PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

EL POLLO LOCO HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Amounts in thousands, except share data)

March 25, 2020 December 25, 2019
Assets

Current assets:

Cash and cash equivalents $ 43,404
$ 8,070
Accounts and other receivables, net 12,075
8,505
Inventories 2,092
2,009
Prepaid expenses and other current assets 4,607
5,718
Income tax receivable 338
376
Total current assets 62,516
24,678
Property and equipment owned, net 87,902
91,778
Property held under operating leases, net ("ROU asset") 187,610
192,395
Goodwill 248,674
248,674
Trademarks 61,888
61,888
Deferred tax assets 3,543
3,709
Other assets 1,366
1,630
Total assets $ 653,499
$ 624,752
Liabilities and Stockholders' Equity

Current liabilities:

Current portion of obligations under finance leases $ 36
$ 34
Current portion of obligations under operating leases 17,585
16,406
Accounts payable 6,456
5,627
Accrued salaries and vacation 7,619
8,618
Accrued insurance 9,881
9,440
Accrued interest 78
302
Current portion of income tax receivable agreement payable 4,987
4,935
Other accrued expenses and current liabilities 12,216
28,597
Total current liabilities 58,858
73,959
Revolver loan 141,500
97,000
Obligations under finance leases, net of current portion 73
83
Obligations under operating leases, net of current portion 192,422
197,492
Deferred taxes 2,366
1,672
Income tax receivable agreement payable, net of current portion 3,128
3,301
Other noncurrent liabilities 6,547
5,679
Total liabilities 404,894
379,186
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; 35,089,983
and 35,126,582 shares issued and outstanding
351
351
Additional paid-in-capital 331,484
330,950
Accumulated deficit (82,388 ) (85,988 )
Accumulated other comprehensive (loss) income (842 ) 253
Total stockholders' equity 248,605
245,566
Total liabilities and stockholders' equity $ 653,499
$ 624,752


	March 31,		December 30,
	2021		2020
Assets
Current assets:
Cash and cash equivalents	$	6,669	$	13,219
Accounts and other receivables, net		11,018		9,963
Inventories		1,928		2,100
Prepaid expenses and other current assets		4,438		3,865
Income tax receivable		615		2,522
Total current assets		24,668		31,669
Property and equipment, net		80,059		79,642
Property and equipment held under finance lease, net		1,830		1,661
Property and equipment held under operating leases, net (“ROU asset”)		176,838		177,129
Goodwill		248,674		248,674
Trademarks		61,888		61,888
Deferred tax assets		3,193		3,166
Other assets		1,431		1,392
Total assets	$	598,581	$	605,221
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of obligations under finance leases	$	134	$	70
Current portion of obligations under operating leases		19,949		19,907
Accounts payable		9,622		7,472
Accrued salaries and vacation		6,722		10,166
Accrued insurance		10,650		10,416
Accrued interest		97		89
Current portion of income tax receivable agreement payable		1,597		1,577
Other accrued expenses and current liabilities		17,587		16,715
Total current liabilities		66,358		66,412
Revolver loan		53,800		62,800
Obligations under finance leases, net of current portion		1,818		1,692
Obligations under operating leases, net of current portion		178,648		178,658
Deferred taxes		4,997		5,227
Income tax receivable agreement payable, net of current portion		1,465		1,562
Other noncurrent liabilities		8,633		11,292
Total liabilities		315,719		327,643
Commitments and contingencies (Note 7)
Stockholders’ Equity
Preferred stock, $0.01 par value, 100,000,000 shares authorized; NaN issued or outstanding		0		0
Common stock, $0.01 par value, 200,000,000 shares authorized; 36,478,683 and 36,423,505 shares issued and outstanding as of March 31, 2021 and December 30, 2020, respectively		365		364
Additional paid-in-capital		340,739		339,561
Accumulated deficit		(57,550)		(61,514)
Accumulated other comprehensive loss		(692)		(833)
Total stockholders’ equity		282,862		277,578
Total liabilities and stockholders’ equity	$	598,581	$	605,221

See notes to condensed consolidated financial statements (unaudited).

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EL POLLO LOCO HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Amounts in thousands, except share data)

Thirteen Weeks Ended
March 25, 2020 March 27, 2019
Revenue
Company-operated restaurant revenue $ 92,634
$ 97,150
Franchise revenue 7,062
6,444
Franchise advertising fee revenue 5,467
5,383
Total revenue 105,163
108,977
Cost of operations

Food and paper cost 25,562
27,152
Labor and related expenses 28,693
29,576
Occupancy and other operating expenses 22,109
23,227
Company restaurant expenses 76,364
79,955
General and administrative expenses 9,331
11,348
Franchise expenses 6,911
6,144
Depreciation and amortization 4,369
4,761
Loss on disposal of assets 100
44
Loss on assets held for sale —
4,124
Impairment and closed-store reserves 2,402
309
Total expenses 99,477

106,685
Income from operations 5,686
2,292
Interest expense, net 905
859
Income tax receivable agreement (income) expense (120 ) 171
Income before provision for income taxes 4,901
1,262
Provision for income taxes 1,301
349
Net income $ 3,600
$ 913
Net income per share

Basic $ 0.10
$ 0.02
Diluted $ 0.10
$ 0.02
Weighted-average shares used in computing net income per share

Basic 34,659,160
38,653,702
Diluted 35,347,456
39,496,436



	Thirteen Weeks Ended
	March 31, 2021		March 25, 2020
Revenue
Company-operated restaurant revenue	$	94,161	$	92,634
Franchise revenue		7,612		7,062
Franchise advertising fee revenue		5,948		5,467
Total revenue		107,721		105,163
Cost of operations
Food and paper cost		24,391		25,562
Labor and related expenses		30,732		28,693
Occupancy and other operating expenses		23,844		22,109
Company restaurant expenses		78,967		76,364
General and administrative expenses		10,474		9,331
Franchise expenses		7,751		6,911
Depreciation and amortization		3,938		4,369
Loss on disposal of assets		26		100
Impairment and closed-store reserves		564		2,402
Total expenses		101,720		99,477
Income from operations		6,001		5,686
Interest expense, net		517		905
Income tax receivable agreement income		(77)		(120)
Income before provision for income taxes		5,561		4,901
Provision for income taxes		1,597		1,301
Net income	$	3,964	$	3,600
Net income per share
Basic	$	0.11	$	0.10
Diluted	$	0.11	$	0.10
Weighted-average shares used in computing net income per share
Basic		35,795,205		34,659,160
Diluted		36,424,068		35,347,456

See notes to condensed consolidated financial statements (unaudited).

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EL POLLO LOCO HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Amounts in ~~thousands, except share data)~~

thousands)


	Thirteen Weeks Ended
	March 31, 2021		March 25, 2020
Net income	$	3,964	$	3,600
Other comprehensive income
Changes in derivative instruments
Unrealized net gains arising during the period from interest rate swap		78		1,459
Reclassifications of losses into net income		115		39
Income tax expense		(52)		(403)
Other comprehensive income (loss), net of taxes		141		(1,095)
Comprehensive income	$	4,105	$	2,505

See notes to condensed consolidated financial statements (unaudited).

Thirteen Weeks Ended
March 25, 2020 March 27, 2019
Net income $ 3,600
$ 913
Other comprehensive loss (income)
Changes in derivative instruments
Unrealized net losses arising during the period from interest rate swap 1,459
—
Reclassifications of gains into net income 39
—
Income benefit (403 ) —
Other comprehensive loss, net of taxes 1,095
—
Comprehensive income $ 2,505
$ 913

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EL POLLO LOCO HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

(Amounts in thousands, except share data)


	Thirteen Weeks Ended March 31, 2021
								Accumulated
				Additional				Other		Total
	Common Stock			Paid-in		Accumulated		Comprehensive		Stockholders’
	Shares	Amount		Capital		Deficit		Income (Loss)		Equity
Balance, December 30, 2020	36,423,505	$	364	$	339,561	$	(61,514)	$	(833)	$	277,578
Stock-based compensation	—		—		853		—		—		853
Issuance of common stock upon exercise of stock options	61,419		1		325		—		—		326
Forfeiture of common stock related to restricted shares	(6,241)		—		—		—		—		—
Other comprehensive loss, net of tax	—		—		—		—		141		141
Net income	—		—		—		3,964		—		3,964
Balance, March 31, 2021	36,478,683	$	365	$	340,739	$	(57,550)	$	(692)	$	282,862

	Thirteen Weeks Ended March 25, 2020
								Accumulated
				Additional				Other		Total
	Common Stock			Paid-in		Accumulated		Comprehensive		Stockholders’
	Shares	Amount		Capital		Deficit		Income (Loss)		Equity
Balance, December 25, 2019	35,126,582	$	351	$	330,950	$	(85,988)	$	253	$	245,566
Stock-based compensation	—		—		534		—		—		534
Forfeiture of common stock related to restricted shares	(36,599)		—		—		—		—		—
Other comprehensive income, net of tax	—		—		—		—		(1,095)		(1,095)
Net income	—		—		—		3,600		—		3,600
Balance, March 25, 2020	35,089,983	$	351	$	331,484	$	(82,388)	$	(842)	$	248,605

See notes to condensed consolidated financial statements (unaudited)

Thirteen Weeks Ended March 25, 2020
Common Stock
Additional
Paid-in Capital
Accumulated Deficit Accumulated Other Comprehensive Income (Loss)
Total
Stockholders’ Equity
Shares Amount
Balance, December 25, 2019 35,126,582
$ 351
$ 330,950
$ (85,988 ) $ 253
$ 245,566
Stock-based compensation —
—
534
—
—
534
Forfeiture of common stock related to restricted shares (36,599 ) —
—
—
—
—
Other comprehensive loss, net of tax —
—
—
—
(1,095 ) (1,095 )
Net income —
—
—
3,600
—
3,600
Balance, March 25, 2020 35,089,983
$ 351
$ 331,484
$ (82,388 ) $ (842 ) $ 248,605

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Thirteen Weeks Ended March 27, 2019
Common Stock
Additional
Paid-in Capital
Accumulated Deficit Accumulated Other Comprehensive Income
Total
Stockholders’ Equity
Shares Amount
Balance, December 26, 2018 39,009,451
$ 390
$ 375,734
$ (110,888 ) $ —
265,236
Stock-based compensation —
—
488
—
—
488
Issuance of common stock related to restricted shares (22,118 ) —
—
—
—
—
Shares repurchased for employee tax withholdings (1,575 ) —
(16 ) —
—
(16 )
Repurchase of common stock (255,554 ) (2 ) (3,381 ) —
—
(3,383 )
Net income —
—
—
913
—
913
Balance, March 27, 2019 38,730,204
$ 388
$ 372,825
$ (109,975 ) $ —
$ 263,238

EL POLLO LOCO HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Amounts in thousands)

Thirteen Weeks Ended
March 25, 2020 March 27, 2019
Cash flows from operating activities:

Net income $ 3,600
$ 913
Adjustments to reconcile net income to net cash flows (used in) provided by operating
activities:

Depreciation and amortization 4,369
4,761
Stock-based compensation expense 534
488
Income tax receivable agreement (income) expense (120 ) 171
Loss on held for sale assets —
4,124
Loss on disposal of assets 100
44
Impairment of property and equipment 1,920
—
Amortization of deferred financing costs 63
63
Amortization of favorable and unfavorable leases, net —
(10 )
Deferred income taxes, net 916
273
Changes in operating assets and liabilities:

Accounts and other receivables, net (3,569 ) (1,150 )
Inventories (83 ) 260
Prepaid expenses and other current assets 1,111
(843 )
Other assets 201
—
Accounts payable 490
(783 )
Accrued salaries and vacation (999 ) 1,347
Accrued insurance 442
764
Income taxes payable 38
76
Other accrued expenses and liabilities (16,539 ) (521 )
Net cash flows (used in) provided by operating activities (7,526 ) 9,977
Cash flows from investing activities:

Purchase of property and equipment (1,632 ) (4,183 )
Net cash flows used in investing activities (1,632 ) (4,183 )
Cash flows from financing activities:

Payments on revolver and swingline loan (8,000 ) (3,000 )
Borrowings on revolver and swingline loan 52,500
—
Payment of obligations under finance leases (8 ) (35 )
Stock buybacks —
(3,029 )
Net cash flows provided by (used in) financing activities 44,492
(6,064 )
Increase (decrease) in cash and cash equivalents 35,334
(270 )
Cash and cash equivalents, beginning of period
8,070
6,969
Cash and cash equivalents, end of period
$ 43,404
$ 6,699

Thirteen Weeks Ended
Supplemental cash flow information March 25, 2020 March 27, 2019
Cash paid during the period for interest $ 1,112
$ 838
Unpaid purchases of property and equipment $ 1,085
$ 948
Unpaid stock buybacks $ —
$ 354



	Thirteen Weeks Ended
	March 31, 2021		March 25, 2020
Cash flows from operating activities:
Net income	$	3,964	$	3,600
Adjustments to reconcile net income to net cash flows provided by operating activities:
Depreciation and amortization		3,938		4,369
Stock-based compensation expense		853		534
Income tax receivable agreement income		(77)		(120)
Loss on disposal of assets		26		100
Impairment of property and equipment		303		1,920
Amortization of deferred financing costs		62		63
Deferred income taxes, net		(310)		916
Changes in operating assets and liabilities:
Accounts and other receivables		(1,055)		(3,569)
Inventories		172		(83)
Prepaid expenses and other current assets		(572)		1,111
Income taxes receivable/payable		1,907		38
Other assets		(101)		201
Accounts payable		2,811		490
Accrued salaries and vacation		(3,444)		(999)
Accrued insurance		234		442
Other accrued expenses and liabilities		(1,313)		(16,539)
Net cash flows provided by (used in) operating activities		7,398		(7,526)
Cash flows from investing activities:
Purchase of property and equipment		(5,257)		(1,632)
Net cash flows used in investing activities		(5,257)		(1,632)
Cash flows from financing activities:
Proceeds from borrowings on revolver and swingline loans		—		52,500
Payments on revolver and swingline loan		(9,000)		(8,000)
Proceeds from issuance of common stock upon exercise of stock options, net of expenses		326		—
Payment of obligations under finance leases		(17)		(8)
Net cash flows (used in) provided by financing activities		(8,691)		44,492
Increase (decrease) in cash and cash equivalents		(6,550)		35,334
Cash and cash equivalents, beginning of period		13,219		8,070
Cash and cash equivalents, end of period	$	6,669	$	43,404



	Thirteen Weeks Ended
	March 31, 2021		March 25, 2020
Supplemental cash flow information
Cash paid during the period for interest	$	334	$	1,112
Unpaid purchases of property and equipment	$	1,172	$	1,085

See notes to ~~the~~ condensed consolidated financial statements (unaudited).

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exceeds its fair value, the Company will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized cannot exceed the total amount of goodwill allocated to that reporting unit.

The Company performs an annual impairment test 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 recognized as an 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.

Due to the recent impact of the COVID-19 pandemic to the global economy, including but not limited to, the volatility of the Company's stock price as well as that of its competitors, declining sales at the Company's restaurants and the challenging environment for the restaurant industry generally, the

The Company determined that there were no indicators of potential impairment of its goodwill and indefinite-lived intangible assets during the thirteen weeks ended March 25, 2020. As such, the Company performed an impairment assessment for both goodwill and indefinite lived intangible assets and concluded that the fair value of these assets substantially exceeded their carrying values.31, 2021. Accordingly, the Company did not record any impairment to its goodwill or indefinite-lived intangible assets during the thirteen weeks ended March ~~25, 2020.~~31, 2021. The ultimate severity and longevity of the COVID-19 pandemic is unknown, and therefore, it is possible that impairments could be identified in future periods, and such amounts could be material.

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

During fiscal 2019, the Company entered into an interest rate swap, 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~~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~~Company’s credit risk. The key inputs for the valuation models are observable market prices, discount rates, and forward yield curves. See ~~"Note 4. Long-Term Debt"~~Note 4, “Long-Term Debt” for further discussion regarding our interest rate swaps.

The following table presents fair value for the interest rate swap at March ~~25, 2020~~31, 2021 (in thousands):

Fair Value Measurements Using
Fair Value Level 1 Level 2 Level 3
Other non-current liabilities - Interest rate swap $ 1,142
$ —
$ 1,142
$ —


			Fair Value Measurements Using
	Fair Value		Level 1		Level 2		Level 3
Other non-current liabilities - Interest rate swap	$	946	$	0	$	946	$	0

The following table presents fair value for the interest rate swap at December ~~25, 2019~~30, 2020 (in thousands):

Fair Value Measurements Using
Fair Value Level 1 Level 2 Level 3
Other assets - Interest rate swap $ 360
$ —
$ 360
$ —


			Fair Value Measurements Using
		Fair Value	Level 1		Level 2		Level 3
Other non-current liabilities - Interest rate swap	$	1,139	$	—	$	1,139	$	—

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

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The following non-financial instruments were measured at fair value, on a nonrecurring basis, as of and for the thirteen weeks ended March 31, 2021 reflecting certain property and equipment assets and right-of-use (“ROU”) assets, for which an impairment loss was recognized during the corresponding periods, as discussed immediately below under “Impairment of Long-Lived Assets and ROU Assets” (in thousands):


	Total		Level 1		Level 2		Level 3		Impairment Losses
Certain property and equipment, net	$	—	$	0	$	0	$	—	$	240
Certain ROU assets, net	$	1,147	$	0	$	0	$	1,147	$	63

The following non-financial instruments were measured at fair value on a nonrecurring basis as of and for the thirteen weeks ended March 25, 2020 reflecting certain property and equipment assets for which an impairment loss was recognized during the corresponding periods, as discussed immediately below under “Impairment of Long-Lived Assets and ROU Assets” (in thousands):

Fair Value Measurements at March 25, 2020 Using Thirteen Weeks Ended March 25, 2020
Total Level 1 Level 2 Level 3 Impairment Losses
Certain property and equipment owned, net $ 39
$ —
$ —
$ 39
$ 1,377
Certain ROU assets, net $ 926
$ —
$ —
$ 926
$ 543

~~The following non-financial instruments were measured at fair value on a nonrecurring basis as of and for the thirteen weeks ended March 27, 2019 (in thousands):~~

Fair Value Measurements at March 27, 2019 Using Thirteen Weeks Ended March 27, 2019
Total Level 1 Level 2 Level 3 Impairment Losses
Certain property and equipment - Held for sale $ 4,494
$ —
$ —
$ 4,494
$ 4,124


	Total		Level 1		Level 2		Level 3		Impairment Losses
Certain property and equipment, net	$	39	$	—	$	—	$	39	$	1,377
Certain ROU assets, net	$	926						926		543

Impairment of Long-Lived Assets and ROU Assets

The Company reviews its long-lived and ~~right-of-use~~ROU 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 flows 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 subleased and future estimated sublease income is less than ~~current~~ lease ~~payments.~~payments under the head lease. If the Company concludes that the carrying value of certain long-lived and ROU assets will not be recovered based on expected undiscounted future cash flows, an impairment loss is recorded to reduce the long-lived or ROU assets to their estimated fair value. The fair value is measured on a nonrecurring basis using unobservable (Level 3) inputs. There is uncertainty in the projected undiscounted future cash flows used in the ~~Company's~~Company’s impairment review analysis, which requires the use of

estimates and assumptions. If actual performance does not achieve the projections, or if the assumptions used change in the future, the Company may be required to recognize impairment charges in future periods, and such charges could be material. The Company determined that triggering events occurred for certain restaurants during the thirteen weeks ended March 31, 2021 that required an impairment review of certain of the Company’s long-lived and ROU assets. Based on the results of the analysis, the Company recorded non-cash impairment charges of $0.3 million for the thirteen weeks ended March 31, 2021, primarily related to the carrying value of the ROU assets of 1 restaurant in Texas closed in 2019 and the long-lived assets of 3 restaurants in California.

The Company recorded a non-cash impairment charge of $1.9 million for the thirteen weeks ended March 25, 2020, primarily related to the carrying value of the ROU assets of ~~one~~1 restaurant in ~~Texas~~California and the long-lived assets of ~~three~~3 restaurants in California.

~~The Company did not recognize any impairment charges for the thirteen weeks ended March 27, 2019, other than the loss on assets held for sale, discussed above.~~ Given the inherent uncertainty in projecting results for newer restaurants in newer markets, as well as the impact of the COVID-19 pandemic, the Company is monitoring the recoverability of the carrying value of the assets of several restaurants on an ongoing basis. For these restaurants, if expected performance is not realized, an impairment charge may be recognized in future periods, and such charge could be material.

Closed-Store Reserves

When a restaurant is closed, the Company will evaluate the ROU asset for impairment, based on anticipated sublease recoveries. The remaining value of the ROU asset is amortized on a straight-line basis, with the expense recognized in closed-store reserve expense. Additionally, any property tax and common area maintenance ~~("CAM"~~(“CAM”) payments relating to closed restaurants are included within closed-store expense. During the thirteen weeks ended March ~~25, 2020,~~31, 2021, the Company recognized ~~$0.5~~$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 the thirteen weeks ended March ~~27, 2019,~~25, 2020, the Company ~~closed one restaurant in California and one restaurant in Texas and~~

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recognized ~~$0.3~~$0.5 million of closed-store reserve expense, primarily related to the amortization of ROU assets, property taxes and CAM payments for ~~the two~~its closed ~~stores.~~

locations.

Derivative Financial Instruments

The Company uses an interest rate swap, a derivative instrument, to hedge interest rate risk and ~~are~~ not ~~used~~ for trading purposes. The derivative contract is entered into with a financial ~~institutions.~~

institution.

The Company records the derivative instrument on its condensed consolidated balance ~~sheet~~sheets at fair value. The derivative instrument qualifies as a hedging instrument in a qualifying cash flow hedge relationship, and the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive (loss) income ~~("AOCI"~~(“AOCI”) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. For any derivative instruments not designated as hedging instruments, the gain or loss will be recognized in earnings immediately. If a derivative previously designated as a hedge is terminated, or no longer meets the qualifications for hedge accounting, any balances in AOCI will be reclassified to earnings immediately.

As a result of the use of an interest rate swap, the Company is exposed to risk that the counterparty will fail to meet their contractual obligations. To mitigate the counterparty credit risk, the Company will only enter into contracts with major financial institutions, based upon their credit ratings and other factors, and will continue to assess the creditworthiness of the counterparty. As of March ~~25, 2020,~~31, 2021, the counterparty to the ~~Company's~~Company’s interest rate swap has performed in accordance with ~~their~~its contractual obligation.

Income Taxes

The provision for income taxes, income taxes payable and deferred income taxes is determined using the asset and liability method. Deferred tax assets and liabilities are determined based on temporary differences between the financial carrying amounts and the tax bases of assets and liabilities using enacted tax rates in effect in the years in which the temporary differences are expected to reverse. On a periodic basis, the Company assesses the probability that its net deferred tax assets, if any, will be recovered. If, after evaluating all of the positive and negative evidence, a conclusion is made that it is more likely than not that some portion or all of the net deferred tax assets will not be recovered, a valuation allowance is provided by charging to tax expense toa reserve for the portion of deferred tax assets which are not expected to be realized.

The Company reviews its filing positions for all open tax years in all U.S. federal and state jurisdictions where the Company 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 percent. 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 at the largest amount of tax benefit that is greater than 50 percent likely of being realized upon its effective resolution. Unrecognized tax benefits involve management’s

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

The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. The Company had no0 accrual for interest or penalties at March ~~25, 2020~~31, 2021 or at December ~~25, 2019, and~~30, 2020. During fiscal 2020 the Company recognized interest of $0.1 million related to the Notice of Proposed Adjustment (“NOPA”), discussed below. The Company did not recognize interest or penalties during the thirteen weeks ended March 25, 2020, ~~or March 27, 2019,~~ since there were no material unrecognized tax benefits. Management believes no ~~material~~significant changes to the amount of unrecognized tax benefits will occur within the next twelve months.

On July 30, 2014, the Company entered into the income tax receivable agreement (the “TRA”), which calls for the Company to pay to its pre-initial public offering (“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. For the thirteen weeks ended March 31, 2021, the Company recorded income tax receivable

~~For~~

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agreement income of less than $0.1 million, and for the thirteen weeks ended March 25, 2020, the Company recorded income tax receivable agreement income of $0.1 million, related to the amortization of interest expense related to the total expected TRA payments and changes in estimates for actual tax returns filed and future forecasted taxable income.

On March 27, 2020, President Trump signed into a law a stimulus package, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), which contains several tax provisions and deferral of employer Social Security taxes that are otherwise owed for wage payments. The tax provisions include 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 condensed consolidated financial statements.

During the thirteen weeks ended March 25, 2020, the Company received a ~~Notice of Proposed Adjustment ("NOPA"),~~NOPA for the years ended December 27, 2017 and December 28, 2016, related to the ~~Company's~~Company’s methodology regarding its ordering of utilization of AMT ~~net operating losses ("NOL).~~NOL. This resulted in payment of $0.4 million, and the audit is closed. As a result of the CARES Act, discussed above, this amount is immediately refundable upon filing of a Form ~~1139. See "Subsequent Event"disclosure above for further discussion of the tax impact of the CARES Act.~~

~~On July 30, 2014,~~1139, which the Company ~~entered into the income tax~~filed during fiscal 2020 and recognized a receivable, ~~agreement (the "TRA"), which calls for the Company to pay to its pre-IPO stockholders 85% of the savings~~included in ~~cash that the Company realizes in its income taxes as a result of utilizing its net operating losses~~Accounts and other ~~tax attributes attributable to preceding periods. For~~receivables within the thirteen weeks ended March 25, 2020, the Company recorded income tax receivable agreement income of $0.1 million, and for the thirteen weeks ended March 27, 2019, the Company recorded income tax receivable agreement expense of $0.2 million, related to the amortization of interest expense related to our total expected TRA payments and changes in estimates for actual tax returns filed and future forecasted taxable income.

~~Changes in Accounting Policies~~

~~Except for the changes below, the Company has consistently applied the accounting policies to all periods presented in these~~ condensed ~~consolidated financial statements.~~

~~The Company adopted Topic 842 with a date of initial application of December 27, 2018. As a result, the Company has changed its accounting policy for leases as detailed below.~~

The Company’s operations utilize property, facilities, equipment and vehicles owned by the Company or leased from others, the majority of which are operating leases. Additionally, the Company has various contracts with vendors that have been determined to contain an embedded lease in accordance with Topic 842. As of the date of adoption, the Company recognized a ROU asset and lease liability equal to the present value of these leases within its consolidated balance sheet ~~for any leases with terms longer than 12 months. The Company also has three finance leases, subleases facilities~~as of March 31, 2021. Subsequent to certain franchises and is the lessor for certain property, facilities and equipment owned by the Company. The adoption of Topic 842 did not have an impact on the Company's current accounting policies for these items. Furthermore, the adoption of this standard did not have any impact on the Company’s consolidated statement of operations or the consolidated statement of cash flows.

~~The Company applied Topic 842 using the effective date method, which allowed~~March 31, 2021, the Company to apply the standard as of the adoption date, and to recognize the cumulative effect of initially applying Topic 842 as an adjustment to retained earnings at December 27, 2018, if applicable. Therefore, the comparative information has not been adjusted and continues to be reported under Topic 840. However, the Company did not have any impact to its retained earnings.

~~Additionally, the Company elected to apply the package of practical expedients, which allowed for carryforwards of 1) historical lease classifications, 2) determination of whether~~received a ~~contract contains a lease under the new definition of a lease and 3) whether previously capitalized initial direct costs qualify for capitalization. See Note 11, "Leases," for further details.~~

refund totaling $0.5 million.

2. PROPERTY AND EQUIPMENT

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

March 25, 2020 December 25, 2019
Land $ 12,323
$ 12,323
Buildings and improvements 145,406
144,794
Other property and equipment 75,344
75,234
Construction in progress 3,448
4,213
236,521
236,564
Less: accumulated depreciation and amortization (148,619 ) (144,786 )
$ 87,902
$ 91,778


	March 31, 2021		December 30, 2020
Land	$	12,323	$	12,323
Buildings and improvements		149,923		147,939
Other property and equipment		78,449		77,177
Construction in progress		4,318		3,567
		245,013		241,006
Less: accumulated depreciation and amortization		(164,954)		(161,364)
	$	80,059	$	79,642

Depreciation expense was ~~$4.4~~$3.9 million and ~~$4.8~~$4.4 million for the thirteen weeks ended March 31, 2021 and March 25, 2020, ~~and March 27, 2019,~~ respectively.

Based on the ~~Company's~~Company’s review of its long-lived assets for impairment, the Company recorded non-cash impairment charges of ~~$1.4~~$0.2 million for the thirteen weeks ended March ~~25, 2020,~~31, 2021, primarily related to the carrying value of the assets of ~~three~~3 restaurants in California. During the thirteen weeks ended March 25, 2020, the Company recorded non-cash impairment charges of $1.4 million, primarily related to the carrying value of the assets of 3 restaurants in California. Depending on the severity and longevity of the COVID-19 pandemic, the ~~Company's~~Company’s financial performance could be further impacted and it is possible that material impairments could be identified in future periods.

See Note 1, “Basis of Presentation and Summary of Significant Accounting Policies – Impairment of Long-Lived Assets ~~are classified as held~~and ROU Assets” for ~~sale if they meet the criteria outlined in ASC 360,~~ ~~Property, Plant and Equipment~~. In accordance with applicable accounting guidance, the net assets were recorded at the lower of carrying value or fair value less costs to sell. The Company classified $4.5 million of assets as held for sale as of March 27, 2019, and recognized a loss on held for sale assets of $4.1 million for the thirteen weeks ended March 27, 2019.

additional information.

3. STOCK-BASED COMPENSATION

At March ~~25, 2020,~~31, 2021, options to purchase ~~2,034,834~~969,447 shares of common stock were outstanding, including ~~1,518,145~~623,588 that are vested and ~~516,689~~345,859 that are unvested. Unvested options vest over time; however, upon a change in control, the ~~board~~Board of Directors may accelerate vesting. At March ~~25, 2020, 1,159,366~~31, 2021, 260,967 premium options, which are options granted above the stock price at date of grant, remained outstanding. A summary of stock option activity as of March ~~25, 2020~~31, 2021 and changes during the thirteen weeks ended March ~~25, 2020~~31, 2021 is 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
Exercised	(61,419)		5.31

Shares
Weighted-Average
Exercise Price
Outstanding - December 25, 2019 2,077,570
$ 8.14
Forfeited, cancelled or expired (42,736 ) $ 11.47
Outstanding - March 25, 2020 2,034,834
$ 8.07
Vested and expected to vest at March 25, 2020 2,026,518
$ 8.05
Exercisable at March 25, 2020 1,518,145
$ 6.93

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Outstanding - March 31, 2021	969,447	$	10.10	5.51	$	5,884
Vested and expected to vest at March 31, 2021	966,137	$	10.10	5.50	$	5,868
Exercisable at March 31, 2021	623,588	$	9.39	4.29	$	4,212

At March ~~25, 2020,~~31, 2021, the Company had total unrecognized compensation expense of ~~$1.5~~$0.9 million related to unvested stock options, which it expects to recognize over a weighted-average period of ~~2.68~~1.77 years.

A summary of restricted share activity as of March ~~25, 2020~~31, 2021 and changes during the thirteen weeks ended March ~~25, 2020~~31, 2021 is as follows:

Shares
Weighted-Average
Fair Value
Unvested shares at December 25, 2019 588,008
$ 11.23
Forfeited, cancelled, or expired (49,010 ) $ 12.42
Unvested shares at March 25, 2020 538,998
$ 11.12


		Weighted-Average
	Shares	Fair Value
Unvested shares at December 30, 2020	742,404	$	11.68
Forfeited, cancelled, or expired	(6,241)	$	12.02
Unvested shares at March 31, 2021	736,163	$	11.68

Unvested shares at March ~~25, 2020,~~31, 2021, included ~~430,823~~652,027 unvested restricted shares, 36,058 unvested performance stock units and ~~72,117~~48,078 unvested restricted units.

At March ~~25, 2020,~~31, 2021, the Company had unrecognized compensation expense of ~~$3.7~~$5.6 million related to unvested restricted shares, which it expects to recognize over a weighted-average period of ~~2.57~~2.58 years, unrecognized compensation expense of $0.1 million related to performance stock units, which it expects to recognize over a weighted-average period of ~~3.12~~2.11 years and unrecognized compensation expense of ~~$0.5~~$0.3 million related to unvested restricted units, which it expects to recognize over a weighted-average period of ~~2.12~~1.11 years.

Total stock-based compensation expense was $0.9 million for the thirteen weeks ended March 31, 2021, and $0.5 million for ~~both~~ the thirteen weeks ended March 25, ~~2020 and March 27, 2019.~~

2020.

4. LONG-TERM DEBT

On July 13, 2018, the Company refinanced a credit agreement with Bank of America, N.A., initially entered into on December 11, 2014 (the “2014 Revolver”), pursuant to a credit agreement (the “2018 Credit Agreement”) among EPL, as borrower, and the Company and Intermediate, as guarantors, Bank of America, N.A., as administrative agent, swingline lender, and letter of credit issuer, the lenders party thereto, and the other parties thereto, which provides for a $150.0 million five-year senior secured revolving credit facility (the “2018 Revolver”). The 2018 Revolver includes a sub limit of $15.0 million for letters of credit and a sub limit of $15.0 million for swingline loans. The 2018 Revolver and 2018 Credit Agreement will mature on July 13, 2023. The obligations under the 2018 Credit Agreement and related loan documents are guaranteed by the Company and Intermediate. The obligations of the Company, EPL and Intermediate under the 2018 Credit Agreement and related loan documents are secured by a first priority lien on substantially all of their respective assets.

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

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rate plus 0.50%, (b) the published Bank of America prime rate, or (c) LIBOR plus 1.00%. For LIBOR loans, the margin is in the range of 1.25% to 2.25%, and for base rate loans the margin is in a range of 0.25% to 1.25%. Borrowings under the 2018 Revolver may be repaid and reborrowed. The interest rate range was 1.36% to 1.65% for the thirteen weeks ended March 31, 2021 respectively, and 3.11% to 3.29% for the thirteen weeks ended March 25, ~~2020 and 3.96% to 4.01% for the thirteen weeks ended March 27, 2019.~~

2020.

The 2018 Credit Agreement contains certain financial covenants. The Company was in compliance with the financial covenants as of March ~~25, 2020.~~31, 2021. However, depending on the severity and longevity of the COVID-19 pandemic, the ~~Company's~~Company’s financial performance and liquidity could be further impacted and could impact the ~~Company's~~Company’s ability to comply with certain financial covenants required in the 2018 Credit Agreement, specifically the lease-adjusted coverage ratio and fixed-charge coverage ratio.

At March ~~25, 2020,~~31, 2021, $8.4 million of letters of credit and ~~$141.5~~$53.8 million in borrowings under the 2018 Revolver were outstanding. The Company had ~~$0.1~~$87.8 million ~~amounts available~~in borrowing availability under the 2018 Revolver at March ~~25, 2020.~~

31, 2021.

Maturities

During the thirteen weeks ended March 31, 2021, the Company elected to pay down $9.0 million on its 2018 Revolver. During the thirteen weeks ended March 25, 2020, the Company borrowed $44.5 million, net of pay downs of $8.0 million on the Company’s 2018 Revolver, primarily as a precautionary measure to bolster its existing cash position, related to the uncertainty regarding the ~~current~~ COVID-19 pandemic, as well as to fund ~~litigation~~ settlement payments. See Note 1 under "Subsequent Events" for further details regarding the Company's actions related to the COVID-19 pandemic and Note 7 for further details regarding the litigation settlement payments. During the thirteen weeks ended March 27, 2019, the Company elected to pay down $3.0 million of outstanding borrowings on the Company’s 2018 Revolver. There are no0 required principal payments prior to maturity for the 2018 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~~Company’s exposure to interest rate risk for a portion of its variable-rate interest payments on its borrowings under the 2018 Revolver. Under the terms of the swap agreement, the variable LIBOR-based component of interest payments ~~were~~was converted to a fixed rate of 1.31%, plus applicable margin, which ~~is currently~~was 1.5%. for the thirteen weeks ended March 31, 2021. The interest rate swap was designated as a cash flow hedge, as the changes in the future cash flows of the swap were expected to offset changes in expected future interest payments on the related variable-rate debt, in accordance with ~~ASC~~Accounting Standards Codification (“ASC”) 815 ~~Derivatives~~“Derivatives and ~~Hedging~~.

Hedging.”

The changes in the fair value of the interest rate swap are not included in earnings, but are included in other comprehensive (loss) income (“OCI”). These changes in fair value are subsequently reclassified into net earnings as a component of interest expense as the hedged interest payments are made on the variable rate borrowings.

For the thirteen weeks ended March ~~25, 2020,~~31, 2021, the swap was a highly effective cash flow hedge.

As of March ~~25, 2020,~~31, 2021, the estimated net loss included in AOCI related to the ~~Company's~~Company’s cash flow hedge that will be reclassified into earnings in the next 12 months is ~~$0.1~~$0.5 million, based on current LIBOR interest rates.

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


	March 31, 2021				December 30, 2020
	Notional		Fair value		Notional		Fair value
Other liabilities - Interest rate swap	$	40,000	$	946	$	40,000	$	1,139

March 25, 2020 December 25, 2019
Notional Fair value Notional Fair value
Other assets - Interest rate swap —
—
$ 40,000
$ 360
Other liabilities - Interest rate swap $ 40,000
$ 1,142
—
—

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

Thirteen Weeks Ended
March 25, 2020 March 27, 2019
Interest expense on hedged portion of debt $ 429
—
Interest income on interest rate swap (39 ) —
Interest expense on debt and derivatives, net $ 390
$ —


	Thirteen Weeks Ended
	March 31, 2021		March 25, 2020
Interest expense on hedged portion of debt	$	200	$	429
Interest expense (income) on interest rate swap		78		(39)
Interest expense on debt and derivatives, net	$	278	$	390

The following table summarizes the effect of the ~~Company's~~Company’s cash flow hedge accounting on AOCI for the thirteen weeks ended March 31, 2021 and March 25, 2020 ~~and March 27, 2019~~ (in thousands):

Thirteen Weeks Ended
Net Loss Recognized in OCI (Gain) Reclassified from AOCI into Interest expense
March 25, 2020 March 27, 2019 March 25, 2020 March 27, 2019
Interest rate swap $ 1,459
—
$ (39 ) —


	Thirteen Weeks Ended
				Loss (Gain) Reclassified from
	Net (Loss) Gain Recognized in OCI			AOCI into Interest expense
	March 31, 2021		March 25, 2020	March 31, 2021		March 25, 2020
Interest rate swap	$	78	1,459	$	115	(39)

See Note 1, “Basis of Presentation and Summary of Significant Accounting Policies” for information about the fair value of ~~our~~the Company’s derivative asset.

5. OTHER ACCRUED EXPENSES AND CURRENT LIABILITIES

Other accrued expenses and current liabilities consist of the following (in thousands):

March 25, 2020 December 25, 2019
Accrued sales and property taxes $ 4,648
$ 4,665
Gift card liability 2,676
3,006
Accrued legal settlements and professional fees 1,037
16,901
Deferred franchise and development fees 670
705
Other 3,185
3,320
Total other accrued expenses and current liabilities $ 12,216
$ 28,597


	March 31, 2021		December 30, 2020
Accrued sales and property taxes	$	5,259	$	5,216
Gift card liability		3,386		4,008
Accrued legal settlements and professional fees		919		321
Deferred franchise and development fees		547		503
Current portion of lease payment deferrals		1,150		1,793
Current portion of employer social security tax deferral		2,426		—
Other		3,900		4,874
Total other accrued expenses and current liabilities	$	17,587	$	16,715

6. OTHER NONCURRENT LIABILITIES

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

March 25, 2020 December 25, 2019
Deferred franchise and development fees $ 5,329
$ 5,612
Derivative liability 1,151
—
Other 67
67
Total other noncurrent liabilities $ 6,547
$ 5,679


	March 31, 2021		December 30, 2020
Deferred franchise and development fees	$	5,095	$	5,125
Derivative liability		946		1,139
Employer social security tax deferral		2,426		4,853
Other		166		175
Total other noncurrent liabilities	$	8,633	$	11,292

7. 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

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NaN specific amount of damages sought was specified in the complaint. The court recently certified ~~two~~2 classes of plaintiffs - one class encompasses restaurant employees who were not provided proper rest breaks because they were not allowed to leave the premises during their breaks and the other class encompasses restaurant employees who were required to wait at the restaurant after they finished working for the night until the manager set the alarm for safety purposes. The parties reached a settlement in principle on January 24, 2019 of all claims brought on behalf of the 32,000+ putative class members in ~~the~~ Olvera, as well as all claims for failure to pay overtime compensation, failure to provide meal periods and rest breaks, and failure to provide itemized wage statements brought in the class actions captioned Martha Perez v. El Pollo Loco, Inc. (Los Angeles Superior Court Case No. BC624001), Maria Vega, et al. v. El Pollo Loco, Inc. (Los Angeles Superior Court Case No. BC649719), and Gonzalez v. El Pollo Loco, Inc. (Los Angeles Superior Court Case No. BC712867). The settlement reached in principle in the Olvera, Perez, Vega, and Gonzalez actions resolves all potential claims from April 12, 2010 through April 1, 2019 that El Pollo Loco restaurant employees may have against El Pollo Loco for failure to pay for all compensation owed, failure to pay overtime compensation, failure to provide meal periods and rest breaks and failure to provide itemized wage statements, among other wage and hour related claims. A $16.3 million accrual of an expected settlement amount related to this matter was recorded as of December 26, 2018, and the court formally approved the settlement on January 31, 2020. The settlement payment was made on February 28, 2020. Purported class actions alleging wage and hour violations are commonly filed against California employers. The Company fully expects to have to defend against similar lawsuits in the future.

~~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 Trimaran Pollo Partners, 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 on July 3, 2018, the Court granted Plaintiffs’ motion and certified a class as to all of Plaintiffs’ claims. Defendants filed a petition for appellate review of a portion of the Court’s July 3, 2018 class certification order. On October 19, 2018 the Ninth Circuit Court of Appeals denied the petition.

On January 23, 2019, the parties filed a Notice of Settlement and Joint Request for Order to Stay Proceedings, stating the parties have reached an agreement in principle to settle the claims and allegations in the action and are negotiating the terms of a Stipulation of Settlement. On January 24, 2019, the Court ordered that all proceedings in the action be stayed until April 3, 2019, on or before which the parties were to file and did so file a Stipulation of Settlement and a motion for preliminary approval of the settlement. The court granted preliminary approval of the settlement on May 13, 2019. Defendants maintain that the Plaintiffs' claims are without merit, and entered into the settlement with Plaintiffs to eliminate the uncertainties, burden and expense of further protracted litigation. A $20.0 million accrual of an expected settlement amount related to this matter was recorded as of December 26, 2018 and all settlement payments were made during the year ended December 25, 2019.

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 governance by putting forward for stockholder vote certain resolutions for amendments to Holdings’ Bylaws or Certificate of Incorporation. The ~~parties have stipulated to, which~~Holdings 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. 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 or until the completion of an investigation of the allegations in the action by a special litigation committee of the Holdings board of directors (the ~~"SLC"~~“SLC”). On February 13, 2019, after concluding its investigation, the SLC filed a motion to dismiss the Diepaction. The SLC filed its investigative report under seal as an exhibit to the motion to dismiss. ~~Discovery~~Following discovery related to the ~~SLC's~~SLC’s motion, on September 25, 2020, the SLC filed a motion to dismiss the Diep action. On April 23, 2021, the court held a hearing on the SLC’s motion to dismiss, and the court’s ruling is ~~ongoing.~~

pending. The Company believes that a loss is currently not probable or estimable under ASC 450, "Contingencies", and as of March 31, 2021 0 accrual has been made with regard to this case.

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 the Handlers Bryman Trust (collectively, “Plaintiffs”), filed suit against us alleging, among other things, that we “imposed unreasonable time limitations” on their development of

additional restaurant locations in Lancaster, California, and that we thereafter developed company-operated El Pollo Loco restaurants in the “market area” of Plaintiffs’ existing El Pollo Loco restaurant in Lancaster. Plaintiffs asserted claims against us for, among other things, (i) breach of the implied 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-operated locations to Plaintiffs or to continuously disgorge to Plaintiffs the unjust enrichment allegedly obtained by us through the operation of the company-operated 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

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Pollo Loco restaurants “in the immediate vicinity of or adjacent to” Plaintiffs’ restaurant in Lancaster. 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 commenced 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 finding that the Company breached the implied covenant of good faith and fair dealing by (1) constructing the ~~two~~2 new company-operated El Pollo Loco restaurants in Lancaster, and (2) not offering the ~~two~~2 new company-operated El Pollo Loco restaurants in Lancaster to Plaintiffs. Because the trial was bifurcated, the December 11, 2017 verdict did not include a determination of damages.

The damages phase of the trial commenced on April 20, 2018. On May 1, 2018, the jury returned a verdict on damages in favor of Plaintiffs in the following amounts: (1) $4,356,600 in “impact damages” arising out of our construction of the ~~two~~2 new company-owned El Pollo Loco restaurants in Lancaster, and (2) $4,481,206 in “lost opportunity damages” arising out of our failure to offer the ~~two~~2 new company-operated El Pollo Loco restaurants in Lancaster to Plaintiffs. On August 1, 2018, the court issued a final judgment and decision on the unfair business practices claim under California Business & Professions Code § 17200 et seq. As part of the final judgment, the court found El Pollo Loco liable and issued injunctive relief requiring El Pollo Loco to revise its franchise disclosure document and franchise agreement. The court also awarded Plaintiffs restitution of $4,356,600 for “impact damages” arising out of our construction of the ~~two~~2 new company-operated El Pollo Loco restaurants in Lancaster. The court, reversing its previous position, held that these damages could be awarded in addition to the ~~"lost~~“lost opportunity ~~damages"~~damages” awarded by the jury. Thus, the court entered a total monetary judgment of $8,837,806. There was no ruling on the causes of action for reformation due to mistake and declaratory relief, and on January 27, 2020, the court entered an amended judgment dismissing these claims. The trial court subsequently awarded the Plaintiffs $249,728 in costs and $1,391,703 in attorney fees. Post judgment interest is running at 10% simple interest per year on the total amount of the monetary judgment, costs, and attorney fees.

On August 27, 2018, the Company filed a notice of appeal as to the entire judgment. As required by California law, on or about August 16, 2018, the Company obtained an appeal bond through a Surety company to secure the trial court’s judgment during the pendency of the appeal. The appeal on the merits is currently pending. Briefing on the merits has not yet occurred in the appellate court. The record was delivered by the trial court to the court of appeal on August 20, 2019. Due to the COVID-19 pandemic, the appellate court has extended the deadline for the Company' to file its opening brief until June 1, 2020. Based on the assessment by management of the numerous legal arguments that can be raised on appeal, together with independent assessments from its trial and appellate counsel, the Company believes that a loss is currently not probable or estimable under ASC 450, "Contingencies," and as of March 25, 2020, no accrual has been made with regard to the verdict.

On March 19, 2020, the Surety, One Beacon, from ~~who~~whom the Company procured the appeal bond to secure the judgment against the Company in the matter of Janice P. Handlers-Bryman and Michael D. Bryman v. El Pollo Loco, Inc., issued a collateral demand to the Company. On April 17, 2020, the Company provided to One Beacon a Letter of Credit in the amount of $2,651,342 to satisfy the Surety’s collateral demand. On July 13, 2020, One Beacon agreed to release its collateral demand and returned the Letter of Credit to the Company.

During fiscal 2020, the Company reached an agreement with the Plaintiffs to resolve the lawsuit for a payment by the Company of $2.5 million, which was recorded within operating expenses in the Company’s statement of operations for the fiscal year ended December 30, 2020. Additionally, during fiscal 2020, the matter was formally resolved. On September 2, 2020, the California Court of Appeals entered an order, following a motion for stipulated reversal of the trial court’s judgment jointly filed by the parties, reversing the trial court’s judgment in the case and instructing the trial court to dismiss the matter with prejudice. On September 10, 2020, the trial court entered an order reversing its judgment and dismissing the case with prejudice. The settlement payment of $2.5 million has been made in the third quarter of 2020 and the appeal bond has been released.

On or about November 9, 2020, a former employee filed a representative action for violation of the Private Attorneys General Act of 2004 (“PAGA”) pursuant to Labor Code sections 2698 et seq. in the Superior Court of the State of California, County of Los Angeles, under the caption Kenneth E. Reising, et al v. El Pollo Loco, Inc., et al (Case No. 20STCV42951) on behalf of all non-exempt employees from June 19, 2020 to the present, alleging certain violations of California labor laws. The claims include failure to pay overtime compensation, failure to provide meal periods and rest breaks, failure to reimburse employees for business expenses, failure to provide suitable seating, and failure to provide accurate itemized wage statements. The requested remedies include statutory penalties and reasonable attorneys’ fees

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and costs. NaN specific amount of damages sought was specified in the complaint. The Company filed an Answer to the complaint on or about January 5, 2021. Based on the assessment by management of the numerous legal arguments that can be raised on this claim, the Company believes that a loss is currently not probable or estimable under ASC 450, “Contingencies”, and as of March 31, 2021 0 accrual has been made with regard to the verdict.

On or about February 4, 2021, a former employee filed a class action in the Superior Court of the State of California, County of Riverside, under the caption Brandie Crispin, et al v. El Pollo Loco, Inc. et al (Case No. CVRI2100490) on behalf of all putative class members (all non-exempt General Managers from February 4, 2017 to the present) alleging certain violations of California labor laws. The claims include failure to pay overtime compensation, failure to provide meal periods and rest breaks, and failure to provide accurate itemized wage statements. The putative lead plaintiff’s requested remedies include compensatory damages, statutory penalties, injunctive relief, and reasonable attorneys’ fees and costs. NaN specific amount of damages sought was specified in the complaint. Plaintiff filed a first amended complaint on April 12, 2021, which dismissed the class action claims and added a representative action for violation of the Private Attorneys General Act of 2004 (“PAGA”) pursuant to Labor Code sections 2698. The Company will file a responsive pleading to the first amended complaint on or before May 12, 2021. Based on the assessment by management of the numerous legal arguments that can be raised on this claim, the Company believes that a loss is currently not probable or estimable under ASC 450, “Contingencies”, and as of March 31, 2021 0 accrual has been made with regard to the verdict.

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.

Purchasing 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 March ~~25, 2020,~~31, 2021, the Company’s total estimated commitment to purchase chicken was ~~$19.5~~$25.7 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 four lease agreements. These leases have various terms, the latest of which expires in 2036. As of March ~~25, 2020,~~31, 2021, the potential amount of undiscounted payments the Company could be required to make in the event of non-payment by the primary lessee was $2.9 million. The present value of these potential payments discounted at the Company’s estimated pre-tax cost of debt at March ~~25, 2020~~31, 2021 was ~~$2.5~~$2.7 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. Due to the current uncertainty related to the COVID-19 pandemic and the impact it has had on the ability of the ~~Company's~~Company’s franchisees to make their lease payments, the Company has recorded a $0.1 million liability in the Company’s condensed consolidated financial statements related to these contingent liabilities.

Employment Agreements

Effective March 18, 2020, Hector Munoz, the Company’s Chief Marketing Officer, left the Company to pursue other opportunities. In connection with his departure, the Company and Mr. Munoz entered into a Separation Agreement and General Release. For more information, please see Item 6, Exhibits.

The Company has employment agreements with ~~three~~3 of the officers of the Company. These agreements provide for minimum salary levels, possible annual adjustments for cost-of-living changes, and incentive bonuses that are payable under certain business conditions.

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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.

8. ~~NET INCOME~~EARNINGS PER SHARE

Basic earnings per share (“EPS”) is calculated using the weighted-average number of shares of common stock outstanding during the thirteen weeks ended March ~~25, 2020~~31, 2021 and March ~~27, 2019.~~25, 2020. Diluted EPS is calculated using the weighted-average number of shares of common stock outstanding and potentially dilutive during the period, using the treasury stock method.

On August 2, 2018, the Company announced that the Board of Directors had authorized a stock repurchase program. The Company entered into a stock repurchase plan on August 28, 2018 (the “2018 Stock Repurchase Plan”), which allowed for the repurchase of up to $20.0 million of the Company’s common stock. The 2018 Stock Repurchase Plan commenced on November 6, 2018 and terminated on June 26, 2019.

On April 30, 2019, as part of the Company’s focus on stockholder returns, the Board of Directors approved a new stock repurchase program. The Company entered into a stock repurchase plan May 17, 2019 (the “2019 Stock Repurchase Plan”), which allowed for the repurchase up to $30.0 million of the Company's common stock. The 2019 Stock Repurchase Plan commenced on June 27, 2019, and was exhausted on September 26, 2019.

Under the 2019 Stock Repurchase Plan, the Company was permitted to repurchase its common stock from time to time, in amounts and at prices that the Company deemed appropriate, subject to market conditions and other considerations. The Company’s repurchases were executed using open market purchases, including pursuant to Rule 10b5-1 trading plans, and/or through privately negotiated transactions.

For the thirteen weeks ended March 27, 2019, the Company repurchased 255,554 shares of common stock under the 2018 Stock Repurchase Plan, using open market purchases, for total consideration of approximately $3.4 million. The common stock repurchased under both the 2018 Stock Repurchase Plan and the 2019 Stock Repurchase Plan was retired upon repurchase.

Below are basic and diluted EPS data for the periods indicated ~~which are in~~(in thousands except for share and per share ~~data:~~

Thirteen Weeks Ended
March 25, 2020 March 27, 2019
Numerator:

Net income $ 3,600
$ 913
Denominator:

Weighted-average shares
   outstanding—basic
34,659,160
38,653,702
Weighted-average shares
   outstanding—diluted
35,347,456
39,496,436
Net income per share—basic $ 0.10
$ 0.02
Net income per share—diluted $ 0.10
$ 0.02
Anti-dilutive securities not considered in
   diluted EPS calculation
474,373
56,016

data):



	Thirteen Weeks Ended
	March 31, 2021		March 25, 2020
Numerator:
Net income	$	3,964	$	3,600
Denominator:
Weighted-average shares outstanding—basic		35,795,205		34,659,160
Weighted-average shares outstanding—diluted		36,424,068		35,347,456
Net income per share—basic	$	0.11	$	0.10
Net income per share—diluted	$	0.11	$	0.10
Anti-dilutive securities not considered in diluted EPS calculation		—		474,373

Below is a reconciliation of basic and diluted share counts:

Thirteen Weeks Ended
March 25, 2020 March 27, 2019
Weighted-average shares outstanding—basic 34,659,160
38,653,702
Dilutive effect of stock options and restricted shares 688,296
842,734
Weighted-average shares outstanding—diluted 35,347,456
39,496,436



	Thirteen Weeks Ended
	March 31, 2021	March 25, 2020
Weighted-average shares outstanding—basic	35,795,205	34,659,160
Dilutive effect of stock options and restricted shares	628,863	688,296
Weighted-average shares outstanding—diluted	36,424,068	35,347,456

9. RELATED PARTY TRANSACTIONS

Trimaran Pollo Partners, L.L.C. (“LLC”) owns approximately ~~47.7%~~45.9% 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 amended and restated certificate of incorporation or amended and restated by-laws, and the Company’s winding up and dissolution. The Company’s amended and restated certificate of incorporation provides that (i) so long as LLC beneficially owns, directly or indirectly, more than 40% of the ~~Company's~~Company’s common stock, any member of the ~~board~~Board of ~~directors~~Directors or the entire ~~board~~Board of ~~directors~~Directors may be removed from office at any time with or without cause by the affirmative vote of a majority of the Company’s common stock, and (ii) prior to the date the LLC ceases to beneficially own, directly or indirectly, 40% or more of the Company’s common stock, stockholders representing at least 40% of the ~~Company's~~Company’s common stock may call a special meeting of the ~~Company's~~Company’s stockholders.

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10. REVENUE FROM CONTRACTS WITH CUSTOMERS

Revenue Recognition

Nature of products and services

The Company has ~~two~~2 revenue streams, company-operated restaurant revenue and franchise related revenue.

Company-operated restaurant revenue

Revenues from the operation of company-operated restaurants are recognized as food and beverage products are delivered to customers and payment is tendered at the time of sale. The Company presents sales, net of sales-related taxes and promotional allowances.

The Company offers a loyalty rewards program, which awards a customer ~~one point~~points for ~~every $1~~dollars spent. ~~When 100~~Customers earn points ~~are accumulated~~for each dollar spent and as of August 4, 2020, 50 points can be redeemed for a ~~$10~~$5 reward to be used onfor a future ~~purchases is earned.~~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 all points expire. Additionally, if a ~~$10~~ 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 ~~$10~~ reward and redeemed, the reward or points have expired, or the likelihood of redemption is remote. A portion of the transaction price is allocated to loyalty points, if necessary, on a pro-rata basis, based on stand-alone selling price, as determined by menu pricing and loyalty ~~point's~~points terms. As of March ~~25, 2020~~31, 2021 and December ~~25, 2019,~~30, 2020, the revenue allocated to loyalty points that have not been redeemed ~~are~~ ~~$1.0~~was $0.7 million and ~~$1.1~~$0.9 million, respectively, which ~~are~~is reflected in the Company’s accompanying condensed consolidated balance sheets within other accrued expenses and current liabilities. The Company expects the loyalty points to be redeemed and recognized over a one-year period.

The Company sells gift cards to its customers in the restaurants and through selected third parties. The gift cards sold to customers have no stated expiration dates and are subject to actual and/or potential escheatment rights in several of the jurisdictions in which the Company operates. Furthermore, due to these escheatment rights, the Company does not recognize breakage related to the sale of gift cards due to the immateriality of the amount remaining after escheatment. The Company recognizes income from gift cards when redeemed by the customer. Unredeemed gift card balances are deferred and recorded as other accrued expenses on the accompanying condensed consolidated balance sheets.

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. These revenue streams are 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.

●

Hardware services.

~~Franchise license - inclusive of advertising services, development agreements, training, access to plans and help desk services.~~

~~Discounted renewal option.~~

~~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 will continue to be 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”)

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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 allocates 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, 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 for the hardware is considered revenue, and is received upon transfer of the goods from the Company to the franchisee. As of March ~~25, 2020,~~31, 2021, there were no0 performance obligations related to hardware services that were unsatisfied or partially satisfied.

Disaggregated revenue

The following table presents our revenues disaggregated by revenue source and market (in thousands):


	Thirteen Weeks Ended
		March 31,		March 25,
		2021		2020
Core Market⁽¹⁾:
Company-operated restaurant revenue	$	87,224	$	85,915
Franchise revenue		3,687		3,508
Franchise advertising fee revenue		2,776		2,642
Total core market	$	93,687	$	92,065
Non-Core Market⁽²⁾:
Company-operated restaurant revenue	$	6,937	$	6,719
Franchise revenue		3,925		3,554
Franchise advertising fee revenue		3,172		2,825
Total non-core market	$	14,034	$	13,098
Total revenue	$	107,721	$	105,163

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

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

Thirteen Weeks Ended
March 25, 2020 March 27, 2019
Core Market⁽¹⁾:

Company-operated restaurant revenue $ 85,915
$ 85,306
Franchise revenue 3,508
3,499
Franchise advertising fee revenue 2,642
2,717
Total core market $ 92,065
$ 91,522
Non-Core Market⁽²⁾:

Company-operated restaurant revenue $ 6,719
$ 11,844
Franchise revenue 3,554
2,945
Franchise advertising fee revenue 2,825
2,666
Total non-core market $ 13,098
$ 17,455
Total revenue $ 105,163
$ 108,977

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

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

The following table presents our revenues disaggregated by geographic market:


	March 31, 2021		March 25, 2020
Greater Los Angeles area market	70.1	%	72.4	%
Other markets	29.9	%	27.6	%
Total	100	%	100	%

Thirteen Weeks Ended
March 25, 2020 March 27, 2019
Greater Los Angeles area market 72.4 % 69.2 %
Other markets 27.6 % 30.8 %
Total 100 % 100 %

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Contract balances

The following table provides information about the change in the franchise contract liability balances during the thirteen weeks ended March 31, 2021 and March 25, 2020 ~~and March 27, 2019~~ (in thousands):

December 25, 2019 $ 6,317
Revenue recognized - beginning balance (318 )
March 25, 2020 $ 5,999

December 26, 2018 $ 5,593
Revenue recognized - beginning balance (104 )
Additional contract liability 140
Revenue recognized - additional contract liability (6 )
March 27, 2019 $ 5,623


December 30, 2020	$	5,628
Revenue recognized - beginning balance		(163)
Additional contract liability		177
March 31, 2021	$	5,642

December 25, 2019	$	6,317
Revenue recognized - beginning balance		(318)
March 25, 2020	$	5,999

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 condensed consolidated balance sheets. The Company receives area development fees from franchisees when they execute multi-unit area development agreements. Initial franchise and license fees, or franchise renewal fees, are received from franchisees upon the execution of, or renewal of, a franchise agreement. Revenue is recognized from these agreements as the underlying performance obligation is satisfied, which is over the term of the agreement.

The following table illustrates the estimated revenue to be recognized in future periods related to performance obligations under the applicable contracts that are unsatisfied as of March ~~25, 2020~~31, 2021 (in thousands):


Franchise revenues:
2021	$	355
2022		439
2023		422
2024		406
2025		398
Thereafter		3,622
Total	$	5,642

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


	March 31,		December 30,
	2021		2020
Loyalty rewards liability, beginning balance	$	900	$	1,084
Revenue deferred		625		2,463
Revenue recognized		(865)		(2,647)
Loyalty rewards liability, ending balance	$	660	$	900

The Company expects all loyalty points revenue related to performance obligations unsatisfied as of March 31, 2021 to be recognized within one year.

Franchise revenues:
2020 $ 524
2021 491
2022 410
2023 391
2024 357
Thereafter 3,826
Total $ 5,999

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Gift Cards

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


	March 31,		December 30,
	2021		2020
Gift card liability	$	3,386	$	4,008

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


	March 31,		March 25,
	2021		2020
Revenue recognized from gift card liability balance at the beginning of the year	$	1,819	$	1,245

Contract Costs

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

11. LEASES

~~Adoption of Topic 842 "Leases"~~

On December 27, 2018, the Company adopted Topic 842, using the effective date method, recognizing and measuring all leases that existed as of December 27, 2018. The Company recorded a cumulative-effect adjustment as of December 27, 2018. Comparative periods are presented in accordance with ASC Topic 840 and do not include any retrospective adjustments to comparative periods to reflect the adoption of Topic 842. All leases that either (1) commenced, or (2) were modified or re-measured after December 27, 2018 are accounted for under Topic 842.

As a result of Topic 842, the Company recognized a ROU asset of $205.2 million and a lease liability of $222.3 million on its consolidated balance sheet as of December 27, 2018. However, the adoption of Topic 842 did not result in a material impact on the Company’s consolidated statement of operations or consolidated statement of cash flows.

Nature of leases

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

As of March ~~25, 2020,~~31, 2021, the Company had ~~one~~1 lease that it had entered into, but had not yet commenced. The Company does not have control of the property until lease commencement.

Building and facility leases

The majority of the Company’s building and facilities leases are classified as operating leases; however, the Company currently has ~~one~~2 facility ~~lease~~and 6 equipment leases that isare classified as a finance ~~lease.~~

leases.

Restaurants are operated under lease arrangements that generally provide for a fixed base rent and, in some instances, contingent rent based on a percentage of gross operating profit or net revenues in excess of a defined amount. Additionally, a number of the Company’s leases have payments, which increase at pre-determined dates based on the change in the consumer price index. For all leases, the Company also reimburses the landlord for non-lease components, or items that are not considered components of a contract, such as ~~common area maintenance,~~CAM, property tax and insurance costs. While the Company determined not to separate lease and non-lease components, these payments are based on actual costs, making them variable consideration and excluding them from the calculations of the ROU asset and lease liability.

The initial terms of land and restaurant building leases are generally 20 years, exclusive of options to renew. These leases typically have four 5-year renewal options, which have generally been excluded in the calculation of the ROU asset and lease liability, as they are not considered reasonably certain to be exercised, unless (1) the renewal had already occurred as of the time of adoption of Topic 842, or (2) there have been significant leasehold improvements that have a useful life that extend past the original lease term. Furthermore, there are no residual value guarantees and no restrictions imposed by the lease.

During the thirteen weeks ended March ~~25, 2020,~~31, 2021, the Company reassessed the lease terms on ~~three~~7 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 ~~$0.3~~$4.7 million of ROU asset and lease liabilities for

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the thirteen weeks ended March ~~25, 2020~~31, 2021, were recognized and will be amortized over the new lease term. During the thirteen weeks ended March 25, 2020, the Company reassessed the lease terms on 3 restaurants due to the addition of significant leasehold improvements with useful lives that extend past the current lease expiration, the decision to terminate a lease or the decision to renew leases. This resulted in an additional $0.3 million of ROU asset and lease liability for the thirteen weeks ended March 31, 2020, which will be recognized over the new lease term. The ~~reassessment~~reassessments did not have any impact on the original lease classification. 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 the ~~first quarter of 2020,~~thirteen weeks ended March 31, 2021, the Company determined that the carrying value of ROU assets at ~~certain restaurants~~1 restaurant was not recoverable. As a result, the Company recorded a less than $0.1 million non-cash impairment charge for the thirteen weeks ended March 31, 2021, related to 1 restaurant closed in 2019. The Company recorded a $0.5 million non-cash impairment ~~expense~~charge for the thirteen weeks ended March 25, ~~2020. The impairment~~2020, primarily related to ~~one~~1 restaurant in Texas, sold to franchisees in the prior year.

See Note 1, “Basis of Presentation and Summary of Significant Accounting Policies – Impairment of Long-Lived Assets and ROU Assets” for additional information.

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. The Company utilizes a third-party valuation firm in determining the discount rate, based on the above assumptions. 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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The following table presents the Company’s total lease cost, disaggregated by underlying asset (in thousands):

Thirteen Weeks Ended March 25, 2020
Property Leases Equipment Leases Total
Finance lease cost:
Interest on lease liabilities 6
—
6
Operating lease cost 6,530
324
6,854
Short-term lease cost —
2
2
Variable lease cost 104
14
118
Sublease income (778 ) —
(778 )
Total lease cost $ 5,862
$ 340
$ 6,202


	Thirteen Weeks Ended
	March 31, 2021						March 25, 2020
	Property		Equipment				Property		Equipment
	Leases		Leases		Total		Leases		Leases		Total
Finance lease cost:
Amortization of right-of-use assets	$	20	$	—	$	20	$	—	$	—	$	—
Interest on lease liabilities		15		—		15		6		—		6
Operating lease cost		6,814		301		7,115		6,530		324		6,854
Short-term lease cost		—		5		5		—		2		2
Variable lease cost		122		107		229		104		14		118
Sublease income		(796)		—		(796)		(778)		—		(778)
Total lease cost	$	6,175	$	413	$	6,588	$	5,862	$	340	$	6,202

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

Thirteen Weeks Ended March 25, 2020
Lease cost – Occupancy and other operating expenses $ 5,879
Lease cost – General & administrative 111
Lease cost – Interest expense 6
Lease cost - Closed-store reserve 206
Total lease cost $ 6,202


	March 31, 2021		March 25, 2020
Lease cost – Occupancy and other operating expenses	$	6,231	$	5,879
Lease cost – General & administrative		116		111
Lease cost – Depreciation and amortization		20		—
Lease cost – Interest expense		15		6
Lease cost – Closed-store reserve		206		206
Total lease cost	$	6,588	$	6,202

During the thirteen weeks ended March 31, 2021 and March 25, 2020, the Company had the following cash and non-cash activities associated with its leases ~~(in~~(dollars in thousands):


	March 31, 2021								March 25, 2020
	Property			Equipment					Property			Equipment
	Leases			Leases			Total		Leases			Leases			Total
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows used for operating leases	$	5,377		$	296		$	5,673	$	6,260		$	309		$	6,569
Financing cash flows used for finance leases	$	10		$	7		$	17	$	8		$	—		$	8

Non-cash investing and financing activities:
Operating lease ROU assets obtained in exchange for lease liabilities:
Operating lease ROU assets	$	4,749		$	0		$	4,749	$	307		$	12		$	319
Finance lease ROU assets obtained in exchange for lease liabilities:
Finance lease ROU assets	$	—		$	196		$	196	$	—		$	—		$	—
Derecognition of ROU assets due to terminations, impairment or modifications	$	(63)		$	(39)		$	(102)	$	(543)		$	—		$	(543)

Other Information
Weighted-average remaining years in lease term—finance leases		18.84			4.77					2.58			—
Weighted-average remaining years in lease term—operating leases		11.38			2.09					11.94			2.97
Weighted-average discount rate—finance leases		2.51	%		1.54	%				11.10	%		—
Weighted-average discount rate—operating leases		4.35	%		3.92	%				4.35	%		3.95	%

Thirteen Weeks Ended March 25, 2020
Property Leases Equipment Leases Total

Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows used for operating leases $ 6,260
$ 309
$ 6,569
Financing cash flows used for finance leases $ 8
$ —
$ 8

Non-cash investing and financing activities:
Operating lease ROU assets obtained in exchange for lease liabilities:
Operating lease ROU assets $ 307
$ 12
$ 319
Derecognition of ROU assets due to terminations, impairment or modifications $ (543 ) $ —
$ (543 )

Operating lease ROU assets obtained and liabilities incurred as a result of adoption of ASC 842:
Operating lease ROU assets $ 200,555
$ 4,668
$ 205,223
Operating lease liabilities $ 217,615
$ 4,668
$ 222,283

Other Information
Weighted-average remaining lease term—finance leases 2.58
—

Weighted-average remaining lease term—operating leases 11.94
2.97

Weighted-average discount rate—finance leases 11.10 % —

Weighted-average discount rate—operating leases 4.35 % 3.95 %

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Information regarding the Company’s minimum future lease obligations as of March ~~25, 2020~~31, 2021 is as follows (in thousands):

Finance Operating Leases
For the Years Ending Minimum
Lease
Payments Minimum
Lease
Payments Minimum
Sublease
Income
December 30, 2020 $ 41
$ 20,080
$ 2,103
December 29, 2021 54
26,702
2,887
December 28, 2022 45
25,694
3,284
December 27, 2023 —
23,289
3,318
December 25, 2024 —
21,018
3,203
Thereafter —
141,124
27,265
Total $ 140
$ 257,907
$ 42,060
Less: imputed interest (2.38% - 11.10%) (31 ) (47,900 )
Present value of lease obligations 109
210,007

Less: current maturities (36 ) (17,585 )
Noncurrent portion $ 73
$ 192,422

~~Information regarding the Company’s minimum future lease obligations as of December 25, 2019 is as follows (in thousands):~~

Finance Leases Operating Leases
For the Years Ending Minimum
Lease
Payments Minimum
Lease
Payments Minimum
Sublease
Income
December 30, 2020 $ 54
$ 26,808
$ 2,754
December 29, 2021 54
25,978
2,887
December 28, 2022 45
24,871
3,284
December 27, 2023 —
22,309
3,318
December 25, 2024 —
19,751
3,203
Thereafter —
139,454
27,265
Total $ 153
$ 259,171
$ 42,711
Less: imputed interest (3.96% to 11.10%) (36 ) (45,273 )
Present value of capital lease obligations 117
213,898

Less: current maturities (34 ) (16,406 )
Noncurrent portion $ 83
197,492


	Finance		Operating Leases
	Minimum		Minimum		Minimum
	Lease		Lease		Sublease
For the Years Ending	Payments		Payments		Income
December 29, 2021	$	140	$	21,694	$	2,302
December 28, 2022		190		27,051		3,383
December 27, 2023		145		24,717		3,346
December 25, 2024		145		22,428		3,231
December 31, 2025		141		19,989		2,881
Thereafter		1,690		129,774		24,475
Total	$	2,451	$	245,653	$	39,618
Less: imputed interest (1.54% - 4.35%)		(499)		(47,056)
Present value of lease obligations		1,952		198,597
Less: current maturities		(134)		(19,949)
Noncurrent portion	$	1,818	$	178,648

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~~statements of operations on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments iswas incurred.

In April 2020, the FASB issued guidance allowing entities to make a policy election whether to account for lease concessions related to the COVID-19 pandemic as lease modifications. The election applies to any lessor-provided lease concession related to the impact of the COVID-19 pandemic, provided the concession does not result in a substantial increase in the rights of the lessor or in the obligations of the lessee. During the fiscal 2020, the Company received non-substantial concessions from certain landlords in the form of rent deferrals and abatements. The Company elected to not account for these rent concessions as lease modifications. The rent concessions are recorded as part of other accrued expenses. The recognition of rent concessions did not have a material impact on the Company’s condensed consolidated financial statements as of March 31, 2021.

Lessor

The Company is a lessor for certain property, facilities and equipment owned by the Company and leased to others, principally franchisees, under non-cancelable leases with initial terms ranging from three to 20 years. These lease agreements generally provide for a fixed base rent and, in some instances, contingent rent based on a percentage of gross operating profit or net revenues. All leases are considered operating leases.

For the leases in which the Company is the lessor, there are options to extend the lease. However, there are no terms and conditions to terminate the lease, no right to purchase premises and no residual value guarantees. Additionally, there are no related party leases.

~~For both thirteen weeks ended March 25, 2020 and March 27, 2019, the~~

The Company received $0.1 million of lease income from company-owned locations.

for both thirteen weeks ended March 31, 2021 and March 25, 2020.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Cautionary Statement Concerning Forward-Looking Statements

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 statements. Forward-looking statements discuss our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements because they do not relate strictly to historical

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or current facts. These statements may include words such as “aim,” “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “outlook,” “potential,” “project,” “projection,” “plan,” “intend,” “seek,” “may,” “could,” “would,” “will,” “should,” “can,” “can have,” “likely,” the negatives thereof and other 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 are subject to risks and uncertainties that could cause actual results to differ materially from those that we expected.

While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. All forward-looking statements are 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. These factors include, but are not limited to:

●

the impacts of the COVID-19 pandemic on our company, our employees, our customers, our partners, our industry and the economy as a whole, as well as our franchisees’ ability to maintain operations in their individual restaurants;

●

our ability to open new restaurants in new and existing markets, including difficulty in finding sites and in negotiating acceptable leases;

●

our ability to compete successfully with other quick-service and fast casual restaurants;

●

vulnerability to changes in consumer preferences and economic conditions;

●

vulnerability to political and social factors, including regarding trade, immigration or customer preferences;

●

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;

●

our ability to effectively identify and secure appropriate new sites for restaurants;

●

the possibility that we may continue to incur significant impairment of certain of our assets, in particular in our new markets;

●

changes to food and supply costs, especially for chicken;

●

social media and negative publicity, whether or not valid, and our ability to respond to and effectively manage the accelerated impact of social media;

●

our ability to continue to expand our digital business, delivery orders and catering;

●

concerns about food safety and quality and about food-borne illness, particularly avian flu;

●

dependence on frequent and timely deliveries of food and supplies and our dependence on a single supplier to distribute substantially all of our products to our restaurants;

●

our ability to service our level of indebtedness;

●

uncertainty related to the success of our marketing programs, new menu items, advertising campaigns and restaurant designs and remodels;

●

our reliance on our franchisees, who may incur financial hardships, lose access to credit, close restaurants, or declare bankruptcy, and our limited control over our franchisees and potential liability for their acts;

●

potential exposure to unexpected costs and losses from our self-insurance programs;

●

potential obligations under long-term and non-cancelable leases, and our ability to renew leases at the end of their terms;

●

the impact of any failure of our information technology system or any breach of our network security;

●

the impact of any security breaches of confidential customer data or personal information in connection with our electronic process of credit and debit card transactions;

●

our ability to enforce and maintain our trademarks and protect our other proprietary intellectual property;

●

risks related to government regulation and litigation, including employment and labor laws; and

●

other risks set forth in our filings with the SEC from time to time, including under Item 1A, Risk Factors in our annual report on Form 10-K for the year ended December 30, 2020, which filings are available online at www.sec.gov.

the impacts of the novel coronavirus (COVID-19) pandemic on our company, our employees, our customers, our partners, our industry and the economy as a whole, as well as our franchisees ability to maintain operations in their individual restaurants;

the adverse impact of economic conditions on our (i) operating results and financial condition, (ii) ability to comply with the terms and covenants of our debt agreements, and (iii) ability to pay or refinance our existing debt or to obtain additional financing;

~~our ability to open new restaurants in new and existing markets, including difficulty in finding sites and in negotiating acceptable leases;~~

~~our ability to compete successfully with other quick-service and fast casual restaurants;~~

~~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;~~

~~our ability to effectively identify and secure appropriate new sites for restaurants;~~

~~changes to food and supply costs, especially for chicken;~~

~~negative publicity, whether or not valid, and our ability to respond to and effectively manage the accelerated impact of social media;~~

~~our ability to continue to expand our digital business, delivery orders and catering;~~

~~concerns about food safety and quality and about food-borne illness, particularly avian flu;~~

~~dependence on frequent and timely deliveries of food and supplies and our dependence on a single supplier to distribute substantially all of our products to our restaurants;~~

~~our ability to service our level of indebtedness;~~

~~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;~~

~~ability to protect our name and logo and other proprietary intellectual property; and~~

other risks set forth in our filings with the SEC from time to time, including under Item 1A, Risk Factors in our annual report on Form 10-K for the year ended December 26, 2018, which such filings are available online at ~~www.sec.gov, at~~ ~~www.elpolloloco.com~~ ~~or upon request from El Pollo Loco.~~

We caution you that the important factors referenced above 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

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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 forward-looking statements by these cautionary statements.

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 culinary traditions of Mexico with the healthier lifestyle of Los Angeles, a combination that we call ~~“LA-Mex”.~~“LA-Mex.” Our distinctive menu features our signature product--citrus-marinated fire-grilled chicken--and a variety of Mexican and LA-inspired entrees that we create from our chicken. We serve individual and family-sized chicken meals, a variety of Mexican and LA-inspired entrees, and sides, and, throughout the year, on a limited-time basis, additional proteins like shrimp. Our entrees include favorites such as our Chicken Avocado Burrito, ~~Under 500 Calorie~~Pollo Fit entrees, chicken tostada salads, and Pollo 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 composition of sales throughout the day (our “day-part mix”), including at lunch and dinner.

COVID-19 Impact

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus ("COVID-19") originating in Wuhan, China and the risks to the international community as the virus spreads globally beyond its point of origin. On March 11, 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.

The COVID-19 pandemic has significantly disrupted our restaurant operations. ~~All~~Following the pandemic declaration in March 2020, federal, state and local governments began to respond to the public health crisis by requiring social distancing, “stay at home” directives, and restaurant restrictions - including government-mandated dining room closures - that limited business to off-premise services only (take-out, drive-thru and delivery). Historically, approximately 20% of our ~~restaurants~~sales are ~~operating on a take-away, mobile pick-up~~associated with dine-in service. Many state and ~~delivery basis only, as well as maintaining drive-thru operations where available,~~ ~~in order~~local governments continue to ~~protect our employees~~periodically implement certain restrictions to try and ~~customers from~~contain the spread of ~~this virus, and in light~~the virus. As of ~~the government-mandated closures to our dining rooms.~~

~~Below is a summary of other actions we have taken, or plan to take to enhance financial and operating flexibility for the Company and for our franchisees, and to protect our employees and customers:~~

~~As a precautionary measure, we bolstered our existing cash position by fully drawing down our $150 million 2018 Revolver, adding $34.5 million of cash to our balance sheet.~~

We have temporarily suspended all but essential capital spending and share repurchase activity, reevaluated essential support center general and administrative expenses, and fine-tuned our restaurant labor model based on dining room closures and lower sales volumes.

For our franchisees, we are deferring 50% of their April royalties until July 1, 2020, when such royalties will begin to be repaid in even monthly installments over the remainder of fiscal 2020. In addition, we deferred 100% of our franchisees' 2020 remodel and new restaurant build requirements until 2021. We also established a support team to assist franchisees in accessing funds and benefits provided by the CARES Act legislation.

For our employees, we continue to implement actions to help protect them from the coronavirus while working in our restaurants. These include implementing enhanced cleaning procedures in our restaurants, providing gloves and masks to all system restaurant employees, installing plexiglass shields at company restaurant cashier stations and initiating other social distancing measures. We are providing extended sick leave benefits to employees impacted by COVID-19 and we have granted two weeks paid leave for employees who are 65 or older.

~~We have shifted our marketing to highlight our free delivery program; our Family Meals as a healthier and affordable option; and our meaningful value platform.~~

~~We delayed making April rent payments on~~March 31, 2021, the majority of our ~~leased properties~~restaurants have dining rooms open at a limited capacity and continue to maintain take-away, mobile pick-up, delivery, and drive-thru operations where available. During the last two months of 2020 and early 2021, the Los Angeles market was heavily impacted by an increase in COVID-19 cases. Due to our high concentration of restaurants in this market, we ~~are currently negotiating rent abatement and/or deferment with~~were disproportionately impacted by this spike. During the thirteen weeks ended March 31, 2021, we temporarily closed 45 restaurants, of which all have reopened as of March 31, 2021. Similarly, during the thirteen weeks ended March 31, 2021, our ~~landlords~~franchisees temporarily closed 15 restaurants, of which all have reopened as of March 31, 2021. For both franchise-operated and company-operated restaurants, this represents total temporary closures and may include more than one closure for ~~those properties.~~

~~We have taken advantage~~the same restaurant. These closures typically lasted from one to three days. As of ~~provisions available under the CARES Act. Specifically,~~March 31, 2021, we ~~have deferred payment of employer Social Security taxes that are otherwise owed for wage payments.~~

~~The full impact of~~had not permanently closed any restaurants due to the COVID-19 ~~outbreak continues~~pandemic. Subsequent to ~~evolve as~~March 31, 2021, the Company has temporarily closed two restaurants, typically for one to three days, and franchisees have not temporarily closed any restaurants.

During the thirteen weeks ended March 31, 2021, we incurred 2.8 million in COVID-19 related expenses, primarily due to leaves of ~~the date of this report. Management is continually evaluating the impact of the global crisis on its financial condition, liquidity, operations, suppliers, industry,~~absence and workforce and will take additional actions as necessary. The disruption in operations has led to us considering the impact of the COVID-19 pandemic on our liquidity, debt covenant compliance, and recoverability of long-lived and ROU assets, goodwill and intangible assets, among others. If these disruptions continue, we expect a continued material negative impact on our financial results, future operations and liquidity. The extent of such negative impact will be determined, in part, by the COVID-19 pandemics longevity and severity.

Due to the rapid development and fluidity of this situation, we cannot determine the ultimate impact that the COVID-19 pandemic will have on our consolidated financial condition, liquidity, and future results of operations, and therefore any prediction as to the ultimate material adverse impact on tour consolidated financial condition, liquidity, and future results of operations is uncertain. See Item 1A, Risk Factors for additional information.

overtime pay.

Growth Strategies and Outlook

As of March ~~25, 2020,~~31, 2021, we had ~~479~~481 locations in six states. In fiscal ~~2019,~~2020, we opened ~~two~~one new company-operated restaurant in Nevada, which was in process prior to the COVID-19 pandemic and our franchisees opened three new restaurants, two ~~new franchised restaurants all~~ in ~~California.~~California and one in Arizona. For the thirteen weeks ended March ~~25, 2020, no~~31, 2021, two new company-operated restaurants were opened, one in Nevada and one ~~franchised restaurant~~ in California, ~~was~~and no new franchised restaurants were opened. As a result of the COVID-19 crisis, we have suspended company-operated new unit development until the timing of the economic recovery and our business improvement becomes more clear. In addition, we are allowing franchisees to defer their 2020 new unit development obligations until 2021. As a result, we now expect to open one company-operated and one franchised restaurant, both of which are currently in progress, during the remainder of 2020.

~~It is our intention to return to the following long-term growth strategy after the impact of the COVID-19 pandemic subsides.~~

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

●

expand our restaurant base;

●

increase our comparable restaurant sales; and

~~expand our restaurant base;~~

~~increase our comparable restaurant sales; and~~

~~enhance operations and leverage our infrastructure.~~

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●

enhance operations and leverage our infrastructure.

To increase comparable restaurant sales, we plan to increase customer frequency, attract new customers, and improve per-person spend. ~~These~~Success of these growth ~~rates are~~plans is not guaranteed.

Highlights and Trends

Comparable Restaurant Sales

~~System-wide, for~~

For the thirteen weeks ended March ~~25, 2020,~~31, 2021, system-wide comparable restaurant sales ~~decreased~~increased by ~~1.5%~~7.4%, from the comparable period in the prior year. For company-operated restaurants, comparable restaurant sales for the thirteen weeks ended March ~~25, 2020, decreased~~31, 2021 increased by ~~0.7%~~3.3%. For company-operated restaurants, the quarter’s change in comparable restaurant sales consisted of ~~a 3.8%~~an approximately 15.7% increase in average check size, ~~and~~partially offset by a ~~4.5%~~ decline in ~~transactions.~~transactions of 10.7%. For franchised restaurants, comparable restaurant sales ~~decreased 2.2%~~increased 10.5% for the thirteen weeks ended March ~~25, 2020.~~31, 2021. Refer to Comparable Restaurant Sales definition in ~~"Key~~“Key Performance ~~Indicators"~~Indicators” section below.

Restaurant Development

Our restaurant counts at the beginning and end of each of the last three fiscal years and the thirteen weeks ended March ~~25, 2020,~~31, 2021, were as ~~follows.~~

Thirteen Weeks Ended Fiscal Year Ended
March 25, 2020 2019 2018 2017
Company-operated restaurant activity:

Beginning of period 195
213
212
201
Openings —
2
8
16
Restaurant sale to franchisee —
(16 ) —
—
Closures —
(4 ) (7 ) (5 )
Restaurants at end of period 195
195
213
212
Franchised restaurant activity:

Beginning of period 287
271
265
259
Openings 1
2
9
7
Restaurant sale to franchisee —
16
—
—
Closures (4 ) (2 ) (3 ) (1 )
Restaurants at end of period 284
287
271
265
System-wide restaurant activity:

Beginning of period 482
484
477
460
Openings 1
4
17
23
Closures (4 ) (6 ) (10 ) (6 )
Restaurants at end of period 479
482
484
477

follows:


	Thirteen Weeks Ended	Fiscal Year Ended
	March 31, 2021	2020	2019	2018
Company-operated restaurant activity:
Beginning of period	196	195	213	212
Openings	2	1	2	8
Restaurant sale to franchisee	—	—	(16)	—
Closures	—	—	(4)	(7)
Restaurants at end of period	198	196	195	213
Franchised restaurant activity:
Beginning of period	283	287	271	265
Openings	—	3	2	9
Restaurant sale to franchisee	—	—	16	—
Closures	—	(7)	(2)	(3)
Restaurants at end of period	283	283	287	271
System-wide restaurant activity:
Beginning of period	479	482	484	477
Openings	2	4	4	17
Closures	—	(7)	(6)	(10)
Restaurants at end of period	481	479	482	484

Restaurant Remodeling

~~As of March 25,~~

In 2020, ~~together with our franchisees,~~ we had remodeled 34 company-operated and 45 franchised restaurants using our newest Vision restaurant design. 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 March 25, 2020, including new builds and remodels, we had 120 restaurants open with the Vision design in our system. Remodeling is a use of cash and has implications for our net property and equipment owned and depreciation and amortization line items on our condensed consolidated balance sheets and consolidated 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 million to $0.4 million per restaurant. We believe that our remodeling program will result in higher restaurant revenue and a strengthened brand. In addition, we are currently working onfinalized a new ~~asset~~restaurant design that we believe will clearly differentiate and communicate our brand, both on the exterior and interior. We believe that ~~this new design will deliver good new unit volumes and cash on cash returns in both existing and new markets. We also believe that~~ our remodels using this new design will result in higher restaurant revenue and a strengthened brand. ~~This new design replaces our “Vision” design, which was implemented in 2016. However, given the uncertainty surrounding the~~ ~~severity and longevity~~As of ~~the COVID-19 pandemic, as a precautionary measure~~March 31, 2021 we have ~~suspended all but essential capital spending, which includes~~completed five remodels using the new asset design. In fiscal 2021, we plan to complete a total of 15 company and ~~we have deferred our franchisee's 2020 remodel requirement until 2021.~~

40 franchise remodels using the new design.

Loco Rewards

During the second quarter of 2017, we introduced a new loyalty rewards points program in an effort to increase sales and loyalty among our customers, by offering rewards that incentivize customers to visit our restaurants more often each month. Customers earn ~~1 point~~points for each $1dollar spent and ~~100~~as of August 4, 2020, 50 points can be redeemed for a ~~$10~~$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 all points expire. Additionally, if a ~~$10~~ 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

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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 ~~$10~~ reward and redeemed, the reward or points have expired, or the likelihood of redemption is remote. A portion of the transaction price is allocated to loyalty points, if necessary, on a pro-rata basis, based on stand-alone selling price, as determined by menu pricing and loyalty ~~point's~~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 both March ~~25, 2020~~31, 2021 and December ~~25, 2019,~~30, 2020, the revenue allocated to loyalty points that have not been redeemed ~~are $1.0~~is $0.7 million and ~~$1.1~~$0.9 million, respectively, which ~~are~~is reflected in the Company’s accompanying condensed consolidated balance sheets within other accrued expenses and current liabilities. The Company had ~~almost 1.7~~over 2.2 million loyalty program members as of March ~~25, 2020.~~

31, 2021.

Critical Accounting Policies and Use of Estimates

The preparation of our condensed 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 disclosures 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 condensed consolidated 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. For a summary of our critical accounting policies and a discussion of our use of estimates, see “Critical Accounting Policies and Use of Estimates” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K for the year ended December ~~25, 2019.~~

30, 2020.

There have been no material changes to our critical accounting policies or uses of estimates since our annual report on Form ~~10-K, other than the adoption of Topic 842, as described in Note 1 and Note 11 to Item 1 above.~~

10-K.

Recent Accounting Pronouncements

Recent accounting pronouncements are described in Note 1, “Basis of Presentation and Summary of Significant Accounting Policies” in the Notes to ~~our condensed consolidated financial statements included elsewhere in this report.~~

Condensed Consolidated Financial Statements above.

Key Financial Definitions

Revenue

Our revenue is derived from three primary sources: company-operated restaurant revenue, franchise revenue, which is comprised primarily of franchise royalties and, to a lesser extent, franchise fees and sublease rental income, and franchise advertising fee revenue. See Note 10, “Revenue from Contracts with Customers” in the Notes to ~~Item I~~Condensed Consolidated Financial Statements above 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.

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

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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,~~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, expenses incurred in support of franchisee information technology systems, and the franchisee’s portion of advertising expenses.

Depreciation and Amortization

Depreciation and amortization primarily consists 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.

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. 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 asset 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 the Company closes a restaurant, it will evaluate the ~~ROU~~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 ~~common area maintenance ("CAM")~~CAM charges for closed restaurants.

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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.

Comparison of Results of ~~Income~~

Operations

Our operating results for the thirteen weeks ended March ~~25, 2020~~31, 2021 and March ~~27, 2019~~25, 2020 and expressed as percentages 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.


	Thirteen Weeks Ended
	March 31, 2021			March 25, 2020			Increase / (Decrease)
	($,000)		(%)	($,000)		(%)	($,000)		(%)
Statements of Income Data
Company-operated restaurant revenue	$	94,161	87.4	$	92,634	88.1	$	1,527	1.6
Franchise revenue		7,612	7.1		7,062	6.7		550	7.8
Franchise advertising fee revenue		5,948	5.5		5,467	5.2		481	8.8
Total revenue		107,721	100.0		105,163	100.0		2,558	2.4
Cost of operations
Food and paper costs (1)		24,391	25.9		25,562	27.6		(1,171)	(4.6)
Labor and related expenses (1)		30,732	32.6		28,693	31.0		2,039	7.1
Occupancy and other operating expenses (1)		23,844	25.3		22,109	23.9		1,735	7.8
Company restaurant expenses (1)		78,967	83.9		76,364	82.5		2,603	3.4
General and administrative expenses		10,474	9.7		9,331	8.9		1,143	12.2
Franchise expenses		7,751	7.2		6,911	6.6		840	12.2
Depreciation and amortization		3,938	3.7		4,369	4.2		(431)	(9.9)
Loss on disposal of assets		26	0.0		100	0.1		(74)	(74.0)
Impairment and closed-store reserves		564	0.5		2,402	2.3		(1,838)	(76.5)
Total expenses		101,720	94.4		99,477	94.6		2,243	2.3
Income from operations		6,001	5.6		5,686	5.4		315	5.5
Interest expense, net of interest income		517	0.5		905	0.9		(388)	(42.9)
Income tax receivable agreement income		(77)	(0.1)		(120)	(0.1)		43	(35.8)
Income before provision for income taxes		5,561	5.2		4,901	4.7		660	13.5
Provision for income taxes		1,597	1.5		1,301	1.2		296	22.8
Net income	$	3,964	3.7	$	3,600	3.4	$	364	10.1

Thirteen Weeks Ended
March 25, 2020 March 27, 2019
Increase /
(Decrease)
Statements of Income Data ($ ,000) (%) ($ ,000) (%) ($ ,000) (%)
Company-operated restaurant revenue $ 92,634
88.1
$ 97,150
89.2 $ (4,516 ) (4.6 )
Franchise revenue 7,062
6.7
6,444
5.9 618
9.6
Franchise advertising fee revenue 5,467
5.2
5,383
4.9 84
1.6
Total revenue 105,163
100.0
108,977
100.0 (3,814 ) (3.5 )
Cost of operations

Food and paper costs(1) 25,562
27.6
27,152
27.9 (1,590 ) (5.9 )
Labor and related expenses(1) 28,693
31.0
29,576
30.4 (883 ) (3.0 )
Occupancy and other operating expenses(1) 22,109
23.9
23,227
23.9 (1,118 ) (4.8 )
Company restaurant expenses(1) 76,364
82.5
79,955
82.3 (3,591 ) (4.5 )
General and administrative expenses 9,331
8.9
11,348
10.4 (2,017 ) (17.8 )
Franchise expenses 6,911
6.6
6,144
5.6 767
12.5
Depreciation and amortization 4,369
4.2
4,761
4.4 (392 ) (8.2 )
Loss on disposal of assets 100
0.1
44
0.0 56
127.3
Loss on assets held for sale —
—
4,124
3.8 (4,124 ) N/A
Impairment and closed-store reserves 2,402
2.3
309
0.3 2,093
677.3
Total expenses 99,477
94.6
106,685
97.9 (7,208 ) (6.8 )
Income from operations 5,686
5.4
2,292
2.1 3,394
148.1
Interest expense, net of interest income 905
0.9
859
0.8 46
5.4
Income tax receivable agreement (income) expense (120 ) (0.1 ) 171
0.2 (291 ) (170.2 )
Income before provision for income taxes 4,901
4.7
1,262
1.2 3,639
288.4
Provision for income taxes 1,301
1.2
349
0.3 952
272.8
Net income $ 3,600
3.4
$ 913
0.8 $ 2,687
294.3


(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

For the quarter, company-operated restaurant revenue ~~decreased $4.5~~increased $1.5 million, or ~~4.6%~~1.6%, from the comparable period in the prior year. The ~~decline~~increase in company-operated restaurant sales was primarily due to a $5.0 million decrease in revenue from the closure of four restaurants and the 16 company-operated restaurants sold by the Company to franchisees during or subsequent to the first quarter of 2019. Additionally, there was a decrease in company-operated restaurant revenue of $0.6 million from a 0.7% decrease3.3% increase in company-operated comparable restaurant sales ~~which we believe~~and an increase of $0.5 million of non-comparable restaurant sales. The company-operated comparable restaurant sales increase consisted of an approximately 15.7% increase in average check size, partially offset by a decline in transactions of 10.7%. It is uncertain whether the increase in average check size will persist once the pandemic ends. This company-operated restaurant sales increase was ~~primarily related~~partially offset by a $1.0 million decrease in revenue due to ~~the impact of~~temporary restaurant closures resulting from the COVID-19 ~~pandemic.~~ pandemic, and a less than $0.1 million decrease in revenue recognized for our loyalty points program. See above under “COVID-19 Impact” for additional information related to the impact of the COVID-19 pandemic on our business. ~~This company-operated restaurant sales decrease was partially offset by an increase~~

Table of $0.8 million of non-comparable restaurant sales on restaurants that had not been open the fifteen months required to be included in comparable restaurant sales and $0.3 million related to an increase in revenue recognized from our loyalty points program. The company-operated comparable restaurant sales decrease consisted of a decline in transactions of 4.5%, partially offset by an increase in average check size of 3.8%.Contents

Franchise Revenue

For the quarter, franchise revenue increased $0.6 million, or ~~9.6%~~7.8%, from the comparable period in the prior year. This increase was primarily due to a franchise comparable restaurant sales increase of 10.5% and the opening of three ~~new franchised restaurants and revenue generated from 16 company-operated restaurants sold by the Company to franchisees~~units during or subsequent to the first quarter of ~~2019.~~2020. This franchise revenue increase was partially offset by ~~a franchise comparable restaurant sales decrease of 2.2%, which we believe was primarily due to the COVID-19 pandemic, and~~ the closure of ~~six~~seven franchise locations during ~~the same period. See above under “COVID-19 Impact” for additional information related~~or subsequent to the ~~impact~~first quarter of ~~the COVID-19 pandemic on our business.~~

2020.

Franchise Advertising Fee Revenue

For the quarter, franchise advertising fee revenue increased ~~$0.1~~$0.5 million, or ~~1.6%~~8.8%, from the comparable period in the prior year. As advertising fee revenue is a percentage of ~~franchisees'~~franchisees’ revenue, ~~this increase was primarily~~the quarter-to-date fluctuations were due to ~~an increase~~the increases and decreases noted in ~~the number of~~ franchise ~~locations, partially offset by lower comparable sales resulting, we believe from the impact of the COVID-19 pandemic.~~

revenue above.

Food and Paper Costs

For the quarter, food and paper costs decreased ~~$1.6~~$1.2 million, or ~~5.9%~~4.6%, from the comparable period in the prior year, primarily due to a ~~$1.3~~$1.2 million decrease in food ~~costs and a $0.3 million decrease in paper~~ costs. The decrease in food and paper costs for the quarter resulted primarily from lower company transactions ~~due to the COVID-19 pandemic,~~and more effective waste management, partially offset by ~~higher~~sales mix and commodity inflation.

For the quarter, food and paper costs as a percentage of company-operated restaurant revenue were ~~27.6%~~25.9%, down from ~~27.9%~~27.6% in the comparable period of the prior year. The percentage decrease for the quarter ~~period~~ was due primarily to an increase in pricing, lower food usage and effective waste management, partially offset by sales mix and commodity inflation.

Labor and Related Expenses

For the quarter, labor and related expenses ~~decreased $0.9~~increased $2.0 million, or ~~3.0%~~7.1%, from the comparable period in the prior year. The ~~decrease~~increase for the quarter was due ~~primarily~~ to ~~a reduction~~$2.8 million increase in labor ~~by restaurants closed or sold~~costs associated with the COVID-19 pandemic and $0.5 million higher wages primarily due to ~~franchisees, partially offset by the impact of the~~ minimum wage increases in California ~~and Los Angeles~~ during fiscal ~~2019 and~~ 2020 and ~~higher workers'~~2021. These increases were partially offset by $1.0 million in labor efficiencies and $0.3 million decrease in workers compensation expense due to ~~increased~~decreased claims activity.

For the quarter, labor and related expenses as a percentage of company-operated restaurant revenue were ~~31.0%~~32.6%, consistent with the comparable period in the prior year. This percentage was impacted by wage increases in California and labor costs associated with the COVID-19 pandemic, offset by an increase in pricing and labor efficiencies.

Occupancy and Other Operating Expenses

For the quarter, occupancy and other operating expenses increased $1.7 million, or 7.8%, from the comparable period of the prior year. Fluctuations in occupancy and other expenses consisted primarily of a $0.6 million increase in market place delivery fees, a $0.3 million increase in occupancy costs, primarily related to rent expense and higher general liability claims, a $0.3 million increase in repairs and maintenance costs, a $0.3 million increase in operating supplies, a $0.1 million increase in advertising fees, a $0.1 million increase in credit card charges and a $0.1 million increase in utilities. These increases were partially offset by a $0.1 million decrease in other operating expenses.

For the quarter, occupancy and other operating expenses as a percentage of company-operated restaurant revenue were 25.3% up from ~~30.4%~~23.9% in the comparable period in the prior year. The increases for the quarter resulted primarily from the increases noted above.

General and Administrative Expenses

For the quarter, general and administrative expenses increased $1.1 million, or 12.2%, from the comparable period in the prior year. The increase for the quarter was due primarily to minimum wage increases in California and Los Angeles and higher workers’ compensation expense due to increased claims activity. Partially offsetting these increases was the positive impact from pricing increases.

~~Occupancy and Other Operating Expenses~~

~~For the quarter, occupancy and other operating expenses decreased $1.1 million, or 4.8%, from the comparable period of the prior year. The decrease was primarily due to~~ a $0.6 million ~~decrease~~increase in ~~occupancy~~labor related costs, primarily related to an increase in management bonus expense, a ~~reduction~~$0.3 million increase in ~~rent expense from restaurants closed or sold to franchisees,~~legal and professional expenses, a ~~$0.4~~$0.3 million increase in stock compensation expenses and a $0.1 million increase in restaurant pre-opening costs. This increase was partially offset by $0.1 million decrease in ~~repair and maintenance costs, a $0.2 million decrease in advertising expenses, a $0.2 million decrease in utilities~~recruiting costs and a $0.1 million decrease in other ~~operating expenses. These decreases were partially offset by a $0.4 million increase in customer order delivery fees due to an increase in delivery orders.~~

~~Occupancy and other operating expenses as a percentage of company-operated restaurant revenue was 23.9% for both the current quarter and comparable prior period.~~

~~General and Administrative Expenses~~

For the quarter, general and administrative expenses decreased $2.0 million, or 17.8%, from the comparable period in the prior year. The decrease for the quarter was due primarily to a $1.7 million decrease in legal expenses related primarily due to a decrease in securities class action litigation costs and a $0.6 million decrease in labor related costs, primarily related to a decrease in management bonus expense. These were partially offset by a $0.3 million increase in other general and administrative expenses.

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For the quarter, general and administrative expenses as a percentage of total revenue were ~~8.9%~~9.7%, ~~down~~up from ~~10.4%~~8.9% in the comparable period of the prior year. The percentage ~~decrease is~~increase for the quarter-to-date period resulted primarily ~~due to~~from the cost ~~decreases~~increases discussed above.

~~Loss on held for sale assets~~

Impairment and Closed-Store Reserves

During the thirteen weeks ended March ~~27, 2019,~~31, 2021, we agreed in principle to sell four restaurants within the San Francisco area to an existing franchisee. Additionally, we agreed in principle to sell seven restaurants in the Phoenix area to another existing franchisee. The net assets were recorded to assets held for sale at the lower of carrying value or fair value less costs to sell, which resulted in a loss on held for sale assets of $4.1 million for the thirteen weeks ended March 27, 2019. These transactions were completed in the second quarter of 2019.

~~Impairment and Closed-Store Reserves~~

~~During the thirteen weeks ended March 25, 2020, we recognized a $1.9 million~~ non-cash impairment ~~charge for the thirteen weeks ended March 25, 2020,~~charges of $0.3 million, primarily related to the carrying value of the ROU assets of one restaurant in Texas closed in 2019 and the long-lived assets of three restaurants in California. ~~The Company did not recognize any impairment charges for~~During the thirteen weeks ended March ~~27, 2019.~~25, 2020, we recorded a non-cash impairment charge of $1.9 million, primarily related to the carrying value of the assets of one restaurant in Texas and the long-lived assets of three restaurants in California. Given the inherent uncertainty in projecting results for newer restaurants in newer markets, as well as the impact of the COVID-19 pandemic, the Company is monitoring the recoverability of the carrying value of the assets of several restaurants on an ongoing basis. For these restaurants, if expected performance is not realized, an impairment charge may be recognized in future periods, and such charge could be material.

When a restaurant is closed, we 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 CAM payments relating to closed restaurants are included within closed-store expense. During the thirteen weeks ended March ~~25, 2020,~~31, 2021, we recognized ~~$0.5~~$0.3 million of closed-store reserve expense related to the amortization of ROU assets, property taxes and CAM payments for our closed locations. During the thirteen weeks ended March ~~27, 2019,~~25, 2020, we ~~closed one restaurant in California and one restaurant in Texas and~~ recognized ~~$0.3~~$0.5 million of closed-store reserve expense, primarily related to the amortization of ROU assets, property taxes and CAM payments for ~~the two~~our closed ~~stores.~~

locations.

Interest Expense, Net

For the quarter, interest expense, net, ~~was consistent with~~decreased $0.4 million from the comparable period in the prior ~~period.~~

year. The decrease is primarily related to lower interest rates and lower outstanding balances on our 2018 Revolver.

Income Tax Receivable Agreement

On July 30, 2014, we entered into the TRA. The TRA calls for us to pay to our pre-IPO stockholders 85% of the savings in cash that we realize in our taxes as a result of utilizing our ~~net operating losses~~NOLs and other tax attributes attributable to preceding periods. For the thirteen weeks ended March 31, 2021, we recorded income tax receivable agreement income of less than $0.1 million, and for the thirteen weeks ended March 25, 2020 we recorded income tax receivable agreement income of $0.1 ~~million, and for the thirteen weeks ended March 27, 2019, we recorded income tax receivable agreement expense of $0.2~~ million.

Provision for Income Taxes

For the quarter ended March 31, 2021, we recorded an income tax provision of $1.6 million, reflecting an estimated effective tax rate of 28.7%. For the quarter ended March 25, 2020, we recorded an income tax provision of $1.3 million, reflecting an estimated effective tax rate of ~~26.5%. For the quarter ended March 27, 2019, we recorded an income tax provision of $0.3 million, reflecting an estimated effective tax rate of~~ approximately ~~27.7%~~26.5%. The difference between the 21.0% statutory rate and the ~~Company��s~~Company’s effective tax rate of ~~26.5%~~28.7% for the ~~quarter-to-date~~quarter ended March ~~25, 2020~~31, 2021 is primarily a result of state taxes, a Work Opportunity Tax Credit benefit, the ~~Company’s~~change in valuation allowance against certain state credits, as a ~~result of future forecasted income apportioned~~windfall tax benefit related to ~~the state jurisdiction,~~stock options exercised and non-deductible executive ~~compensation and changes to total expected TRA payments due to changes in future forecasted taxable income.~~

compensation.

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,~~ restaurant contribution, restaurant contribution margin, new restaurant openings, EBITDA, and Adjusted EBITDA.

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 operations is limited to company-operated restaurant revenue and franchise revenue from our franchisees. Accordingly, system-wide sales should not be

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considered in isolation or as a substitute for our results as reported under GAAP. Management believes that system-wide sales are an important figure for investors, because they are widely used in the restaurant industry, including by our management, to evaluate brand scale and market penetration.

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


	Thirteen Weeks Ended
(Dollar amounts in thousands)	March 31, 2021		March 25, 2020
Company-operated restaurant revenue	$	94,161	$	92,634
Franchise revenue		7,612		7,062
Franchise advertising fee revenue		5,948		5,467
Total Revenue		107,721		105,163
Franchise revenue		(7,612)		(7,062)
Franchise advertising fee revenue		(5,948)		(5,467)
Sales from franchised restaurants		132,965		125,824
System-wide sales	$	227,126	$	218,458

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 traffic 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. In addition, we expect our quarterly company-operated restaurant revenue and comparable restaurant sales to continue to fluctuate significantly due to the current COVID-19 pandemic. See above under “COVID-19 Impact” for additional information related to the impact of the COVID-19 pandemic on our business.

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 March 31, 2021 and March 25, 2020, ~~and March 27, 2019,~~ there were ~~472~~465 and ~~458~~472 comparable restaurants, 191 and ~~200~~191 company-operated restaurants and ~~281~~274 and ~~258~~281 franchised restaurants, 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, resulting from a shift in menu mix and/or higher prices resulting from new products or price increases.

~~Company-Operated Average Unit Volumes~~

We measure company-operated average unit volumes (“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: 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 excludes certain costs, such as general and administrative expenses, depreciation and amortization, impairment and closed-store reserve and other costs that are considered normal operating costs and accordingly, restaurant contribution is not indicative of overall Company results and does not accrue directly to the benefit of stockholders 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.

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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 superior to, or as substitutes for the analysis of our results as reported under GAAP. 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 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:

Thirteen Weeks Ended
(Dollar amounts in thousands) March 25, 2020 March 27, 2019
Restaurant contribution:
Income from operations $ 5,686
$ 2,292
Add (less):
  General and administrative expenses 9,331
11,348
  Franchise expenses 6,911
6,144
  Depreciation and amortization 4,369
4,761
  Loss on disposal of assets 100
44
Loss on assets held for sale —
4,124
  Franchise revenue (7,062 ) (6,444 )
  Franchise advertising fee revenue (5,467 ) (5,383 )
Impairment and closed-store reserves 2,402
309
Restaurant contribution $ 16,270
$ 17,195

Company-operated restaurant revenue:
Total revenue $ 105,163
$ 108,977
Less:
  Franchise revenue (7,062 ) (6,444 )
  Franchise advertising fee revenue (5,467 ) (5,383 )
Company-operated restaurant revenue $ 92,634
$ 97,150

Restaurant contribution margin (%) 17.6 % 17.7 %


	Thirteen Weeks Ended
(Dollar amounts in thousands)	March 31, 2021			March 25, 2020
Restaurant contribution:
Income from operations	$	6,001		$	5,686
Add (less):
General and administrative expenses		10,474			9,331
Franchise expenses		7,751			6,911
Depreciation and amortization		3,938			4,369
Loss on disposal of assets		26			100
Franchise revenue		(7,612)			(7,062)
Franchise advertising fee revenue		(5,948)			(5,467)
Impairment and closed-store reserves		564			2,402
Restaurant contribution	$	15,194		$	16,270

Company-operated restaurant revenue:
Total revenue	$	107,721		$	105,163
Less:
Franchise revenue		(7,612)			(7,062)
Franchise advertising fee revenue		(5,948)			(5,467)
Company-operated restaurant revenue	$	94,161		$	92,634

Restaurant contribution margin (%)		16.1	%		17.6	%

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.

EBITDA and Adjusted EBITDA

EBITDA represents net income before interest expense, provision for income taxes, depreciation, and amortization. Adjusted EBITDA represents net income before interest expense, provision 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 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 the significant 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 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)~~NOL) and the age and book depreciation of facilities and equipment (affecting relative depreciation expense). We also present EBITDA and Adjusted EBITDA because (i) we believe that these measures are frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry, (ii) we believe 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 for a number of benchmarks including to compare our performance to that of our ~~competitors and for compensation performance benchmarks.~~

competitors.

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

EBITDA:


	Thirteen Weeks Ended
(Amounts in thousands)	March 31, 2021		March 25, 2020
Net income	$	3,964	$	3,600
Non-GAAP adjustments:
Provision for income taxes		1,597		1,301
Interest expense, net of interest income		517		905
Depreciation and amortization		3,938		4,369
EBITDA	$	10,016	$	10,175
Stock-based compensation expense (a)		853		534
Loss on disposal of assets (b)		26		100
Impairment and closed-store reserves (c)		564		2,402
Income tax receivable agreement income (d)		(77)		(120)
Securities class action legal expense (e)		364		201
Legal settlements (f)		—		67
Pre-opening costs (g)		163		51
Adjusted EBITDA	$	11,909	$	13,410

Thirteen Weeks Ended
(Amounts in thousands) March 25, 2020 March 27, 2019
Net income $ 3,600
$ 913
Non-GAAP adjustments:

Provision for income taxes 1,301
349
Interest expense, net of interest income 905
859
Depreciation and amortization 4,369
4,761
EBITDA $ 10,175
$ 6,882
Stock-based compensation expense (a) 534
488
Loss on disposal of assets (b) 100
44
Loss on assets held for sale (c) —
4,124
Impairment and closed-store reserves (d)
2,402
309
Income tax receivable agreement (income) expense (e) (120 ) 171
Securities class action legal expense (f) 201
2,139
Legal settlements (g) 67
—
Pre-opening costs (h) 51
—
Executive transition costs (i) —
37
Adjusted EBITDA $ 13,410
$ 14,194


(a)	Includes non-cash, stock-based compensation.

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

(c)

During the thirteen weeks ended March 27, 2019, we agreed in principle to sell four restaurants within the San Francisco area to an existing franchisee. Additionally, we agreed in principle to sell seven restaurants in the Phoenix area to another existing franchisee. The net assets were recorded to assets held for sale at the lower of carrying value or fair value less costs to sell, which resulted in a loss on held for sale assets of $4.1 million for the thirteen weeks ended March 27, 2019. These transactions were completed in the second quarter of 2019.

~~(d)~~

Includes costs related to impairment of long-lived and ROU assets and closing restaurants. During the thirteen weeks ended March ~~25, 2020,~~31, 2021, we ~~recognized a $1.9 million~~recorded non-cash impairment ~~charge for~~charges of $0.3 million, primarily related to the carrying value of the ROU assets of one restaurant in Texas closed in 2019 and the long-lived assets of three restaurants in California. During the thirteen weeks ended March 25, 2020, we recorded a non-cash impairment charge of $1.9 million, primarily related to the carrying value of the ROU assets of one restaurant in Texas and the long-lived assets of three restaurants in California.

~~three restaurants in California. The Company did not recognize any impairment charges for~~

During the thirteen weeks ended March ~~27, 2019. Given the difficulty in projecting results for newer restaurants in newer markets, as well as the impact~~31, 2021, we recognized $0.3 million of the COVID-19 pandemic, the Company is monitoring the recoverability of the carrying value of the assets of several restaurants on an ongoing basis. For these restaurants, if expected performance is not realized, an impairment charge may be recognized in future periods, and such charge could be material.

When a restaurant is closed, we 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~~expense related to the amortization of ROU assets, property ~~tax~~taxes and CAM payments ~~relating to~~for our closed ~~restaurants are included within closed-store expense.~~locations. During the thirteen weeks ended March 25, 2020, we recognized $0.5 million of closed-store reserve expense, primarily related to the amortization of ROU assets, property ~~tax~~taxes and ~~common area maintenance ("CAM")~~CAM payments for our closed locations. During the thirteen weeks ended March 27, 2019, we closed one restaurant in California and one restaurant in Texas and recognized $0.3 million primarily related to the amortization of ROU assets for the two closed stores.

(d)

~~(e)~~

On July 30, 2014, we entered into the TRA. This agreement calls for us to pay to our pre-IPO stockholders 85% of the savings in cash that we realize in our taxes as a result of utilizing our ~~net operating losses~~NOL and other tax attributes attributable to preceding periods. For the thirteen weeks ended March ~~25, 2020~~31, 2021 and March ~~27, 2019,~~25, 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.

(e)
~~(f)~~	Consists of costs related to the defense of securities lawsuits. See ~~"Note~~Note 7, ~~Commitments~~“Commitments and Contingencies, Legal ~~Matters."~~Matters” in the Notes to Condensed Consolidated Financial Statements above.

(f)
~~(g)~~	Includes amounts incurred related to the payment of the final settlement amounts for multiple wage and hour class action suits.

(g)

~~(h)~~

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.


~~(i)~~	~~Includes costs associated with the transition of our CEO, such as CEO sign-on bonus.~~

Liquidity and Capital Resources

Our primary sources of liquidity and capital resources have been cash provided from operations, cash and cash equivalents, and the 2018 Revolver. 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, ~~lease obligations, and~~ working capital and general corporate needs. ~~However, in light of the COVID-19 pandemic, we have temporarily suspended all new restaurants and capital investments.~~ 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 for them.~~suppliers. Our restaurants do not require significant inventories or receivables. We believe that ~~our~~these sources of liquidity and capital are sufficient to finance our continued operations for at least the next ~~twelve~~12 months from the ~~filing~~issuance of the ~~condensed~~ consolidated financial statements. However, depending on the severity and longevity of the COVID-19 pandemic, the efforts taken to reduce its spread ~~(including government-mandated closures of our dining rooms)~~ and the possibility of a subsequent resurgence of the COVID-19 outbreak after the current outbreak subsides, our financial performance and liquidity could be further impacted and could impact our ability to meet certain financial covenants required in our 2018 Credit Agreement (as defined below), specifically the lease-adjusted coverage ratio and fixed-charge coverage ratio.

The following table presents summary cash flow information for the periods indicated.


	Thirteen Weeks Ended
(Amounts in thousands)	March 31, 2021		March 25, 2020
Net cash provided by (used in)
Operating activities	$	7,398	$	(7,526)
Investing activities		(5,257)		(1,632)
Financing activities		(8,691)		44,492
Net increase (decrease) in cash	$	(6,550)	$	35,334

Thirteen Weeks Ended
(Amounts in thousands) March 25, 2020 March 27, 2019
Net cash (used in) provided by

Operating activities $ (7,526 ) $ 9,977
Investing activities (1,632 ) (4,183 )
Financing activities 44,492
(6,064 )
Net increase (decrease) in cash $ 35,334
$ (270 )

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Operating Activities

For the thirteen weeks ended March ~~25, 2020,~~31, 2021, net cash ~~used in~~from operating activities ~~increased~~changed by approximately ~~$17.5~~$15.0 million from the comparable period of the prior year. This change was due primarily to a $16.3 million payment made in the first quarter of 2020 related to our wage and hour class action settlements ~~(see Note 7) and unfavorable working capital fluctuations.~~

~~Investing Activities~~

~~For~~for the thirteen weeks ended March 25, 2020, slightly offset by unfavorable working capital fluctuations.

Investing Activities

For the thirteen weeks ended March 31, 2021, net cash used in investing activities decreased by $2.6 million from the comparable period of the prior year. This was due primarily to fewer major facilities and information technology projects, as well as opening no new company restaurant and completing no remodels in the thirteen weeks ended March 25, 2020 compared to no new company restaurants and one completed remodel in the thirteen weeks ended March 27, 2019.

~~Given the uncertainty surrounding the~~ ~~severity and longevity of the COVID-19 pandemic, as a precautionary measure we have suspended all but essential capital spending.~~

~~Financing Activities~~

~~For the thirteen weeks ended March 25, 2020, net cash provided by financing activities~~ increased by ~~$50.6~~$3.7 million from the comparable period of the prior year. This increase was due primarily to opening two new company-operated restaurant and remodeling three restaurants in the thirteen weeks ended March 31, 2021 compared to opening no new company-operated restaurants and completing no new remodels in the thirteen weeks ended March 25, 2020.

Financing Activities

For the thirteen weeks ended March 31, 2021, net cash from in financing activities changed by $53.2 million from the comparable period of the prior year. This change was due primarily to an increase in net borrowings of ~~$47.5~~$44.5 million on the 2018 Revolver during the thirteen weeks ended March 25, 2020, primarily as a precautionary measure to bolster our existing cash position in light of the ~~current~~ COVID-19 pandemic, as well as to provide for the $16.3 million litigation settlement payment. ~~Additionally, there was a $3.0 million cash outflow related to stock buybacks in~~In addition, during the thirteen weeks ended March ~~27, 2019. As of March 25, 2020, we have no remaining borrowing capacity under our~~31, 2021, the Company paid down $9.0 million on the 2018 Revolver.

Debt and Other Obligations

~~On July 13,~~

The 2018 ~~the Company entered into~~Revolver, which is available pursuant to the 2018 Credit Agreement, ~~which provides for the 2018 Revolver to refinance the previous 2014 Revolver. The 2018 Revolver~~ includes a sub limit of $15.0 million for letters of credit and a sub limit of $15.0 million for swingline loans. The 2018 Revolver and 2018 Credit Agreement will mature on July 13, 2023. The obligations under the 2018 Credit Agreement and related loan documents are guaranteed by the Company and Intermediate. The obligations of the Company, EPL and Intermediate under the 2018 Credit Agreement and related loan documents are secured by a first priority lien on substantially all of their respective assets.

Borrowings under the 2018 Credit Agreement (other than any swingline loans) bear interest, at the borrower’s option, at rates based upon either LIBOR or a base rate, plus, for each rate, a margin determined in accordance with a lease-adjusted consolidated leverage ratio-based pricing grid. The base rate is calculated as the highest of (a) the federal funds rate plus 0.50%, (b) the published Bank of America prime rate, or (c) LIBOR plus 1.00%. For LIBOR loans, the margin is in the range of 1.25% to 2.25%, and for base rate loans the margin is in a range of 0.25% to 1.25%. Borrowings under the 2018 Revolver may be repaid and reborrowed. The interest rate range was 1.36% to 1.65% for the thirteen weeks ended March 31, 2021, and 3.11% to 3.29% for the thirteen weeks ended March 25, ~~2020, respectively, and 3.96% to 4.01% for the thirteen weeks ended March 27, 2019.~~

2020.

The 2018 Credit Agreement contains certain financial covenants. The Company was in compliance with the financial covenants as of March ~~25, 2020.~~31, 2021. However, depending on the severity and longevity of the COVID-19 pandemic, the efforts taken to reduce its spread and the possibility of a resurgence of the COVID-19 outbreak after the ~~Company's~~initial outbreak subside, the Company’s financial performance and liquidity could be further impacted and could impact the ~~Company's~~ Company’s

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ability to comply with certain financial covenants required in our 2018 Credit Agreement, specifically the lease-adjusted coverage ratio and fixed-charge coverage ratio.

At March ~~25, 2020,~~31, 2021, $8.4 million of letters of credit and ~~$141.5~~$53.8 million of borrowings were outstanding under the 2018 Revolver. There were ~~$0.1~~$87.8 million remaining borrowings available under the 2018 Revolver at March ~~25, 2020.~~

31, 2021.

During the year ended December 25, 2019, we entered into an interest rate swap with a notional amount of $40.0 million, related to the outstanding borrowings under our 2018 Revolver. The interest rate swap was designated as a cash flow hedge and effectively converted a portion of our outstanding borrowings to a fixed rate of 1.31%, plus the applicable margin spread, which ~~is currently~~was 1.5%. for the thirteen weeks ended March 31, 2021. The interest rate swap matures in June 2023.

Contractual Obligations

~~Our~~

Other than our paydown of $9.0 million on the 2018 Revolver during the thirteen weeks ended March 31, 2021 described above, our contractual ~~commitments~~obligations outstanding on March ~~25, 2020~~31, 2021 have not changed materially since those disclosed under “Debt and Other Obligations – Contractual Obligations” in Part II, Item 7 of our annual report on Form 10-K for the year ended December ~~25, 2019~~ other than an increase in net borrowings of $47.5 million on the 2018 Revolver during the thirteen weeks ended March 25, 2020 and the impact of our delay in making April rent payments on the majority of our leased properties, refer to COVID-19 impact in "Overview" section above. These30, 2020. Our contractual commitments relate to future (i) debt payments, including expected interest expense, calculated based on current interest rates, (ii) restaurant operating lease payments, (iii) income tax receivable agreement payments, and (iv) purchasing commitments for chicken.

Off-Balance Sheet and Other Arrangements

As of March ~~25, 2020~~31, 2021 and December 25, ~~2019,~~2020, we were using $8.4 million of borrowing capacity on the 2018 Revolver for letters of credit in support of our insurance programs.

Additionally, subsequent to March 25, 2020, the Company issued a $2.7 million letter of credit to support its Surety demand related to an appeal bond used to secure a judgment against the Company. See additional information presented in "Note 13 Commitments and Contingencies—Legal Matters" in the accompanying "Notes to Consolidated Financial Statements."

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk

We are exposed to market risk from changes in ~~the~~ interest ~~rate~~rates on our debt, which bears interest, at ~~our option, at rates based on~~USD LIBOR ~~or a base rate,~~ plus ~~for each rate,~~ a margin ~~determined in accordance with the terms of the 2018 Credit Agreement. For LIBOR loans, the margin is in the range of~~between 1.25% and 2.25%. As of March ~~25, 2020,~~31, 2021, we had outstanding borrowings of ~~$141.5~~$53.8 million under our 2018 Revolver, $8.4 million of letters of credit in support of our insurance programs, and the applicable margin on outstanding borrowings under 2018 Revolver was 1.5%. In addition, ~~there~~ LIBOR is ~~currently uncertainty around whether LIBOR will continue~~expected to ~~exist~~be phased out beginning after 2021. IfOrganizations are currently working on industry wide and company specific transition plans as it relates to financial and other derivative contracts exposed to LIBOR. When LIBOR ceases to exist, we may need to enter into an amendment to the 2018 Credit Agreement and we cannot predict what alternative index would be negotiated with our lenders. If future rates based upon a successor rate are higher than LIBOR rates as currently determined or if our lenders have increased costs due to changes in LIBOR, we may experience potential increases in interest rates on our variable rate debt, which could adversely impact our interest expense, results of operations and cash flows. After giving effect to the $40.0 million of interest rate swaps described below, we effectively had ~~$101.5~~$13.8 million of long-term debt subject to variations in interest rates as of March 31, 2021 and a one percent increase in the variable rate of interest would increase annual interest expense by ~~$1.0~~$0.1 million.

We manage our interest rate risk through normal operating and financing activities and, when determined appropriate, through the use of derivative financial instruments. To balance our portfolio, we entered into an interest rate swap during the year ended December 25, 2019 with a notional amount of $40.0 million, related to the outstanding borrowings under our 2018 Revolver. The interest rate swap was designated as a cash flow hedge and effectively converted a portion of our outstanding borrowings to a fixed rate of ~~2.81%.~~1.31%, plus applicable margin, which was 1.5% for the thirteen weeks ended March 31, 2021. The interest rate swap matures in June 2023.

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. In general, we have been able to substantially offset cost increases resulting from inflation

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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.

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 when the prices of commodities drop, we may pay higher prices under our purchasing commitments. In rapidly 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.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as such term is 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 time periods specified in the ~~SEC's~~SEC’s rules and forms and 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 March ~~25, 2020.~~

31, 2021.

Changes in Internal Control over Financial Reporting

No changes in our internal control over financial reporting occurred during the quarter ended March ~~25, 2020~~31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

For information regarding legal proceedings, see ~~"Note 7. Commitments~~Note 7, “Commitments and Contingencies—Legal ~~Matters"~~Matters” in the ~~accompanying "Notes~~“Notes to Condensed Consolidated Financial ~~Statements" in this Quarterly Report,~~Statements” above, which information is incorporated by reference into this Item 1.

Item 1A. Risk Factors.

There have been no material changes from the risk factors previously disclosed in our annual report on Form 10-K for the year ended December ~~25, 2019~~30, 2020 filed with the SEC on March ~~6, 2020, except for the addition of the risk factors that immediately follow.~~

~~The recent outbreak of COVID-19 and measures intended to prevent its spread may have a significant negative impact on our business, sales, results of operations and financial condition.~~

The global pandemic resulting from the outbreak of the novel coronavirus (“COVID-19”) has disrupted El Pollo Loco’s restaurant operations beginning in March 2020. In response to federal, state and local mandates (subject to exceptions for certain state and local mandates) aimed at limiting the spread of COVID-19, all of our dining rooms have closed. All of our restaurants are operating drive-thru (where available), delivery & take-away services only, with some restaurants operating with limited hours. ~~Additionally, as of the date of this report,~~ ~~we have temporarily closed 18 restaurants,~~ 15, ~~of which have reopened and 3 remain closed at this time. Similarly, franchisees have temporarily closed 12 restaurants, 8 of which have reopened and 4 remain closed at this time.~~ Furthermore, the decrease in discretionary consumer spending as a result of the COVID-19 outbreak has materially decreased demand for our products. This decrease in demand, as well as the actions described above, have resulted in declines in revenue and has led to us delaying April rent payments on the majority of our leased properties and we are currently negotiating rent abatement and/or deferment with our landlords for those properties.

While we are not currently experiencing any supply chain or labor force shortages, our ability to maintain our supply chain and labor force may become challenging as a result of the COVID-19 pandemic. For example, if there are mandatory shutdowns in locations where our suppliers are located or if our suppliers are otherwise unable to supply us with the products we need to operate our business, we could see significant disruptions to our supply chain and our business would be negatively impacted. In addition, if we experience an outbreak of COVID-19 at a significant number of our locations that requires us to temporarily close those location for disinfection or if a large number of our employees become ill with COVID-19 and are unable to work, it may materially adversely affect our business or results of operations, and may impact our financial condition. COVID-19 may also adversely affect our ability to implement our growth plans, including delays in the opening or construction of new restaurants. As this situation is ongoing and the duration and severity of the COVID-19 pandemic is uncertain at this time, it is difficult to forecast any long-term impacts on our future operating results or predict when our operations will return to full service. However, we expect the COVID-19 pandemic to negatively impact our financial results and, depending on the severity and longevity of the COVID-19 pandemic, the efforts taken to reduce its spread and the possibility of a resurgence of the COVID-19 outbreak, such impact 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 global economic impact, 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 an economic slowdown or recession now or in the near-term future. Risks related to the impact of an economic downturn are described in our risk factors titled, “~~A prolonged economic downturn could materially affect us in the future” and “We are vulnerable to changes in consumer preferences and economic conditions that could harm our business, financial condition, results of operations, and cash flow” under “Risk Factors - Risks Related to our Business and Industry” in our Annual Report on Form 10-K for the year ended December 25, 2019.~~ In addition, even after the COVID-19 pandemic has subsided, the perceived risk of infection or concern of a resurgence of the COVID-19 outbreak 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, particularly if there is an actual recurrence of the COVID-19 virus.

~~The resale of shares of common stock currently held by Trimaran Pollo Partners, L.L.C. could adversely affect the market price of our common stock.~~

Our largest stockholder, Trimaran Pollo Partners, L.L.C. (the “LLC”), holds 16,746,544 shares, or approximately 47.7%, of our outstanding common stock as of the date of this report. Members of the LLC include affiliates of Trimaran and Freeman Spogli. Pursuant to the terms of the 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 initial public offering, or July 27, 2020. We expect the dissolution and winding up of the LLC to begin on July 27, 2020. If all or a substantial portion of these shares are resold into the public markets, or if it is perceived that they will be resold, the trading price of our common stock could decline.

2021.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults ofUpon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

None.

~~None.~~

Table of Contents

Item 6. Exhibits.

Exhibit Index

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

31.1	Certification of Principal Executive Officer under section 302 of the Sarbanes–Oxley Act of 2002	X

31.2	Certification of Principal Financial Officer under section 302 of the Sarbanes–Oxley Act of 2002	X

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	*

101.INS	Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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

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	X

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

10.1
Severance Agreement and General Release between Hector Muñoz and El Pollo Loco, Inc.
X

31.1
Certification of Principal Executive Officer under section 302 of the Sarbanes–Oxley Act of 2002
X

31.2
Certification of Principal Financial Officer under section 302 of the Sarbanes–Oxley Act of 2002
X

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
*

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

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.

Table of Contents

SIGNATURES

Pursuant to the requirements 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.
		(Registrant)

Date: May ~~1, 2020~~7, 2021		/s/ Bernard Acoca
~~Date~~		Bernard Acoca
		President and Chief Executive Officer
		(duly authorized officer)
Date: May ~~1, 2020~~7, 2021		/s/ Laurance Roberts
~~Date~~		Laurance Roberts
		Chief Financial Officer
		(principal financial officer)



~~Delaware~~		~~20-3563182~~
(State or other jurisdiction of 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)



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	LOCO	The Nasdaq Stock Market LLC

Large Accelerated Filer	☐	Accelerated Filer	☒

~~Large accelerated filer~~ Non-accelerated Filer	☐	~~Accelerated filer~~ Smaller Reporting Company	☒ ☐

~~Non-accelerated filer~~	☐	~~Smaller reporting company~~ Emerging Growth Company	☒

		~~Emerging growth company~~	☐


☒
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


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



Table of Contents		Page

PART I—FINANCIAL INFORMATION	4	3
Item 1. Financial Statements.	4	3
Condensed Consolidated Balance Sheets (Unaudited)	5	3
Condensed Consolidated Statements of Income (Unaudited)	6	4
Condensed Consolidated Statements of Comprehensive Income (Unaudited)	7	5
Condensed Consolidated Statements of Changes in ~~Stockholders'~~Stockholders’ Equity (Unaudited)	8	6
Condensed Consolidated Statements of Cash Flows (Unaudited)	9	7
Notes to Condensed Consolidated Financial Statements (Unaudited)	10	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.	31	28
Item 3. Quantitative and Qualitative Disclosures About Market Risk.	46	42
Item 4. Controls and Procedures.	47	43

PART II—OTHER INFORMATION	48	44
Item 1. Legal Proceedings.	48	44
Item 1A. Risk Factors.	48	44
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	49	44
Item 3. Defaults ofUpon Senior Securities.	49	44
Item 4. Mine Safety Disclosures.	49	44
Item 5. Other Information.	49	44
Item 6. Exhibits.	50	45
Signatures	51	46



	March 25, 2020			December 25, 2019
Assets
Current assets:
Cash and cash equivalents	$	43,404		$	8,070
Accounts and other receivables, net	12,075			8,505
Inventories	2,092			2,009
Prepaid expenses and other current assets	4,607			5,718
Income tax receivable	338			376
Total current assets	62,516			24,678
Property and equipment owned, net	87,902			91,778
Property held under operating leases, net ("ROU asset")	187,610			192,395
Goodwill	248,674			248,674
Trademarks	61,888			61,888
Deferred tax assets	3,543			3,709
Other assets	1,366			1,630
Total assets	$	653,499		$	624,752
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of obligations under finance leases	$	36		$	34
Current portion of obligations under operating leases	17,585			16,406
Accounts payable	6,456			5,627
Accrued salaries and vacation	7,619			8,618
Accrued insurance	9,881			9,440
Accrued interest	78			302
Current portion of income tax receivable agreement payable	4,987			4,935
Other accrued expenses and current liabilities	12,216			28,597
Total current liabilities	58,858			73,959
Revolver loan	141,500			97,000
Obligations under finance leases, net of current portion	73			83
Obligations under operating leases, net of current portion	192,422			197,492
Deferred taxes	2,366			1,672
Income tax receivable agreement payable, net of current portion	3,128			3,301
Other noncurrent liabilities	6,547			5,679
Total liabilities	404,894			379,186
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; 35,089,983 and 35,126,582 shares issued and outstanding	351			351
Additional paid-in-capital	331,484			330,950
Accumulated deficit	(82,388		)	(85,988		)
Accumulated other comprehensive (loss) income	(842		)	253
Total stockholders' equity	248,605			245,566
Total liabilities and stockholders' equity	$	653,499		$	624,752



	Thirteen Weeks Ended
	March 25, 2020			March 27, 2019
Revenue
Company-operated restaurant revenue	$	92,634		$	97,150
Franchise revenue	7,062			6,444
Franchise advertising fee revenue	5,467			5,383
Total revenue	105,163			108,977
Cost of operations
Food and paper cost	25,562			27,152
Labor and related expenses	28,693			29,576
Occupancy and other operating expenses	22,109			23,227
Company restaurant expenses	76,364			79,955
General and administrative expenses	9,331			11,348
Franchise expenses	6,911			6,144
Depreciation and amortization	4,369			4,761
Loss on disposal of assets	100			44
Loss on assets held for sale	—			4,124
Impairment and closed-store reserves	2,402			309
Total expenses	99,477			106,685
Income from operations	5,686			2,292
Interest expense, net	905			859
Income tax receivable agreement (income) expense	(120		)	171
Income before provision for income taxes	4,901			1,262
Provision for income taxes	1,301			349
Net income	$	3,600		$	913
Net income per share
Basic	$	0.10		$	0.02
Diluted	$	0.10		$	0.02
Weighted-average shares used in computing net income per share
Basic	34,659,160			38,653,702
Diluted	35,347,456			39,496,436



Thirteen Weeks Ended March 25, 2020
	Common Stock				Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
	Shares		Amount		Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
Balance, December 25, 2019	35,126,582		$	351	$	330,950	$	(85,988	)	$	253		$	245,566
Stock-based compensation	—		—		534		—			—			534
Forfeiture of common stock related to restricted shares	(36,599	)	—		—		—			—			—
Other comprehensive loss, net of tax	—		—		—		—			(1,095		)	(1,095		)
Net income	—		—		—		3,600			—			3,600
Balance, March 25, 2020	35,089,983		$	351	$	331,484	$	(82,388	)	$	(842	)	$	248,605



Thirteen Weeks Ended March 27, 2019
	Common Stock					Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income		Total Stockholders’ Equity
	Shares		Amount			Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income		Total Stockholders’ Equity
Balance, December 26, 2018	39,009,451		$	390		$	375,734		$	(110,888	)	$	—	265,236
Stock-based compensation	—		—			488			—			—		488
Issuance of common stock related to restricted shares	(22,118	)	—			—			—			—		—
Shares repurchased for employee tax withholdings	(1,575	)	—			(16		)	—			—		(16		)
Repurchase of common stock	(255,554	)	(2		)	(3,381		)	—			—		(3,383		)
Net income	—		—			—			913			—		913
Balance, March 27, 2019	38,730,204		$	388		$	372,825		$	(109,975	)	$	—	$	263,238



	Thirteen Weeks Ended
Supplemental cash flow information	March 25, 2020		March 27, 2019
Cash paid during the period for interest	$	1,112	$	838
Unpaid purchases of property and equipment	$	1,085	$	948
Unpaid stock buybacks	$	—	$	354



			Fair Value Measurements Using
	Fair Value		Level 1		Level 2		Level 3
Other non-current liabilities - Interest rate swap	$	1,142	$	—	$	1,142	$	—



	Shares		Weighted-Average Exercise Price
Outstanding - December 25, 2019	2,077,570		$	8.14
Forfeited, cancelled or expired	(42,736	)	$	11.47
Outstanding - March 25, 2020	2,034,834		$	8.07
Vested and expected to vest at March 25, 2020	2,026,518		$	8.05
Exercisable at March 25, 2020	1,518,145		$	6.93

Delaware		20-3563182



	Shares		Weighted-Average Fair Value
Unvested shares at December 25, 2019	588,008		$	11.23
Forfeited, cancelled, or expired	(49,010	)	$	12.42
Unvested shares at March 25, 2020	538,998		$	11.12



	March 25, 2020				December 25, 2019
	Notional		Fair value		Notional		Fair value
Other assets - Interest rate swap	—		—		$	40,000	$	360
Other liabilities - Interest rate swap	$	40,000	$	1,142	—		—



	Thirteen Weeks Ended
	Net Loss Recognized in OCI			(Gain) Reclassified from AOCI into Interest expense
	March 25, 2020		March 27, 2019	March 25, 2020			March 27, 2019
Interest rate swap	$	1,459	—	$	(39	)	—



December 26, 2018	$	5,593
Revenue recognized - beginning balance	(104		)
Additional contract liability	140
Revenue recognized - additional contract liability	(6		)
March 27, 2019	$	5,623



Franchise revenues:
2020	$	524
2021	491
2022	410
2023	391
2024	357
Thereafter	3,826
Total	$	5,999



	Thirteen Weeks Ended March 25, 2020
	Property Leases			Equipment Leases		Total
Finance lease cost:
Interest on lease liabilities	6			—		6
Operating lease cost	6,530			324		6,854
Short-term lease cost	—			2		2
Variable lease cost	104			14		118
Sublease income	(778		)	—		(778		)
Total lease cost	$	5,862		$	340	$	6,202



	Finance			Operating Leases
For the Years Ending	Minimum Lease Payments			Minimum Lease Payments			Minimum Sublease Income
December 30, 2020	$	41		$	20,080		$	2,103
December 29, 2021	54			26,702			2,887
December 28, 2022	45			25,694			3,284
December 27, 2023	—			23,289			3,318
December 25, 2024	—			21,018			3,203
Thereafter	—			141,124			27,265
Total	$	140		$	257,907		$	42,060
Less: imputed interest (2.38% - 11.10%)	(31		)	(47,900		)
Present value of lease obligations	109			210,007
Less: current maturities	(36		)	(17,585		)
Noncurrent portion	$	73		$	192,422



	Finance Leases			Operating Leases
For the Years Ending	Minimum Lease Payments			Minimum Lease Payments			Minimum Sublease Income
December 30, 2020	$	54		$	26,808		$	2,754
December 29, 2021	54			25,978			2,887
December 28, 2022	45			24,871			3,284
December 27, 2023	—			22,309			3,318
December 25, 2024	—			19,751			3,203
Thereafter	—			139,454			27,265
Total	$	153		$	259,171		$	42,711
Less: imputed interest (3.96% to 11.10%)	(36		)	(45,273		)
Present value of capital lease obligations	117			213,898
Less: current maturities	(34		)	(16,406		)
Noncurrent portion	$	83		197,492



	Thirteen Weeks Ended		Fiscal Year Ended
	March 25, 2020		2019		2018		2017
Company-operated restaurant activity:
Beginning of period	195		213		212		201
Openings	—		2		8		16
Restaurant sale to franchisee	—		(16	)	—		—
Closures	—		(4	)	(7	)	(5	)
Restaurants at end of period	195		195		213		212
Franchised restaurant activity:
Beginning of period	287		271		265		259
Openings	1		2		9		7
Restaurant sale to franchisee	—		16		—		—
Closures	(4	)	(2	)	(3	)	(1	)
Restaurants at end of period	284		287		271		265
System-wide restaurant activity:
Beginning of period	482		484		477		460
Openings	1		4		17		23
Closures	(4	)	(6	)	(10	)	(6	)
Restaurants at end of period	479		482		484		477



	Thirteen Weeks Ended
(Dollar amounts in thousands)	March 25, 2020			March 27, 2019
Restaurant contribution:
Income from operations	$	5,686		$	2,292
Add (less):
General and administrative expenses	9,331			11,348
Franchise expenses	6,911			6,144
Depreciation and amortization	4,369			4,761
Loss on disposal of assets	100			44
Loss on assets held for sale	—			4,124
Franchise revenue	(7,062		)	(6,444		)
Franchise advertising fee revenue	(5,467		)	(5,383		)
Impairment and closed-store reserves	2,402			309
Restaurant contribution	$	16,270		$	17,195

Company-operated restaurant revenue:
Total revenue	$	105,163		$	108,977
Less:
Franchise revenue	(7,062		)	(6,444		)
Franchise advertising fee revenue	(5,467		)	(5,383		)
Company-operated restaurant revenue	$	92,634		$	97,150

Restaurant contribution margin (%)	17.6		%	17.7		%



	Thirteen Weeks Ended
(Amounts in thousands)	March 25, 2020			March 27, 2019
Net income	$	3,600		$	913
Non-GAAP adjustments:
Provision for income taxes	1,301			349
Interest expense, net of interest income	905			859
Depreciation and amortization	4,369			4,761
EBITDA	$	10,175		$	6,882
Stock-based compensation expense (a)	534			488
Loss on disposal of assets (b)	100			44
Loss on assets held for sale (c)	—			4,124
Impairment and closed-store reserves (d)	2,402			309
Income tax receivable agreement (income) expense (e)	(120		)	171
Securities class action legal expense (f)	201			2,139
Legal settlements (g)	67			—
Pre-opening costs (h)	51			—
Executive transition costs (i)	—			37
Adjusted EBITDA	$	13,410		$	14,194