.8 million, $1.0 million, and $1.1 millionperiod in which the obligation for fiscal 2017, 2016, and 2015, respectively.

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 noncancelablenon-cancelable leases with initial terms ranging from three3 to nine20 years. TheThese 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. Total rental income includedAll leases are considered operating leases.

For the leases in franchise revenue inwhich the accompanying consolidated statements of income for leased property was $0.5Company 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 28, 2022, December 29, 2021, and December 30, 2020, the Company received $0.4 million, $0.5$0.4 million and $0.4$0.6 million, for fiscal 2017, 2016, and 2015, respectively.

Minimum future rentalrespectively, of lease income for company-operated properties under noncancelable operating leases, which is recorded on a straight-line basis, in effect as of Decemberfrom company-owned locations.

6. LONG-TERM DEBT

On July 27, 2017, is as follows (in thousands):

For the Years Ending 
December 26, 2018$274
December 25, 2019184
December 30, 2020188
December 29, 2021146
December 28, 2022132
Thereafter352
Total future minimum rental income$1,276
6. CURRENT CREDIT AGREEMENTS
On December 11, 2014,2022, the Company refinanced and terminated its debt, withcredit 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 Holdings entering intoletter 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 with(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 $200.0$150.0 million five-year senior secured revolving credit facility (the “2014“2022 Revolver”). In connection with the refinancing, the 2018 Credit Agreement was terminated.

The 20142022 Revolver includes a sub limit of $15.0 million for letters of credit and a sub limit of $15.0 million for swingline loans. At DecemberThe 2022 Revolver and 2022 Credit Agreement will mature on July 27, 2017, $7.72027. The obligations under the 2022 Credit Agreement and related loan documents are guaranteed by Holdings and Intermediate. The obligations of Holdings, EPL and Intermediate under the 2022 Credit Agreement and related loan documents are secured by a first priority lien on substantially all of their respective assets.

The 2018 Revolver included a sub limit of $15.0 million offor letters of credit and $93.0a sub limit of $15.0 million for swingline loans. The obligations under the 2018 Credit Agreement and related loan documents were guaranteed by the Company and Intermediate. The obligations of the revolving lineCompany, EPL and Intermediate under the 2018 Credit Agreement and related loan documents were secured by a first priority lien on substantially all of credit were


their respective assets.

The special dividend announced by the Company’s Board of Directors on October 11, 2022 is permitted under the terms of 2022 Revolver pursuant to both subclause (iii)(d) and (iii)(e) of the following sentence. Under the 2022 Revolver, Holdings is restricted from making certain payments such as cash dividends, except that it may, inter alia, (i) pay up to $1.0 million per year to repurchase or redeem qualified equity interests of Holdings held by past or present officers, directors, or employees (or their estates) of the Company upon death, disability, or termination of employment, (ii) pay under its TRA, and (iii) so long as no default or event of default has occurred and is continuing, (a) make non-cash repurchases of equity interests in connection with the exercise of stock options by directors, officers and management, provided that those equity interests represent a portion of the consideration of the exercise price of those stock options, (b) pay up to $0.5 million in any 12 month consecutive period to redeem, repurchase or otherwise acquire equity interests of any subsidiary that is not a wholly-owned subsidiary from any holder of equity interest in such subsidiary, (c) pay up to $2.5 million per year pursuant to stock option plans, employment agreements, or incentive plans, (d) make up to $5.0 million in other restricted payments per year, and (e) make other restricted payments, subject to its compliance, on a pro forma basis, with (x) a lease-adjusted consolidated leverage ratio not to exceed 4.25 times and (y) the financial covenants applicable to the 2022 Revolver. 

72

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EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



outstanding. The amount available under the revolving line of credit was $99.3 million at December 27, 2017. The 2014 Revolver will mature on or about December 11, 2019.

Borrowings under the 2014 Revolver2022 Credit Agreement (other than any swingline loans) bear interest, at the borrower’s option, at rates based upon either LIBORthe 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 prime rate ofpublished Bank of America prime rate, or (c) LIBORTerm SOFR with a term of one-month SOFR plus 1.00%. For LIBORTerm SOFR loans, the margin is in the range of 1.75%1.25% to 2.50%2.25%, and for base rate loans the margin is in thea range of 0.75%0.25% to 1.50%1.25%. The margin was initially set at 2.00% for LIBOR loansBorrowings under the 2022 Revolver may be repaid and at 1.00% for base rate loans untilreborrowed. For borrowings under the delivery of financial statements2022 Revolver and a compliance certificate for2018 Revolver during fiscal 2022, the first quarter of 2016. The interest rate range was 2.4%1.4% to 3.3%6.0%. For borrowings under the 2018 Revolver during fiscal 2017 and 2.0%2021, the interest rate range was 1.3% to 2.4% during fiscal 2016 and1.6%. The interest rate under the 2022 Revolver was 3.3% and 2.4%5.7% at December 27, 201728, 2022 and 1.4% under the 2018 Revolver at December 29, 2021. For the year ended December 28, 2022, the Company had interest expense of $0.9 million under the 2022 Revolver and 2018 Revolver. For the years ended December 29, 2021 and December 28, 2016, respectively.

30, 2020, the Company had interest expense of $1.2 million and $2.7 million, respectively, under the 2018 Revolver.

The 2014 Revolver includes a number of negative and2022 Credit Agreement contains certain financial covenants, including, among others, the following (all subject to certain exceptions): a maximum lease-adjusted consolidated leverage ratio covenant, a minimum consolidated fixed charge coverage ratio, and limitations on indebtedness, liens, investments, asset sales, mergers, consolidations, liquidations, dissolutions, restricted payments, and negative pledges. The 2014 Revolver also includes certain customary affirmative covenants and events of default.covenants. The Company was in compliance with all such covenants at December 28, 2022.

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. At December 29, 2021, $10.0 million of letters of credit and $40.0 million of borrowings were outstanding under the 2018 Revolver. The amount available under the 2018 Revolver was $100.0 million at December 29, 2021.

Maturities

On July 27, 2017. See Note 1 for restrictions2022, 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 28, 2022, the Company borrowed $26.0 million net of pay downs of $20.0 million on its 2022 Revolver. During the year ended December 29, 2021, the Company paid down $22.8 million on the payment of dividends under the 20142018 Revolver.

Transaction Costs
Transaction costs of $1.5 million were incurred in connection with the December 11, 2014 refinancing and were capitalized and are included in other assets in the accompanying consolidated balance sheets and the related amortization is reflected as a component of interest expense, net, in the accompanying consolidated financial statements. As of December 27, 2017 and December 28, 2016 the Company had $0.6 million and $0.9 million, respectively, of transaction costs remaining in other assets.
Maturities
There are no required principal payments prior to maturity for the 20142022 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. As of December 28, 2022, the estimated net gains included in AOCI related to the Company’s cash flow hedge that will be reclassified into earnings in the next 12 months is $0.2 million, based on current Term SOFR interest rates.

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

December 28, 2022

December 29, 2021

    

Notional

    

Fair value

    

Notional

    

Fair value

Other liabilities - Interest rate swap

$

$

$

40,000

$

396


76

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EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

    

December 28, 2022

    

December 29, 2021

December 30, 2020

    

Interest expense on hedged portion of debt

$

439

$

568

$

979

Interest (income) expense on interest rate swap

 

(296)

 

486

278

 

Interest (income) expense on debt and derivatives, net

$

143

$

1,054

$

1,257

The following table summarizes the effect of the Company’s cash flow hedge accounting on AOCI for the years ended December 28, 2022, December 29, 2021 and December 30, 2020 (in thousands):

(Gain) Loss Reclassified from

Net Gain (Loss) Recognized in OCI

AOCI into Interest (Income) Expense

 

December 28, 2022

 

December 29, 2021

 

December 30, 2020

 

December 28, 2022

 

December 29, 2021

December 30, 2020

 

Interest rate swap

$

862

$

257

$

(1,762)

$

(296)

$

486

$

278

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, 2017 December 28, 2016
Accrued sales and property taxes$4,792
 $4,223
Gift card liability2,319
 1,870
Other6,159
 3,579
Total other accrued expenses and current liabilities$13,270
 $9,672

    

December 28, 2022

    

December 29, 2021

Accrued sales and property taxes

$

5,270

$

4,726

Gift card liability

 

4,667

 

4,622

Loyalty rewards program liability

526

687

Accrued advertising

831

3,635

Accrued legal settlements and professional fees

 

1,303

 

771

Deferred franchise and development fees

 

610

 

637

Other

 

1,913

 

4,632

Total other accrued expenses and current liabilities

$

15,120

$

19,710

8. OTHER NONCURRENT LIABILITIES

Other noncurrent liabilities consist of the following (in thousands):

    

December 28, 2022

    

December 29, 2021

Deferred franchise and development fees

$

5,767

$

5,691

Derivative liability

396

Employer social security tax deferral

2,426

Other

 

89

 

140

Total other noncurrent liabilities

$

5,856

$

8,653

77

 December 27, 2017 December 28, 2016
Deferred rent$9,403
 $8,328
Other3,369
 2,354
Total noncurrent liabilities$12,772
 $10,682

73


Table of Contents

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



9. INCOME TAXES

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

For the Years EndedDecember 27, 2017 December 28, 2016 December 30, 2015
Current income taxes: 
  
  
Federal$
 $
 $
State250
 224
 188
Total current250
 224
 188
Deferred income taxes: 
  
  
Federal1,495
 9,660
 8,871
State192
 2,730
 6,378
Total deferred1,687
 12,390
 15,249
Charge in lieu of tax (attributable to stock options)
 169
 5,420
Adjustment to deferred taxes for tax rate change(1,440) 
 
Tax provision for income taxes$497
 $12,783
 $20,857

    

December 28,

    

December 29,

    

December 30,

For the Years Ended

2022

2021

2020

Current income taxes:

 

  

 

  

 

  

Federal

$

2,366

$

7,163

$

520

State

 

1,112

 

2,158

 

1,123

Total current

 

3,478

 

9,321

 

1,643

Deferred income taxes:

 

  

 

  

 

  

Federal

 

2,958

 

93

 

3,350

State

 

1,642

 

918

 

658

Total deferred

 

4,600

 

1,011

 

4,008

Tax provision for income taxes

$

8,078

$

10,332

$

5,651

The provision for income taxes differs from the amount computed by applying the federal income tax rate of 21.0% for fiscal 2022, 2021 and 2020 as follows:

For the Years EndedDecember 27, 2017 December 28, 2016 December 30, 2015
Statutory federal income tax rate of 35% applied to
   earnings before income taxes and extraordinary items
35.0 % 35.0 % 35.0 %
TRA expense(21.4) 0.4
 0.1
Revaluation of deferred taxes(15.8) 
 
Change in valuation allowance10.9
 1.3
 6.5
WOTC Credit(2.5) (0.8) 
State tax benefit (net of federal benefit)0.6
 5.0
 5.1
State tax credits
 
 (0.6)
Other(1.3) 0.2
 0.3
Total5.5 % 41.1 % 46.4 %

December 28,

December 29,

December 30,

For the Years Ended

    

2022

    

2021

    

2020

 

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)

 

7.7

 

5.9

 

4.3

Change in valuation allowance

 

 

0.1

 

0.4

TRA (income) expense

 

(0.3)

 

 

162(m)

0.5

0.8

0.2

WOTC Credit

 

(0.9)

 

(0.5)

 

(0.9)

Stock option exercises

 

0.3

 

(1.4)

 

(6.6)

Other

 

(0.3)

 

0.3

 

0.4

Total

 

28.0

%  

26.2

%  

18.8

%

As of December 28, 2022, the Company had no federal and less than $0.1 million state NOL carryforwards. These State NOLs expire beginning 2029.The Company also has state enterprise zone credits of approximately$9.2 million, which expire in2023. 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 from certain state credits will be realized. In both fiscal 20152021 and 2016,2020, the Company recorded a valuation allowance of approximately $2.9$0.1 million and $0.4 million, respectively, against its deferred tax asset resulting from certain tax credits that may not be realizable prior to the time the credits expire. In fiscal 2017,2022, the Company recorded an additional $1.0$0.5 million to the valuation allowance. As of December 27, 201728, 2022, the total valuation allowance was $4.3$6.7 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) expense is a permanent add-back to the Company’s taxable income. TRA resulted in approximately $5.6$0.4 million of benefitincome in fiscal 20172022 as a result of the amortization of interest expense related

78

Table of Contents

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

to the total expected TRA payments and changes in estimates for actual tax returns filed and future forecasted taxable income, less than $0.1 million of expense in fiscal 2021 as a reduction in result of the Federal corporate income tax rateamortization of interest expense related to the newly enactedtotal expected TRA payments and changes in estimates for actual tax reforms discussed further below, $0.4returns filed and future forecasted taxable income and $0.1 million of tax expense in fiscal 2016,2020 as a result of changes to future forecasted results and $0.2 million of tax expense in fiscal 2015.deduction on 2018 legal settlement accrual. In fiscal 2017, we2022, 2021 and 2020, the Company paid $11.1$0.4 million, $1.7 million and $5.2 million, respectively, to ourits pre-IPO stockholders under the TRA

TRA.

As of December 27, 2017,28, 2022 and December 29, 2021, the deferred tax assets related to California Enterprise Zone credits, net of valuation allowances are $5.4 million.


74


EL POLLO LOCO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


$0.5 million and $1.3 million, respectively.

The Company’s deferred tax assets and liabilities as of December 27, 201728, 2022 and December 28, 201629, 2021 are summarized below.

    

December 28,

    

December 29,

2022

2021

Deferred assets:

 

  

 

  

Capital leases

$

55

$

60

Accrued vacation

 

508

 

503

Accrued workers’ compensation

 

2,201

 

2,616

Enterprise zone and other credits

 

7,258

 

7,524

Net operating losses

 

5

 

5

Fixed assets

 

2,392

 

4,393

ROU assets

 

50,112

 

51,864

Other

 

4,397

 

5,694

Total deferred tax assets

 

66,928

 

72,659

Valuation allowance

 

(6,727)

 

(6,181)

Net deferred tax assets

 

60,201

 

66,478

Deferred liabilities:

 

  

 

  

Goodwill

 

(6,420)

 

(6,349)

Trademark

 

(16,721)

 

(16,727)

Prepaid expense

 

(595)

 

(498)

ROU liabilities

 

(44,737)

 

(46,484)

Other

 

267

 

361

Deferred tax liabilities

 

(68,206)

 

(69,697)

Net deferred tax liability

$

(8,005)

$

(3,219)

The 2017 balances reflect the revaluation for the reduction in the Federal corporate rate to 21%. The 2016 balances are presented at the pre-new tax law rate of 35%.

 December 27, 2017 December 28, 2016
Deferred assets: 
  
Capital leases$90
 $197
Accrued vacation428
 658
Accrued legal
 308
Deferred rent3,516
 4,351
Accrued workers’ compensation1,450
 1,932
Enterprise zone and other credits12,722
 11,982
Net operating losses13,488
 30,452
Fixed assets4,176
 
Other2,261
 2,737
Total deferred tax assets38,131
 52,617
Valuation allowance(4,306) (3,311)
Net deferred tax assets33,825
 49,306
Deferred liabilities: 
  
Goodwill(6,037) (8,809)
Trademark(17,613) (26,463)
Prepaid expense(380) (523)
Fixed asset
 (1,771)
Other(2,628) (4,323)
Deferred tax liabilities(26,658) (41,889)
Net deferred tax asset$7,167
 $7,417
On December 22, 2017 the U.S government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act reduces the corporate tax rate to from 35% to 21%, effective for tax years beginning January 1, 2018. The Company is subject to the provisions of the FASB Accounting Standards Codification 740-10, Income Taxes, which requires that the effect on deferred tax assets and liabilities of a change in tax rates be recognized in the period the tax rate change was enacted. The enacted reduction in the corporate federal income tax rate resulted in a re-measurement of the Company’s net deferred tax asset amounts above as of December 28, 2022 and December 29, 2021 have been classified in the accompanying consolidated balance sheets as noncurrent assets and liabilities with a one-time, non-cash increase to income tax benefit. Consequently, we have recorded a decrease related to deferred tax assets and deferred tax liabilities of $12.1 million and $13.5 million, respectively, with a net benefit to deferred income tax expense of $1.4 million for the year ended December 27, 2017. In addition, under the new tax law, the corporate alternative minimum tax (“AMT”) is repealed effective for tax years beginning January 1, 2018. For tax years beginning in 2018, 2019 and 2020, to the extent AMT credit carryovers exceed regular tax liability, 50% of the excess of AMT credit carryovers would be refundable. Any remaining AMT credits would be fully refundable in 2021.
are as follows (in thousands):

    

December 28,

    

December 29,

2022

2021

Noncurrent:

Assets - state

$

512

$

2,245

Liabilities - federal

 

(8,517)

 

(5,464)

Net deferred tax liability

$

(8,005)

$

(3,219)

As of December 27, 2017, the Company has federal and state NOL carryforwards of approximately $55.8 million and $20.1 million, respectively, which expire beginning in 2030 and 2025, respectively.  The Company also has state enterprise zone credits of approximately $10.9 million, which expire in 2023, federal Work Opportunity Credits of approximately $0.8 million, which will expire in 2038 and federal and state alternative minimum tax ("AMT") credits of approximately $0.9 million, which carry forward to 2021.  The utilization of NOL carryforwards may be subject to limitation under section 382 of the Internal Revenue Code of 1986 (the “Code”) and similar state law provisions.  In fiscal 2014, the Company completed a section 382 analysis and determined that all of the Company's NOL carryforwards and other tax attributes are subject to limitation under section 382. However, that limitation did not impact the Company's 2017 or 2016 year tax liability.  

As of December 27, 2017, December 28, 2016,2022 and December 30, 2015,29, 2021, 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 20132019 by the federal taxing authority, and for years before 20122018 by state taxing authorities.


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EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, 2017,28, 2022, December 28, 2016,29, 2021 and December 30, 20152020.

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, our stockholders approved amending the Equity Incentive Plan, formerly the 2018 Omnibus Equity Incentive Plan, under which the new aggregate share limit was increased to be 2,000,000 shares. As of December 28, 2022, 945,282 shares were $0.7available for grant.

During the years ended December 28, 2022, December 29, 2021 and December 30, 2020, the Company recognized stock-based compensation expense of $3.5 million, $0.6$3.2 million and $0.5$3.1 million, respectively.

11. STOCK-BASED COMPENSATION
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, 2017,28, 2022, options to purchase 2,309,1031,068,179 shares of common stock of the Company were outstanding, including 1,909,440625,436 vested and 399,663442,743 unvested. Unvested options vest over time, or upon our achieving annual financial goals. However, the compensation committee of the board of directors, as administrator of the Company’s 2014 Omnibus Equity Incentive Plan, has the power to accelerate the vesting schedule of stock-based compensation, and, generally, in the event of an employee termination in connection with a change in control of the Company, any unvested portion of an award under the plan shall become fully vested. At December 27, 2017, 1,563,54928, 2022, 180,020 premium options, options granted above the stock price at date of grant, remained outstanding. In fiscal 2017 and 2016,2022, the Company granted 135,036 and 329,673372,958 options, respectively, with an exercise price equal to the fair market value of the common stock on the date of grant. The options granted in fiscal 2017 and 2016,2022 had a four-yearfour year vesting period. NoStock options weregenerally expire ten years from the date of grant. In fiscal 2021, the Company granted 256,172 options, with an exercise price equal to the fair market value of the common stock on the date of grant. The options granted in fiscal 2015. On November 15, 2016, the board of directors approved the modification of the remaining performance based stock options granted in 2014 and 2013 to vest based solely on time. As2021 hadresult, a) 17,380 performance based stock options that did not vest in fiscal 2015 based on performance targets not being met, vested as of November 15, 2016; b) 80,799 performance based stock options that would not have vested based on 2016 performance targets vested as of December 28, 2016; and c) 17,378 performance based stock options that would not have vested based on the 2017 performance target vested at the end of fiscal 2017, subject to continued employment of the option holder and the other terms and conditions of the 2014four year vesting period. Stock Option Plan. The Company recorded $0.6 million as compensation expense in fiscal 2016 as a result of this stock option modification. As of December 27, 2017, there were no remaining performance based stock options and 2,309,103 time based stock options outstanding. The options generally expire 10 years from the date of grant.grant. Changes in stock options for the years ended December 27, 201728, 2022 and December 28, 2016,29, 2021, are as follows:

Weighted-Average

 

Aggregate

    

    

Weighted-Average

 

 Contractual Life

 

Intrinsic Value

Shares

Exercise Price

 

Life (Years)

 

(in thousands)

Outstanding - December 30, 2020

 

1,030,866

$

9.82

Grants

256,172

17.55

Exercised

 

(132,760)

6.52

Forfeited, cancelled or expired

 

(176,200)

 

14.48

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

5.68

$

1,368

Vested and expected to vest at December 28, 2022

 

1,060,880

$

9.92

5.66

$

1,362

Exercisable at December 28, 2022

 

625,436

$

9.50

3.37

$

1,033

80

 Shares 
Weighted-Average
Exercise Price
Outstanding - December 30, 20152,151,214
 $6.25
Grants347,053
 12.14
Exercised(147,726) 6.62
Forfeited, cancelled or expired(158,813) 8.20
Outstanding - December 28, 20162,191,728
 7.26
Grants135,036
 13.73
Exercised(17,661) 5.26
Forfeited, cancelled or expired
 
Outstanding - December 27, 20172,309,103
 $7.65
Vested and expected to vest at December 27, 20172,289,313
 $7.60
Exercisable at December 27, 20171,909,440
 $6.59

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EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



Stock options at December 27, 2017 are summarized as follows:
Range of Exercise Prices 
Number
Outstanding
 
Weighted-Average
Remaining
Contractual Life
(in Years)
 
Weighted-
Average Exercise
Price
 
Number
Exercisable
 
Weighted-Average
Exercise Price
$4.09 105,418
 5.48 $4.09
 105,418
 $4.09
$5.84 1,599,944
 4.49 5.84
 1,599,944
 $5.84
$9.65 - $13.95 464,709
 8.68 12.49
 82,424
 $11.99
$15.00 139,032
 6.58 15.00
 121,654
 $15.00
$4.09 - $15.00 2,309,103
 5.51 $7.65
 1,909,440
 $6.59
The intrinsic value of both options outstanding and options exercisable, calculated as the difference between the market value as of December 27, 2017 and the exercise price, is $7.3 million.

The intrinsic value of options exercised, calculated as the difference between the market value on the date of exercise and the exercise price, was $0.2$0.8 million, $0.9$1.6 million and $14.9$9.9 million for fiscal years 2017, 20162022, 2021 and 2015,2020, 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. The Company has authorized 4,402,240 shares of common stock for issuance in connection with stock options. As of December 27, 2017, 359,642 shares were available for grant. In order to calculate our stock options’ fair values and the associated compensation costs for share-based awards, the Company utilizes the Black–Scholes option pricing model and has developed estimates of various inputs including forfeiture rate, expected term, expected volatility, and risk-free interest rate. 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 estimated using four publicly-traded companies in our market category. These are selected based on similarities of market capitalization, size, and other financial and operational characteristics.the Company’s historical data. Volatility is calculated by taking the historical daily closing equity prices of our peer companies,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 20172022 and 2021 was $4.29$4.89 and $8.10 per share, respectively, using the Black–Scholes model with the following weighted-average assumptions used to value the option grants: expected volatility of 28.6%, expected term of 5.75 years, risk-free interest rate of 1.9% to 2.0%, and expected dividend yield of 0%.

The weighted-average estimated fair value of employee stock options granted in fiscal 2016 was $4.13 per share using the Black–Scholes model with the following weighted-average assumptions used to value the option grants: expected volatility of 32.4%, expected term of 5.75 years, risk-free interest rates of 1.1% to 1.8%, and expected dividend yield of 0%.
During the years ended December 27, 2017, December 28, 2016 and December 30, 2015, the Company recognized stock option compensation expense of $0.6 million, $0.9 million and $0.5 million, respectively. These expenses were included in general and administrative expenses consistent with the salary expense for the related optionees in the accompanying consolidated statements of income. In connection with the separation of its former Audit Committee Chair, during fiscal 2017, the Company modified previously granted equity awards to allow for additional time to exercise previously vested awards following his separation date. As a result, the Company incurred incremental stock-based compensation expense of less than $0.1 million for the year ended December 27, 2017.

    

December 28, 2022

    

December 29, 2021

 

Expected volatility

43.0

%  

46.9

%

Risk-free interest rate

 

2.9

%  

1.1

%

Expected term (years)

 

6.25

 

6.25

Expected dividends

 

 

As of December 27, 2017, we28, 2022, the Company had total unrecognized compensation expense of $1.2$2.1 million related to unvested stock options, which the Company expects to recognize over a weighted average period of 2.73.0 years.

The above assumptions generally require significant judgment. If in the future we determinethe Company determines that another method is more reasonable, or if another method for calculating these input assumptions is prescribed by authoritative guidance, and, therefore, should be used to estimate volatility or expected term, the fair value calculated for our stock options could change significantly. Higher volatility and longer expected lives result in an increase to stock-based compensation expense determined at the date of grant. Stock-based compensation expense affects our general and administrative expense.

We estimate our

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


77


EL POLLO LOCO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


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 2017, 20162022, 2021 and 2015. We2020. The Company will continue to use significant judgment in evaluating the expected term, volatility, and forfeiture rate related to ourits stock-based compensation.

Restricted Shares

In fiscal 20172022 and 2016, 181,2922021, 356,610 and 29,259222,741 restricted sharesshare awards were granted, respectively, at the fair market value on the date of grant. These grants vest based on continued service over three years for directors and four years for employees. We base

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EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Changes in restricted shares for the amount of unearned compensation recorded on the market value of the shares on the date of issuance. In fiscal 2017, 2016,years ended December 28, 2022 and 2015 the Company recognized share-based compensation expense of $0.5 million, $0.2 million, and $0.1 million, respectively. This expense was included in general and administrative expenses in the accompanying consolidated statements of income. December 29, 2021, are as follows:

    

    

Weighted-Average

Shares

Fair Value

Unvested shares at December 30, 2020

 

742,404

$

11.68

Granted

 

222,741

$

17.13

Released

 

(248,255)

$

11.99

Forfeited, cancelled, or expired

 

(221,110)

$

11.80

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

As of December 27, 2017,28, 2022, there was total unrecognized compensation expense of $2.3$5.0 million related to unvested restricted shares,share awards, which the Company expects to recognize over a weighted-average period of 3.22.62 years.

Changes in restricted shares for the years ended December 27, 2017 and As of December 28, 2016, are as follows:
 Shares 
Weighted-Average
Fair Value
Unvested shares at December 30, 201512,352
 $24.58
Granted29,259
 $13.33
Released(4,859) $26.10
Forfeited, cancelled, or expired
 $
Unvested shares at December 28, 201636,752
 $15.42
Granted181,292
 $13.69
Released(10,527) $16.48
Forfeited, cancelled, or expired(10,875) $16.72
Unvested shares at December 27, 2017196,642
 $13.70
2022, all remaining performance stock units and restricted units were forfeited, cancelled, expired, or released.

12. NET INCOMEEARNINGS PER SHARE

Basic net income per shareEPS is calculated using the weighted-average number of shares of common stock outstanding during the years ended December 27, 2017,28, 2022, December 28, 2016,29, 2021, and December 30, 2015.2020. Diluted net income per shareEPS is calculated using the weighted-average number of shares of common stock outstanding and potentially dilutive during the period, using the treasury stock method.

On October 11, 2022, the Company’s Board of Directors approved a share repurchase program (the “2022 Stock Repurchase Plan”) under which the Company is authorized to repurchase up to $20.0 million of shares of our common stock. The 2022 Stock Repurchase Plan will terminate on March 28, 2024, may be modified, suspended or discontinued at any time, and does not obligate the Company to acquire any particular number of shares.

Under the 2022 Stock Repurchase Plan, the Company is permitted to repurchase its common stock from time to time, in amounts and at prices that the Company deemed appropriate, subject to market conditions and other considerations. The Company’s repurchases will be executed using open market purchases, including pursuant to Rule 10b5-1 trading plans, and/or through privately negotiated transactions.

For the year ended December 28, 2022, the Company did not repurchase any shares of common stock under the 2022 Stock Repurchase Plan.

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

For the Years Ended

December 28,

December 29,

December 30,

    

2022

    

2021

    

2020

Numerator:

 

  

 

  

 

  

Net income

$

20,801

$

29,121

$

24,474

Denominator:

 

  

 

  

 

  

Weighted-average shares outstanding—basic

 

36,350,579

 

35,973,892

 

35,193,325

Weighted-average shares outstanding—diluted

 

36,575,904

 

36,446,756

 

35,796,406

Net income per share—basic

$

0.57

$

0.81

$

0.70

Net income per share—diluted

$

0.57

$

0.80

$

0.68

Anti-dilutive securities not considered in diluted EPS calculation

 

535,574

 

136,397

 

81,041

82

For the Years EndedDecember 27, 2017 December 28, 2016 December 30, 2015
Numerator: 
  
  
Net income$8,619
 $18,339
 $24,054
Denominator: 
  
  
Weighted-average shares outstanding—Basic38,453,347
 38,357,805
 37,949,316
Weighted-average shares outstanding—Diluted39,086,676
 39,026,950
 39,039,558
Net income per share—Basic$0.22
 $0.48
 $0.63
Net income per share—Diluted$0.22
 $0.47
 $0.62
Anti-dilutive securities not considered in diluted EPS
   calculation
747,985
 468,705
 214,411

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EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



Below is a reconciliation of basic and diluted share counts.

For the Years EndedDecember 27, 2017 December 28, 2016 December 30, 2015
Weighted-average shares outstanding—Basic38,453,347
 38,357,805
 37,949,316
Dilutive effect of stock options and restricted shares633,329
 669,145
 1,090,242
Weighted-average shares outstanding—Diluted39,086,676
 39,026,950
 39,039,558

For the Years Ended

    

December 28,

    

December 29,

    

December 30,

2022

2021

2020

Weighted-average shares outstanding—basic

 

36,350,579

 

35,973,892

 

35,193,325

Dilutive effect of stock options and restricted shares

 

225,325

 

472,864

 

603,081

Weighted-average shares outstanding—diluted

 

36,575,904

 

36,446,756

 

35,796,406

13. COMMITMENTS AND CONTINGENCIES

Legal Matters

On or about February 24, 2014, a former employee filed a class action in the Superior Court of the State of California, County of Orange, under the caption Elliott Olvera, et al v. El Pollo Loco, Inc., et al (Case No. 30-2014-00707367-CU-OE-CXC) on behalf of all putative class members (all hourly employees from 2010 to the present) alleging certain violations of California labor laws, including failure to pay overtime compensation, failure to provide meal periods and rest breaks, and failure to provide itemized wage statements. The putative lead plaintiff’s requested remedies include compensatory and punitive damages, injunctive relief, disgorgement of profits, and reasonable attorneys’ fees and costs. No specific amount of damages sought was specified in the complaint. The parties executed a Stipulation of Class Settlement and Release which the court refused to approve on the grounds that it did not provide sufficient compensation for the putative class members. Further settlement discussions were not successful, and the litigation is moving forward with the filing deadline for plaintiff’s class certification motion postponed until May 4, 2018. Purported class actions alleging wage and hour violations are commonly filed against California employers. The Company has similar cases pending that overlap in part with the Olvera action and fully expects to have to defend against similar lawsuits in the future.
Daniel Turocy, et al. v. El Pollo Loco Holdings, Inc., et al. (Case No. 8:15-cv-01343) was filed in the United States District Court for the Central District of California on August 24, 2015, and Ron Huston, et al. v. El Pollo Loco Holdings, Inc., et al. (Case No. 8:15-cv-01710) was filed in the United States District Court for the Central District of California on October 22, 2015. The two lawsuits have been consolidated, with co-lead plaintiffs and class counsel.  A consolidated complaint was filed on January 29, 2016, on behalf of co-lead plaintiffs and others similarly situated, alleging violations of federal securities laws in connection with Holdings common stock purchased or otherwise acquired and the purchase of call options or the sale of put options, between May 1, 2015 and August 13, 2015 (the “Class Period”). The named defendants are Holdings; Stephen J. Sather, Laurance Roberts, and Edward J. Valle (collectively, the “Individual Defendants”); and LLC, Trimaran Capital Partners, and Freeman Spogli & Co. (collectively, the “Controlling Shareholder Defendants”). Among other things, Plaintiffs allege that, in 2014 and early 2015, Holdings suffered losses due to rising labor costs in California and, in an attempt to mitigate the effects of such rising costs, removed a $5 value option from the Company's menu, which resulted in a decrease in traffic from value-conscious consumers. Plaintiffs further allege that during the Class Period, Holdings and the Individual Defendants made a series of materially false and misleading statements that concealed the effect that these factors were having on store sales growth, resulting in Holdings stock continuing to be traded at artificially inflated prices. As a result, Plaintiffs and other members of the putative class allegedly suffered damages in connection with their purchase of Holdings’ stock during the Class Period. In addition, Plaintiffs allege that the Individual Defendants and Controlling Shareholder Defendants had direct involvement in, and responsibility over, the operations of Holdings, and are presumed to have had, among other things, the power to control or influence the transactions giving rise to the alleged securities law violations. In both cases, Plaintiffs seek an unspecified amount of damages, as well as costs and expenses (including attorneys’ fees).
On July 25, 2016, the Court issued an order granting, without prejudice, Defendants’ Motion to Dismiss plaintiff’s complaint for failure to state a claim. Plaintiffs were granted leave to amend their complaint, and filed an amended complaint on August 22, 2016. Defendants moved to dismiss the amended complaint, and on March 20, 2017, the Court dismissed the amended complaint and granted Plaintiffs leave to file another amended complaint.  Plaintiffs filed another amended complaint on April 17, 2017. Defendants filed a motion to dismiss the amended complaint on or about May 17, 2017. The Court denied Defendants' motion to dismiss the third amended complaint on August 4, 2017. On December 8, 2017, Plaintiffs filed a motion for class certification, and Defendants’ opposition was filed on March 8, 2018. Defendants intend to continue to defend against the claims asserted.
In addition, on September 16, 2015, Holdings and certain of its officers and directors received an informal, non-public inquiry from the SEC requesting voluntary production of documents and information. All parties cooperated fully with the SEC's request. On July 15, 2016, Holdings was informed that the SEC was closing its inquiry as to all parties.

79


EL POLLO LOCO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


On or about November 5, 2015, a purported Holdings shareholder filed a derivative complaint on behalf of Holdings in the Court of Chancery of the State of Delaware against certain Holdings officers, directors and Trimaran Pollo Partners, L.L.C.,LLC, 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 parties have stipulated to, whichHoldings shareholder voluntarily dismissed the court has ordered, a stay of these proceedings pending the outcome of Turocy v. El Pollo Loco Holdings, Inc., discussed above.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.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'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 pendingor until the completion of an investigation of the allegations in the action by a special litigation committee of the Holdings board of directors.


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

On May 21, 2021, while the SLC’s motion to dismiss the Diep action was pending, the Company filed a notice of proposed partial settlement of the Diep action with respect to defendants Kay Bogeajis, Laurance Roberts, Stephen J. Sather, Edward J. Valle, Douglas K. Ammerman, and Samuel N. Borgese (collectively, the “Settling Defendants”). Defendant Trimaran Pollo Partners, LLC (“Trimaran”) was not a party to the settlement. The court approved the settlement of $625,000, less Plaintiffs’ fees of $156,250, on September 10, 2021, and dismissed all claims brought, or that could have been brought, against Settling Defendants. In connection with this settlement, the Company received $469,000 in insurance proceeds, which was recorded within general and administrative expenses in the Company’s statement of income for the year ended December 29, 2021.

On July 30, 2021, the court granted the SLC’s motion to dismiss with respect to the claims asserted against remaining defendant Trimaran. On October 4, 2021, Plaintiffs filed a notice of appeal of the court’s granting of the motion to dismiss against defendant Trimaran. Plaintiff filed its opening brief on December 6, 2021. SLC filed its answering brief on December 20, 2021 and the public version of the brief was filed on January 7, 2022. Plaintiffs filed the reply brief on January 4, 2022. The hearing on the appeal took place on March 30, 2022. On June 28, 2022, the court’s granting of the motion to dismiss against Trimaran was affirmed.

Janice P. Handlers-Bryman and Michael D. Bryman v. El Pollo Loco, Inc., Los Angeles Superior Court (Case No. MC026045) (the “Lancaster Lawsuit”) was filed on February 9, 2016. Existing El Pollo Loco franchisees, Janice P. Handlers-Bryman and Michael D. Bryman, as individuals and in their capacities as trustees of Ethethe Handlers Bryman Trust (collectively, “Plaintiffs”), filed suit against us alleging, among other things, that we “imposed unreasonable time limitations” on their development of additional restaurant locations in Lancaster, California, and that we thereafter

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EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

developed company-ownedcompany-operated El Pollo Loco restaurants in the “market area” of Plaintiffs’ existing El Pollo Loco restaurant in Lancaster. Plaintiffs’ asserted claims against us for, among other things, (i) breach of

During fiscal 2020, the covenant of good faith and fair dealing, (ii) intentional interferenceCompany reached an agreement with prospective business, and (iii) unfair business practices. In additionthe Plaintiffs to an unspecified amount of damages and costs ofresolve the lawsuit Plaintiffs sought reformation of the contract, declaratory relief, disgorgement of alleged revenues and profits, injunctive relief, andfor a judicial mandate requiring us to either transfer the company-owned locations to Plaintiffs or to continuously disgorge to Plaintiffs the unjust enrichment allegedly obtained by us through the operation of the company-owned restaurants in Lancaster. We denied Plaintiffs’ allegations  as the franchise agreement did not grant Plaintiffs any exclusive territorial rights and, instead, expressly reserved for us the right to open and operate and the right to grant others the right to open and operate - El Pollo Loco restaurants “in the immediate vicinity of or adjacent to” Plaintiffs’ restaurant in Lancaster. On June 7, 2016, we filed a cross-complaint against Plaintiffs for breach of the franchise agreement due to Plaintiffs’ failure to pay to us liquidated damages in connection with their solicitation and/or hiring of our general manager. This counterclaim was voluntarily dismissed by us, without prejudice, on February 27, 2017 but continued in a related action before the San Bernardino Superior Court titled El Pollo Loco, Inc. v. EPL 3766, Inc.  On April 24, 2017, four days before the commencement of trial, Plaintiffs filed a voluntary dismissal, without prejudice, of the Lancaster Lawsuit without any payment or other concession by us. The corresponding dismissal was entered by the court on April 25, 2017. Company of $2.5 million, which was recorded within operating expenses in the Company’s statement of income for the fiscal year ended December 30, 2020. Additionally, during fiscal 2020, the matter was formally resolved. On May 22, 2017, Plaintiffs filedSeptember 2, 2020, the California Court of Appeals entered an order, following a motion for relief fromstipulated reversal of the dismissal which was grantedtrial court’s judgment jointly filed by the court on  June 29, 2017.  Theparties, reversing the trial court’s judgment in the case was bifurcated between the liability and damages phases.   The liability phase went forward on November 16, 2017.  The only cause of action that the court allowed to go to the jury was the cause of action for breach of the covenant of good faith and fair dealing.  The court elected not to present the cause of action for intentional interference with prospective business to the jury.  (The causes of action for  reformation due to mistake and unconscionability, unfair business practices under California Business & Professions Code §§ 17200 et seq. , and declaratory relief were not presented to the jury as these types of equitable claims are to be decided by the court as a matter of law.).  On December 11, 2017, the jury returned a verdict in favor of Plaintiffs on the cause of action for breach of the covenant of good faith and fair dealing.  


The December 11, 2017 verdict did not include a determination of damages. The damages phase ofinstructing the trial is currently scheduledcourt to begin on April 20, 2018. 
dismiss the matter with prejudice. On September 10, 2020, the trial court entered an order reversing its judgment and dismissing the case with prejudice. The Courtsettlement payment of $2.5 million has recently allowed Plaintiffs to reopen discovery on damages related to new claims involving the opening of a second company-owned location in Lancaster, California and that El Pollo Loco did not offer the new restaurant locations to Plaintiffs.  Experts will be allowed to update their damages calculations to account for the updated information and these new claims.  These unknown variables preclude us from providing a reasonable estimation of the range of damages that may be awarded.  Although we cannot predict the ultimate outcome of this lawsuit, the Company believes the jury’s verdict is in error due to express language of the franchise agreement and prejudicial and reversible errors in either earlier phases of the litigation

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EL POLLO LOCO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


or during the liability phase of the trial.  El Pollo Loco intends to file a motion challenging the verdict, a motion for new trial and, if unsuccessful, will appeal the verdict and various other rulingsbeen made in the case.
third quarter of 2020.

The Company is also involved in various other claims such as wage and hour and other legal actions that arise in the ordinary course of business. The outcomes of these actions are not predictable but the Company does not believe that the ultimate resolution of these other actions will have a material adverse effect on its financial position, results of operations, liquidity, or capital resources. A significant increase in the number of claims, or an increase in amounts owing under successful claims, could materially and adversely affect its business, consolidated financial condition, results of operations, and cash flows.

Purchasing

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, 2017,28, 2022, the Company’s total estimated commitment to purchase chicken was $30.8$40.9 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 fivethree lease agreements. These leases have various terms, the latest of which expires in 2036. As of December 27, 2017,28, 2022, the potential amount of undiscounted payments the Company could be required to make in the event of non-payment by the primary lessee was $2.6$2.3 million. The present value of these potential payments discounted at the Company’s estimated pre-tax cost of debt at December 27, 201728, 2022 was $2.3$1.7 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. Accordingly, no liability has been recorded in the Company’s consolidated financial statements related to these contingent liabilities.

Employment Agreements

As of December 27, 2017,28, 2022, the Company had employment agreements with fourthree of the officers of the Company on an at will basis.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.

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
LLC owns approximately 43.3% of the Company’s outstanding common stock. This large position means that LLC and its majority owners—predecessors and affiliates of, and certain funds managed by, Trimaran Capital Partners and Freeman Spogli & Co. (collectively, “Trimaran” and “Freeman Spogli,” respectively)—possess significant influence when stockholders vote on matters such as election of directors, mergers, consolidations and acquisitions, the sale of all or substantially all of the Company’s assets, decisions affecting the Company’s capital structure, amendments to the Company’s certificate of incorporation or by-laws, and the Company’s winding up and dissolution. So long as LLC maintains at least 40% ownership, (i) any member of the board of directors may be removed at any time without cause by affirmative vote of a majority of the Company’s common stock, and (ii) stockholders representing 40% or greater ownership may cause special stockholder meetings to be called.


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EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



14. RELATED PARTY TRANSACTIONS

As of December 28, 2022, LLC, FS Equity Partners V, L.P. and FS Affiliates V, L.P. own approximately 30.3%, 14.8% and 0.2%, respectively, of our outstanding common stock. FS Equity V and FS Affiliates V, which previously indirectly held shares of our common stock through LLC, received shares directly on August 31, 2022, upon LLC’s pro rata distribution in kind of shares of our common stock to FS Equity V and FS Affiliates V.

15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

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 revenue

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

Disaggregated revenue

The following table sets forth a summary of our unaudited quarterly operating resultspresents the Company’s revenues for each of the last eight quarters in the periodyears ended December 27, 2017. We have derived this data from our unaudited consolidated interim financial statements that, in our opinion, have been prepared on substantially the same basis as the audited financial statements contained elsewhere in this report28, 2022, December 29, 2021 and include all normal recurring adjustments necessary for a fair presentation of the financial information for the periods presented. These unaudited quarterly results should be read in conjunction with our financial statementsDecember 30, 2020 disaggregated by revenue source and notes thereto included elsewhere in this report. The operating results in any quarter are not necessarily indicative of the results that may be expected for any future period.

market (in thousands):

 

December 28,

    

December 29,

December 30,

 

2022

2021

2020

Core Market(1):

  

 

  

  

Company-operated restaurant revenue

$

384,504

$

371,067

$

346,662

Franchise revenue

 

17,953

 

16,062

 

14,216

Franchise advertising fee revenue

 

13,223

 

12,017

 

10,632

Total core market

$

415,680

$

399,146

$

371,510

Non-Core Market(2):

 

  

 

  

 

  

Company-operated restaurant revenue

$

18,714

$

23,666

$

27,402

Franchise revenue

 

20,272

 

17,667

 

15,202

Franchise advertising fee revenue

 

15,293

 

13,884

 

11,973

Total non-core market

$

54,279

$

55,217

$

54,577

Total revenue

$

469,959

$

454,363

$

426,087

QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
 2017 2016
(Dollar amounts in thousands, except
share data)
Dec. Sept. June Mar Dec. Sept. July Apr
Selected Financial Data         
  
  
  
Total revenue ($)95,202
 101,155
 105,573
 99,771
 92,479
 95,816
 97,474
 94,354
(Loss) income from Operations ($)(9,665) (5,612) 12,740
 9,361
 1,926
 9,008
 13,401
 10,294
(Benefit) provision for income taxes(4,757)(3)(2,457) 4,244
 3,467
 853
 2,830
 5,339
 3,761
Net (loss) income ($)(38) (4,039) 7,819
 4,877
 418
 5,211
 7,267
 5,443
Per Share Data (2) :
 
  
  
  
  
  
  
  
Net (loss) income per share 
  
  
  
  
  
  
  
Basic
 (0.11) 0.20
 0.13
 0.01
 0.14
 0.19
 0.14
Diluted
 (0.11) 0.20
 0.12
 0.01
 0.13
 0.19
 0.14
Weighted average shares used in computing net income per share 
  
  
  
  
  
  
  
Basic38,465,208
 38,462,100
 38,449,240
 38,437,020
 38,437,020
 38,415,189
 38,294,575
 38,284,435
Diluted38,465,208
(4)38,462,100
(4)39,123,961
 39,079,007
 39,108,967
 39,083,577
 38,962,802
 39,001,078
Selected Operating Data 
  
  
  
  
  
  
  
Number of restaurants (at period end) 
  
  
  
  
  
  
  
Company-operated212
 208
 208
 204
 201
 193
 188
 188
Franchised265
 265
 264
 263
 259
 253
 251
 248
System-wide477
 473
 472
 467
 460
 446
 439
 436
Average unit volume (AUV)
   (company-operated) (1)
1,787
 1,922
 1,995
 1,913
 1,790
 1,929
 1,970
 1,936
Comparable restaurant sales growth (%) 
  
  
  
  
  
  
  
Company-operated0.9
 0.9
 2.4
 (0.4) (0.6) 1.4
 2.0
 (0.6)
Franchised1.9
 2.4
 3.2
 (0.2) (1.9) 1.8
 2.7
 1.8
System-wide1.4
 1.7
 2.9
 (0.3) (1.3) 1.6
 2.4
 0.7
Restaurant contribution margin (%)18.4
 18.3
 21.8
 20.3
 18.5
 20.9
 22.0
 20.7
(1)AUVs consistCore Market includes markets with existing company-operated restaurants at the time of average annualized sales of all company-owned restaurants over the fiscal quarter.Company’s Initial Public Offering ("IPO") on July 28, 2014.
(2)DueNon-Core Market includes markets entered into by the Company subsequent to the use of weighted average shares outstanding for each quarter of computing earnings per share, the sum of the quarterly per share amounts may not equal the per share amount for the year.
(3)The Company recorded a benefit for income taxes of $4.8 million in the fourth quarter of 2018 related to the newly enacted tax reform. The Tax Act had the following effects on our income tax expense for the year ended December 27, 2017, all of which impacted the fourth quarter:IPO date.
Under Financial Accounting Standards Board Accounting Standards Codification (ASC) Topic 740, Income Taxes (“ASC 740”), we are required to revalue any deferred tax assets or liabilities in

The following table presents the periodCompany’s revenues disaggregated by geographic market for the years ended December 28, 2022, December 29, 2021 and December 30, 2020:

    

December 28, 2022

    

December 29, 2021

    

December 30, 2020

 

Greater Los Angeles area market

 

71.2

%  

70.9

%  

71.3

%

Other markets

 

28.8

%  

29.1

%  

28.7

%

Total

 

100

%  

100

%  

100

%

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Table of enactment of change in tax rates. The Tax Act lowers the corporate income tax rate from 35% to 21%. We have estimated the impact of the




Contents

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



revaluation

Contract balances

The following table provides information about the change in the franchise contract liability balances during the year ended December 28, 2022 and December 29, 2021 (in thousands):

December 30, 2020

    

$

5,628

Revenue recognized - beginning balance

 

(680)

Additional contract liability

 

1,380

December 29, 2021

$

6,328

Revenue recognized - beginning balance

 

(744)

Additional contract liability

 

793

December 28, 2022

$

6,377

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, our deferred tax assets and liabilities,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 28, 2022, there was an increase to the contract liability balance due to the Company’s completion of the sale of three company-operated restaurants within the Orange County area to an existing franchisee. This resulted in an additional contract liability of $0.8 million, relating to allocation of the transaction price to various performance obligations under the applicable contracts of the sale. For the year ended December 29, 2021, there was an increase to the contract liability balance due to the Company’s completion of the sale of eight company-operated restaurants within the Sacramento area to an existing franchisee which resulted in a decreasean additional contract liability of $0.7 million, relating to our net deferred income tax liability by $1.4 million and is reflected as a decrease in our income tax expense in our results for fiscal 2017.

allocation of the transaction price to various performance obligations under the applicable contracts of the sale.

The reduced corporate tax rate, also resulted in a Tax Receivable Agreement “TRA” benefitfollowing table illustrates the estimated revenue to the provision for income tax expense for fiscal 2017be recognized in the amountfuture related to performance obligations that are unsatisfied as of $2.0 million.

The Tax Act is generally effective for tax years beginning after December 31, 2017. As such, the reduction28, 2022:

Franchise revenues:

    

  

2023

$

615

2024

 

522

2025

 

474

2026

 

451

2027

 

428

Thereafter

 

3,887

Total

$

6,377

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

    

December 28,

December 29,

December 30,

2022

2021

2020

Loyalty rewards liability, beginning balance

$

687

$

900

$

1,084

Revenue deferred

 

2,754

 

2,677

 

2,463

Revenue recognized

 

(2,915)

 

(2,890)

 

(2,647)

Loyalty rewards liability, ending balance

$

526

$

687

$

900

The Company expects all loyalty points revenue related to performance obligations unsatisfied as of December 28, 2022 to be recognized within one year.

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EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 28,

December 29,

2022

2021

Gift card liability

$

4,667

$

4,622

Revenue recognized from 35%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 28,

December 29,

December 30,

2022

2021

2020

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

$

1,145

$

1,218

$

1,028

Contract Costs

The Company does not currently incur costs to 21% willobtain or fulfill a contract that would be effective for the fiscal year ended December 26, 2018.considered contract assets under Topic 606.

(4)Due to a loss for the period, zero incremental shares are included because the effect would be antidilutive.

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ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.CONTROLS AND PROCEDURES

ITEM 9A.CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15 (e) of the Exchange Act) that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the required time periods, and designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Our disclosure controls and procedures are based on assumptions about the likelihood of future events, and even effective disclosure controls and procedures can only provide reasonable assurance of achieving their objectives. Because of their inherent limitations, we cannot guarantee that our disclosure controls and procedures will succeed in achieving their stated objectives in all cases, that they will be complied with in all cases, or that they will prevent or detect all misstatements.

Our management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 27, 2017.

Management28, 2022.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Exchange Act Rule 13a-15(f), internal control over financial reporting is a process designed by, or under the supervision of, our principal executive officer and principal financial officer and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. The design of any system of control is based upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated objectives under all future events, no matter how remote, or that the degree of compliance with the policies or procedures may not deteriorate. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Accordingly, even effective internal control over financial reporting can only provide reasonable assurance of achieving their control objectives. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of our management, including our chief executive officerChief Executive Officer and chief financial officer,Chief Financial Officer, we carried out an evaluation of the effectiveness of our internal control over financial reporting as of December 27, 201728, 2022 based on the criteria in “InternalInternal Control — Integrated Framework (“2013 Framework” (2013 Framework)) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of December 27, 2017.


28, 2022 based on the criteria established in the 2013 Framework.

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Previously Reported Material Weaknesses
We previously reported material weaknesses that were identified as of December 28, 2016 relating to the design and operating

The effectiveness of our internal control over financial reporting. The material weaknesses resulted from:

1.Certain accounting staff shared accounting system password information and access with an external consultant, who was not engaged through standard Company channels and subject to standard terms and conditions of engagement, who conducted standard accounting functions and had system administrator access.
2.Certain accounting staff, on several occasions, used passwords from other Company employees to enter data for approval on those employees’ behalf and then approved the resulting transactions in the accounting system, thereby circumventing controls over segregation of duties.
The control deficiencies did not result in a material misstatement in the consolidated financial statements; however, we previously concluded that material weaknesses existed in the controls in fiscal 2016 because such a misstatement could have occurred.
With the oversight of our audit committee, we took corrective steps during 2017 to remediate the underlying causes of the material internal control weaknesses described above. The corrective steps we have taken include:
1.Increased awareness among accounting and information system employees of our existing password, data security and access, and accounting entry policies.
2.Designed and implemented controls over system access and password assignments so that users cannot circumvent these controls.
3.Changed our vendor approval and payment procedures so that accounting staff in relevant positions cannot engage or pay vendors without additional review and adherence to standard Company policies and provisions for engagement.

As of our third quarter ended September 27, 2017, we have completed documentation and implementation of the new and revised internal controls described above. After completing our testing of the design and operating effectiveness of this new procedure, we concluded that the above identified material weaknesses in our internal controls over financial reporting was fully remediated as of September 27, 2017.
December 28, 2022 has been audited by BDO USA, LLP, the independent registered public accounting firm that audited the financial statements included in this Annual Report on Form 10-K, as stated in their report included herein.

Changes in Internal Control over Financial Reporting

No changes in our internal control over financial reporting occurred during our most recent fiscalthe quarter that hasended December 28, 2022 have materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.

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Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors

El Pollo Loco Holdings, Inc.

Costa Mesa, California

Opinion on Internal Control over Financial Reporting

We have audited El Pollo Loco Holdings, Inc.’s (the “Company’s”) internal control over financial reporting as of December 28, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 28, 2022, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 28, 2022 and December 29, 2021, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 28, 2022, and the related notes and our report dated March 10, 2023, expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control system, no matter how wellover financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and operated, cannotthe preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide absolutereasonable assurance that the objectivestransactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control system are met, and noover financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls can provide absolute assurancemay become inadequate because of changes in conditions, or that all control issues and instancesthe degree of fraud, if any, within any company have been detected.compliance with the policies or procedures may deteriorate.

/s/ BDO USA, LLP

Costa Mesa, California

March 10, 2023


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ITEM 9B.OTHER INFORMATION

ITEM 9B.OTHER INFORMATION

None.



ITEM 9C.Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

Not applicable.

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91



PART III

Table of Contents

ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

PART III

ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Incorporated by reference from our definitive proxy statement to be filed not later than 120 days after the end of our 20172022 fiscal year.

In addition, our Board of Directors has adopted a Code of Business Conduct and Ethics that applies to all of our directors, employees and officers, including our principal executive officer, principal financial officer, principal accounting officer, controller, and any persons performing similar functions. The current version of the Code of Business Conduct and Ethics is available on our website under the Corporate Governance section at www.elpolloloco.com. To the extent required by rules adopted by the SEC and The Nasdaq Stock Market LLC, we intend to promptly disclose future amendments to certain provisions of the Code of Business Conduct and Ethics, or waivers of such provisions granted to executive officers and directors, on our website under the Corporate Governance section at www.elpolloloco.com.

ITEM 11.
EXECUTIVE COMPENSATION

ITEM 11.EXECUTIVE COMPENSATION

Incorporated by reference from our definitive proxy statement to be filed not later than 120 days after the end of our 20172022 fiscal year.

ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Incorporated by reference from our definitive proxy statement to be filed not later than 120 days after the end of our 20172022 fiscal year.

ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Incorporated by reference from our definitive proxy statement to be filed not later than 120 days after the end of our 20172022 fiscal year.

ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES

ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES

Incorporated by reference from our definitive proxy statement to be filed not later than 120 days after the end of our 20172022 fiscal year.



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92



PART IV

Table of Contents

ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES

PART IV

ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

The following documents are filed as a part of this report:

(1)Financial Statements: Consolidated financial statements filed as part of this report are listed under Item 8. Financial Statements and Supplementary Data.
(2)Financial Statement Schedules: None.
(3)Exhibits:

Incorporated by Reference

Number

Description

Filed

Herewith

Form

Period

Ended

Exhibit

Filing

Date

SEC File Number

3.1

Amended and Restated Certificate of Incorporation of El Pollo Loco Holdings, Inc.

10-Q

6/25/2014

3.1

9/5/2014

001-36556

3.2

Amended and Restated By-Laws of El Pollo Loco Holdings, Inc.

10-Q

6/25/2014

3.2

9/5/2014

001-36556

4.1

Description of El Pollo Loco Holdings, Inc. Capital Stock

10-K

12/25/2019

4.1

3/6/2020

001-36556

10.1

Income Tax Receivable Agreement, dated July 30, 2014, between El Pollo Loco Holdings, Inc., and Trimaran Pollo Partners, L.L.C.

10-Q

9/24/2014

10.1

11/7/2014

001-36556

10.2

Franchise Development Agreement (Exclusive), dated August 20, 2014, between El Pollo Loco, Inc., as franchisor, and Anil Yadav and Atour Eyvazian, collectively, as developer

8-K

N/A

10.1

8/22/2014

001-36556

10.3

Consent to and Assignment of Development Rights (Initial Change of Entity), dated August 20, 2014, between El Pollo Loco, Inc., as franchisor, and (i) Anil Yadav and Atour Eyvazian, collectively, as assignor, and (ii) AA Pollo, Inc., as assignee

8-K

N/A

10.2

8/22/2014

001-36556

10.4

Franchise Development Option Agreement, dated July 11, 2014, between El Pollo Loco, Inc., and Trimaran Pollo Partners, L.L.C.

S-1/A

N/A

10.14

7/14/2014

333-197001

10.5

Stockholders Agreement, dated as of November 18, 2005, by and among El Pollo Loco Holdings, Inc. (formerly

S-1

N/A

10.3

6/24/2014

333-197001

93

Table of Contents

Chicken Acquisition Corp.) and the stockholders listed therein

10.6

Amendment No. 1 to Stockholders Agreement, dated as of April 20, 2006, by and between El Pollo Loco Holdings, Inc. (formerly Chicken Acquisition Corp.) and Trimaran Pollo Partners, L.L.C.

S-1

N/A

10.4

6/24/2014

333-197001

10.7

Amendment No. 2 to Stockholders Agreement, dated as of December 26, 2007, by and between El Pollo Loco Holdings, Inc. (formerly Chicken Acquisition Corp.) and Trimaran Pollo Partners, L.L.C.

S-1

N/A

10.5

6/24/2014

333-197001

10.8

Second Amended and Restated Limited Liability Company Operating Agreement of Trimaran Pollo Partners, L.L.C., dated as of March 8, 2006

S-1

N/A

10.6

6/24/2014

333-197001

10.9

Amendment No. 1 to Second Amended and Restated Limited Liability Company Operating Agreement of Trimaran Pollo Partners, L.L.C., dated as of December 26, 2007

S-1

N/A

10.7

6/24/2014

333-197001

10.10

Amendment No. 2 to Second Amended and Restated Limited Liability Company Operating Agreement of Trimaran Pollo Partners, L.L.C., dated as of January 30, 2008

S-1

N/A

10.8

6/24/2014

333-197001

10.11

Amendment No. 3 to Second Amended and Restated Limited Liability Company Operating Agreement of Trimaran Pollo Partners, L.L.C., dated as of July 14, 2011

S-1

N/A

10.9

6/24/2014

333-197001

10.12

Form of Franchise Agreement

S-1

N/A

10.12

6/24/2014

333-197001

10.13*

Form of Franchise Development Agreement

S-1

N/A

10.13

6/24/2014

333-197001

10.14

Form of Franchise Agreement (2019)

10-K

12/25/2019

10.15

3/6/2020

001-36556

10.15

Form of Franchise Development Agreement (2019)

10-K

12/25/2019

10.16

3/6/2020

001-36556

10.16

Form of Franchise Agreement (2021)

10-K

N/A

10.17

3/11/2022

001-36556

10.17

Form of Franchise Development Agreement (2021)

10-K

N/A

10.18

3/11/2022

001-36556

10.18

Credit Agreement, dated as of July 27, 2022, among El Pollo

8-K

N/A

10.1

8/2/2022

001-36556

94

Table of Contents

Loco, Inc., as borrower, El Pollo Loco Holdings, Inc., as guarantor, the other guarantors party thereto, the lenders party thereto and Bank of America, as administrative agent, swingline lender and letter of credit issuer

10.19

Supplemental Agreement, dated as of August 31, 2022, by and among El Pollo Loco Holdings, Inc., FS Equity Partners V, L.P., and FS Affiliates V, L.P.

10-Q

N/A

10.4

11/4/2022

001-36556

10.20*

Form of Indemnification Agreement between El Pollo Loco Holdings, Inc. and each of its directors and executive officers

S-1/A

N/A

10.27

7/22/2014

333-197001

10.21*

2014 Omnibus Equity Incentive Plan

S-1/A

N/A

10.22

7/22/2014

333-197001

10.22*

Form of Option Award Agreement (Fair Market Value Options) under 2014 Omnibus Equity Incentive Plan

S-1/A

N/A

10.25

7/22/2014

333-197001

10.23*

Form of Non-Officer Director Restricted Share Agreement under 2014 Omnibus Equity Incentive Plan

S-1/A

N/A

10.26

7/22/2014

333-197001

10.24*

Form of Option Award Agreement (Fair Market Value Options) under 2014 Omnibus Equity Incentive Plan (Time Vesting Only)

10-Q

6/29/2016

10.27

8/5/2016

001-36556

10.25*

Form of Employee Restricted Share Agreement under 2014 Omnibus Equity Incentive Plan

10-Q

9/28/2016

10.28

11/4/2016

001-36556

10.26*

2018 Omnibus Equity Incentive Plan

S-8

N/A

4.3

8/6/2018

333-226621

10.27*

Form of Restricted Stock Agreement under 2018 Omnibus Equity Incentive Plan

10-K

12/25/2019

10.24

3/6/2020

001-36556

10.28*

Form of Restricted Stock Agreement under 2018 Omnibus Equity Incentive Plan (Non-Employee Directors)

10-K

12/25/2019

10.25

3/6/2020

001-36556

10.29*

Form of Restricted Stock Unit Agreement under 2018 Omnibus Equity Incentive Plan

10-K

12/25/2019

10.26

3/6/2020

001-36556

10.30*

Form of Stock Option Awards Agreement under 2018 Omnibus Equity Incentive Plan

10-K

12/25/2019

10.27

3/6/2020

001-36556

10.31*

El Pollo Loco Holdings, Inc. Equity Incentive Plan

8-K

N/A

10.1

6/14/2021

001-36556

95

Table of Contents

10.32*

Form of Stock Option Awards Agreement under 2021 Equity Incentive Plan

10-K

N/A

10.31

3/11/2022

001-36556

10.33*

Form of Restricted Share Agreement under 2021 Equity Incentive Plan

10-K

N/A

10.32

3/11/2022

001-36556

10.34*

Form of Restricted Stock Agreement under 2021 Equity Incentive Plan (Non-Employee Directors)

10-K

N/A

10.33

3/11/2022

001-36556

10.35*

Employment Agreement between Bernard Acoca and El Pollo Loco, Inc.

10-K

12/27/2017

10.29

3/9/2018

001-36556

10.36*

Release and Consulting Agreement, dated October 14, 2021, between El Pollo Loco, Inc. and Bernard Acoca

8-K

N/A

10.2

10/15/2021

001-36556

10.37*

Employment Agreement, dated March 9, 2022, between El Pollo Loco, Inc. and Laurance Roberts

10-K

3/9/2022

10.37

3/11/2022

001-36556

10.38*

Employment Agreement between Miguel Lozano and El Pollo Loco, Inc.

10-Q

3/27/2019

10.31

5/3/2019

001-36556

10.39*

Form of Restricted Share Unit Award Agreement between El Pollo Loco Holdings, Inc. and Bernard Acoca

S-8

N/A

4.4

5/8/2018

333-224730

10.40*

Form of Performance Share Unit Award Agreement between El Pollo Loco Holdings, Inc. and Bernard Acoca

S-8

N/A

4.5

5/8/2018

333-224730

10.41*

Severance and Separation Agreement, dated June 15, 2022, between El Pollo Loco Holdings, Inc. and Miguel Lozano

8-K

N/A

10.1

6/21/2022

001-36556

10.42*

Employment Agreement, dated June 28, 2022, between El Pollo Loco Holdings, Inc. and Ira Fils

8-K

N/A

10.1

7/1/2022

001-36556

21.1

Subsidiaries of El Pollo Loco Holdings, Inc.

S-1

N/A

21.1

6/24/2014

333-197001

23.1

Consent of BDO USA, LLP

X

24.1

Power of Attorney (included on signature page hereto)

X

31.1

Certification of Chief Executive Officer under section 302 of the Sarbanes–Oxley Act of 2002

X

31.2

Certification of Chief Financial Officer under section 302 of the Sarbanes–Oxley Act of 2002

X

96

Table of Contents

32.1

Certification of Chief Executive Officer and Chief Financial Officer under 18 U.S.C. section 1350, adopted by section 906 of the Sarbanes–Oxley Act of 2002

**

(3)

101.INS

Exhibits: The exhibits listed on

XBRL Instance Document - the accompanying Exhibit Indexinstance document does not appear in the Interactive Data File because its XBRL tags are filed or incorporated by reference as part of this report.

embedded within the Inline XBRL Document

X

ITEM 16.

101.SCH

FORM 10-K SUMMARY

XBRL Taxonomy Extension Schema Document

X

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

X

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

X

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

X

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

X

104

Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL Document

*

This exhibit is a management contract or a compensatory plan or arrangement.

**

Furnished herewith.

ITEM 16.FORM 10-K SUMMARY

None.



86

97



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

EL POLLO LOCO HOLDINGS, INC.

By:

/s/ Stephen J. SatherLaurance Roberts

Stephen J. Sather

Laurance Roberts

President and Chief Executive Officer

Date:

March 9, 201810, 2023

SIGNATURES AND POWER OF ATTORNEY

We, the undersigned, hereby severally constitute Stephen J. Sather and Laurance Roberts, and each of them singly, our true and lawful attorneys with full power to them and each of them to sign for us, and in our names in the capacities indicated below, any and all amendments to this report, and file the same, with all exhibits thereto, and other documents in connection therewith, hereby ratifying and confirming all that said attorney may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


87



Name

Title

Date

NameTitleDate

/s/ Stephen J. SatherLaurance Roberts

Director, President and Chief Executive Officer (principal executive officer)

March 9, 201810, 2023

Stephen J. Sather

Laurance Roberts

/s/ Laurance RobertsIra Fils

Chief Financial Officer (principal financial and accounting officer)

March 9, 201810, 2023

Laurance Roberts

Ira Fils

/s/ Michael G. Maselli

Chairman and Director

March 9, 201810, 2023

Michael G. Maselli

/s/ Dean C. Kehler

Director

March 9, 201810, 2023

Dean C. Kehler

/s/ John M. Roth

Director

March 9, 201810, 2023

John M. Roth

/s/ Douglas J. Babb

Director

March 9, 201810, 2023

Douglas J. Babb

/s/ Samuel N. Borgese

Director

March 9, 201810, 2023

Samuel N. Borgese

/s/ Mark Buller

Director

March 9, 201810, 2023

Mark Buller

/s/ William R. Floyd

Director

March 9, 201810, 2023

William R. Floyd

/s/ Nancy Faginas-Cody

Director

March 10, 2023

Nancy Faginas-Cody

/s/ Deborah Gonzalez

Director

March 10, 2023

Deborah Gonzalez

/s/ Carol Lynton

Director

March 9, 201810, 2023

Carol Lynton


88

98



EXHIBIT INDEX
      Incorporated by Reference  
Number Description 
Filed
Herewith
 Form 
Period
Ended
 Exhibit 
Filing
Date
 SEC File Number
3.1    10-Q 6/25/2014 3.1
 9/5/2014 001-36556
3.2    10-Q 6/25/2014 3.2
 9/5/2014 001-36556
10.1    10-Q 9/24/2014 10.1
 11/7/2014 001-36556
10.2    8-K N/A 10.1
 8/22/2014 001-36556
10.3    8-K N/A 10.2
 8/22/2014 001-36556
10.4    S-1/A N/A 10.14
 7/14/2014 333-197001
10.5    S-1 N/A 10.3
 6/24/2014 333-197001
10.6    S-1 N/A 10.4
 6/24/2014 333-197001
10.7    S-1 N/A 10.5
 6/24/2014 333-197001
10.8    S-1 N/A 10.6
 6/24/2014 333-197001
10.9    S-1 N/A 10.7
 6/24/2014 333-197001

89



      Incorporated by Reference  
Number Description 
Filed
Herewith
 Form 
Period
Ended
 Exhibit 
Filing
Date
 SEC File Number
10.10    S-1 N/A 10.8
 6/24/2014 333-197001
10.11    S-1 N/A 10.9
 6/24/2014 333-197001
10.12    S-1 N/A 10.12
 6/24/2014 333-197001
10.13    S-1 N/A 10.13
 6/24/2014 333-197001
10.14*    S-1 N/A 10.14
 6/24/2014 333-197001
10.15*    S-1 N/A 10.15
 6/24/2014 333-197001
10.17*    S-1 N/A 10.17
 6/24/2014 333-197001
10.18*    S-1 N/A 10.18
 6/24/2014 333-197001
10.19*    S-1/A N/A 10.22
 7/22/2014 333-197001
10.20*    S-1 N/A 10.19
 6/24/2014 333-197001
10.21*    S-1 N/A 10.20
 6/24/2014 333-197001
10.22*    S-1/A N/A 10.25
 7/22/2014 333-197001
10.23*    S-1/A N/A 10.26
 7/22/2014 333-197001
10.24*    S-1/A N/A 10.27
 7/22/2014 333-197001
10.25    8-K N/A 10.1
 12/16/2014 001-36556
10.26*    10-Q 3/30/2016 10.26
 5/6/2016 001-36556
10.27*    10-Q 6/29/2016 10.27
 8/5/2016 001-36556

90



      Incorporated by Reference  
Number Description 
Filed
Herewith
 Form 
Period
Ended
 Exhibit 
Filing
Date
 SEC File Number
10.28*    10-Q 9/28/2016 10.28
 11/4/2016 001-36556
10.29*  X          
10.30*  X          
21.1    S-1 N/A 21.1
 6/24/2014 333-197001
23.1  X      
    
24.1  X      
    
31.1  X      
    
31.2  X      
    
32.1  **      
    
101.INS XBRL Instance Document X      
    
101.SCH XBRL Taxonomy Extension Schema Document X      
    
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document X      
    
101.DEF XBRL Taxonomy Extension Definition Linkbase Document X      
    
101.LAB XBRL Taxonomy Extension Label Linkbase Document X      
    
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document X      
    
*This exhibit is a management contract or a compensatory plan or arrangement.
**Furnished herewith. Pursuant to Item 601(b)(32)(ii) of Regulation S-K (17 C.F.R. § 229.601(b)(32)(ii)), this certification is deemed furnished, not filed, for purposes of section 18 of the Exchange Act, nor is it otherwise subject to liability under that section. It will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except if the registrant specifically incorporates it by reference.


91