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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

(Mark one)

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☒

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

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For the quarterly period ended September 28, 2022

or

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☐

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

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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)

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Delaware

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20-3563182

(State or other jurisdiction of incorporation or organization)

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

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

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92626

(Address of principal executive offices)

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(Zip Code)

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(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)

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

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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

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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 October 28, 2022, there were 37,049,182 shares of the issuer’s common stock outstanding.

​

​

​

​

​

​

​

​

​

Table of Contents

    

Page

​

​

​

​

3

​

3

​

3

​

4

​

5

​

6

​

8

​

9

​

28

​

45

​

46

​

​

​

​

47

​

47

​

47

​

48

​

48

​

49

​

49

​

50

​

52

​

​

​

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)

​

​

​

​

​

​

​

​

​

    

September 28,

    

December 29,

​

    

2022

    

2021

Assets

​

​

  

​

​

​

Current assets:

​

​

  

​

​

  

Cash and cash equivalents

​

$

19,275

​

$

30,046

Accounts and other receivables, net

​

 

14,946

​

 

13,407

Inventories

​

 

2,209

​

 

2,318

Prepaid expenses and other current assets

​

 

2,977

​

 

3,732

Income tax receivable

 

​

570

​

 

—

Total current assets

​

 

39,977

​

 

49,503

Property and equipment, net

​

 

78,107

​

 

75,668

Property and equipment held under finance lease, net

​

 

1,565

​

 

1,635

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

​

 

167,985

​

 

171,981

Goodwill

​

 

248,674

​

 

248,674

Trademarks

​

 

61,888

​

 

61,888

Deferred tax assets

​

 

1,253

​

 

2,245

Other assets

​

 

2,920

​

 

2,192

Total assets

​

$

602,369

​

$

613,786

Liabilities and Stockholders’ Equity

​

 

  

​

 

  

Current liabilities:

​

 

  

​

 

  

Current portion of obligations under finance leases

​

$

109

​

$

143

Current portion of obligations under operating leases

​

 

20,063

​

 

19,959

Accounts payable

​

 

12,486

​

 

10,626

Accrued salaries and vacation

​

 

6,975

​

 

11,539

Accrued insurance

​

 

11,286

​

 

11,193

Accrued income taxes payable

​

 

—

​

 

889

Current portion of income tax receivable agreement payable

​

 

417

​

 

437

Other accrued expenses and current liabilities

​

 

18,930

​

 

19,796

Total current liabilities

​

 

70,266

​

 

74,582

Revolver loan

​

 

20,000

​

 

40,000

Obligations under finance leases, net of current portion

​

 

1,653

​

 

1,712

Obligations under operating leases, net of current portion

​

 

167,562

​

 

171,651

Deferred taxes

​

 

6,739

​

 

5,464

Income tax receivable agreement payable, net of current portion

​

 

776

​

 

1,101

Other noncurrent liabilities

​

 

5,862

​

 

8,653

Total liabilities

​

 

272,858

​

 

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; 37,053,405 and 36,601,648 shares issued and outstanding as September 28, 2022 and December 29, 2021, respectively

​

 

370

​

 

365

Additional paid-in-capital

​

 

347,079

​

 

342,941

Accumulated deficit

​

 

(18,128)

​

 

(32,393)

Accumulated other comprehensive income (loss)

​

 

190

​

 

(290)

Total stockholders’ equity

​

 

329,511

​

 

310,623

Total liabilities and stockholders’ equity

​

$

602,369

​

$

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

    

Thirty-Nine Weeks Ended

    

​

​

September 28, 2022

​

September 29, 2021

​

September 28, 2022

​

September 29, 2021

​

Revenue

 

​

  

 

​

  

 

​

  

 

​

  

 

Company-operated restaurant revenue

​

$

103,174

​

$

99,986

​

$

303,585

​

$

301,117

​

Franchise revenue

​

 

9,543

​

 

8,918

​

 

28,862

​

 

24,919

​

Franchise advertising fee revenue

​

 

7,161

​

 

6,796

​

 

21,590

​

 

19,370

​

Total revenue

​

 

119,878

​

 

115,700

​

 

354,037

​

 

345,406

​

Cost of operations

​

 

  

​

 

  

​

 

  

​

 

  

​

Food and paper cost

​

 

30,163

​

 

26,698

​

 

89,586

​

 

78,971

​

Labor and related expenses

​

 

33,279

​

 

27,802

​

 

98,966

​

 

90,060

​

Occupancy and other operating expenses

​

 

26,920

​

 

25,108

​

 

76,597

​

 

74,288

​

Company restaurant expenses

​

 

90,362

​

 

79,608

​

 

265,149

​

 

243,319

​

General and administrative expenses

​

 

9,855

​

 

9,357

​

 

29,488

​

 

30,354

​

Franchise expenses

​

 

9,027

​

 

8,545

​

 

27,315

​

 

24,457

​

Depreciation and amortization

​

 

3,530

​

 

3,685

​

 

10,745

​

 

11,540

​

Loss on disposal of assets

​

 

21

​

 

83

​

 

129

​

 

194

​

Loss on disposition of restaurants

​

​

—

​

​

10

​

​

—

​

​

1,534

​

Impairment and closed-store reserves

​

 

219

​

 

167

​

 

598

​

 

1,091

​

Total expenses

​

 

113,014

​

 

101,455

​

 

333,424

​

 

312,489

​

Income from operations

​

 

6,864

​

 

14,245

​

 

20,613

​

 

32,917

​

Interest expense, net

​

 

108

​

 

449

​

 

957

​

 

1,399

​

Income tax receivable agreement income

​

 

(29)

​

 

(19)

​

 

(345)

​

 

(69)

​

Income before provision for income taxes

​

 

6,785

​

 

13,815

​

 

20,001

​

 

31,587

​

Provision for income taxes

​

 

1,776

​

 

3,654

​

 

5,736

​

 

8,644

​

Net income

​

$

5,009

​

$

10,161

​

$

14,265

​

$

22,943

​

Net income per share

​

 

  

​

 

  

​

 

​

​

​

​

​

Basic

​

$

0.14

​

$

0.28

​

$

0.39

​

$

0.64

​

Diluted

​

$

0.14

​

$

0.28

​

$

0.39

​

$

0.63

​

Weighted-average shares used in computing net income per share

​

 

  

​

 

  

​

 

  

​

 

  

​

Basic

​

 

36,402,899

​

 

36,067,754

​

 

36,329,938

​

 

35,930,246

​

Diluted

​

 

36,507,050

​

 

36,525,424

​

 

36,491,624

​

 

36,457,110

​

​

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

    

Thirty-Nine Weeks Ended

    

​

​

September 28, 2022

​

September 29, 2021

​

September 28, 2022

    

September 29, 2021

​

Net income

​

$

5,009

​

$

10,161

​

$

14,265

​

$

22,943

​

Other comprehensive income (loss)

​

 

  

​

 

  

​

 

​

​

 

​

​

Changes in derivative instruments

​

 

  

​

 

  

​

 

​

​

 

​

​

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

​

 

43

​

 

(32)

​

 

974

​

 

44

​

Reclassifications of (gains) losses into net income

​

 

(369)

​

 

133

​

 

(197)

​

 

367

​

Income tax expense

​

 

—

​

 

(27)

​

 

(297)

​

 

(111)

​

Other comprehensive (loss) income, net of taxes

​

 

(326)

​

 

74

​

​

480

​

 

300

​

Comprehensive income

​

$

4,683

​

$

10,235

​

$

14,745

​

$

23,243

​

​

​

​

See notes to condensed consolidated financial statements (unaudited).

​

​

​

​

​

​

​

​

​

5

EL POLLO LOCO HOLDINGS, INC.

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

(Amounts in thousands, except share data)

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Thirteen Weeks Ended September 28, 2022

​

    

​

    

​

​

    

​

​

    

​

​

    

Accumulated

    

  

​

​

    

​

    

​

​

    

Additional

    

​

​

    

Other

    

Total

​

​

Common Stock

​

Paid-in

​

Accumulated

​

Comprehensive

​

Stockholders’

​

    

Shares

    

Amount

    

Capital

    

Deficit

    

Income

    

Equity

Balance, June 29, 2022

​

37,002,513

​

$

369

​

$

346,095

​

$

(23,137)

​

$

516

​

$

323,843

Stock-based compensation

​

—

​

 

—

​

 

1,009

​

 

—

​

 

—

​

 

1,009

Issuance of common stock related to restricted shares

​

53,476

​

​

1

​

​

(1)

​

​

—

​

​

—

​

​

—

Shares repurchased for employee tax withholdings

​

(2,584)

​

​

—

​

​

(24)

​

​

—

​

​

—

​

​

(24)

Other comprehensive income, net of tax

​

—

​

 

—

​

 

—

​

 

—

​

 

(326)

​

 

(326)

Net income

​

—

​

 

—

​

 

—

​

 

5,009

​

 

—

​

 

5,009

Balance, September 28, 2022

​

37,053,405

​

$

370

​

$

347,079

​

$

(18,128)

​

$

190

​

$

329,511

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Thirteen Weeks Ended September 29, 2021

​

    

​

    

​

​

    

​

​

    

​

​

    

Accumulated

    

  

​

​

    

​

    

​

​

    

Additional

    

​

​

    

Other

    

Total

​

​

Common Stock

​

Paid-in

​

Accumulated

​

Comprehensive

​

Stockholders’

​

    

Shares

    

Amount

    

Capital

    

Deficit

    

Loss

    

Equity

Balance, June 30, 2021

​

36,637,761

​

$

367

​

$

341,358

​

$

(48,732)

​

$

(607)

​

​

292,386

Stock-based compensation

​

—

​

 

—

​

 

1,042

​

 

—

​

 

—

​

 

1,042

Issuance of common stock upon exercise of stock options, net

​

41,216

​

 

—

​

 

300

​

 

—

​

 

—

​

 

300

Shares repurchased for employee tax withholdings

​

(2,446)

​

 

—

​

 

(45)

​

 

—

​

 

—

​

 

(45)

Forfeiture of common stock related to restricted shares

​

(5,084)

​

​

(1)

​

​

1

​

​

—

​

​

—

​

​

—

Other comprehensive income, net of tax

​

—

​

​

—

​

​

—

​

​

—

​

​

74

​

​

74

Net income

​

—

​

 

—

​

 

—

​

 

10,161

​

 

—

​

 

10,161

Balance, September 29, 2021

​

36,671,447

​

$

366

​

$

342,656

​

$

(38,571)

​

$

(533)

​

$

303,918

​

​

​

​

​

​

​

​

​

6

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Thirty-Nine Weeks Ended September 28, 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

​

—

​

 

—

​

 

2,806

​

 

—

​

 

—

​

 

2,806

Issuance of common stock related to restricted shares

​

352,114

​

​

4

​

​

(4)

​

​

—

​

​

—

​

​

—

Issuance of common stock upon exercise of stock options, net

​

150,475

​

​

1

​

​

1,579

​

​

—

​

​

—

​

​

1,580

Shares repurchased for employee tax withholdings

​

(22,901)

​

​

—

​

​

(243)

​

​

—

​

​

—

​

​

(243)

Forfeiture of common stock related to restricted shares

​

(27,931)

​

 

—

​

 

—

​

 

—

​

 

—

​

 

—

Other comprehensive income, net of tax

​

—

​

 

—

​

 

—

​

 

—

​

 

480

​

 

480

Net income

​

—

​

 

—

​

 

—

​

 

14,265

​

 

—

​

 

14,265

Balance, September 28, 2022

​

37,053,405

​

$

370

​

$

347,079

​

$

(18,128)

​

$

190

​

$

329,511

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Thirty-Nine Weeks Ended September 29, 2021

​

    

​

    

​

​

    

​

​

    

​

​

    

Accumulated

    

  

​

​

    

​

    

​

​

    

Additional

    

​

​

    

Other

    

Total

​

​

Common Stock

​

Paid-in

​

Accumulated

​

Comprehensive

​

Stockholders’

​

    

Shares

    

Amount

    

Capital

    

Deficit

    

(Loss) Income

    

Equity

Balance, December 30, 2020

​

36,423,505

​

$

364

​

$

339,561

​

$

(61,514)

​

$

(833)

​

$

277,578

Stock-based compensation

​

—

​

 

—

​

 

2,936

​

 

—

​

 

—

​

 

2,936

Issuance of common stock related to restricted shares

​

206,098

​

 

2

​

 

(2)

​

 

—

​

 

—

​

 

—

Issuance of common stock upon exercise of stock options, net

​

132,760

​

 

1

​

 

865

​

 

—

​

 

—

​

 

866

Shares repurchased for employee tax withholdings

​

(40,384)

​

 

—

​

 

(705)

​

 

—

​

 

—

​

 

(705)

Forfeiture of common stock related to restricted shares

​

(50,532)

​

​

(1)

​

​

1

​

​

—

​

​

—

​

​

—

Other comprehensive income, net of tax

​

—

​

​

—

​

​

—

​

​

—

​

​

300

​

​

300

Net income

​

—

​

 

—

​

 

—

​

 

22,943

​

 

—

​

 

22,943

Balance, September 29, 2021

​

36,671,447

​

$

366

​

$

342,656

​

$

(38,571)

​

$

(533)

​

$

303,918

​

See notes to condensed consolidated financial statements (unaudited).

​

​

​

​

​

​

​

7

EL POLLO LOCO HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Amounts in thousands)

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

    

Thirty-Nine Weeks Ended

    

​

    

September 28, 2022

​

September 29, 2021

    

Cash flows from operating activities:

​

​

  

​

​

  

​

Net income

​

$

14,265

​

$

22,943

​

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

​

 

​

​

 

​

​

Depreciation and amortization

​

 

10,745

​

 

11,540

​

Stock-based compensation expense

​

 

2,806

​

 

2,936

​

Income tax receivable agreement income

​

 

(345)

​

 

(69)

​

Loss on disposition of restaurants

​

 

—

​

 

1,534

​

Loss on disposal of assets

​

 

129

​

 

194

​

Impairment of property and equipment

​

 

392

​

 

701

​

Amortization of deferred financing costs

​

 

292

​

 

188

​

Deferred income taxes, net

​

 

2,351

​

 

2,026

​

Changes in operating assets and liabilities:

​

 

​

​

 

​

​

Accounts and other receivables

​

 

(1,539)

​

 

(1,547)

​

Inventories

​

 

108

​

 

(27)

​

Prepaid expenses and other current assets

​

 

755

​

 

825

​

Income taxes receivable

​

 

(1,459)

​

 

3,616

​

Other assets

​

 

(150)

​

 

289

​

Accounts payable

​

 

1,285

​

 

(507)

​

Accrued salaries and vacation

​

 

(4,564)

​

 

(2,116)

​

Accrued insurance

​

 

93

​

 

615

​

Other accrued expenses and liabilities

​

 

(3,257)

​

 

(809)

​

Net cash flows provided by operating activities

​

 

21,907

​

 

42,332

​

Cash flows from investing activities:

​

 

​

​

​

​

​

Proceeds from disposition of restaurants

​

 

—

​

 

4,556

​

Purchase of property and equipment

​

 

(13,022)

​

 

(12,699)

​

Net cash flows used in investing activities

​

 

(13,022)

​

 

(8,143)

​

Cash flows from financing activities:

​

 

  

​

 

  

​

Payments on revolver and swingline loan

​

 

(20,000)

​

 

(22,800)

​

Minimum tax withholdings related to net share settlements

​

 

(243)

​

 

(705)

​

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

​

​

1,580

​

​

866

​

Payment of obligations under finance leases

​

 

(124)

​

 

(100)

​

Deferred financing costs for revolver loan

​

 

(869)

​

 

—

​

Net cash flows used in financing activities

​

 

(19,656)

​

 

(22,739)

​

Increase (decrease) in cash and cash equivalents

​

 

(10,771)

​

 

11,450

​

Cash and cash equivalents, beginning of period

​

 

30,046

​

 

13,219

​

Cash and cash equivalents, end of period

​

$

19,275

​

$

24,669

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

    

Thirty-Nine Weeks Ended

    

​

​

September 28, 2022

​

September 29, 2021

​

Supplemental cash flow information

 

​

  

 

​

  

 

Cash paid during the period for interest

​

$

819

​

$

828

​

Cash paid during the period for income taxes

​

$

5,100

​

$

4,088

​

Unpaid purchases of property and equipment

​

$

3,030

​

$

2,259

​

​

See notes to condensed consolidated financial statements (unaudited).

​

8

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 September 28, 2022, the Company operated 190 and franchised 297 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 2022 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 2022 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.

9

COVID-19

The Company may face future business disruption and related risks resulting from the ongoing COVID-19 pandemic or from another pandemic, epidemic or infectious disease outbreak, or from broader macroeconomic trends, any of which could have a significant impact on our business. During both thirteen weeks ended September 28, 2022 and September 29, 2021, respectively, the Company incurred $0.5 million in COVID-19 related expenses, primarily due to leaves of absence. During the thirty-nine weeks ended September 28, 2022 and September 29, 2021, respectively, the Company incurred $3.1 million and $3.5 million, in COVID-19 related expenses, primarily due to leaves of absence and overtime pay. While all of the Company’s restaurants had dining rooms open as of September 28, 2022, the Company continues to experience staffing challenges, including higher wage inflation, overtime costs and other labor related costs. Further, the Company continues to experience inflationary pressures, which resulted in increased commodity prices and impacted the Company’s business and results of operations during the thirteen and thirty-nine weeks ended September 28, 2022. The Company expects these pressures to continue during the remainder of fiscal 2022.

​

Due to the rapid development and fluidity of this situation, the Company cannot determine the ultimate direct and indirect impact that the COVID-19 pandemic and related economic effects 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 September 28, 2022, the Company’s total debt was $20.0 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 $19.3 million at September 28, 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.

Recently Adopted Accounting Pronouncements

None.

Subsequent Events

On October 11, 2022, the Company announced that its Board of Directors declared a special dividend of $1.50 per share on the common stock, par value $0.01 per share, of the Company (the “Common Stock”). The special dividend is payable on November 9, 2022, to stockholders of record, including holders of restricted stock and restricted stock units, at the close of business on October 24, 2022.

In addition, on October 11, 2022, the Company announced that its Board of Directors approved a share repurchase program under which the Company is authorized to repurchase up to $20.0 million of shares of the Company’s Common Stock. The repurchase program will terminate on March 28, 2024, may be modified, suspended or discontinued at any time, and does not obligate the Company to acquire any particular number of shares.

Lastly, on November 3, 2022, the Company borrowed $46.0 million on its 2022 Revolver and outstanding borrowings as of November 3, 2022 were $66.0 million. After payment of the special dividend, the Company is expected to have approximately $10.0 million in cash on hand.

10

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 25.2% and 26.1% of the Company’s accounts payable at September 28, 2022 and December 29, 2021, respectively. Purchases from the Company’s largest supplier totaled 28.4% and 28.5% of total expenses for the thirteen and thirty-nine weeks ended September 28, 2022 and 27.0% and 28.1% of total expenses for the thirteen and thirty-nine weeks ended September 29, 2021.

​

Company-operated and franchised restaurants in the greater Los Angeles area generated, in the aggregate, approximately 71.9% and 71.2% of total revenue for the thirteen and thirty-nine weeks ended September 28, 2022 and 71.6% and 70.8% for the thirteen and thirty-nine weeks ended September 29, 2021, respectively.

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 and thirty-nine weeks ended September 28, 2022. Accordingly, the Company did not record any impairment to its goodwill or indefinite-lived intangible assets during the thirteen and thirty-nine weeks ended September 28, 2022.

11

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 key inputs for the valuation models are observable market prices, discount rates, and forward yield curves. In connection with the Company’s entry into the 2022 Credit Agreement (as defined below), it terminated the interest rate swap in July 2022 previously used to hedge interest rate risk. In settlement of this swap, the Company received approximately $0.6 million. See Note 4, “Long-Term Debt” for further discussion regarding the Company’s interest rate swap and its termination.

​

​

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 and thirty-nine weeks ended September 28, 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):

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Thirteen Weeks

​

Thirty-Nine Weeks

​

​

​

​

​

Fair Value Measurements at September 28, 2022 Using

​

Ended September 28, 2022

​

Ended September 28, 2022

​

    

Total

    

Level 1

    

Level 2

    

Level 3

​

Impairment Losses

​

Impairment Losses

Certain property and equipment, net

​

$

—

​

$

—

​

$

—

​

$

—

 

$

100

​

$

353

Certain ROU assets, net

​

$

332

​

$

—

​

$

—

​

$

332

​

$

39

​

$

39

​

12

​

The following non-financial instruments were measured at fair value on a nonrecurring basis as of and for the thirteen and thirty-nine weeks ended September 29, 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):

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​