LOCO US Equity☆

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

The following discussion should be read in conjunction with our "Audited Consolidated Financial Statements" and accompanying "Notes to Consolidated Financial Statements" included elsewhere in this Annual Report. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties, and assumptions that could cause actual results to differ materially from management’s expectations. See “Forward-Looking Statements” and "Item 1A. Risk Factors” included elsewhere in this Annual Report. We assume no obligation to update any of these forward-looking statements.

Basis of Presentation

We use a 52- or 53-week fiscal year ending on the last Wednesday of each calendar year. Fiscal 2021, 2020, and 2019 ended on December 29, 2021, December 30, 2020 and December 25, 2019, respectively. In a 52-week fiscal year, each quarter includes 13 weeks of operations. In a 53-week fiscal year, the first, second and third quarters each include 13 weeks of operations, and the fourth quarter includes 14 weeks of operations. Approximately every six or seven years a 53-week fiscal year occurs. Fiscal 2020 was a 53-week fiscal year. Fiscal 2021 and 2019 were 52-week fiscal years. 53-week years may cause revenues, expenses, and other results of operations to be higher due to the additional week of operations. Fiscal years are identified in this report according to the calendar years in which they ended. For example, references to fiscal 2021 refer to the fiscal year ended December 29, 2021.

Overview

El Pollo Loco is a differentiated and growing restaurant concept that specializes in fire-grilling citrus-marinated chicken and operates in the LSR segment. We strive to offer food that integrates the culinary traditions of Mexico with the

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healthier lifestyle of Los Angeles, a combination that we call “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, 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 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

During the COVID-19 pandemic, we have experienced periods of significant disruption to our restaurant operations. Following the pandemic declaration in March 2020, federal, state and local governments have periodically responded to the public health crisis by requiring social distancing, issuing “stay at home” directives, and implementing restaurant restrictions - including government-mandated dining room closures - that limited business to off-premise services only (take-out, drive-thru and delivery). COVID-19 pandemic and the measures taken to prevent its spread have adversely affected our operations and financial results, particularly during fiscal 2020 as well as periods of 2021 when COVID-19 infections increased with the spread of new strains of the virus. 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 right-of-use (“ROU”) assets, goodwill and intangible assets, among others.We are continually evaluating the impact of the global crisis on our financial condition, liquidity, operations, suppliers, industry, and workforce and will take additional actions as necessary.

While all of our restaurants had dining rooms open as of December 29, 2021, we continue to experience staffing challenges, which resulted in reduced operating hours and service channels at some of our restaurants and resulted in higher wage inflation, overtime costs and other labor related costs. Further, we experienced inflationary pressures due to supply chain disruptions that resulted in increased commodity prices and impacted our business and results of operations during the year ended December 29, 2021. We expect these pressures to continue during fiscal 2022. During fiscal 2021, we incurred $3.9 million in COVID-19 related expenses, primarily due to leaves of absence and overtime pay. During fiscal 2020, we incurred $4.9 million in COVID-19 related expenses, primarily due to leaves of absence and overtime pay. During fiscal 2021 as part of the CARES Act, we recognized the Employee Retention Credit (“ERC”) in the amount of $3.4 million, which is recorded as an offset to the corresponding payroll expense and is classified as part of the labor and other operating expenses on the consolidated statements of income for the year ended December 29, 2021. See additional information presented in Note 2 “Summary of Significant Accounting Policies” in the accompanying “Notes to Consolidated Financial Statements” in this Annual Report.

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 materiality of the adverse impact on our consolidated financial condition, liquidity, and future results of operations is uncertain.

Growth Strategies and Outlook

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

● develop a people-first culture;

● differentiate the brand;

● simplify operations; and

● accelerate new restaurant development.

As of December 29, 2021, we had 480 locations in six states. In fiscal 2021, we opened two new company-operated restaurants, one in Nevada and one in California, and our franchisees opened two new restaurants, one in Texas and one

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in Louisiana. In fiscal 2020, we opened one new company-operated restaurant in Nevada and our franchisees opened three new restaurants, two in California and one in Arizona.

In 2022, we intend to open three to six new company-operated and six to 10 new franchised restaurants. To increase comparable restaurant sales, we plan to increase customer frequency, attract new customers, and improve per-person spend.

Highlights and Trends

Comparable Restaurant Sales

In fiscal 2021, comparable restaurant sales system-wide increased 12.1%. In fiscal 2020, comparable restaurant sales system-wide decreased 2.4%. In fiscal 2019, comparable restaurant sales system-wide increased 2.0%. Comparable restaurant sales growth/decline reflects the change in year-over-year sales for the comparable restaurant base. A restaurant enters our comparable restaurant base the first full week after its 15-month anniversary. System-wide comparable restaurant sales include restaurant sales at all comparable company-operated restaurants and at all comparable franchised restaurants, as reported by franchisees. Comparable restaurant sales at company-operated restaurants increased 7.6% in fiscal 2021, decreased 3.0% in fiscal 2020, and increased 1.9% in fiscal 2019. For company-operated restaurants, the change in comparable restaurant sales consisted of a 6.3% increase in average check size and a 1.2% increase in transactions. In fiscal 2020, the decrease in company-operated comparable restaurant sales was primarily the result of a decrease in transactions of 15.8%, partially offset by a 15.3% increase in average check size. In fiscal 2019, the increase in company-operated comparable restaurant sales was primarily the result of an increase in average check size of 2.9%, partially offset by a decrease in transactions of 1.0%. In fiscal 2021, comparable restaurant sales at franchised restaurants increased 15.3%. In fiscal 2020, comparable restaurant sales at franchised restaurants decreased 2.0%, and in fiscal 2019, comparable restaurant sales at franchised restaurants increased 2.0%.

Restaurant Development

In fiscal 2021, we opened two company-operated restaurants, and our franchisees opened two new restaurants. From time to time, we and our franchisees close restaurants. In fiscal 2021, we closed one company-operated restaurant. Our franchisees closed two restaurants. Our restaurant counts at the beginning and end of each of the last three years were as follows:

​

​ ​ ​ ​ ​ ​ ​

​ Fiscal Year Ended

Company-operated restaurant activity: ​ ​ ​

Openings ​ 2 ​ 1 ​ 2

Restaurant sale to franchisee ​ (8) ​ — ​ (16)

Closures ​ (1) ​ — ​ (4)

Restaurants at end of period ​ 189 ​ 196 ​ 195

Franchised restaurant activity: ​ ​ ​

Openings ​ 2 ​ 3 ​ 2

Restaurant sale to franchisee ​ 8 ​ — ​ 16

Closures ​ (2) ​ (7) ​ (2)

Restaurants at end of period ​ 291 ​ 283 ​ 287

System-wide restaurant activity: ​ ​ ​

Openings ​ 4 ​ 4 ​ 4

Closures ​ (3) ​ (7) ​ (6)

Restaurants at end of period ​ 480 ​ 479 ​ 482

​

In 2020, we finalized a new restaurant design that we believe will clearly differentiate and communicate our brand, both on the exterior and interior. We believe that our remodels using this new design will result in higher restaurant revenue and a strengthened brand. As of December 29, 2021, we have completed 12 company-operated restaurants remodels using the new design, including 10 during fiscal 2021. During 2021, our franchisees completed five remodels, two of

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which used the new design. In fiscal 2022, we plan to continue our standard practices for remodels, which includes completing a total of 10-15 company and 20-30 franchise remodels using the new design. Remodeling is a use of cash and has implications for our net property and depreciation line items on our consolidated balance sheets and statements of income, among others. The cost of our restaurant remodels varies depending on the scope of work required, but on average the investment is $0.3 to $0.4 million per restaurant.

Loco Rewards

Our Loco Rewards loyalty program offers rewards that incentivize customers to visit our restaurants more often each month. Customers earn points for each dollar spent and as of August 4, 2020, 50 points can be redeemed for a $5 reward to be used for a future purchase. Prior to August 4, 2020, 100 points could be redeemed for a $10 reward. If a customer does not earn or use points within a one-year period, their account is deactivated and all points expire. Additionally, if a reward is not used within six months, it expires. When a customer is part of the rewards program, the obligation to provide future discounts related to points earned is considered a separate performance obligation, to which a portion of the transaction price is allocated. The performance obligation related to loyalty points is deemed to have been satisfied, and the amount deferred in the balance sheet is recognized as revenue, when the points are transferred to a reward and redeemed, the reward or points have expired, or the likelihood of redemption is remote. A portion of the transaction price is allocated to loyalty points on a pro-rata basis, based on stand-alone selling price, as determined by menu pricing and loyalty point’s terms.

In addition, customers can earn additional points and free entrées for a variety of engagement activities. As points are available for redemption past the quarter earned, a portion of the revenue associated with the earned points will be deferred until redemption or expiration. As of December 29, 2021, the amount of revenue deferred related to the earned points, net of redemptions, is $0.7 million. We had more than 2.8 million members in the Loco Rewards loyalty program as of December 29, 2021.

Key Financial Definitions

Revenue

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

Food and Paper Costs

Food and paper costs include the direct costs associated with food, beverage and packaging of our menu items. The components of food and paper costs are variable in nature, change with sales volume, are impacted by menu mix, and are subject to increases or decreases in commodity costs.

Labor and Related Expenses

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

Occupancy Costs and Other Operating Expenses

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

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General and Administrative Expenses

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

Legal Settlements

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

Franchise Expenses

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

Depreciation and Amortization

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

Loss on Disposal of Assets

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

Impairment and Closed-Store Reserves

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

When we close a restaurant, we will evaluate the 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”) charges for closed restaurants.

Loss on Disposition of Restaurants

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

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Interest Expense, Net

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

Provision for Income Taxes

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

Results of Operations

Fiscal Year 2021 Compared to Fiscal Year 2020

Our operating results for the fiscal years ended December 29, 2021 and December 30, 2020, in absolute terms and expressed as a percentage of total revenue, with the exception of cost of operations and company restaurant expenses, which are expressed as a percentage of company-operated restaurant revenue, are compared below:

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ Fiscal Year

​ ​ (52-Weeks) ​ (53-Weeks) ​ Increase / (Decrease)

Statements of Income Data: ​ ​ ​ ​

Revenue ​ ​ ​ ​

Cost of operations ​ ​ ​ ​

Legal settlements ​ — — ​ 2,566 0.6 ​ (2,566) N/A ​

Loss on disposition of restaurants ​ ​ 1,534 ​ 0.3 ​ ​ — ​ — ​ ​ 1,534 ​ N/A ​

Income tax receivable agreement expense ​ 58 0.0 ​ 139 — ​ (81) (58.3) ​

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Company-Operated Restaurant Revenue

In fiscal 2021, company-operated restaurant revenue increased $20.7 million, or 5.5%. The increase in company-operated restaurant sales was primarily due to an increase in company-operated comparable restaurant revenue of $25.6 million, or 7.6%. The company-operated comparable restaurant sales increase consisted of an approximately 6.3% increase in average check size and a 1.2% increase in transactions. In addition, company-operated restaurant revenue was favorably impacted by $3.7 million of additional sales from restaurants that had not been open the fifteen months required to be included in comparable restaurant sales and a $1.7 million increase in revenue from restaurants that were temporarily closed due to the COVID-19 pandemic during the prior year. This company-operated restaurant sales increase was partially offset by a $5.1 million decrease in revenue from the eight company-operated restaurants sold by the Company to an existing franchisee during 2021 and a $0.5 million decrease in revenue recognized for our loyalty points program. Company-operated restaurant revenue was also negatively impacted by $4.6 million for the additional week of operations in 2020 as it was a 53-week fiscal year.See above under “COVID-19 Impact” for additional information related to the impact of the COVID-19 pandemic on our business.

Franchise Revenue

In fiscal 2021, franchise revenue increased $4.3 million, or 14.7%. This increase was primarily due to a franchise comparable restaurant sales increase of 15.3%, the opening of five restaurants during or subsequent to the first quarter of 2020 and revenue generated from eight company-operated restaurants sold by the Company to an existing franchisee during the year. This franchise revenue increase was partially offset by the closure of nine franchise locations during the same period.

Franchise Advertising Fee Revenue

Franchise advertising fee revenue increased $3.3 million, or 14.6% from the comparable period in the prior year. As advertising fee revenue is a percentage of franchisees’ revenue, the year-to-date fluctuation was due to the increases noted in franchise revenue above.

Food and Paper Costs

Food and paper costs increased $5.6 million, or 5.7%, in fiscal 2021, due to a $2.8 million increase in food costs and a $2.8 million increase in paper costs. The increase in food and paper costs resulted primarily from a $0.9 million increase from restaurants opened during the current or prior year, higher company transactions and commodity inflation. These increases were partially offset by a reduction of $1.4 million for restaurant locations sold to franchisees during fiscal 2021 and $1.2 millionfor the additional week of operations in 2020 which was a 53-week fiscal year. Food and paper costs as a percentage of company-operated restaurant revenue were 26.4% in fiscal 2021, consistent with the prior year.

Labor and Related Expenses

Labor and related expenses increased $5.9 million, or 5.1% in fiscal 2021. The increase was due to a $4.0 million increase primarily related to minimum wage increases in California during fiscal 2020 and 2021 and other labor wage increases as a result of competitive pressure, a $3.0 million increase in overtime, a $1.3 million increase related to the 1.2% increase in year-over-year sales transactions, a $1.2 million increase from restaurants opened during or after the first quarter of the prior year, a $0.8 million increase in employee medical costs, $0.6 million in higher payroll taxes, a $0.7 million increase primarily related to employee training and a $1.9 million increase in other labor related expenses.

This labor and related expense increase was partially offset by recognizing a $3.4 million ERC, which is recorded as an offset to the corresponding payroll expense and is classified as part of the labor and other operating expenses on the consolidated statements of income for the year ended December 29, 2021. See additional information presented in Note 2 “Summary of Significant Accounting Policies” in the accompanying “Notes to Consolidated Financial Statements” in this Annual Report. In addition, the labor and related expenses increase was partially offset by a reduction of $1.8 million in labor for restaurant locations sold to franchisees during fiscal 2021, a reduction of $1.6 million for the additional week of operations in 2020 which was a 53-week fiscal year and a reduction of COVID-19 related expenses of $0.8 million.

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Labor and related expenses as a percentage of company-operated restaurant revenue were 30.5% in fiscal 2021, consistent with the prior year.

Occupancy and Other Operating Expenses

Occupancy and other operating expenses increased $5.1 million, or 5.6%, in fiscal 2021. The increase was primarily due to a $1.4 million increase in market place delivery fees, a $1.0 million increase in utilities costs, a $0.8 million increase in advertising expenses, a $0.8 million increase in repair and maintenance costs, a $0.3 million increase in operating supplies primarily related to COVID-19 and a $1.1 million increase in other operating expenses. These increases were partially offset by a $0.3 million decrease in occupancy costs, primarily related to a reduction in rent expense from restaurants sold to franchisees during 2021. Occupancy and other operating expenses as a percentage of company-operated restaurant revenue were 24.7% in fiscal 2021, consistent with the prior year.

Gain on Recovery of Insurance Proceeds, Lost Profits

In fiscal 2020, we received business interruption insurance proceeds of $2.0 million, primarily related to restaurant sales losses and expenses related to the COVID-19 pandemic and resulting dining room closures.

General and Administrative Expenses

General and administrative expenses increased $3.9 million, or 11.0%, in fiscal 2021. The increase was due primarily to a $1.4 million increase in legal expenses, a $0.9 million increase in labor related costs, primarily related to an increase in management bonus expense, a $1.2 million increase in recruiting costs and other outside services fees and a $0.5 million increase in other general and administrative expenses. These increases were partially offset by a $0.5 million impact from an additional week of operations in fiscal 2020, which was a 53-week fiscal year.

General and administrative expenses as a percentage of total revenue were 8.8% in fiscal 2021, up from 8.4% in fiscal 2020. This increase is primarily due to the cost increases described above, partially offset by higher revenue.

Legal Settlements

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

Franchise Expenses

Franchise expenses increased $4.1 million, or 14.2%, in fiscal 2021. The increase was primarily due to an increase in advertising expenses, primarily resulting from higher franchise revenue and rent expense for locations sub-leased to franchisees that have a portion of the rent based on a percentage of revenue generated.

Recovery of Securities Class Action Legal Expenses and Other Insurance Claims

During fiscal 2020, we received insurance proceeds of $0.1 million related to a property claim. See Note 13, “Commitments and Contingencies—Legal Matters” in the accompanying "Notes to Consolidated Financial Statements" in this Annual Report.

Impairment and Closed-Store Reserves

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

During fiscal 2020, we recorded a $3.5 million non-cash impairment charge primarily related to the carrying value of the ROU assets of one restaurant in Texas and the long-lived assets of four restaurants in California.

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

During fiscal 2020, we recognized $1.2 million of closed-store reserve expense related to the amortization of ROU assets, property taxes and CAM payments for our closed locations.

Given the inherent uncertainty in projecting results for newer restaurants in newer markets, as well as the impact of the COVID-19 pandemic, we are 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.

Loss on Disposition of Restaurants

During fiscal 2021, we completed the sale of eight company-operated restaurants within the Sacramento area to an existing franchisee. We determined that these restaurant dispositions represent multiple element arrangements, and as a result, the cash consideration received was allocated to the separate elements based on their relative standalone selling price. Cash proceeds included upfront consideration for the sale of the restaurants and franchise fees, as well as

future cash consideration for royalties. The cash consideration per restaurant related to franchise fees is consistent with the amounts stated in the related franchise agreements, which are charged for separate standalone arrangements. The Company initially defers and subsequently recognizes the franchise fees over the term of the franchise agreement. Future royalty income is also recognized in revenue as earned.

This sale resulted in cash proceeds of $4.6 million and a net loss on sale of restaurants of $1.5 million for the fiscal year ended December 29, 2021. These restaurants are included in the total number of franchised El Pollo Loco restaurants.

Interest Expense, Net

For fiscal 2021, net interest expense, decreased by $1.5 million, primarily related to lower interest rates and lower outstanding balances on our 2018 Revolver (as defined below).

Income Tax Receivable Agreement

On July 30, 2014, we entered into the tax receivable agreement (the “TRA”) liability. The TRA calls for us to pay to our pre-IPO stockholders 85% of the savings in cash that we realize in our taxes as a result of utilizing our net operating losses and other tax attributes attributable to preceding periods. In fiscal 2021 and fiscal 2020, we recognized income tax receivable agreement expense of less than $0.1 million and $0.1 million, respectively. In fiscal 2021 and 2020, we paid $1.7 million and $5.2 million, respectively, to our pre-IPO stockholders under the TRA.

Provision for Income Taxes

In fiscal 2021, we recorded an income tax expense of $10.3 million, compared to income tax expense of $5.7 million in fiscal 2020, reflecting an estimated effective tax rate of 26.2% and 18.8%, respectively. The difference between the 21.0% statutory rate and the Company’s effective tax rate of 26.2% for the year-to-date ended December 29, 2021 is primarily a result of windfall tax benefit related to stock options exercised and state taxes, a Work Opportunity Tax Credit benefit and the change in valuation allowance against certain state credits as a result of future forecasted income apportioned to the state jurisdiction.

The difference between the 21.0% statutory rate and the Company’s effective tax rate of 18.8% for the year ended December 30, 2020 is primarily a result of state taxes, windfall tax benefit related to stock options exercised and state taxes, a Work Opportunity Tax Credit benefit and the change in valuation allowance against certain state credits as a result of future forecasted income apportioned to the state jurisdiction.

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Fiscal Year 2020 Compared to Fiscal Year 2019

Year-to-year comparisons of fiscal 2020 and fiscal 2019 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 on our Annual Report on Form 10-K for the year ended December 30, 2020, which was filed with the SEC on March 15, 2021.

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Key Performance Indicators

To evaluate the performance of our business, we utilize a variety of financial and performance measures. These key measures include company-operated restaurant revenue, system-wide sales, comparable restaurant sales, company-operated average unit volumes ("AUV"), restaurant contribution, restaurant contribution margin, new restaurant openings, EBITDA, and Adjusted EBITDA. In fiscal 2021, our restaurants generated company-operated restaurant revenue of $394.7 million and system-wide sales of $973.2 million, and system comparable sales growth of 12.1%, consisting of company-operated restaurant comparable sales growth of 7.6% and franchised comparable sales growth of 15.3%. The company-operated comparable sales increase consisted of a 6.3% increase in average check size. In fiscal 2021, for company-operated restaurants, our annual AUV was $2.0 million, restaurant contribution margin was 18.4%, and Adjusted EBITDA was $63.4 million.

Company-Operated Restaurant Revenue

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

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

System-Wide Sales

System-wide sales are neither required by, nor presented in accordance with, accounting principles generally accepted in the United States of America (“GAAP”). System-wide sales are the sum of company-operated restaurant revenue and sales from franchised restaurants. Our total revenue in our consolidated statements of income is limited to company-operated restaurant revenue and franchise revenue from our franchisees. Accordingly, system-wide sales should not be considered in isolation or as a substitute for our results as reported under GAAP. Management believes that 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:

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Fiscal Year ​ ​

Franchise advertising fee revenue ​ ​ (25,901) ​ ​ (22,605) ​ ​ (22,399) ​ ​

​

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Comparable Restaurant Sales

Comparable restaurant sales reflect year-over-year sales changes for comparable company-operated, franchised, and system-wide restaurants. A restaurant enters our comparable restaurant base the first full week after it has operated for fifteen months. Comparable restaurant sales exclude restaurants closed during the applicable period. At December 29, 2021, December 30, 2020 and December 25, 2019, there were 464, 465 and 460 comparable restaurants, 187, 190 and 195 company-operated and 276, 275 and 265 franchised, respectively. Comparable restaurant sales indicate the performance of existing restaurants, since new restaurants are excluded. Comparable restaurant sales growth can be generated by an increase in the number of meals sold and/or by increases in the average check size, 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 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 a step process. First, we divide our total net sales for all company-operated restaurants for the fiscal year by the total number of restaurant operating weeks during the same period. Second, we annualize that average weekly per-restaurant sales figure by multiplying it by 52. An operating week is defined as a restaurant open for business over a seven-day period from Thursday to Wednesday. This measurement allows management to assess changes in consumer spending patterns at our restaurants and the overall performance of our restaurant base.

Restaurant Contribution and Restaurant Contribution Margin

Restaurant contribution and restaurant contribution margin are neither required by, nor presented in accordance with, GAAP. Restaurant contribution is defined as company-operated restaurant revenue less company restaurant expenses which includes food and paper cost, labor and related expenses and occupancy and other operating expenses, where applicable. Restaurant contribution 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 shareholders because of the exclusion of certain corporate-level expenses. Restaurant contribution margin is defined as restaurant contribution as a percentage of net company-operated restaurant revenue.

Restaurant contribution and restaurant contribution margin are supplemental measures of operating performance of our restaurants, and our calculations thereof may not be comparable to those reported by other companies. Restaurant contribution and restaurant contribution margin have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. Management 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:

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ Fiscal Year

Restaurant contribution: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Add (less): ​ ​ ​ ​

Legal settlements ​ — ​ 2,566 ​ — ​

Loss on disposal of assets ​ 289 ​ 189 ​ 266 ​

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Impairment and closed-store reserves ​ 1,087 ​ 4,691 ​ 4,852 ​

Loss on disposition of restaurants ​ 1,534 ​ — ​ 5,058 ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Company-operated restaurant revenue: ​ ​ ​ ​

Less: ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Restaurant contribution margin (%) ​ 18.4 % 18.8 % 18.7 %

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

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

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

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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) 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 as benchmarks to compare our performance to that of our competitors.

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

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ Fiscal Year

Non-GAAP adjustments: ​ ​ ​ ​ ​ ​

Interest expense, net of interest income ​ 1,824 ​ 3,292 ​ 3,687

Loss on disposal of assets (b) ​ 289 ​ 189 ​ 266

Impairment and closed-store reserves (d) ​ 1,087 ​ 4,691 ​ 4,852

Loss on disposition of restaurants (e) ​ 1,534 ​ — ​ 5,058

Income tax receivable agreement expense (f) ​ 58 ​ 139 ​ 57

Securities class action legal expense (g) ​ 495 ​ 604 ​ 3,181

Legal settlements (h) ​ ​ — ​ ​ 2,566 ​ ​ —

Executive transition costs (j) ​ ​ — ​ ​ — ​ ​ 151

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In fiscal 2020, we recorded non-cash impairment charges of $3.5 million for the year ended December 30, 2020, primarily related to the carrying value of the ROU assets of one restaurant in Texas and the long-lived assets of four restaurants in California. During fiscal 2020, we recognized $1.2 million of closed-store reserve expense, primarily related to the amortization of ROU assets, property taxes and CAM payments for our closed locations.

In fiscal 2019, we recorded impairment charges of $3.6 million, primarily related to the carrying value of the ROU assets of four restaurants sold to franchisees and one restaurant closed during fiscal 2019, and the long-lived assets of one restaurant in California. Additionally, during fiscal 2019, we closed two restaurants in California and two restaurants in Texas and recognized $1.3 million of closed-store reserve expense, primarily related to the amortization, property taxes and CAM payments for our closed locations.

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

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However, depending on the severity and longevity of the COVID-19 pandemic, the efforts taken to reduce its spread and the possibility of a subsequent resurgence of the COVID-19 outbreak, 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.

Cash Flows

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

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ Fiscal Year

Net cash provided by (used in) ​ ​ ​ ​ ​ ​

​

Operating Activities

In fiscal 2021, net cash provided by operating activities increased by $11.6 million compared to fiscal 2020. This increase was due primarily to an increase in profitability after non-cash items and favorable working capital fluctuations for the year ended December 29, 2021.

In fiscal 2020, net cash provided by operating activities increased by $4.4 million compared to fiscal 2019. This increase was due primarily to favorable working capital fluctuations, partially offset by a decline in profitability after non-cash items for the year ended December 30, 2020 compared to the prior year, which we believe related to the COVID-19 pandemic.

Investing Activities

In fiscal 2021, net cash used in investing activities increased by $5.8 million compared to fiscal 2020. This increase was due primarily to opening two new company-operated restaurants and remodeling 10 restaurants during the year ended December 29, 2021 compared to opening one new company-operated restaurant and completing two new remodels during the year ended December 30, 2020. This was partially offset by cash proceeds of $4.6 million received during the year ended December 29, 2021 related to the sale of eight restaurants within the Sacramento area to an existing franchisee.

In fiscal 2020, net cash used in investing activities decreased by $4.0 million compared to fiscal 2019. This was due primarily to purchases of property and equipment of $6.7 million in fiscal 2020 compared to $15.4 million in fiscal 2019. This was partially offset by cash proceeds of $4.8 million received during the year ended December 25, 2019 related to the sale of four company-operated restaurants within the San Francisco area to an existing franchisee and seven company-operated restaurants in the Phoenix area to another existing franchisee. Capital expenditures for these periods exclude unpaid purchases of property and equipment.

Financing Activities

In fiscal 2021, net cash used in financing activities decreased by $5.9 million compared to fiscal 2020. This decrease was due primarily to $22.8 million of net pay downs on the 2018 Revolver (as defined below) during fiscal 2021, compared to net pay downs of $34.2 million in fiscal 2020. The change was partially offset by a decrease of $5.0 million in proceeds received from the issuance of common stock upon exercise of stock options in fiscal 2021 compared to fiscal 2020.

In fiscal 2020, net cash used in financing activities increased by $4.3 million compared to fiscal 2019. This increase was due primarily to $34.2 million of net pay downs on the 2018 Revolver (as defined below) during fiscal 2020, compared to net borrowings of $23.0 million in fiscal 2019. This was partially offset by $48.4 million of cash outflow related to

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stock buybacks in fiscal 2019 and an increase of $4.4 million of proceeds received from the issuance of common stock upon exercise of stock options in fiscal 2020 compared to fiscal 2019.

Debt Obligations

The Company, as a guarantor, is a party to a credit agreement (the “2018 Credit Agreement”) among EPL, as borrower, Intermediate, as a guarantor, Bank of America, N.A., as administrative agent, swingline lender, and letter of credit issuer, the lenders party thereto, and the other parties thereto, which provides for a $150.0 million five-year senior secured revolving credit facility (the “2018 Revolver”). The 2018 Revolver, which is available pursuant to the 2018 Credit Agreement, includes a sub limit of $15.0 million for letters of credit and a sub limit of $15.0 million for swingline loans. The 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.

​

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

​

Borrowings under the 2018 Revolver (other than any swingline loans) bear interest, at the borrower’s option, at rates based upon either LIBOR or a base rate, plus, for each rate, a margin determined in accordance with a lease-adjusted consolidated leverage ratio-based pricing grid. The base rate is calculated as the highest of (a) the federal funds rate plus 0.50%, (b) the 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 the range of 0.25% to 1.25%. For borrowings under the 2018 Revolver during fiscal 2021, the interest rate range was 1.3% to 1.6%. For borrowings under the 2018 Revolver during fiscal 2020, the interest rate range was 1.6% to 3.3%. The interest rate under the 2018 Revolver was 1.4% at December 29, 2021 and 1.6% under the 2018 Revolver at December 30, 2020.

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. The 2018 Credit Agreement contains certain financial covenants. The Company was in compliance with all such covenants at December 29, 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 1.5%. The interest rate swap matures in June 2023.

Material Cash Requirements

Our total capital expenditures for 2021 were $17.0 million. In 2021, we spent approximately $7.0 million on the development and construction of our new restaurants. The remaining $10.0 million of capital expenditures during 2021 were related to investments in existing restaurants, including new equipment andhardware, technology to optimize efficiencies, remodeling and similar improvements. In 2022, we expect to incur between $20.0 million and $25.0 million in total capital expenditures, of which we expect $10.0 million to $12.0 million will be related to our construction of new restaurants, and $10.0 million to $13.0 million will be related to investments in existing restaurants, including new equipment andhardware, technology to optimize efficiencies, remodeling and similar improvements. Finally, we expect a portion of our incurred capital expenditures in 2022 to be for additional corporate initiatives, including investments in

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technology for support centers to boost innovation, enhancing the customer experience, and improving operations. We expect to fund these capital expenditures primarily with operating cash flows.

The following table summarizes our other current and long-term material cash requirements as of December 29, 2021, which we expect to fund primarily with operating cash flows:

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ Payments Due by Period

(Amounts in thousands) ​ Total ​ 2022 ​ 2024 ​ 2026 ​ thereafter

Income tax receivable agreement (3) ​ 1,538 ​ 437 ​ 1,101 ​ — ​ —

Purchasing commitments—chicken(4) ​ 38,681 ​ 38,681 ​ — ​ — ​ —

​

Critical Accounting Policies and Estimates

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

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

Revenue Recognition

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

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franchised restaurant sales based on a percentage of restaurant revenues in the period that the related franchised restaurants’ revenues are earned. The initial franchise services, or exclusivity of the development agreements, are not distinct from the continuing rights or services offered during the term of the franchise agreement and are, therefore, treated as a single performance obligation. As such, initial franchise and development fees received, and subsequent renewal fees, are recognized over the franchise, or renewal, term, which is typically 20 years.

Goodwill and Indefinite-Lived Intangible Assets, Net

Intangible assets consist primarily of goodwill and trademarks.

We do not amortize our goodwill and indefinite-lived intangible assets. We perform an annual impairment test for goodwill during the fourth fiscal quarter of each year, or more frequently if impairment indicators arise.

We perform an annual impairment test for indefinite-lived intangible assets during the fourth fiscal quarter of each year, or more frequently if impairment indicators arise. An impairment test consists of either a qualitative assessment or a comparison of the fair value of an intangible asset with its carrying amount. The excess of the carrying amount of an intangible asset over its fair value is its impairment loss.

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

We determined that there were no indicators of potential impairment of our goodwill and indefinite-lived intangible assets during fiscal 2021. Accordingly, we did not record any impairment to goodwill or indefinite-lived intangible assets during the year ended December 29, 2021. The ultimate severity and longevity of the COVID-19 pandemic and the extent and duration of any economic downturn is unknown, and therefore, it is possible that impairments could be identified in future periods, and such amounts could be material.

Long-Lived and ROU Assets

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

The Company reviews its long-lived and ROU assets for impairment on a restaurant-by-restaurant basis whenever events or changes in circumstances indicate that the carrying value of certain assets may not be recoverable. The Company considers a triggering event to have occurred related to a specific restaurant if the restaurant’s AUV for the last twelve months are less than a minimum threshold or if consistent levels of undiscounted cash flows for the remaining lease period are less than the carrying value of the restaurant’s assets. If the Company concludes that the carrying value of certain assets will not be recovered based on expected undiscounted future cash flows, an impairment write-down is recorded to reduce the assets to their estimated fair value. The fair value is measured on a nonrecurring basis using unobservable (Level 3) inputs. There is uncertainty in the projected undiscounted future cash flows used in our impairment review analysis. If actual performance does not achieve the projections, we may recognize impairment charges in future periods, and such charges could be material.

Insurance Reserves

We are responsible for workers’ compensation, general, and health insurance claims up to a specified amount. We maintain a reserve for estimated claims both reported and incurred but not reported, based on historical claims experience and other assumptions. In estimating our insurance accruals, we utilize independent actuarial estimates of

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expected losses, which are based on statistical analyses of historical data. Our actuarial assumptions are closely monitored and adjusted when warranted by changing circumstances. Should claims occur or medical costs increase in greater amounts than we have expected, accruals may not be sufficient, and we may record additional expenses.

Accounting for Lease Obligations

We lease a substantial number of our restaurant properties. At the inception of each lease, we evaluate the property and the lease to determine whether the lease is an operating lease or a finance lease. This lease accounting evaluation may require significant judgment in determining the fair value and useful life of the leased property and the appropriate lease term. The lease term used for the evaluation includes renewal option periods only in instances in which the exercise of the renewal option can be reasonably assured because failure to exercise such an option would result in an economic penalty. Such an economic penalty would typically result from our having to abandon a building or fixture with remaining economic value upon vacating a property.

We make significant assumptions and judgments related to determination of whether a contract contains a lease and the discount rate used for the lease. In determining if any of our contracts contain a lease, we make assumptions and judgments related to our ability to direct the use of any assets stated in the contract and the likelihood of renewing any short-term contracts for a period extending past twelve months. We also make significant assumptions and judgments in determining an appropriate discount rate for property leases. These include using a consistent discount rate for a portfolio of leases entered into at varying dates, using the full 20-year term of the lease, excluding any options, and using the total minimum lease payments. We utilize a third-party valuation firm to assist in determining the discount rate, based on the above assumptions. For all other leases, we use the discount rate implicit in the lease, or the Company’s incremental borrowing rate.

Income Taxes

We use the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are determined based on temporary differences between the financial carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which the temporary differences are expected to reverse. As of December 29, 2021, we had no federal and less than $0.1 million state net operating loss (“NOL”) carryforwards. These State NOLs expire beginning 2028.

​

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

● future reversals of existing taxable temporary differences;

● tax-planning strategies; and

● taxable income in prior carryback years.

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

● current financial performance;

● the overall market environment; and

● the volatility and trends in the industry in which we operate.

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

When there are uncertainties related to potential income tax benefits, in order to qualify for recognition, the position we take has to have at least a “more likely than not” chance of being sustained (based on the position’s technical merits) upon challenge by the responsible authorities. The term “more likely than not” means a likelihood of more than 50%. Otherwise, we may not recognize any of the potential tax benefits associated with that position. We recognize a benefit for a tax position that meets the “more likely than not” criterion as the largest amount of tax benefit that is greater than 50% likely to be realized upon its effective resolution. Unrecognized tax benefits involve our judgment regarding the likelihood of a benefit being sustained. The final resolutions of uncertain tax positions could result in adjustments to recorded amounts and affect our results of operations, financial position, and cash flows. However, we anticipate that any such adjustments would not materially impact our financial statements.

On July 30, 2014, we entered into the TRA. The TRA calls for us to pay our pre-IPO stockholders 85% of the cash savings that we realize in our taxes as a result of utilizing our NOLs and other tax attributes attributable to preceding periods. The TRA charge expense (benefit) is a permanent add-back to our taxable income. TRA resulted in less than $0.1 million of expense in fiscal 2021 as a result of the amortization of interest expense related to the total expected TRA payments and changes in estimates for actual tax returns filed and future forecasted taxable income, $0.1 million of expense in fiscal 2020 as a result of changes to future forecasted results and deduction on 2018 legal settlement accrual and $0.1 million of expense in fiscal 2019 as a result of changes to future forecasted results. In fiscal 2021, 2020 and 2019, we paid $1.7 million, $5.2 million and $5.8 million, respectively, to our pre-IPO stockholders under the TRA.

In addition, in fiscal 2014, we applied for various tax credits that resulted in $6.7 million of additional deferred tax assets and tax benefits. As of fiscal 2021, the deferred asset balance related to these various tax credits, net of valuation allowance was $1.3 million. The fiscal 2021 provision includes a $6.2 million valuation allowance against our deferred tax asset, resulting from certain tax credits that may not be realizable prior to the time the credits expire.

During fiscal 2020, we received a Notice of Proposed Adjustment for the years ended December 27, 2017 and December 28, 2016, related to our methodology regarding our ordering of NOL. Resolution of this NOPA resulted in a payment of $0.4 million, and the audit is closed. As a result of the CARES Act, this amount was immediately refundable upon filing of a Form 1139. We filed the Form 1139 during the year ended December 30, 2020 and received a refund totaling $0.5 million.

Stock-Based Compensation

We measure and recognize compensation expense for the estimated fair value of equity instruments for employees and non-employee directors based on the grant-date fair value of the award. For awards that are based on a service requirement, the cost is recognized on a straight-line basis over the requisite service period, usually the vesting period. We granted 256,172 options during fiscal 2021. In fiscal 2021, we granted 222,741 restricted stock awards, with an exercise price equal to the fair market value of the common stock on the date of grant. The awards granted in fiscal 2021, 2020 and 2019 had a four-year vesting period for employees and three-year vesting period for directors. In order to calculate the grant date fair value for our stock options, we utilize the Black–Scholes option pricing model. The model involves several assumptions including the expected term of the option, expected volatility and risk-free interest rate. The volatility and the expected life assumptions were based on our historical data. If we changed our assumptions of stock price volatility or expected lives of our stock options, our stock-based compensation expense and results of operations may be materially different.

Recent Accounting Pronouncements

Recent accounting pronouncements are described in Note 2 “Summary of Significant Accounting Policies” in our accompanying “Notes to Consolidated Financial Statements” in this Annual Report.

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ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

We are exposed to market risk from changes in interest rates on our debt, which bears interest, at USD LIBOR plus a margin between 1.25% and 2.25%. As of December 29, 2021, we had outstanding borrowings of $40.0 million under our 2018 Revolver, $10.0 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, certain tenors of LIBOR were phased out as of December 31, 2021 and the remaining tenors of LIBOR will be phased out as of June 30, 2023. Organizations are currently working on industry wide and company specific transition plans as it relates to financial and other derivative contracts exposed to LIBOR. Prior to LIBOR phasing out, we are likely 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 did not have any long-term debt subject to variations in interest rates as of December 29, 2021 and as such, a one percent increase in the variable rate of interest would not result in a material increase in annual interest expense.

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 1.31%, plus applicable margin, which was 1.5% for the year ended December 29, 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 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.

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ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

EL POLLO LOCO HOLDINGS, INC. AND SUBSIDIARIES

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS

​

Audited Consolidated Financial Statements ​

Consolidated Balance Sheets – December 29, 2021 and December 30, 2020 53

Notes to Consolidated Financial Statements 58

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and Board of Directors

El Pollo Loco Holdings, Inc.

Costa Mesa, California

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of El Pollo Loco Holdings, Inc. (the “Company”) as of December 29, 2021 and December 30, 2020, the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 29, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 29, 2021 and December 30, 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 29, 2021, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 29, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 11, 2022 expressed an unqualified opinion thereon.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.

​

Impairment of Restaurant Property and Equipment

As discussed in Notes 2 and 3 to the consolidated financial statements, the Company reviews its long-lived assets including property and equipment, related to restaurants held and used in the business, for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. For certain restaurants, indicators of impairment of the related property and equipment were present. As such, for these restaurants, management compared the projected undiscounted cash flow to the carrying value. Total property and equipment, net of accumulated depreciation was $75.7 million as of December 29, 2021.

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We identified the Company’s evaluation of impairment of restaurant property and equipment as a critical audit matter. The future cash flows used in the Company's restaurant property and equipment impairment analysis requires management to develop estimates and assumptions about future revenue transaction growth rates, pricing changes, and restaurant operating margins, which are made more uncertain by the significant and evolving impact of COVID-19 on the Company’s business. Auditing these significant judgments and assumptions involved especially challenging auditor judgment and increased effort in performing procedures.

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

​

​

/s/ BDO USA, LLP

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

Costa Mesa, California

March 11, 2022

​

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​

CONSOLIDATED BALANCE SHEETS

​

(Amounts in thousands, except share data)

​

​ ​ ​ ​ ​ ​ ​

​ December 29, December 30,

Assets ​ ​ ​ ​ ​

Current assets: ​ ​ ​ ​

Accounts and other receivables, net ​ 13,407 ​ 9,963

Prepaid expenses and other current assets ​ 3,732 ​ 3,865

Income tax receivable ​ — ​ 2,522

Property and equipment held under finance lease, net ​ 1,635 ​ 1,661

Liabilities and Stockholders’ Equity ​ ​

Current liabilities: ​ ​

Current portion of obligations under finance leases ​ $ 143 ​ $ 70

Current portion of obligations under operating leases ​ 19,959 ​ 19,907

Accrued income taxes payable ​ 889 ​ —

Current portion of income tax receivable agreement payable ​ 437 ​ 1,577

Other accrued expenses and current liabilities ​ 19,796 ​ 16,804

Obligations under finance leases, net of current portion ​ 1,712 ​ 1,692

Obligations under operating leases, net of current portion ​ 171,651 ​ 178,658

Income tax receivable agreement payable, net of current portion ​ 1,101 ​ 1,562

Commitments and contingencies (Note 13) ​ ​

Stockholders’ equity ​ ​

Accumulated other comprehensive loss ​ (290) ​ (833)

Total liabilities and stockholders’ equity ​ $ 613,786 ​ $ 605,221

See notes to consolidated financial statements.

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​

CONSOLIDATED STATEMENTS OF INCOME

​

(Amounts in thousands, except share data)

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ For the Fiscal Years Ended

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Revenue ​ ​ ​

Cost of operations ​ ​ ​

Gain on recovery of insurance proceeds, lost profits ​ ​ — ​ ​ (2,000) ​ ​ —

Legal settlements ​ — ​ 2,566 ​ —

Loss on disposition of restaurants ​ ​ 1,534 ​ ​ — ​ ​ 5,058

Income tax receivable agreement expense ​ 58 ​ 139 ​ 57

Net income per share ​ ​ ​

Weighted-average shares used in computing net income per share ​ ​ ​

​

See notes to consolidated financial statements.

​

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​

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

​

(Amounts in thousands)

​

​ ​ ​ ​ ​ ​ ​ ​ ​

​ For the Fiscal Years Ended

​ December 29, December 30, December 25,

Other comprehensive income (loss) ​ ​

Changes in derivative instruments ​ ​

Reclassifications of losses (gains) into net income 486 ​ 278 ​ (84)

Income tax (expense) benefit (200) ​ 398 ​ (93)

Other comprehensive income (loss), net of taxes 543 ​ (1,086) ​ 253

​

See notes to consolidated financial statements.

​

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​

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

​

(Amounts in thousands, except share data)

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ Accumulated ​

​ ​ ​ ​ Additional ​ ​ Other Total

​ ​ Common Stock ​ Paid-in ​ Accumulated ​ Comprehensive ​ Stockholders’

​ Shares Amount Capital Deficit Income (Loss) Equity

Stock-based compensation ​ — ​ — ​ 2,474 ​ — ​ — ​ 2,474

Stock-based compensation ​ — ​ — ​ 3,093 ​ — ​ — ​ 3,093

Stock-based compensation ​ — ​ — ​ 3,220 ​ — ​ — ​ 3,220

Other comprehensive income, net of income tax ​ — ​ — ​ — ​ — ​ 543 ​ 543

​

See notes to consolidated financial statements.

​

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​

CONSOLIDATED STATEMENTS OF CASH FLOWS

​

(Amounts in thousands)

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ For the Fiscal Years Ended

​ December 29, December 30, December 25,

Cash flows from operating activities: ​ ​ ​ ​ ​ ​

Bad debt expense ​ ​ — ​ ​ 190 ​ ​ —

Income tax receivable agreement expense ​ 58 ​ 139 ​ 57

Loss on disposition of restaurants ​ ​ 1,534 ​ ​ — ​ ​ 5,058

Impairment of property and equipment ​ 711 ​ 3,498 ​ 3,559

Amortization of deferred financing costs ​ 251 ​ 252 ​ 251

Changes in operating assets and liabilities: ​ ​ ​

Prepaid expenses and other current assets ​ 133 ​ 1,853 ​ (2,727)

Payment related to tax receivable agreement ​ (1,658) ​ (5,237) ​ (5,764)

Other accrued expenses and liabilities ​ (1,072) ​ (8,575) ​ (20,160)

Cash flows from investing activities: ​ ​ ​

Proceeds from disposition of restaurants ​ 4,556 ​ — ​ 4,770

Net cash flows used in investing activities ​ (12,485) ​ (6,690) ​ (10,669)

Cash flows from financing activities: ​ ​ ​

Proceeds from borrowings on revolver and swingline loans ​ — ​ 59,500 ​ 42,000

Payments on revolver and swingline loan ​ ​ (22,800) ​ ​ (93,700) ​ ​ (19,000)

Payment of obligations under finance leases ​ (148) ​ (39) ​ (68)

Repurchases of common stock ​ — ​ — ​ (48,382)

Net cash flows used in financing activities ​ (22,787) ​ (28,708) ​ (24,365)

Cash and cash equivalents, beginning of period ​ 13,219 ​ 8,070 ​ 6,969

Cash and cash equivalents, end of period ​ $ 30,046 ​ $ 13,219 ​ $ 8,070

​

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ For the Fiscal Years Ended

​ December 29, December 30, December 25,

Supplemental cash flow information ​ ​ ​

Cash paid during the period for interest ​ $ 1,066 ​ $ 2,956 ​ $ 3,649

Cash paid during the period for income taxes ​ $ 5,968 ​ $ 4,225 ​ $ 558

Unpaid purchases of property and equipment ​ $ 2,454 ​ $ 1,925 ​ $ 746

​

​

See notes to consolidated financial statements.

​

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

​

1. DESCRIPTION OF BUSINESS

El Pollo Loco Holdings, Inc. (“Holdings”) is a Delaware corporation headquartered in Costa Mesa, California. Holdings and its direct and indirect subsidiaries are collectively known as “we,” “us” or the “Company.” The Company’s activities are conducted principally through its indirect wholly-owned subsidiary, El Pollo Loco, Inc. (“EPL”), which develops, franchises, licenses and operates quick-service restaurants under the name El Pollo Loco ®. The restaurants, which are located principally in California but also in Arizona, Nevada, Texas, Utah and Louisiana, specialize in fire-grilling citrus-marinated chicken in a wide variety of contemporary Mexican and LA-inspired entrees, including specialty chicken burritos, chicken quesadillas, chicken tostada salads, chicken tortilla soup, variations on our Pollo Bowl®, Pollo Salads and our Pollo Fit entrees. At December 29, 2021, the Company operated 189 (141 in the greater Los Angeles area) and franchised 291 (135 in the greater Los Angeles area) El Pollo Loco restaurants. In addition, the Company currently licenses one restaurant in the Philippines. The Company’s largest stockholder is Trimaran Pollo Partners, L.L.C. (“LLC”), which is controlled by affiliates of Trimaran Capital, L.L.C. LLC acquired Chicken Acquisition Corp. (“CAC”), a predecessor of Holdings, on November 17, 2005 (the “Acquisition”) and has a 45.8% ownership interest as of December 29, 2021. LLC’s only material asset is its investment in Holdings.

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

Holdings has no material assets or operations. Holdings and Holdings’ direct subsidiary, EPL Intermediate, Inc. (“Intermediate”), guarantee EPL’s 2018 Revolver (see Note 6, “Long-Term Debt”) on a full and unconditional basis and Intermediate has no subsidiaries other than EPL. EPL is a separate and distinct legal entity, and has no obligation to make funds available to Intermediate. EPL and Intermediate may pay dividends to Intermediate and to Holdings, respectively.

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

​

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Liquidity

The Company’s principal liquidity and capital requirements are new restaurants, existing restaurant capital investments (remodel and maintenance), interest payments on its debt, lease obligations and working capital and general corporate needs. At December 29, 2021, the Company’s total debt was $40.0 million. The Company’s ability to make payments on its indebtedness and to fund planned capital expenditures depends on available cash and its ability to generate adequate cash flows in the future, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond the Company’s control. Based on current operations, the Company believes that its cash flows from operations, available cash of $30.0 million at December 29, 2021, and available borrowings under the 2018 Revolver (as defined in Note 6) will be adequate to meet the Company’s liquidity needs for the next twelve months from the issuance of the consolidated financial statements. However, depending on the severity and longevity of the COVID-19 pandemic, the Company’s financial performance and liquidity could be further impacted and could impact the Company’s ability to meet certain covenants required in its 2018 Credit Agreement (as defined in Note 6), specifically the lease-adjusted coverage ratio and fixed-charge coverage ratio.

Basis of Presentation

The Company uses a 52- or 53-week fiscal year ending on the last Wednesday of each calendar year. Fiscal 2021, 2020, and 2019 ended on December 29, 2021, December 30, 2020 and December 25, 2019, respectively. In a 52-week fiscal year, each quarter includes 13 weeks of operations. In a 53-week fiscal year, the first, second and third quarters each include 13 weeks of operations and the fourth quarter includes 14 weeks of operations. Approximately every six or

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seven years a 53-week fiscal year occurs. Fiscal 2021 and 2019 were 52-week fiscal years. Fiscal 2020 was a 53-week fiscal year. 53-week years may cause revenues, expenses, and other results of operations to be higher due to the additional week of operations.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Holdings and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and revenue and expenses during the period reported. Actual results could materially differ from those estimates. The Company’s significant estimates include estimates for impairment of goodwill, intangible assets and property and equipment, insurance reserves, lease accounting matters, stock-based compensation, tax receivable agreement (the “TRA”) liability, contingent liabilities and income tax valuation allowances.

COVID-19

During the COVID-19 pandemic, the Company has experienced periods of significant disruption to its restaurant operations. Following the pandemic declaration in March 2020, federal, state and local governments have periodically responded to the public health crisis by requiring social distancing, issuing “stay at home” directives, and implementing restaurant restrictions - including government-mandated dining room closures - that limited business to off-premise services only (take-out, drive-thru and delivery). The COVID-19 pandemic and the measures taken to prevent its spread have adversely affected the Company’s operations and financial results, particularly during fiscal 2020 as well as periods of 2021 when COVID-19 infections increased with the spread of new strains of the virus. The disruption in operations has led to the Company considering the impact of the COVID-19 pandemic on its liquidity, debt covenant compliance, and recoverability of long-lived and right-of-use (“ROU”) assets, goodwill and intangible assets, among others.The Company is continually evaluating the impact of the global crisis on its financial condition, liquidity, operations, suppliers, industry, and workforce and will take additional actions as necessary.

While all of the Company’s restaurants had dining rooms open as of December 29, 2021, the Company continues to experience staffing challenges, which resulted in reduced operating hours and service channels at some of the Company’s restaurants and resulted in higher wage inflation, overtime costs and other labor related costs. Further, the Company experienced inflationary pressures due to supply chain disruptions that resulted in increased commodity prices and impacted the Company’s business and results of operations during the year ended December 29, 2021. The Company expects these pressures to continue during fiscal 2022. During fiscal 2021, the Company incurred $3.9 million in COVID-19 related expenses, primarily due to leaves of absence and overtime pay. During fiscal 2020, the Company incurred $4.9 million in COVID-19 related expenses, primarily due to leaves of absence and overtime pay. During fiscal 2021 as part of the CARES Act, the Company recognized the Employee Retention Credit (“ERC”) in the amount of $3.4 million, which is recorded as an offset to the corresponding payroll expense and is classified as part of the labor and other operating expenses on the consolidated statements of income for the year ended December 29, 2021. See additional information presented in Note 2 “Summary of Significant Accounting Policies” below.

Due to the rapid development and fluidity of this situation, the Company cannot determine the ultimate impact that the COVID-19 pandemic will have on the Company’s consolidated financial condition, liquidity, and future results of operations, and therefore any prediction as to the ultimate materiality of the adverse impact on the Company’s consolidated financial condition, liquidity, and future results of operations is uncertain.

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Cash and Cash Equivalents

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

Subsequent Events

On March 8, 2022, the Company’s Board of Directors appointed Mr. Roberts as Chief Executive Officer, President and a Class III director on the Board of Directors of the Company, effective March 9, 2022. Mr. Roberts will continue to serve as the Company’s interim Chief Financial Officer and as its principal executive officer, principal accounting officer and principal financial officer. Refer to Item 9B below for additional information.

Concentration of Risk

Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally-insured limits. The Company has never experienced any losses related to these balances.

The Company had one supplier for which amounts due at December 29, 2021 totaled 26.1% of the Company’s accounts payable. As of December 30, 2020, the Company had two suppliers for which amounts due totaled 24.2% and 11.4% of the Company’s accounts payable. Purchases from the Company’s largest supplier totaled 27.1% of the Company’s purchases for fiscal 2021, 26.9% for fiscal 2020 and 29.0% for fiscal 2019 with no amounts payable at December 29, 2021 or December 30, 2020.

In fiscal 2021, 2020 and 2019, Company-operated and franchised restaurants in the greater Los Angeles area generated, in the aggregate, approximately 70.9%, 71.3%, and 70.5%, respectively, of total revenue. One franchisee accounted for 10.6% of total accounts receivable as of December 29, 2021, and one franchisee accounted for 11.5% of total accounts receivable as of December 30, 2020.

Management believes the loss of the significant supplier or franchisee could have a material adverse effect on the Company’s consolidated results of operations and financial condition.

Accounts and Other Receivables, Net

Accounts and other receivables consist primarily of royalties, advertising and sublease rent and related amounts receivable from franchisees. Such receivables are due on a monthly basis, which may differ from the Company’s fiscal month-end dates. Accounts and other receivables also include credit/debit card receivables. The need for an allowance for doubtful accounts is reviewed on a specific identification basis and takes into consideration past due balances and the financial strength of the obligor.

Inventories

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

Property and Equipment, Net

Property and equipment are recorded at cost and are depreciated using the straight-line method over the estimated useful lives of the assets. Expenditures for reimbursements and improvements that significantly add to the productivity capacity or extend the useful life are capitalized, while expenditures for maintenance and repairs are expensed as incurred. Leasehold improvements and property held under finance leases are amortized over the shorter of their estimated useful lives or the remaining lease terms. For leases with renewal periods at the Company’s option, the Company generally uses the original lease term, excluding the option periods, to determine estimated useful lives; if failure to exercise a renewal option imposes an economic penalty on the Company, such that management determines at the inception of the

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lease that renewal is reasonably assured, the Company may include the renewal option period in the determination of appropriate estimated useful lives.

The estimated useful service lives are as follows:

​

​ ​ ​

Buildings 20 years

Land improvements 3—30 years

Building improvements 3—10 years

Restaurant equipment 3—10 years

Other equipment 2—10 years

Leasehold improvements Shorter of useful life or lease term

​

The Company capitalizes certain directly attributable internal costs in conjunction with the acquisition, development and construction of future restaurants. The Company also capitalizes certain directly attributable costs, including interest, in conjunction with constructing new restaurants. These costs are included in property and amortized over the shorter of the life of the related buildings and leasehold improvements or the lease term. Costs related to abandoned sites and other site selection costs that cannot be identified with specific restaurants are charged to general and administrative expenses in the accompanying consolidated statements of income, and were less than $0.1 million for each of the years ended December 29, 2021, December 30, 2020 and December 25, 2019. The Company capitalized internal costs related to site selection and construction activities of $1.4 million, $1.0 million and $1.1 million for the years ended December 29, 2021, December 30, 2020 and December 25, 2019, respectively.

Impairment of Long-Lived and ROU Assets

The Company reviews its long-lived and right-of-use assets (“ROU assets”) for impairment on a restaurant-by-restaurant basis whenever events or changes in circumstances indicate that the carrying value of certain long-lived and ROU assets may not be recoverable. The Company considers a triggering event, related to long-lived assets or ROU assets in a net asset position, to have occurred related to a specific restaurant if the restaurant’s AUV for the last twelve months are less than a minimum threshold or if consistent levels of undiscounted cash flows for the remaining lease period are less than the carrying value of the restaurant’s assets. Additionally, the Company considers a triggering event related to ROU assets, to have occurred related to a specific lease if the location has been closed or subleased and future estimated sublease income is less than current lease payments. As of December 29, 2021 and December 30, 2020, ROU assets related to closed or subleased restaurant locations totaled $21.9 million and $27.7 million, respectively. If the Company concludes that the carrying value of certain long-lived and ROU assets will not be recovered based on expected undiscounted future cash flows, an impairment loss is recorded to reduce the long-lived or ROU assets to their estimated fair value. The fair value is measured on a nonrecurring basis using unobservable (Level 3) inputs. There is uncertainty in the projected undiscounted future cash flows used in the Company’s impairment review analysis, which requires the use of estimates and assumptions. If actual performance does not achieve the projections, or if the assumptions used change in the future, the Company may be required to recognize impairment charges in future periods, and such charges could be material. The Company determined that triggering events occurred for certain stores during the year ended December 29, 2021 that required an impairment review of the Company’s long-lived and ROU assets. Based on the results of this analysis, the Company recorded non-cash impairment charges of $0.7 million for the year ended December 29, 2021, primarily related to the carrying value of the ROU assets of one restaurant in Texas that closed in 2019, the carrying value of one restaurant in California that closed in 2021 and the long-lived assets of three restaurants in California.

In fiscal 2020, the Company recorded non-cash impairment charges of $3.5 million primarily related to the carrying value of the ROU assets of one restaurant in Texas and the long-lived assets of four restaurants in California. In fiscal 2019, the Company recorded a non-cash impairment charge of $3.6 million primarily related to the carrying value of the ROU assets of four restaurants sold to franchisees and one restaurant closed during fiscal 2019, and the long-lived assets of one restaurant 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Closed-Store Reserves

When a restaurant is closed, the Company will evaluate the ROU asset for impairment, based on anticipated sublease recoveries. The remaining value of the ROU asset is amortized on a straight-line basis, with the expense recognized in closed-store reserve expense. Additionally, any property tax and common area maintenance (“CAM”) payments relating to closed restaurants are included within closed-store expense.

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

During fiscal 2020, the Company recognized $1.2 million of closed-store reserve expense related to the amortization of ROU assets, property taxes and CAM payments for its closed locations. During fiscal 2019, the Company closed two restaurants in California and two in Texas and recognized $1.3 million of closed-store reserve expense, primarily related to the amortization of ROU assets, property taxes and CAM payments for its closed locations.

Goodwill and Indefinite-Lived Intangible Assets

The Company’s indefinite-lived intangible assets consist of trademarks. Goodwill represents the excess of cost over fair value of net identified assets acquired in business combinations accounted for under the purchase method. The Company does not amortize its goodwill and indefinite-lived intangible assets. Goodwill resulted from the Acquisition and from the acquisition of certain franchise locations.

Upon the sale of a restaurant, the Company evaluates whether there is a decrement of goodwill. The amount of goodwill included in the cost basis of the asset sold is determined based on the relative fair value of the portion of the reporting unit disposed of compared to the fair value of the reporting unit retained. The Company determined there was no decrement of goodwill related to the disposition of restaurants in fiscal 2021, 2020 and 2019.

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

The Company reviews goodwill for impairment utilizing either a qualitative assessment or a fair value test by comparing the fair value of a reporting unit with its carrying amount. If the Company decides that it is appropriate to perform a qualitative assessment and concludes that the fair value of a reporting unit more likely than not exceeds its carrying value, no further evaluation is necessary. If the Company performs the fair value test, the Company will compare the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its fair value, the Company will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized cannot exceed the total amount of goodwill allocated to that reporting unit.

The Company performs annual impairment tests for indefinite-lived intangible assets during the fourth fiscal quarter of each year, or more frequently if impairment indicators arise. An impairment test consists of either a qualitative assessment or a comparison of the fair value of an intangible asset with its carrying amount. The excess of the carrying amount of an intangible asset over its fair value is its impairment loss.

The assumptions used in the estimate of fair value are generally consistent with the past performance of the Company’s reporting segment and are also consistent with the projections and assumptions that are used in current operating plans. These assumptions are subject to change as a result of changing economic and competitive conditions.

The Company determined that there were no indicators of potential impairment of its goodwill and indefinite-lived intangible assets during fiscal 2021. Accordingly, the Company did not record any impairment to its goodwill or indefinite-lived intangible assets during the year ended December 29, 2021. The ultimate severity and longevity of the COVID-19 pandemic and the extent and duration of any economic downturn is unknown, and therefore, it is possible that impairments could be identified in future periods, and such amounts could be material.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Deferred Financing Costs

Deferred financing costs are capitalized and amortized over the period of the loan on a straight-line basis, which approximates the effective interest method. Included in other assets are deferred financing costs (net of accumulated amortization), related to the revolver, of $0.4 million and $0.6 million as of December 29, 2021 and December 30, 2020, respectively. Amortization expense for deferred financing costs was approximately $0.3 million for each of the three years ended December 29, 2021, December 30, 2020, and December 25, 2019, and is reflected as a component of interest expense in the accompanying consolidated statements of income.

Insurance Reserves

The Company is responsible for workers’ compensation, general and health insurance claims up to a specified aggregate stop loss amount. The Company maintains a reserve for estimated claims both reported and incurred but not reported, based on historical claims experience and other assumptions. At December 29, 2021 and December 30, 2020, the Company had accrued $11.2 million and $10.4 million, respectively, and such amounts are reflected as accrued insurance in the accompanying consolidated balance sheets. The expense for such reserves for the years ended December 29, 2021, December 30, 2020 and December 25, 2019, totaled $9.0 million, $8.4 million, and $9.6 million, respectively. These amounts are included in labor and related expenses and general and administrative expenses on the accompanying consolidated statements of income.

Restaurant Revenue

Revenues from the operation of company-operated restaurants are recognized as food and beverage products are delivered to customers and payment is tendered at the time of sale. The Company presents sales net of sales-related taxes and promotional allowances. Promotional allowances amounted to approximately $7.7 million, $7.5 million and $8.0 million during the years ended December 29, 2021, December 30, 2020, and December 25, 2019, respectively.

The Company offers a loyalty rewards program, which awards a customer points for dollars spent. Customers earn points for each dollar spent and, as of August 4, 2020, 50 points can be redeemed for a $5 reward to be used for a future purchase. Prior to August 4, 2020, 100 points could be redeemed for a $10 reward. If a customer does not earn or use points within a one-year period, their account is deactivated and all points expire. Additionally, if a reward is not used within six months, it expires. When a customer is part of the rewards program, the obligation to provide future discounts related to points earned is considered a separate performance obligation, to which a portion of the transaction price is allocated. The performance obligation related to loyalty points is deemed to have been satisfied, and the amount deferred in the balance sheet is recognized as revenue, when the points are transferred to a reward and redeemed, the reward or points have expired, or the likelihood of redemption is remote. A portion of the transaction price is allocated to loyalty points, if necessary, on a pro-rata basis, based on stand-alone selling price, as determined by menu pricing and loyalty points terms. As of December 29, 2021 and December 30, 2020, the revenue allocated to loyalty points that have not been redeemed was $0.7 million and $0.9 million, respectively, which is reflected in the Company’s accompanying consolidated balance sheets within other accrued expenses and current liabilities. The Company expects the loyalty points to be redeemed and recognized over a one-year period.

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

Franchise Revenue

Franchise revenue consists of franchise royalties, initial franchise fees, license fees due from franchisees and IT support services. Rental income for subleases to franchisees are outside of the scope of the revenue standard and are within the scope of lease guidance. Under Topic 842, sublease income is recorded on a gross basis within the consolidated

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