10-Q 1 loco-20220330x10q.htm 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended March 30, 2022

or

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

For the transition period from                      to                     

Commission File Number: 001-36556

EL POLLO LOCO HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware

20-3563182

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

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

92626

(Address of principal executive offices)

(Zip Code)

(714) 599-5000

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

LOCO

The Nasdaq Stock Market LLC

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

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

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

Large Accelerated Filer

Accelerated Filer

Non-accelerated Filer

Smaller Reporting Company

Emerging Growth Company

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

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

As of April 29, 2022, there were 36,752,491 shares of the issuer’s common stock outstanding.

Table of Contents

    

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3

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40

41

41

41

41

41

41

41

42

43

2

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

EL POLLO LOCO HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Amounts in thousands, except share data)

    

March 30,

    

December 29,

    

2022

    

2021

Assets

  

Current assets:

  

  

Cash and cash equivalents

$

25,451

$

30,046

Accounts and other receivables, net

 

14,052

 

13,407

Inventories

 

2,363

 

2,318

Prepaid expenses and other current assets

 

4,599

 

3,732

Total current assets

 

46,465

 

49,503

Property and equipment, net

 

76,170

 

75,668

Property and equipment held under finance lease, net

 

1,631

 

1,635

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

 

169,671

 

171,981

Goodwill

 

248,674

 

248,674

Trademarks

 

61,888

 

61,888

Deferred tax assets

 

2,454

 

2,245

Other assets

 

2,487

 

2,192

Total assets

$

609,440

$

613,786

Liabilities and Stockholders’ Equity

 

  

 

  

Current liabilities:

 

  

 

  

Current portion of obligations under finance leases

$

138

$

143

Current portion of obligations under operating leases

 

20,052

 

19,959

Accounts payable

 

10,233

 

10,626

Accrued salaries and vacation

 

6,237

 

11,539

Accrued insurance

 

11,589

 

11,193

Accrued income taxes payable

 

2,827

 

889

Current portion of income tax receivable agreement payable

 

440

 

437

Other accrued expenses and current liabilities

 

19,505

 

19,796

Total current liabilities

 

71,021

 

74,582

Revolver loan

 

40,000

 

40,000

Obligations under finance leases, net of current portion

 

1,708

 

1,712

Obligations under operating leases, net of current portion

 

169,401

 

171,651

Deferred taxes

 

4,823

 

5,464

Income tax receivable agreement payable, net of current portion

 

969

 

1,101

Other noncurrent liabilities

 

5,912

 

8,653

Total liabilities

 

293,834

 

303,163

Commitments and contingencies (Note 7)

 

  

 

  

Stockholders’ equity

 

  

 

  

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

 

 

Common stock, $0.01 par value, 200,000,000 shares authorized; 36,743,496 and 36,601,648 shares issued and outstanding as March 30, 2022 and December 29, 2021, respectively

 

366

 

365

Additional paid-in-capital

 

345,296

 

342,941

Accumulated deficit

 

(30,278)

 

(32,393)

Accumulated other comprehensive income (loss)

 

222

 

(290)

Total stockholders’ equity

 

315,606

 

310,623

Total liabilities and stockholders’ equity

$

609,440

$

613,786

See notes to condensed consolidated financial statements (unaudited).

3

EL POLLO LOCO HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Amounts in thousands, except share data)

    

Thirteen Weeks Ended

    

March 30, 2022

March 31, 2021

Revenue

 

  

 

  

 

Company-operated restaurant revenue

$

93,957

$

94,161

Franchise revenue

 

9,255

 

7,612

Franchise advertising fee revenue

 

6,836

 

5,948

Total revenue

 

110,048

 

107,721

Cost of operations

 

  

 

  

Food and paper cost

 

27,732

 

24,391

Labor and related expenses

 

32,672

 

30,732

Occupancy and other operating expenses

 

23,845

 

23,844

Company restaurant expenses

 

84,249

 

78,967

General and administrative expenses

 

9,954

 

10,474

Franchise expenses

 

8,731

 

7,751

Depreciation and amortization

 

3,597

 

3,938

Loss on disposal of assets

 

66

 

26

Impairment and closed-store reserves

 

131

 

564

Total expenses

 

106,728

 

101,720

Income from operations

 

3,320

 

6,001

Interest expense, net

 

430

 

517

Income tax receivable agreement income

 

(130)

 

(77)

Income before provision for income taxes

 

3,020

 

5,561

Provision for income taxes

 

905

 

1,597

Net income

$

2,115

$

3,964

Net income per share

 

Basic

$

0.06

$

0.11

Diluted

$

0.06

$

0.11

Weighted-average shares used in computing net income per share

 

  

 

  

Basic

 

36,225,747

 

35,795,205

Diluted

 

36,480,354

 

36,424,068

See notes to condensed consolidated financial statements (unaudited).

4

EL POLLO LOCO HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Amounts in thousands)

Thirteen Weeks Ended

    

March 30, 2022

    

March 31, 2021

Net income

$

2,115

$

3,964

Other comprehensive income (loss)

 

 

Changes in derivative instruments

 

 

Unrealized net gains arising during the period from interest rate swap

 

584

 

78

Reclassifications of losses into net income

 

117

 

115

Income tax expense

 

(189)

 

(52)

Other comprehensive income, net of taxes

512

 

141

Comprehensive income

$

2,627

$

4,105

See notes to condensed consolidated financial statements (unaudited).

5

EL POLLO LOCO HOLDINGS, INC.

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

Thirteen Weeks Ended March 30, 2022

    

    

    

    

    

Accumulated

    

  

    

    

    

Additional

    

    

Other

    

Total

Common Stock

Paid-in

Accumulated

Comprehensive

Stockholders’

    

Shares

    

Amount

    

Capital

    

Deficit

    

(Loss) Income

    

Equity

Balance, December 29, 2021

36,601,648

$

365

$

342,941

$

(32,393)

$

(290)

$

310,623

Stock-based compensation

 

 

826

 

 

 

826

Issuance of common stock upon exercise of stock options

141,848

1

1,529

1,530

Other comprehensive income, net of tax

 

 

 

 

512

 

512

Net income

 

 

 

2,115

 

 

2,115

Balance, March 30, 2022

36,743,496

$

366

$

345,296

$

(30,278)

$

222

$

315,606

Thirteen Weeks Ended March 31, 2021

    

    

    

    

    

Accumulated

    

  

    

    

    

Additional

    

    

Other

    

Total

Common Stock

Paid-in

Accumulated

Comprehensive

Stockholders’

    

Shares

    

Amount

    

Capital

    

Deficit

    

Income (Loss)

    

Equity

Balance, December 30, 2020

36,423,505

$

364

$

339,561

$

(61,514)

$

(833)

$

277,578

Stock-based compensation

 

 

853

 

 

 

853

Issuance of common stock upon exercise of stock options

61,419

 

1

 

325

 

 

 

326

Forfeiture of common stock related to restricted shares

(6,241)

Other comprehensive loss, net of tax

141

141

Net income

 

 

 

3,964

 

 

3,964

Balance, March 31, 2021

36,478,683

$

365

$

340,739

$

(57,550)

$

(692)

$

282,862

See notes to condensed consolidated financial statements (unaudited).

6

EL POLLO LOCO HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Amounts in thousands)

    

Thirteen Weeks Ended

    

    

March 30, 2022

March 31, 2021

    

Cash flows from operating activities:

  

  

Net income

$

2,115

$

3,964

Adjustments to reconcile net income to net cash flows (used in) provided by operating activities:

 

 

Depreciation and amortization

 

3,597

 

3,938

Stock-based compensation expense

 

826

 

853

Income tax receivable agreement income

 

(130)

 

(77)

Loss on disposal of assets

 

66

 

26

Impairment of property and equipment

 

89

 

303

Amortization of deferred financing costs

 

63

 

62

Deferred income taxes, net

 

(1,039)

 

(310)

Changes in operating assets and liabilities:

 

 

Accounts and other receivables

 

(645)

 

(1,055)

Inventories

 

(45)

 

172

Prepaid expenses and other current assets

 

(867)

 

(572)

Income taxes payable

 

1,938

 

1,907

Other assets

 

(357)

 

(101)

Accounts payable

 

(846)

 

2,811

Accrued salaries and vacation

 

(5,302)

 

(3,444)

Accrued insurance

 

396

 

234

Other accrued expenses and liabilities

 

(2,164)

 

(1,313)

Net cash flows (used in) provided by operating activities

 

(2,305)

 

7,398

Cash flows from investing activities:

 

Purchase of property and equipment

 

(3,772)

 

(5,257)

Net cash flows used in investing activities

 

(3,772)

 

(5,257)

Cash flows from financing activities:

 

  

 

  

Payments on revolver and swingline loan

 

 

(9,000)

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

1,530

326

Payment of obligations under finance leases

 

(48)

 

(17)

Net cash flows provided by (used in) financing activities

 

1,482

 

(8,691)

Decrease in cash and cash equivalents

 

(4,595)

 

(6,550)

Cash and cash equivalents, beginning of period

 

30,046

 

13,219

Cash and cash equivalents, end of period

$

25,451

$

6,669

    

Thirteen Weeks Ended

    

March 30, 2022

March 31, 2021

Supplemental cash flow information

 

  

 

  

 

Cash paid during the period for interest

$

236

$

334

Cash paid during the period for income taxes

$

5

$

Unpaid purchases of property and equipment

$

2,725

$

1,172

See notes to condensed consolidated financial statements (unaudited).

7

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Overview

El Pollo Loco Holdings, Inc. (“Holdings”) is a Delaware corporation headquartered in Costa Mesa, California. Holdings and its direct and indirect subsidiaries are collectively referred to herein as the “Company.” The Company’s activities are conducted principally through its indirect wholly-owned subsidiary, El Pollo Loco, Inc. (“EPL”), which develops, franchises, licenses, and operates quick-service restaurants under the name El Pollo Loco® and operates under one operating segment. At March 30, 2022, the Company operated 188 and franchised 293 El Pollo Loco restaurants.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments consisting of normal recurring adjustments necessary for a fair statement of the Company’s condensed consolidated financial position and results of operations and cash flows for the periods presented. Interim results of operations are not necessarily indicative of the results that may be achieved for the full year. The condensed consolidated financial statements and related notes do not include all information and footnotes required by GAAP for annual reports. This quarterly report should be read in conjunction with the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 29, 2021.

The Company uses a 52- or 53-week fiscal year ending on the last Wednesday of the calendar year. 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. Every six or seven years, a 53-week fiscal year occurs. Fiscal 2022 and 2021 are both 52-week years, ending on December 28, 2022 and December 29, 2021, respectively. Revenues, expenses, and other financial and operational figures may be elevated in a 53-week year.

Holdings has no material assets or operations. Holdings and Holdings’ direct subsidiary, EPL Intermediate, Inc. (“Intermediate”), guarantee EPL’s 2018 Revolver (as defined below) on a full and unconditional basis (see Note 4, “Long-Term Debt”), 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, subject to the terms of the 2018 Revolver.

Principles of Consolidation

The accompanying condensed 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 condensed consolidated financial statements in conformity with 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 condensed consolidated financial statements and revenue and expenses during the periods 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, income tax receivable agreement liability, contingent liabilities and income tax valuation allowances.

8

COVID-19

While all of the Company’s restaurants had dining rooms open as of March 30, 2022, the Company continues to experience staffing challenges, which resulted in reduced operating hours and service channels at some of the Company 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 thirteen weeks ended March 30, 2022. The Company expects these pressures to continue during the rest of fiscal 2022. During the thirteen weeks ended March 30, 2022, the Company incurred $2.3 million in COVID-19 related expenses, primarily due to leaves of absence and overtime pay. During the thirteen weeks ended March 31, 2021, the Company incurred $2.8 million in COVID-19 related expenses, primarily due to leaves of absence and overtime pay.

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 condensed 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 condensed consolidated financial condition, liquidity, and future results of operations is uncertain.

Cash and Cash Equivalents

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

Liquidity

The Company’s principal liquidity and capital requirements are new restaurants, existing restaurant capital investments (remodels and maintenance), interest payments on its debt, lease obligations and working capital and general corporate needs. At March 30, 2022, 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 flow from operations and available cash of $25.5 million at March 30, 2022 will be adequate to meet the Company’s liquidity needs for the next twelve months from the date of filing of these condensed 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 below), specifically the lease-adjusted coverage ratio and fixed-charge coverage ratio.

Recently Adopted Accounting Pronouncements

None.

Concentration of Risk

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

The Company had one supplier to whom amounts due totaled 20.6% and 26.1% of the Company’s accounts payable at March 30, 2022 and December 29, 2021, respectively. Purchases from the Company’s largest supplier totaled 29.7% of total expenses for the thirteen weeks ended March 30, 2022, and 25.5% of total expenses for the thirteen weeks ended March 31, 2021.

Company-operated and franchised restaurants in the greater Los Angeles area generated, in the aggregate, approximately 70.8% of total revenue for the thirteen weeks ended March 30, 2022, and 70.1% thirteen weeks ended March 31, 2021.

9

Goodwill and Indefinite Lived Intangible Assets

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

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

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

The Company determined that there were no indicators of potential impairment of its goodwill and indefinite-lived intangible assets during the thirteen weeks ended March 30, 2022. Accordingly, the Company did not record any impairment to its goodwill or indefinite-lived intangible assets during the thirteen weeks ended March 30, 2022. The ultimate severity and longevity of the COVID-19 pandemic is unknown, and therefore, it is possible that impairments could be identified in future periods, and such amounts could be material.

Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

Level 1: Quoted prices for identical instruments in active markets.
Level 2: Observable prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs or significant value drivers are observable.
Level 3: Unobservable inputs used when little or no market data is available.

During fiscal 2019, the Company entered into an interest rate swap, which is required to be measured at fair value on a recurring basis. The fair value was determined based on Level 2 inputs, which include valuation models, as reported by the Company’s counterparty. These valuation models use a discounted cash flow analysis on the cash flows of the derivative based on the terms of the contract and the forward yield curves adjusted for the Company’s credit risk. The

10

key inputs for the valuation models are observable market prices, discount rates, and forward yield curves. See Note 4, “Long-Term Debt” for further discussion regarding the Company’s interest rate swap.

The following table presents fair value for the interest rate swap at March 30, 2022 (in thousands):

Fair Value Measurements Using

    

Fair Value

    

Level 1

    

Level 2

    

Level 3

    

Other assets - Interest rate swap

$

307

$

$

307

$

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

Fair Value Measurements Using

    

Fair Value

    

Level 1

    

Level 2

    

Level 3

    

Other non-current liabilities - Interest rate swap

$

396

$

$

396

$

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

The following non-financial instruments were measured at fair value, on a nonrecurring basis, as of and for the thirteen weeks ended March 30, 2022, reflecting certain property and equipment assets and right-of-use (“ROU”) assets for which an impairment loss was recognized during the corresponding periods, as discussed under Note 2, “Property and Equipment” and immediately below under “Impairment of Long-Lived Assets and ROU Assets” (in thousands):

    

Total

    

Level 1

    

Level 2

    

Level 3

Impairment Losses

Certain property and equipment, net

$

$

$

$

 

$

89

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

    

Total

    

Level 1

    

Level 2

    

Level 3

 

Impairment Losses

Certain property and equipment, net

$

$

$

$

 

$

240

Certain ROU assets, net

$

1,147

$

$

$

1,147

$

63

Impairment of Long-Lived Assets and ROU 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 long-lived and ROU assets may not be recoverable. The Company considers a triggering event related to long-lived assets or ROU assets in a net asset position to have occurred related to a specific restaurant if the restaurant’s average unit volume for the last twelve months is less than a minimum threshold or if consistent levels of undiscounted cash flows for the remaining lease period are less than the carrying value of the restaurant’s assets. Additionally, the Company considers a triggering event related to ROU assets to have occurred related to a specific lease if the location has been subleased and future estimated sublease income is less than lease payments under the head lease. If the Company concludes that the carrying value of certain long-lived and ROU assets will not be recovered based on expected undiscounted future cash flows, an impairment loss is recorded to reduce the long-lived or ROU assets to their estimated fair value. The fair value is measured on a nonrecurring basis using unobservable (Level 3) inputs. There is uncertainty in the projected undiscounted future cash flows used in the Company’s impairment review analysis, which requires the use of estimates and assumptions. If actual performance does not achieve the projections, or if the assumptions used change in the future, the Company may be required to recognize impairment charges in future periods, and such charges could be material. The Company determined that triggering events occurred for certain restaurants during the thirteen weeks ended March 30, 2022 that required an impairment review of certain of the Company’s long-lived and ROU assets. Based on the results of the analysis, the Company recorded non-cash impairment charges of $0.1 million for the thirteen weeks ended March 30, 2022, primarily related to the long-lived assets of one restaurant in California.

11

The Company recorded a non-cash impairment charge of $0.3 million for the thirteen weeks ended March 31, 2021, primarily related to the carrying value of the ROU assets of one restaurant in Texas closed in 2019 and the long-lived assets of three restaurants in California. Given the inherent uncertainty in projecting results for newer restaurants in newer markets, as well as the impact of the COVID-19 pandemic, the Company is monitoring the recoverability of the carrying value of the assets of several restaurants on an ongoing basis. For these restaurants, if expected performance is not realized, an impairment charge may be recognized in future periods, and such charge could be material.

Closed-Store Reserves

When a restaurant is closed, the Company will evaluate the ROU asset for impairment, based on anticipated sublease recoveries. The remaining value of the ROU asset is amortized on a straight-line basis, with the expense recognized in closed-store reserve expense. Additionally, any property tax and common area maintenance (“CAM”) payments relating to closed restaurants are included within closed-store expense. During the thirteen weeks ended March 30, 2022, the Company recognized less than $0.1 million of closed-store reserve expense related to the amortization of ROU assets, property taxes and CAM payments for its closed locations. During the thirteen weeks ended March 31, 2021, the Company recognized $0.3 million of closed-store reserve expense, primarily related to the amortization of ROU assets, property taxes and CAM payments for its closed locations.

Derivative Financial Instruments

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

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

As a result of the use of an interest rate swap, the Company is exposed to risk that the counterparty will fail to meet its contractual obligations. To mitigate the counterparty credit risk, the Company will only enter into contracts with major financial institutions, based upon their credit ratings and other factors, and will continue to assess the creditworthiness of the counterparty. As of March 30, 2022, the counterparty to the Company’s interest rate swap has performed in accordance with its contractual obligation.

Income Taxes

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

The Company reviews its filing positions for all open tax years in all U.S. federal and state jurisdictions where the Company is required to file.

When there are uncertainties related to potential income tax benefits, in order to qualify for recognition, the position the Company takes has to have at least a “more likely than not” chance of being sustained (based on the position’s technical merits) upon challenge by the respective authorities. The term “more likely than not” means a likelihood of more than 50 percent. Otherwise, the Company may not recognize any of the potential tax benefit associated with the position. The Company recognizes a benefit for a tax position that meets the “more likely than not” criterion at the largest amount of tax benefit that is greater than 50 percent likely of being realized upon its effective resolution. Unrecognized tax benefits

12

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

The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. The Company had no accrual for interest or penalties at March 30, 2022 or at December 29, 2021. The Company did not recognize interest or penalties during the thirteen weeks ended March 30, 2022 and March 31, 2021, respectively, since there were no material unrecognized tax benefits. Management believes no significant changes to the amount of unrecognized tax benefits will occur within the next twelve months.

On July 30, 2014, the Company entered into the income tax receivable agreement (the “TRA”), which calls for the Company to pay to its pre-initial public offering (“IPO”) stockholders 85% of the savings in cash that the Company realizes in its income taxes as a result of utilizing its net operating losses (“NOLs”) and other tax attributes attributable to preceding periods. For the thirteen weeks ended March 30, 2022, the Company recorded income tax receivable agreement income of $0.1 million, and for the thirteen weeks ended March 31, 2021, the Company recorded income tax receivable agreement income of less than $0.1 million, in each case, related to the amortization of interest expense related to the total expected TRA payments and changes in estimates for actual tax returns filed and future forecasted taxable income.

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

The CARES Act also provides for the deferral of employer Social Security taxes that are otherwise owed for wage payment and the creation of refundable employee retention credits. The total amount deferred as of December 30, 2020 was $4.9 million, of which 50% was paid at the end of 2021 and another 50% is due by December 31, 2022.

2. PROPERTY AND EQUIPMENT

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

    

March 30, 2022

    

December 29, 2021

Land

$

12,323

$

12,323

Buildings and improvements

 

146,647

 

144,631

Other property and equipment

 

79,006

 

78,383

Construction in progress

 

5,218

 

5,333

 

243,194

 

240,670

Less: accumulated depreciation and amortization

 

(167,024)

 

(165,002)

$

76,170

$

75,668

Depreciation expense was $3.6 million and $3.9 million for the thirteen weeks ended March 30, 2022 and March 31, 2021, respectively.

Based on the Company’s review of its long-lived assets for impairment, the Company recorded non-cash impairment charges of $0.1 million for the thirteen weeks ended March 30, 2022, primarily related to the carrying value of the long-lived assets of one restaurant in California.

During the thirteen weeks ended March 31, 2021, the Company recorded non-cash impairment charges of $0.2 million, primarily related to the carrying value of the long-lived assets of three restaurants in California. Depending on the severity and longevity of the COVID-19 pandemic, the Company’s financial performance could be further impacted and it is possible that material impairments could be identified in future periods. See Note 1, “Basis of Presentation and Summary of Significant Accounting Policies – Impairment of Long-Lived Assets and ROU Assets” for additional information.

13

3. STOCK-BASED COMPENSATION

At March 30, 2022, options to purchase 836,230 shares of common stock were outstanding, including 557,322 vested and 278,908 unvested. Unvested options vest over time; however, upon a change in control, the Board of Directors may accelerate vesting. At March 30, 2022, 212,196 premium options, which are options granted above the stock price at date of grant, remained outstanding. A summary of stock option activity as of March 30, 2022 and changes during the thirteen weeks ended March 30, 2022 is as follows:

Weighted-Average

 

Aggregate

    

    

Weighted-Average

 

 Contractual Life

 

Intrinsic Value

Shares

Exercise Price

 

Life (Years)

 

(in thousands)

Outstanding - December 29, 2021

 

978,078

$

11.45

Exercised

 

(141,848)

$

10.79

Outstanding - March 30, 2022

 

836,230

$

11.56

5.04

$

1,413

Vested and expected to vest at March 30, 2022

 

832,975

$

11.54

5.02

$

1,413

Exercisable at March 30, 2022

 

557,322

$

9.82

3.46

$

1,381

At March 30, 2022, the Company had total unrecognized compensation expense of $1.2 million related to unvested stock options, which it expects to recognize over a weighted-average period of 2.73 years.

A summary of restricted share activity as of March 30, 2022 and changes during the thirteen weeks ended March 30, 2022 is as follows:

    

    

Weighted-Average

Shares

Fair Value

Unvested shares at December 29, 2021

 

495,780

$

13.92

Unvested shares at March 30, 2022

 

495,780

$

13.92

At March 30, 2022, the Company had unrecognized compensation expense of $4.7 million related to unvested restricted shares, which it expects to recognize over a weighted-average period of 2.31 years.

Total stock-based compensation expense was 0.8 million for the thirteen weeks ended March 30, 2022, and $0.9 million for the thirteen weeks ended March 31, 2021.

4. LONG-TERM DEBT

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 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 Holdings and Intermediate. The obligations of Holdings, EPL and Intermediate under the 2018 Credit Agreement and related loan documents are secured by a first priority lien on substantially all of their respective assets.

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

14

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.

Borrowings under the 2018 Credit Agreement (other than any swingline loans) bear interest, at the borrower’s option, at rates based upon either LIBOR or a base rate, plus, for each rate, a margin determined in accordance with a lease-adjusted consolidated leverage ratio-based pricing grid. The base rate is calculated as the highest of (a) the federal funds rate plus 0.50%, (b) the published Bank of America prime rate, or (c) LIBOR plus 1.00%. For LIBOR loans, the margin is in the range of 1.25% to 2.25%, and for base rate loans the margin is in a range of 0.25% to 1.25%. Borrowings under the 2018 Revolver may be repaid and reborrowed. The interest rate range was 1.35% to 1.70% for the thirteen weeks ended March 30, 2022, and 1.36% to 1.65% for the thirteen weeks ended March 31, 2021.

The 2018 Credit Agreement contains certain financial covenants. The Company was in compliance with the financial covenants as of March 30, 2022.

At March 30, 2022, $10.0 million of letters of credit and $40.0 million in borrowings under the 2018 Revolver were outstanding. The Company had $100.0 million in borrowing availability under the 2018 Revolver at March 30, 2022.

Maturities

No amounts were paid on the 2018 Revolver during the thirteen weeks ended March 30, 2022. During the thirteen weeks ended March 31, 2021, the Company paid down $9.0 million on the 2018 Revolver. There are no required principal payments prior to maturity for the 2018 Revolver.

Interest Rate Swap

During the year ended December 25, 2019, the Company entered into a variable-to-fixed interest rate swap agreement with a notional amount of $40.0 million that matures in June 2023. The objective of the interest rate swap was to reduce the Company’s exposure to interest rate risk for a portion of its variable-rate interest payments on its borrowings under the 2018 Revolver. Under the terms of the swap agreement, the variable LIBOR-based component of interest payments was converted to a fixed rate of 1.31%, plus applicable margin, which was 1.5% for the thirteen weeks ended March 30, 2022. The interest rate swap was designated as a cash flow hedge, as the changes in the future cash flows of the swap were expected to offset changes in expected future interest payments on the related variable-rate debt, in accordance with Accounting Standards Codification (“ASC”) 815 “Derivatives and Hedging.”

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

For the thirteen weeks ended March 30, 2022, the swap was a highly effective cash flow hedge.

As of March 30, 2022, the estimated net gain included in AOCI related to the Company’s cash flow hedge that will be reclassified into earnings in the next 12 months is $0.5 million, based on current LIBOR interest rates.

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

March 30, 2022

December 29, 2021

    

Notional

    

Fair value

    

Notional

    

Fair value

Other assets - Interest rate swap

$

40,000

$

307

Other liabilities - Interest rate swap

$

$

$

40,000

$

396

15

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

    

March 30, 2022

    

March 31, 2021

Interest expense on hedged portion of debt

$

143

$

200

Interest expense on interest rate swap

 

117

 

78

Interest expense on debt and derivatives, net

$

260

$

278

The following table summarizes the effect of the Company’s cash flow hedge accounting on AOCI for the thirteen weeks ended March 30, 2022 and March 31, 2021 (in thousands):

Gain (Loss) Reclassified from

Net Gain (Loss) Recognized in OCI

AOCI into Interest expense

    

March 30, 2022

March 31, 2021

March 30, 2022

March 31, 2021

    

Interest rate swap

$

584

$

78

$

117

$

115

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

5. OTHER ACCRUED EXPENSES AND CURRENT LIABILITIES

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

    

March 30, 2022

    

December 29, 2021

Accrued sales and property taxes

$

5,159

$

4,726

Gift card liability

 

4,039

 

4,622

Loyalty rewards program liability

599

687

Accrued advertising

2,195

3,635

Accrued legal settlements and professional fees

 

857

 

771

Deferred franchise and development fees

 

643

 

637

Other

 

6,013

 

4,718

Total other accrued expenses and current liabilities

$

19,505

$

19,796

6. OTHER NONCURRENT LIABILITIES

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

    

March 30, 2022

    

December 29, 2021

Deferred franchise and development fees

$

5,783

$

5,691

Derivative liability

396

Employer social security tax deferral

2,426

Other

 

129

 

140

Total other noncurrent liabilities

$

5,912

$

8,653

7. COMMITMENTS AND CONTINGENCIES

Legal Matters

On or about February 24, 2014, a former employee filed a class action in the Superior Court of the State of California, County of Orange, under the caption Elliott Olvera, et al v. El Pollo Loco, Inc., et al (Case No. 30-2014-00707367-CU-OE-CXC) on behalf of all putative class members (all hourly employees from 2010 to the present) alleging certain violations of California labor laws, including failure to pay overtime compensation, failure to provide meal periods and rest breaks, and failure to provide itemized wage statements. The parties reached a settlement in principle on January 24, 2019 of all claims brought on behalf of the 32,000+ putative class members in Olvera, as well as all claims for failure to pay overtime compensation, failure to provide meal periods and rest breaks, and failure to provide itemized wage statements brought in the class actions captioned Martha Perez v. El Pollo Loco, Inc. (Los Angeles Superior Court Case

16

No. BC624001), Maria Vega, et al. v. El Pollo Loco, Inc. (Los Angeles Superior Court Case No. BC649719), and Gonzalez v. El Pollo Loco, Inc. (Los Angeles Superior Court Case No. BC712867). The settlement reached in principle in the Olvera, Perez, Vega, and Gonzalez actions resolves all potential claims from April 12, 2010 through April 1, 2019 that El Pollo Loco restaurant employees may have against El Pollo Loco for failure to pay for all compensation owed, failure to pay overtime compensation, failure to provide meal periods and rest breaks and failure to provide itemized wage statements, among other wage and hour related claims. A $16.3 million accrual of an expected settlement amount related to this matter was recorded as of December 26, 2018, and the court formally approved the settlement on January 31, 2020. The settlement payment was made on February 28, 2020. Purported class actions alleging wage and hour violations are commonly filed against California employers. The Company fully expects to have to defend against similar lawsuits in the future.

On or about November 5, 2015, a purported Holdings shareholder filed a derivative complaint on behalf of Holdings in the Court of Chancery of the State of Delaware against certain Holdings officers, directors and Trimaran Pollo Partners, L.L.C., under the caption Armen Galustyan v. Sather, et al. (Case No. 11676-VCL). The derivative complaint alleges that these defendants breached their fiduciary duties to Holdings and were unjustly enriched when they sold shares of Holdings at artificially inflated prices due to alleged misrepresentations and omissions regarding EPL’s comparable store sales in the second quarter of 2015. The Holdings shareholder’s requested remedies include an award of compensatory damages to Holdings, as well as a court order to improve corporate governance by putting forward for stockholder vote certain resolutions for amendments to Holdings’ Bylaws or Certificate of Incorporation. The Holdings shareholder voluntarily dismissed the action on October 7, 2020. A second purported Holdings shareholder filed a derivative complaint on or about September 23, 2016, under the caption Diep v. Sather, CA 12760-VCL in the Delaware Court of Chancery. The Diep action is also purportedly brought on behalf of Holdings, names the same defendants and asserts substantially the same claims on substantially the same alleged facts as does Galustyan. Defendants moved to stay or dismiss the Diep action.

On March 17, 2017, the Delaware court granted in part, and denied in part, the motion to stay the Diep action. The court denied defendants’ motion to dismiss the complaint for failure to state a claim. On January 17, 2018, the court entered an order granting the parties’ stipulation staying all proceedings in the Diep action for five months or until the completion of an investigation of the allegations in the action by a special litigation committee of the Holdings board of directors (the “SLC”). On September 25, 2020, after concluding its investigation, the SLC filed a motion to dismiss the Diep action and filed its investigative report under seal as an exhibit to the motion to dismiss.

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

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

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

17

Purchasing Commitments

The Company has long-term beverage supply agreements with certain major beverage vendors. Pursuant to the terms of these arrangements, marketing rebates are provided to the Company and its franchisees from the beverage vendors based upon the dollar volume of purchases for system-wide restaurants which will vary according to their demand for beverage syrup and fluctuations in the market rates for beverage syrup. These contracts have terms extending through the end of 2024.

At March 30, 2022, the Company’s total estimated commitment to purchase chicken was $30.4 million.

Contingent Lease Obligations

As a result of assigning the Company’s interest in obligations under real estate leases in connection with the sale of company-operated restaurants to some of the Company’s franchisees, the Company is contingently liable on four lease agreements. These leases have various terms, the latest of which expires in 2036. As of March 30, 2022, the potential amount of undiscounted payments the Company could be required to make in the event of non-payment by the primary lessee was $2.6 million. The present value of these potential payments discounted at the Company’s estimated pre-tax cost of debt at March 30, 2022 was $2.3 million. The Company’s franchisees are primarily liable on the leases. The Company has cross-default provisions with these franchisees that would put them in default of their franchise agreements in the event of non-payment under the leases. The Company believes that these cross-default provisions reduce the risk that payments will be required to be made under these leases.

Employment Agreements

As of March 30, 2022, the Company had employment agreements with two of the officers of the Company. These agreements provide for minimum salary levels, possible annual adjustments for cost-of-living changes, and incentive bonuses that are payable under certain business conditions.

Indemnification Agreements

The Company has entered into indemnification agreements with each of its current directors and officers. These agreements require the Company to indemnify these individuals to the fullest extent permitted under Delaware law against liabilities that may arise by reason of their service to the Company and to advance expenses incurred as a result of any proceeding against them as to which they could be indemnified. The Company also intends to enter into indemnification agreements with future directors and officers.

8. EARNINGS PER SHARE

Basic earnings per share (“EPS”) is calculated using the weighted-average number of shares of common stock outstanding during the thirteen weeks ended March 30, 2022 and March 31, 2021. Diluted EPS is calculated using the weighted-average number of shares of common stock outstanding and potentially dilutive during the period, using the treasury stock method.

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

Thirteen Weeks Ended

March 30, 2022

    

March 31, 2021

    

Numerator:

  

 

  

 

Net income

$

2,115

$

3,964

Denominator:

 

  

 

  

Weighted-average shares outstanding—basic

 

36,225,747

 

35,795,205

Weighted-average shares outstanding—diluted

 

36,480,354

 

36,424,068

Net income per share—basic

$

0.06

$

0.11

Net income per share—diluted

$

0.06

$

0.11

Anti-dilutive securities not considered in diluted EPS calculation

 

305,632

 

18

Below is a reconciliation of basic and diluted share counts:

    

Thirteen Weeks Ended

    

March 30, 2022

March 31, 2021

Weighted-average shares outstanding—basic

 

36,225,747

 

35,795,205

 

Dilutive effect of stock options and restricted shares

 

254,607

 

628,863

 

Weighted-average shares outstanding—diluted

 

36,480,354

 

36,424,068

 

9. RELATED PARTY TRANSACTIONS

Trimaran Pollo Partners, L.L.C. (“LLC”) owns approximately 45.6% of the Company’s outstanding common stock as of March 30, 2022. This large position means that LLC and its majority owners—predecessors and affiliates of, and certain funds managed by, Trimaran Capital Partners and Freeman Spogli & Co. (collectively, “Trimaran” and “Freeman Spogli,” respectively)—possess significant influence when stockholders vote on matters such as election of directors, mergers, consolidations and acquisitions, the sale of all or substantially all of the Company’s assets, decisions affecting the Company’s capital structure, amendments to the Company’s amended and restated certificate of incorporation or amended and restated by-laws, and the Company’s winding up and dissolution. The Company’s amended and restated certificate of incorporation provides that (i) so long as LLC beneficially owns, directly or indirectly, more than 40% of the Company’s common stock, any member of the Board of Directors or the entire Board of Directors may be removed from office at any time with or without cause by the affirmative vote of a majority of the Company’s common stock, and (ii) prior to the date the LLC ceases to beneficially own, directly or indirectly, 40% or more of the Company’s common stock, stockholders representing at least 40% of the Company’s common stock may call a special meeting of the Company’s stockholders.

10. REVENUE FROM CONTRACTS WITH CUSTOMERS

Revenue Recognition

Nature of products and services

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

Company-operated restaurant revenue

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

The Company offers a loyalty rewards program, which awards a customer points for dollars spent. Customers earn points for each dollar spent and 50 points can be redeemed for a $5 reward to be used for a future purchase. If a customer does not earn or use points within a one-year period, their account is deactivated and all points expire. Additionally, if a reward is not used within six months, it expires. When a customer is part of the rewards program, the obligation to provide future discounts related to points earned is considered a separate performance obligation, to which a portion of the transaction price is allocated. The performance obligation related to loyalty points is deemed to have been satisfied, and the amount deferred in the balance sheet is recognized as revenue, when the points are transferred to a reward and redeemed, the reward or points have expired, or the likelihood of redemption is remote. A portion of the transaction price is allocated to loyalty points, if necessary, on a pro-rata basis, based on stand-alone selling price, as determined by menu pricing and loyalty points terms. As of March 30, 2022 and December 29, 2021, the revenue allocated to loyalty points that have not been redeemed was $0.6 million and $0.7 million, respectively, which is reflected in the Company’s accompanying condensed consolidated balance sheets within other accrued expenses and current liabilities. The Company expects the loyalty points to be redeemed and recognized over a one-year period.

The Company sells gift cards to its customers in the restaurants and through selected third parties. The gift cards sold to customers have no stated expiration dates and are subject to actual and/or potential escheatment rights in several of the jurisdictions in which the Company operates. Furthermore, due to these escheatment rights, the Company does not recognize breakage related to the sale of gift cards due to the immateriality of the amount remaining after escheatment.

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The Company recognizes income from gift cards when redeemed by the customer. Unredeemed gift card balances are deferred and recorded as other accrued expenses on the accompanying condensed consolidated balance sheets.

Franchise and franchise advertising revenue

Franchise revenue consists of franchise royalties, initial franchise fees, license fees due from franchisees, IT support services, and rental income for subleases to franchisees. Franchise advertising revenue consists of advertising contributions received from franchisees. These revenue streams are made up of the following performance obligations:

Franchise license - inclusive of advertising services, development agreements, training, access to plans and help desk services.
Discounted renewal option.
Hardware services.

The Company satisfies the performance obligation related to the franchise license over the term of the franchise agreement, which is typically 20 years. Payment for the franchise license consists of three components, a fixed-fee related to the franchise/development agreement, a sales-based royalty fee and a sales-based advertising fee. The fixed fee, as determined by the signed development and/or franchise agreement, is due at the time the development agreement is entered into, and/or when the franchise agreement is signed, and does not include a finance component.

The sales-based royalty fee and sales-based advertising fee are considered variable consideration and will continue to be recognized as revenue as such sales are earned by the franchisees. Both sales-based fees qualify under the royalty constraint exception, and do not require an estimate of future transaction price. Additionally, the Company is utilizing the practical expedient available under ASC Topic 606, “Revenue from Contracts with Customers” (“Topic 606”) regarding disclosure of the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied for sales-based royalties.

In certain franchise agreements, the Company offers a discounted renewal to incentivize future renewals after the end of the initial franchise term. As this is considered a separate performance obligation, the Company allocates a portion of the initial franchise fee to this discounted renewal, on a pro-rata basis, assuming a 20-year renewal. This performance obligation is satisfied over the renewal term, typically 10 or 20 years, while payment is fixed and due at the time the renewal is signed.

The Company purchases hardware, such as scanners, printers, cash registers and tablets, from third party vendors, which it then sells to franchisees. As the Company is considered the principal in this relationship, payment for the hardware is considered revenue, and is received upon transfer of the goods from the Company to the franchisee. As of March 30, 2022, there were no performance obligations related to hardware services that were unsatisfied or partially satisfied.

Disaggregated revenue

The following table presents the Company’s revenues disaggregated by revenue source and market (in thousands):

 

March 30,

    

March 31,

 

2022

2021

Core Market(1):

  

 

  

Company-operated restaurant revenue

$

89,627

$

87,224

Franchise revenue

 

4,350

 

3,687

Franchise advertising fee revenue

 

3,198

 

2,776

Total core market

$

97,175

$

93,687

Non-Core Market(2):

 

  

 

  

Company-operated restaurant revenue

$

4,330

$

6,937

Franchise revenue

 

4,905

 

3,925

Franchise advertising fee revenue

 

3,638

 

3,172

Total non-core market

$

12,873

$

14,034

Total revenue

$

110,048

$

107,721

20

(1)Core Market includes markets with existing company-operated restaurants at the time of the Company’s IPO on July 28, 2014.
(2)Non-Core Market includes markets entered into by the Company subsequent to the IPO date.

The following table presents the Company’s revenues disaggregated by geographic market:

March 30, 2022

    

March 31, 2021

 

Greater Los Angeles area market

70.8

%