El Pollo Loco Earnings 2020-03-25

Balance Sheet	Income Statement	Cash Flow
Assets, Equity	Rev, G Profit, Net Income	Ops, Inv, Fin

10-Q 1 loco-10qq12020.htm 10-Q Document

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 25, 2020



☐	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, 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 24, 2020, there were 35,103,583 shares of the issuer’s common stock outstanding.



Table of Contents	Page
PART I—FINANCIAL INFORMATION	4
Item 1. Financial Statements.	4
Condensed Consolidated Balance Sheets (Unaudited)	5
Condensed Consolidated Statements of Income (Unaudited)	6
Condensed Consolidated Statements of Comprehensive Income (Unaudited)	7
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)	8
Condensed Consolidated Statements of Cash Flows (Unaudited)	9
Notes to Condensed Consolidated Financial Statements (Unaudited)	10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.	31
Item 3. Quantitative and Qualitative Disclosures About Market Risk.	46
Item 4. Controls and Procedures.	47
PART II—OTHER INFORMATION	48
Item 1. Legal Proceedings.	48
Item 1A. Risk Factors.	48
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	49
Item 3. Defaults of Senior Securities.	49
Item 4. Mine Safety Disclosures.	49
Item 5. Other Information.	49
Item 6. Exhibits.	50
Signatures	51

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

EL POLLO LOCO HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Amounts in thousands, except share data)



	March 25, 2020			December 25, 2019
Assets
Current assets:
Cash and cash equivalents	$	43,404		$	8,070
Accounts and other receivables, net	12,075			8,505
Inventories	2,092			2,009
Prepaid expenses and other current assets	4,607			5,718
Income tax receivable	338			376
Total current assets	62,516			24,678
Property and equipment owned, net	87,902			91,778
Property held under operating leases, net ("ROU asset")	187,610			192,395
Goodwill	248,674			248,674
Trademarks	61,888			61,888
Deferred tax assets	3,543			3,709
Other assets	1,366			1,630
Total assets	$	653,499		$	624,752
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of obligations under finance leases	$	36		$	34
Current portion of obligations under operating leases	17,585			16,406
Accounts payable	6,456			5,627
Accrued salaries and vacation	7,619			8,618
Accrued insurance	9,881			9,440
Accrued interest	78			302
Current portion of income tax receivable agreement payable	4,987			4,935
Other accrued expenses and current liabilities	12,216			28,597
Total current liabilities	58,858			73,959
Revolver loan	141,500			97,000
Obligations under finance leases, net of current portion	73			83
Obligations under operating leases, net of current portion	192,422			197,492
Deferred taxes	2,366			1,672
Income tax receivable agreement payable, net of current portion	3,128			3,301
Other noncurrent liabilities	6,547			5,679
Total liabilities	404,894			379,186
Commitments and contingencies
Stockholders' Equity
Preferred stock, $0.01 par value, 100,000,000 shares authorized; none issued or outstanding	—			—
Common stock, $0.01 par value, 200,000,000 shares authorized; 35,089,983 and 35,126,582 shares issued and outstanding	351			351
Additional paid-in-capital	331,484			330,950
Accumulated deficit	(82,388		)	(85,988		)
Accumulated other comprehensive (loss) income	(842		)	253
Total stockholders' equity	248,605			245,566
Total liabilities and stockholders' equity	$	653,499		$	624,752

See notes to condensed consolidated financial statements (unaudited).

EL POLLO LOCO HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Amounts in thousands, except share data)



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

See notes to condensed consolidated financial statements (unaudited).

EL POLLO LOCO HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Amounts in thousands, except share data)



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

EL POLLO LOCO HOLDINGS, INC.

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

(Amounts in thousands, except share data)



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



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

EL POLLO LOCO HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Amounts in thousands)



	Thirteen Weeks Ended
	March 25, 2020			March 27, 2019
Cash flows from operating activities:
Net income	$	3,600		$	913
Adjustments to reconcile net income to net cash flows (used in) provided by operating activities:
Depreciation and amortization	4,369			4,761
Stock-based compensation expense	534			488
Income tax receivable agreement (income) expense	(120		)	171
Loss on held for sale assets	—			4,124
Loss on disposal of assets	100			44
Impairment of property and equipment	1,920			—
Amortization of deferred financing costs	63			63
Amortization of favorable and unfavorable leases, net	—			(10		)
Deferred income taxes, net	916			273
Changes in operating assets and liabilities:
Accounts and other receivables, net	(3,569		)	(1,150		)
Inventories	(83		)	260
Prepaid expenses and other current assets	1,111			(843		)
Other assets	201			—
Accounts payable	490			(783		)
Accrued salaries and vacation	(999		)	1,347
Accrued insurance	442			764
Income taxes payable	38			76
Other accrued expenses and liabilities	(16,539		)	(521		)
Net cash flows (used in) provided by operating activities	(7,526		)	9,977
Cash flows from investing activities:
Purchase of property and equipment	(1,632		)	(4,183		)
Net cash flows used in investing activities	(1,632		)	(4,183		)
Cash flows from financing activities:
Payments on revolver and swingline loan	(8,000		)	(3,000		)
Borrowings on revolver and swingline loan	52,500			—
Payment of obligations under finance leases	(8		)	(35		)
Stock buybacks	—			(3,029		)
Net cash flows provided by (used in) financing activities	44,492			(6,064		)
Increase (decrease) in cash and cash equivalents	35,334			(270		)
Cash and cash equivalents, beginning of period	8,070			6,969
Cash and cash equivalents, end of period	$	43,404		$	6,699



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

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

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 “we,” “us” or the “Company.” The Company’s activities are conducted principally through its indirect wholly-owned subsidiary, El Pollo Loco, Inc. (“EPL”), which develops, franchises, licenses, and operates quick-service restaurants under the name El Pollo Loco® and operates under one operating segment. At March 25, 2020, the Company operated 195 and franchised 284 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 presentation of the Company’s 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 25, 2019.

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 2020 is a 53-week year ending on December 30, 2020, and fiscal 2019 was a 52-week year ending on December 25, 2019. 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), 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.

COVID-19

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

Following the pandemic declaration in March 2020, federal, state and local governments began to respond to the public health crisis by requiring social distancing, "stay at home" directives, and restaurant restrictions - including government-mandated dining room closures - that limited business to off-premise services only (take-out, drive-thru and delivery). Historically, approximately 20% of the Company’s sales are associated with dine-in service. As such, the COVID-19 pandemic has significantly disrupted consumer demand, as well as the Company's restaurant operations. All of the Company's restaurants are operating on a take-away, mobile pick-up and delivery basis only, as well as maintaining drive-thru operations where available, in order to protect its employees and customers from the spread of the COVID-19 pandemic and to comply with the government mandates. As of March 25, 2020, the Company had not closed any restaurants due to the COVID-19 pandemic. Please refer to Subsequent Events, below, for discussion of stores that have temporarily closed.

The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. Management has taken precautionary actions, such as drawing on its 2018 Revolver (see Note 4), temporarily suspending all but essential capital spending and share repurchase activity, reevaluating essential support center general and administrative expenses and fine-tuning its restaurant labor model based on dining room closures and lower sales volumes. Additionally, Management has delayed making April rent payments on the majority of its leased properties and is currently negotiating rent abatement and/or deferment with its landlords for those properties. For the Company's franchisees, the Company is deferring 50% of their April royalties as well as 100% of their 2020 remodel and new restaurant build requirements until 2021. Management is continually evaluating the impact of the global crisis on its financial condition, liquidity, operations, suppliers, industry, and workforce and will take additional actions as necessary. The disruption in operations has led to the Company to consider the impact of the COVID-19 pandemic on its liquidity, debt covenant compliance, and recoverability of long-lived and ROU assets, goodwill and intangible assets, among others. If these disruptions continue, the Company expects a continued material negative impact on its consolidated financial condition, future results of operations and liquidity. The extent of such negative impact will be determined, in part, by the longevity and severity of the pandemic.

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

Subsequent Events

Due to the impact of the COVID-19 pandemic, subsequent to March 25, 2020, the Company has temporarily closed 18 restaurants, 15 of which have reopened and 3 remain closed at this time. Similarly, franchisees have temporarily closed 12 restaurants, 8 of which have reopened and 4 remain closed at this time.

On March 27, 2020 President Trump signed into a law a stimulus package, the Coronavirus Aid, Relief and Economic Security ("CARES") Act, which contains several tax provisions and deferral of employer Social Security taxes that are otherwise owed for wage payments. The tax provisions include a correction of previous drafting error related to quality improvement property ("QIP") and immediate refundability of all remaining alternative minimum tax ("AMT") credits. The Company is in the process of assessing the impact of these new tax provisions and will recognize the impact during its second quarter of 2020.

On March 19, 2020, the Surety from who the Company procured the appeal bond to secure the judgment against the Company in a legal matter, issued a collateral demand to the Company. On April 17, 2020, the Company issued a letter of credit in the amount of $2.7 million to satisfy the Surety’s collateral demand. Refer to Note 7 "Commitments and Contingencies" for further details. In order to provide the aforementioned letter of credit, on April 15, 2020 the Company made a $2.7 million pre-payment on the 2018 Revolver.

Additionally, subsequent to March 25, 2020 one franchised location in Texas has been permanently closed.

The Company has evaluated subsequent events that have occurred after March 25, 2020, and determined that there were no other events or transactions occurring during this reporting period that require recognition or disclosure in the condensed consolidated financial statements.

Cash and Cash Equivalents

The Company considers all highly-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 our debt, lease obligations and working capital and general corporate needs. At March 25, 2020, the Company’s total debt was $141.5 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 $43.4 million at March 25, 2020 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.

Assets Held For Sale

During the thirteen weeks ended March 27, 2019, the Company agreed in principle to sell four restaurants within the San Francisco area to an existing franchisee. Additionally, during the thirteen weeks ended March 27, 2019, the Company agreed in principle to sell seven restaurants in the Phoenix area to another existing franchisee. Assets are classified as held for sale if they meet the criteria outlined in Accounting Standards Codification ("ASC") 360, Property, Plant and Equipment. In accordance with applicable accounting guidance, the net assets were recorded at the lower of carrying value or fair value less costs to sell. The Company classified $4.5 million of assets as held for sale, consisting of leasehold improvements and other property equipment, as of March 27, 2019, and recognized a loss on held for sale assets of $4.1 million for the thirteen weeks ended March 27, 2019. These transactions were completed during the second quarter of 2019.

As of March 25, 2020, there were no assets held for sale.

Recently Adopted Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting," which provides optional guidance, for a limited time, to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting. ASU 2020-04 is effective for a limited time, from March 12, 2020, through December 31, 2022. The Company adopted this ASU on March 12, 2020. The adoption of ASU 2020-04 did not have a significant impact on the Company’s consolidated financial position or results of operations.

In February 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement," which finalizes proposed ASU No. 2015-350, and of the same name as part of its disclosure framework project, which focuses on improving the effectiveness of disclosures in the notes to financial statements by facilitating clear communication of the information required by U.S. GAAP that is most important to users of each entity’s financial statements. The Company adopted ASU No. 2018-13 during the first quarter of 2020. The adoption of ASU 2018-13 did not have a significant impact on the Company’s consolidated financial position or results of operations.

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which finalizes proposed ASU No. 2012-260 "Financial Instruments—Credit Losses (Subtopic 825-15)" and adds Topic 326 "Financial Instruments—Credit Losses", to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The Company adopted ASU No. 2016-13 during the first quarter of 2020. The adoption of ASU 2016-03 did not have a significant impact on the Company’s consolidated financial position or results of operations.

Recent Accounting Pronouncements Not Yet Adopted

In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes", which modifies Topic 740 to simplify the accounting for income taxes. ASU 2019-12 is effective for financial statements issued for annual periods beginning after December 15, 2020, and for the interim periods therein. The adoption of ASU 2019-12 is not expected to have a significant impact on the Company’s consolidated financial position or results of operations.

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 for which amounts due totaled 12.2% and 11.7% of the Company’s accounts payable at March 25, 2020 and December 25, 2019, respectively. Purchases from the Company’s largest supplier totaled 27.4% of total expenses for the thirteen weeks ended March 25, 2020, and 26.6% of total expenses for the thirteen weeks ended March 27, 2019.

Company-operated and franchised restaurants in the greater Los Angeles area generated, in the aggregate, approximately 72.4% of total revenue for the thirteen weeks ended March 25, 2020, and 69.2% for the thirteen weeks ended March 27, 2019.

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 determined there was no decrement of goodwill related to the disposition of restaurants during the thirteen weeks ended March 25, 2020.

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.

Due to the recent impact of the COVID-19 pandemic to the global economy, including but not limited to, the volatility of the Company's stock price as well as that of its competitors, declining sales at the Company's restaurants and the challenging environment for the restaurant industry generally, the Company determined that there were indicators of potential impairment of its goodwill and indefinite-lived intangible assets during the thirteen weeks ended March 25, 2020. As such, the Company performed an impairment assessment for both goodwill and indefinite lived intangible assets and concluded that the fair value of these assets substantially exceeded their carrying values. Accordingly, the Company did not record any impairment to its goodwill or indefinite-lived intangible assets during the thirteen weeks ended March 25, 2020. 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 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 our interest rate swaps. The following table presents fair value for the interest rate swap at March 25, 2020 (in thousands):



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

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



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

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 25, 2020 (in thousands):



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

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



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

Impairment of Long-Lived Assets and ROU Assets

The Company reviews its long-lived and right-of-use assets ("ROU assets") for impairment on a restaurant-by-restaurant basis whenever events or changes in circumstances indicate that the carrying value of certain long-lived and ROU assets may not be recoverable. The Company considers a triggering event related to long-lived assets or ROU assets in a net asset position to have occurred related to a specific restaurant if the restaurant’s cash flows for the last twelve months are less than a minimum threshold or if consistent levels of undiscounted cash flows for the remaining lease period are less than the carrying value of the restaurant’s assets. Additionally, the Company considers a triggering event related to ROU assets to have occurred related to a specific lease if the location has been subleased and future estimated sublease income is less than current lease payments. 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. Based on the results of the analysis, the Company recorded a non-cash impairment charge of $1.9 million for the thirteen weeks ended March 25, 2020, primarily related to the carrying value of the ROU assets of one restaurant in Texas and the long-lived assets of three restaurants in California.

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

Closed-Store Reserves

When a restaurant is closed, the Company will evaluate the ROU asset for impairment, based on anticipated sublease recoveries. The remaining value of the ROU asset is amortized on a straight-line basis, with the expense recognized in closed-store reserve expense. Additionally, any property tax and common area maintenance ("CAM") payments relating to closed restaurants are included within closed-store expense. During the thirteen weeks ended March 25, 2020, the Company recognized $0.5 million of closed-store reserve expense related to the amortization of ROU assets, property taxes and CAM payments for its closed locations. During the thirteen weeks ended March 27, 2019, the Company closed one restaurant in California and one restaurant in Texas and recognized $0.3 million primarily related to the amortization of ROU assets for the two closed stores.

Derivative Financial Instruments

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

The Company records the derivative instrument on its condensed consolidated balance sheet at fair value. The derivative instrument qualifies as a hedging instrument in a qualifying cash flow hedge relationship, 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 their contractual obligations. To mitigate the counterparty credit risk, the Company will only enter into contracts with major financial institutions, based upon their credit ratings and other factors, and will continue to assess the creditworthiness of the counterparty. As of March 25, 2020, the counterparty to the Company's interest rate swap has performed in accordance with their 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 to reserve the portion of deferred tax assets which are not expected to be realized.

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

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

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

The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. The Company had no accrual for interest or penalties at March 25, 2020 or at December 25, 2019, and did not recognize interest or penalties during the thirteen weeks ended March 25, 2020 or March 27, 2019, since there were no material unrecognized tax benefits. Management believes no material changes to the amount of unrecognized tax benefits will occur within the next twelve months.

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

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

Changes in Accounting Policies

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

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

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

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

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

2. PROPERTY AND EQUIPMENT

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



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

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

Based on the Company's review of its long-lived assets for impairment, the Company recorded non-cash impairment charges of $1.4 million for the thirteen weeks ended March 25, 2020, primarily related to the carrying value of the 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.

Assets are classified as held for sale if they meet the criteria outlined in ASC 360, Property, Plant and Equipment. In accordance with applicable accounting guidance, the net assets were recorded at the lower of carrying value or fair value less costs to sell. The Company classified $4.5 million of assets as held for sale as of March 27, 2019, and recognized a loss on held for sale assets of $4.1 million for the thirteen weeks ended March 27, 2019.

3. STOCK-BASED COMPENSATION

At March 25, 2020, options to purchase 2,034,834 shares of common stock were outstanding, including 1,518,145 vested and 516,689 unvested. Unvested options vest over time; however, upon a change in control, the board may accelerate vesting. At March 25, 2020, 1,159,366 premium options, options granted above the stock price at date of grant, remained outstanding. A summary of stock option activity as of March 25, 2020 and changes during the thirteen weeks ended March 25, 2020 is as follows:



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

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

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



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

Unvested shares at March 25, 2020, included 430,823 unvested restricted shares, 36,058 unvested performance stock units and 72,117 unvested restricted units.

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

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

4. LONG-TERM DEBT

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

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

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 3.11% to 3.29% for the thirteen weeks ended March 25, 2020 and 3.96% to 4.01% for the thirteen weeks ended March 27, 2019.

The 2018 Credit Agreement contains certain financial covenants. The Company was in compliance with the financial covenants as of March 25, 2020. 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 comply with certain financial covenants required in the 2018 Credit Agreement, specifically the lease-adjusted coverage ratio and fixed-charge coverage ratio.

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

Maturities

During the thirteen weeks ended March 25, 2020, the Company borrowed $44.5 million, net of pay downs of $8.0 million, on the Company’s 2018 Revolver, primarily as a precautionary measure to bolster its existing cash position, related to the uncertainty regarding the current COVID-19 pandemic, as well as to fund litigation settlement payments. See Note 1 under "Subsequent Events" for further details regarding the Company's actions related to the COVID-19 pandemic and Note 7 for further details regarding the litigation settlement payments. During the thirteen weeks ended March 27, 2019, the Company elected to pay down $3.0 million of outstanding borrowings on the Company’s 2018 Revolver. There are 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 were converted to a fixed rate of 1.31%, plus applicable margin, which is currently 1.5%. The interest rate swap was designated as a cash flow hedge, as the changes in the future cash flows of the swap were expected to offset changes in expected future interest payments on the related variable-rate debt, in accordance with ASC 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 25, 2020, the swap was a highly effective cash flow hedge.

As of March 25, 2020, the estimated net loss included in AOCI related to the Company's cash flow hedge that will be reclassified into earnings in the next 12 months is $0.1 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 sheet (in thousands):



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

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



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

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



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

See Note 1 for the fair value of our derivative asset.

5. OTHER ACCRUED EXPENSES AND CURRENT LIABILITIES

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



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

6. OTHER NONCURRENT LIABILITIES

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



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

7. COMMITMENTS AND CONTINGENCIES

Legal Matters

On or about February 24, 2014, a former employee filed a class action in the Superior Court of the State of California, County of Orange, under the caption Elliott Olvera, et al v. El Pollo Loco, Inc., et al (Case No. 30-2014-00707367-CU-OE-CXC) on behalf of all putative class members (all hourly employees from 2010 to the present) alleging certain violations of California labor laws, including failure to pay overtime compensation, failure to provide meal periods and rest breaks, and failure to provide itemized wage statements. The putative lead plaintiff’s requested remedies include compensatory and punitive damages, injunctive relief, disgorgement of profits, and reasonable attorneys’ fees and costs. No specific amount of damages sought was specified in the complaint. The court recently certified two classes of plaintiffs - one class encompasses restaurant employees who were not provided proper rest breaks because they were not allowed to leave the premises during their breaks and the other class encompasses restaurant employees who were required to wait at the restaurant after they finished working for the night until the manager set the alarm for safety purposes. The parties reached a settlement in principle on January 24, 2019 of all claims brought on behalf of the 32,000+ putative class members in the Olvera, as well as all claims for failure to pay overtime compensation, failure to provide meal periods and rest breaks, and failure to provide itemized wage statements brought in the class actions captioned Martha Perez v. El Pollo Loco, Inc. (Los Angeles Superior Court Case No. BC624001), Maria Vega, et al. v. El Pollo Loco, Inc. (Los Angeles Superior Court Case No. BC649719), and Gonzalez v. El Pollo Loco, Inc. (Los Angeles Superior Court Case No. BC712867). The settlement reached in principle in the Olvera, Perez, Vega, and Gonzalez actions resolves all potential claims from April 12, 2010 through April 1, 2019 that El Pollo Loco restaurant employees may have against El Pollo Loco for failure to pay for all compensation owed, failure to pay overtime compensation, failure to provide meal periods and rest breaks and failure to provide itemized wage statements, among other wage and hour related claims. A $16.3 million accrual of an expected settlement amount related to this matter was recorded as of December 26, 2018, and the court formally approved the settlement on January 31, 2020. The settlement payment was made on February 28, 2020. Purported class actions alleging wage and hour violations are commonly filed against California employers. The Company fully expects to have to defend against similar lawsuits in the future.

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

on January 29, 2016, on behalf of co-lead plaintiffs and others similarly situated, alleging violations of federal securities laws in connection with Holdings common stock purchased or otherwise acquired and the purchase of call options or the sale of put options, between May 1, 2015 and August 13, 2015 (the “Class Period”). The named defendants are Holdings; Stephen J. Sather, Laurance Roberts, and Edward J. Valle (collectively, the “Individual Defendants”); and Trimaran Pollo Partners, LLC, Trimaran Capital Partners, and Freeman Spogli & Co. (collectively, the “Controlling Shareholder Defendants”). Among other things, Plaintiffs allege that, in 2014 and early 2015, Holdings suffered losses due to rising labor costs in California and, in an attempt to mitigate the effects of such rising costs, removed a $5 value option from the Company’s menu, which resulted in a decrease in traffic from value-conscious consumers. Plaintiffs further allege that during the Class Period, Holdings and the Individual Defendants made a series of materially false and misleading statements that concealed the effect that these factors were having on store sales growth, resulting in Holdings stock continuing to be traded at artificially inflated prices. As a result, Plaintiffs and other members of the putative class allegedly suffered damages in connection with their purchase of Holdings’ stock during the Class Period. In addition, Plaintiffs allege that the Individual Defendants and Controlling Shareholder Defendants had direct involvement in, and responsibility over, the operations of Holdings, and are presumed to have had, among other things, the power to control or influence the transactions giving rise to the alleged securities law violations. In both cases, Plaintiffs seek an unspecified amount of damages, as well as costs and expenses (including attorneys’ fees).

On July 25, 2016, the Court issued an order granting, without prejudice, Defendants’ Motion to Dismiss plaintiff’s complaint for failure to state a claim. Plaintiffs were granted leave to amend their complaint, and filed an amended complaint on August 22, 2016. Defendants moved to dismiss the amended complaint, and on March 20, 2017, the Court dismissed the amended complaint and granted Plaintiffs leave to file another amended complaint. Plaintiffs filed another amended complaint on April 17, 2017. Defendants filed a motion to dismiss the amended complaint on or about May 17, 2017. The Court denied Defendants' motion to dismiss the third amended complaint on August 4, 2017. On December 8, 2017, Plaintiffs filed a motion for class certification, and on July 3, 2018, the Court granted Plaintiffs’ motion and certified a class as to all of Plaintiffs’ claims. Defendants filed a petition for appellate review of a portion of the Court’s July 3, 2018 class certification order. On October 19, 2018 the Ninth Circuit Court of Appeals denied the petition.

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

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

On March 17, 2017, the Delaware court granted in part, and denied in part, the motion to stay the Diep action. The court denied defendants' motion to dismiss the complaint for failure to state a claim. On January 17, 2018, the court entered an order granting the parties’ stipulation staying all proceedings in the Diep action for five months 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 February 13, 2019, after concluding its investigation, the SLC filed a motion to dismiss the Diep action. The SLC filed its investigative report under seal as an exhibit to the motion to dismiss. Discovery related to the SLC's motion is ongoing.

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

additional restaurant locations in Lancaster, California, and that we thereafter developed company-operated El Pollo Loco restaurants in the “market area” of Plaintiffs’ existing El Pollo Loco restaurant in Lancaster. Plaintiffs asserted claims against us for, among other things, (i) breach of the implied covenant of good faith and fair dealing, (ii) intentional interference with prospective business, and (iii) unfair business practices. In addition to an unspecified amount of damages and costs of the lawsuit, Plaintiffs sought reformation of the contract, declaratory relief, disgorgement of alleged revenues and profits, injunctive relief, and a judicial mandate requiring us to either transfer the company-operated locations to Plaintiffs or to continuously disgorge to Plaintiffs the unjust enrichment allegedly obtained by us through the operation of the company-operated restaurants in Lancaster. We denied Plaintiffs’ allegations as the franchise agreement did not grant Plaintiffs any exclusive territorial rights and, instead, expressly reserved for us the right to open and operate - and the right to grant others the right to open and operate - El Pollo Loco restaurants “in the immediate vicinity of or adjacent to” Plaintiffs’ restaurant in Lancaster. On April 24, 2017, four days before the commencement of trial, Plaintiffs filed a voluntary dismissal, without prejudice, of the Lancaster Lawsuit without any payment or other concession by us. The corresponding dismissal was entered by the court on April 25, 2017. On May 22, 2017, Plaintiffs filed a motion for relief from the dismissal which was granted by the court on June 29, 2017. The trial in the case was bifurcated between the liability and damages phases. The liability phase commenced on November 16, 2017. The only cause of action that the court allowed to go to the jury was the cause of action for breach of the covenant of good faith and fair dealing. The court elected not to present the cause of action for intentional interference with prospective business to the jury. (The causes of action for reformation due to mistake and unconscionability, unfair business practices under California Business & Professions Code §17200 et seq., and declaratory relief were not presented to the jury as these types of equitable claims are to be decided by the court as a matter of law.) On December 11, 2017, the jury returned a verdict in favor of Plaintiffs finding that the Company breached the implied covenant of good faith and fair dealing by (1) constructing the two new company-operated El Pollo Loco restaurants in Lancaster, and (2) not offering the two new company-operated El Pollo Loco restaurants in Lancaster to Plaintiffs. Because the trial was bifurcated, the December 11, 2017 verdict did not include a determination of damages.

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

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

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

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

Purchasing Commitments

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

At March 25, 2020, the Company’s total estimated commitment to purchase chicken was $19.5 million.

Contingent Lease Obligations

As a result of assigning the Company’s interest in obligations under real estate leases in connection with the sale of company-operated restaurants to some of the Company’s franchisees, the Company is contingently liable on four lease agreements. These leases have various terms, the latest of which expires in 2036. As of March 25, 2020, the potential amount of undiscounted payments the Company could be required to make in the event of non-payment by the primary lessee was $2.9 million. The present value of these potential payments discounted at the Company’s estimated pre-tax cost of debt at March 25, 2020 was $2.5 million. The Company’s franchisees are primarily liable on the leases. The Company has cross-default provisions with these franchisees that would put them in default of their franchise agreements in the event of non-payment under the leases. The Company believes that these cross-default provisions reduce the risk that payments will be required to be made under these leases. Due to the current uncertainty related to the COVID-19 pandemic and impact it has had on the ability of the Company's franchisees to make their lease payments, the Company has recorded a $0.1 million liability in the Company’s condensed consolidated financial statements related to these contingent liabilities.

Employment Agreements

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

The Company has employment agreements with three 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. NET INCOME PER SHARE

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

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

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

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

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

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



	Thirteen Weeks Ended
	March 25, 2020		March 27, 2019
Numerator:
Net income	$	3,600	$	913
Denominator:
Weighted-average shares outstanding—basic	34,659,160		38,653,702
Weighted-average shares outstanding—diluted	35,347,456		39,496,436
Net income per share—basic	$	0.10	$	0.02
Net income per share—diluted	$	0.10	$	0.02
Anti-dilutive securities not considered in diluted EPS calculation	474,373		56,016

Below is a reconciliation of basic and diluted share counts:



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

9. RELATED PARTY TRANSACTIONS

Trimaran Pollo Partners, L.L.C. (“LLC”) owns approximately 47.7% of the Company’s outstanding common stock. This large position means that LLC and its majority owners—predecessors and affiliates of, and certain funds managed by, Trimaran Capital Partners and Freeman Spogli & Co. (collectively, “Trimaran” and “Freeman Spogli,” respectively)—possess significant influence when stockholders vote on matters such as election of directors, mergers, consolidations and acquisitions, the sale of all or substantially all of the Company’s assets, decisions affecting the Company’s capital structure, amendments to the Company’s amended and restated certificate of incorporation or amended and restated by-laws, and the Company’s winding up and dissolution. The Company’s amended and restated certificate of incorporation provides that (i) so long as LLC beneficially owns, directly or indirectly, more than 40% of the Company's 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 one point for every $1 spent. When 100 points are accumulated a $10 reward to be used on future purchases is earned. If a customer does not earn or use points within a one-year period, their account is deactivated and all points expire. Additionally, if a $10 reward is not used within six months it expires. When a customer is part of the rewards program, the obligation to provide future discounts related to points earned is considered a separate performance obligation, to which a portion of the transaction price is allocated. The performance obligation related to loyalty points is deemed to have been satisfied, and the amount deferred in the balance sheet is recognized as revenue, when the points are transferred to a $10 reward and redeemed, the reward or points have expired, or the likelihood of redemption is remote. A portion of the transaction price is allocated to loyalty points, if necessary, on a pro-rata basis, based on stand-alone selling price, as determined by menu pricing and loyalty point's terms. As of March 25, 2020 and December 25, 2019, the revenue allocated to loyalty points that have not been redeemed are $1.0 million and $1.1 million, respectively, which are reflected in the Company’s accompanying condensed consolidated balance sheets within other accrued expenses and current liabilities. The Company expects the loyalty points to be redeemed and recognized over a one-year period.

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

Franchise and franchise advertising revenue

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


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


•	Discounted renewal option.


•	Hardware services.

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 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 25, 2020, there were no performance obligations related to hardware services that were unsatisfied or partially satisfied.

Disaggregated revenue

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



	Thirteen Weeks Ended
	March 25, 2020		March 27, 2019
Core Market⁽¹⁾:
Company-operated restaurant revenue	$	85,915	$	85,306
Franchise revenue	3,508		3,499
Franchise advertising fee revenue	2,642		2,717
Total core market	$	92,065	$	91,522
Non-Core Market⁽²⁾:
Company-operated restaurant revenue	$	6,719	$	11,844
Franchise revenue	3,554		2,945
Franchise advertising fee revenue	2,825		2,666
Total non-core market	$	13,098	$	17,455
Total revenue	$	105,163	$	108,977

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

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

The following table presents our revenues disaggregated by geographic market:



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

Contract balances

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



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



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

The Company’s franchise contract liability includes development fees, initial franchise and license fees, franchise renewal fees, lease subsidies and royalty discounts and is included within other accrued expenses and current liabilities and other noncurrent liabilities within the accompanying condensed consolidated balance sheets. The Company receives area development fees from franchisees when they execute multi-unit area development agreements. Initial franchise and license fees, or franchise renewal fees, are received from franchisees upon the execution of, or renewal of, a franchise agreement. Revenue is recognized from these agreements as the underlying performance obligation is satisfied, which is over the term of the agreement.

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



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

Contract Costs

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

11. LEASES

Adoption of Topic 842 "Leases"

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

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

Nature of leases

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

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

Building and facility leases

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

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

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

During the thirteen weeks ended March 25, 2020, the Company reassessed the lease terms on three restaurants due to certain triggering events, such as, the addition of significant leasehold improvements, the decision to terminate a lease, or the decision to renew. As a result of the reassessment, an additional $0.3 million of ROU asset and lease liabilities for the thirteen weeks ended March 25, 2020 were recognized and will be amortized over the new lease term. The reassessment did not have any impact on the original lease classification. Additionally, as the Company adopted all practical expedients available under Topic 842, no reallocation between lease and non-lease components was necessary.

The Company also subleases facilities to certain franchisees and other non-related parties which are also considered operating leases. Sublease income also includes contingent rental income based on net revenues. The vast majority of these leases have rights to extend terms via fixed rental increases. However, none of these leases have early termination rights, the right to purchase the premises or any residual value guarantees. The Company does not have any related party leases.

During the first quarter of 2020, the Company determined that the carrying value of ROU assets at certain restaurants was not recoverable. As a result, the Company recorded a $0.5 million impairment expense for the thirteen weeks ended March 25, 2020. The impairment primarily related to one restaurant in Texas, sold to franchisees in the prior year.

Equipment

Leases of equipment primarily consist of restaurant equipment, copiers and vehicles. These leases are fixed payments with no variable component. Additionally, no optional renewal periods have been included in the calculation of the ROU asset, there are no residual value guarantees and no restrictions imposed.

Significant Assumptions and Judgments

In applying the requirements of Topic 842 the Company made significant assumptions and judgments related to determination of whether a contract contains a lease and the discount rate used for the lease.

In determining if any of the Company’s contracts contain a lease the Company made assumptions and judgments related to its ability to direct the use of any assets stated in the contract and the likelihood of renewing any short-term contracts for a period extending past twelve months.

The Company also made significant assumptions and judgments in determining an appropriate discount rate for property leases. These included using a consistent discount rate for a portfolio of leases entered into at varying dates, using the full 20-year term of the lease, excluding any options, and using the total minimum lease payments. The Company utilizes a third-party valuation firm in determining the discount rate, based on the above assumptions. For all other leases, the Company uses the discount rate implicit in the lease, or the Company’s incremental borrowing rate.

As the Company has adopted the practical expedient not to separate lease and non-lease components, no significant assumptions or judgments were necessary in allocating consideration between these components, for all classes of underlying assets.

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



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

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



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

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



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

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

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

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

Other Information
Weighted-average remaining lease term—finance leases	2.58			—
Weighted-average remaining lease term—operating leases	11.94			2.97
Weighted-average discount rate—finance leases	11.10		%	—
Weighted-average discount rate—operating leases	4.35		%	3.95		%

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



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

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



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

Short-Term Leases

The Company has multiple short-term leases, which have terms of less than 12 months, and thus were excluded from the recognition requirements of Topic 842. The Company has recognized these lease payments in its consolidated statement of operations on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred.

Lessor

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

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

For both thirteen weeks ended March 25, 2020 and March 27, 2019, the Company received $0.1 million of lease income from company-owned locations.

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

Cautionary Statement Concerning Forward-Looking Statements

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

While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. You should evaluate all forward-looking statements made in this report in the context of the factors that could cause outcomes to differ materially from our expectations. These factors include, but are not limited to:


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


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


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


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


•	vulnerability to changes in consumer preferences and economic conditions;


•	vulnerability to conditions in the greater Los Angeles area;


•	vulnerability to natural disasters given the geographic concentration and real estate intensive nature of our business;


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


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


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


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


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


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


•	our ability to service our level of indebtedness;


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


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


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


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


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

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

Overview

El Pollo Loco is a differentiated and growing restaurant concept that specializes in fire-grilling citrus-marinated chicken and operates in the limited service restaurant (“LSR”) segment. We strive to offer food that integrates the culinary traditions of Mexico with the healthier lifestyle of Los Angeles, a combination that we call “LA-Mex”. Our distinctive menu features our signature product--citrus-marinated fire-grilled chicken--and a variety of Mexican and LA-inspired entrees that we create from our chicken. We serve individual and family-sized chicken meals, a variety of Mexican and LA-inspired entrees, and sides, and, throughout the year, on a limited-time basis, additional proteins like shrimp. Our entrees include favorites such as our Chicken Avocado Burrito, Under 500 Calorie entrees, chicken tostada salads, and Pollo Bowls. Our famous Creamy Cilantro dressings and salsas are prepared fresh daily, allowing our customers to create their favorite flavor profiles to enhance their culinary experience. Our distinctive menu with healthier alternatives appeals to consumers across a wide variety of socio-economic

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

COVID-19 Impact

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

The COVID-19 pandemic has disrupted our restaurant operations. All of our restaurants are operating on a take-away, mobile pick-up and delivery basis only, as well as maintaining drive-thru operations where available, in order to protect our employees and customers from the spread of this virus, and in light of the government-mandated closures to our dining rooms.

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


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


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

•

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

•

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


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


•	We delayed making April rent payments on the majority of our leased properties and we are currently negotiating rent abatement and/or deferment with our landlords for those properties.


•	We have taken advantage of provisions available under the CARES Act. Specifically, we have deferred payment of employer Social Security taxes that are otherwise owed for wage payments.

The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. Management is continually evaluating the impact of the global crisis on its financial condition, liquidity, operations, suppliers, industry, and workforce and will take additional actions as necessary. The disruption in operations has led to us considering the impact of the COVID-19 pandemic on our liquidity, debt covenant compliance, and recoverability of long-lived and ROU assets, goodwill and intangible assets, among others. If these disruptions continue, we expect a continued material negative impact on our financial results, future operations and liquidity. The extent of such negative impact will be determined, in part, by the COVID-19 pandemics longevity and severity.

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

Growth Strategies and Outlook

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

It is our intention to return to the following long-term growth strategy after the impact of the COVID-19 pandemic subsides. We plan to continue to expand our business, drive restaurant sales growth, and enhance our competitive positioning, by executing the following strategies:


•	expand our restaurant base;


•	increase our comparable restaurant sales; and


•	enhance operations and leverage our infrastructure.

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

Highlights and Trends

Comparable Restaurant Sales

System-wide, for the thirteen weeks ended March 25, 2020, comparable restaurant sales decreased by 1.5%, from the comparable period in the prior year. For company-operated restaurants, comparable restaurant sales, for the thirteen weeks ended March 25, 2020, decreased by 0.7%. For company-operated restaurants, the quarter’s change in comparable restaurant sales consisted of a 3.8% increase in average check size, and a 4.5% decline in transactions. For franchised restaurants, comparable restaurant sales decreased 2.2% for the thirteen weeks ended March 25, 2020. Refer to Comparable Restaurant Sales definition in "Key Performance Indicators" section below.

Restaurant Development

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



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

Restaurant Remodeling

As of March 25, 2020, together with our franchisees, we had remodeled 34 company-operated and 45 franchised restaurants using our newest Vision restaurant design. The Vision design elevates the brand image with exterior and interior features that embrace the brand’s authentic roots with warm textures, rustic elements and a focus on the signature open kitchen layout established in previous designs. As of March 25, 2020, including new builds and remodels, we had 120 restaurants open with the Vision design in our system. Remodeling is a use of cash and has implications for our net property and equipment owned and depreciation and amortization line items on our condensed consolidated balance sheets and consolidated statements of income, among others. The cost of our restaurant remodels varies depending on the scope of work required, but on average, the

investment is $0.3 million to $0.4 million per restaurant. We believe that our remodeling program will result in higher restaurant revenue and a strengthened brand. In addition, we are currently working on a new asset design that we believe will clearly differentiate and communicate our brand, both on the exterior and interior. We believe that this new design will deliver good new unit volumes and cash on cash returns in both existing and new markets. We also believe that our remodels using this new design will result in higher restaurant revenue and a strengthened brand. This new design replaces our “Vision” design, which was implemented in 2016. However, given the uncertainty surrounding the severity and longevity of the COVID-19 pandemic, as a precautionary measure we have suspended all but essential capital spending, which includes remodels, and we have deferred our franchisee's 2020 remodel requirement until 2021.

Loco Rewards

During the second quarter of 2017, we introduced a new loyalty rewards points program in an effort to increase sales and loyalty among our customers, by offering rewards that incentivize customers to visit our restaurants more often each month. Customers earn 1 point for each $1 spent and 100 points can be redeemed for a $10 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 $10 reward is not used within six months, it expires. When a customer is part of the rewards program, the obligation to provide future discounts related to points earned is considered a separate performance obligation, to which a portion of the transaction price is allocated. The performance obligation related to loyalty points is deemed to have been satisfied, and the amount deferred in the balance sheet is recognized as revenue, when the points are transferred to a $10 reward and redeemed, the reward or points have expired, or the likelihood of redemption is remote. A portion of the transaction price is allocated to loyalty points, if necessary, on a pro-rata basis, based on stand-alone selling price, as determined by menu pricing and loyalty point's terms.

In addition, customers can earn additional points and free entrées for a variety of engagement activities. As points are available for redemption past the quarter earned, a portion of the revenue associated with the earned points will be deferred until redemption or expiration. As of March 25, 2020 and December 25, 2019, the revenue allocated to loyalty points that have not been redeemed are $1.0 million and $1.1 million, respectively, which are reflected in the Company’s accompanying condensed consolidated balance sheets within other accrued expenses and current liabilities. The Company had almost 1.7 million loyalty program members as of March 25, 2020.

Critical Accounting Policies and Use of Estimates

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

Accounting policies are an integral part of our condensed consolidated financial statements. A thorough understanding of these accounting policies is essential when reviewing our reported results of operations and our financial position. Management believes that the critical accounting policies and estimates discussed below involve the most difficult management judgments, due to the sensitivity of the methods and assumptions used. For a summary of our critical accounting policies and a discussion of our use of estimates, see “Critical Accounting Policies and Use of Estimates” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K for the year ended December 25, 2019.

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

Recent Accounting Pronouncements

Recent accounting pronouncements are described in Note 1 to our condensed consolidated financial statements included elsewhere in this report.

Key Financial Definitions

Revenue

Our revenue is derived from three primary sources: company-operated restaurant revenue, franchise revenue, which is comprised primarily of franchise royalties and, to a lesser extent, franchise fees and sublease rental income, and franchise advertising fee revenue. See Note 10 to Item I above for further details regarding our revenue recognition policy.

Food and Paper Costs

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

Labor and Related Expenses

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

Occupancy Costs and Other Operating Expenses

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

General and Administrative Expenses

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

Legal Settlements

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

Franchise Expenses

Franchise expenses are primarily comprised of rent expenses incurred on properties leased by us and then sublet to franchisees, expenses incurred in support of franchisee information technology systems, and the franchisee’s portion of advertising expenses.

Depreciation and Amortization

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

Loss on Disposal of Assets

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

Impairment and Closed-Store Reserves

We review long-lived assets such as property, equipment, and intangibles on a unit-by-unit basis for impairment when events or circumstances indicate a carrying value of the assets that may not be recoverable. We determine if there is impairment at the

restaurant level by comparing undiscounted future cash flows from the related long-lived assets to their respective carrying values, and record an impairment charge when appropriate. In determining future cash flows, significant estimates are made by us with respect to future operating results of each restaurant over its remaining lease term, including sales trends, labor rates, commodity costs and other operating cost assumptions. If assets are determined to be impaired, the impairment charge is measured by calculating the amount by which the asset carrying amount exceeds its fair value. This process of assessing fair values requires the use of estimates and assumptions, including our ability to sell or reuse the related assets and market conditions, which are subject to a high degree of judgment. If these assumptions change in the future, we may be required to record impairment charges for these assets and these charges could be material.

When the Company closes a restaurant, it will evaluate the ROU asset for impairment, based on anticipated sublease recoveries. The remaining value of the ROU asset is amortized on a straight-line basis, with the expense recognized in closed-store reserve expense, in addition to property tax and common area maintenance ("CAM") charges for closed restaurants.

Interest Expense, Net

Interest expense, net, consists primarily of interest on our outstanding debt. Debt issuance costs are amortized at cost over the life of the related debt.

Provision for Income Taxes

Provision for income taxes consists of federal and state taxes on our income.

Comparison of Results of Income

Our operating results for the thirteen weeks ended March 25, 2020 and March 27, 2019 and expressed as percentages of total revenue, with the exception of cost of operations and company restaurant expenses, which are expressed as a percentage of company-operated restaurant revenue, are compared below.



	Thirteen Weeks Ended
	March 25, 2020					March 27, 2019			Increase / (Decrease)
Statements of Income Data	($ ,000)			(%)		($ ,000)		(%)	($ ,000)			(%)
Company-operated restaurant revenue	$	92,634		88.1		$	97,150	89.2	$	(4,516	)	(4.6	)
Franchise revenue	7,062			6.7		6,444		5.9	618			9.6
Franchise advertising fee revenue	5,467			5.2		5,383		4.9	84			1.6
Total revenue	105,163			100.0		108,977		100.0	(3,814		)	(3.5	)
Cost of operations
Food and paper costs(1)	25,562			27.6		27,152		27.9	(1,590		)	(5.9	)
Labor and related expenses(1)	28,693			31.0		29,576		30.4	(883		)	(3.0	)
Occupancy and other operating expenses(1)	22,109			23.9		23,227		23.9	(1,118		)	(4.8	)
Company restaurant expenses(1)	76,364			82.5		79,955		82.3	(3,591		)	(4.5	)
General and administrative expenses	9,331			8.9		11,348		10.4	(2,017		)	(17.8	)
Franchise expenses	6,911			6.6		6,144		5.6	767			12.5
Depreciation and amortization	4,369			4.2		4,761		4.4	(392		)	(8.2	)
Loss on disposal of assets	100			0.1		44		0.0	56			127.3
Loss on assets held for sale	—			—		4,124		3.8	(4,124		)	N/A
Impairment and closed-store reserves	2,402			2.3		309		0.3	2,093			677.3
Total expenses	99,477			94.6		106,685		97.9	(7,208		)	(6.8	)
Income from operations	5,686			5.4		2,292		2.1	3,394			148.1
Interest expense, net of interest income	905			0.9		859		0.8	46			5.4
Income tax receivable agreement (income) expense	(120		)	(0.1	)	171		0.2	(291		)	(170.2	)
Income before provision for income taxes	4,901			4.7		1,262		1.2	3,639

10-Q	2020-03-25	Filed 2020-05-01
10-K	2019-12-25	Filed 2020-03-06
10-Q	2019-09-25	Filed 2019-11-01
10-Q	2019-06-26	Filed 2019-08-02
10-Q	2019-03-27	Filed 2019-05-03
10-K	2018-12-26	Filed 2019-03-08
10-Q	2018-09-26	Filed 2018-11-02
10-Q	2018-06-27	Filed 2018-08-03
10-Q	2018-03-28	Filed 2018-05-07
10-K	2017-12-27	Filed 2018-03-09
10-Q	2017-09-27	Filed 2017-11-03
10-Q	2017-06-28	Filed 2017-08-07
10-Q	2017-03-29	Filed 2017-05-05
10-K	2016-12-28	Filed 2017-03-10
10-Q	2016-09-28	Filed 2016-11-04
10-Q	2016-06-29	Filed 2016-08-05
10-Q	2016-03-30	Filed 2016-05-06
10-K	2015-12-30	Filed 2016-03-11
10-Q	2015-09-30	Filed 2015-11-13
10-Q	2015-07-01	Filed 2015-08-14
10-Q	2015-04-01	Filed 2015-05-15
10-K	2014-12-31	Filed 2015-03-17
S-1	2014-11-10	Public Filing
10-Q	2014-09-24	Filed 2014-11-07
10-Q	2014-06-25	Filed 2014-09-05
S-1	2014-06-24	Public Filing

8-K	2020-04-30	Earnings, Exhibits
8-K	2020-04-08	Earnings, Regulation FD, Exhibits
8-K	2020-03-18	Officers
8-K	2020-03-05	Earnings, Exhibits
8-K	2019-10-31	Earnings, Exhibits
8-K	2019-08-01	Earnings, Exhibits
8-K	2019-06-04	Shareholder Vote
8-K	2019-05-02	Earnings, Exhibits
8-K	2019-03-29	Officers, Exhibits
8-K	2019-03-07	Earnings, Exhibits
8-K	2019-01-22	Officers
8-K	2018-11-01	Earnings, Exhibits
8-K	2018-08-31	Other Events
8-K	2018-08-02	Earnings, Exhibits
8-K	2018-06-28	Officers
8-K	2018-06-05	Shareholder Vote
8-K	2018-05-03	Earnings, Exhibits
8-K	2018-03-08	Earnings, Exhibits
8-K	2018-02-15	Officers, Exhibits
8-K	2018-01-16	Officers
8-K	2018-01-03	Officers

EX-10.1	ex101severanceagreementmun.htm
EX-31.1	ex311q12020.htm
EX-31.2	ex312q12020.htm
EX-32.1	ex321q12020.htm

Price	15.24	EPS	1
Shares	35	P/E	21
MCap	535	P/FCF	15
Net Debt	89	EBIT	38
TEV	624	TEV/EBIT	16
TTM 2019-12-25, in MM, except price, ratios

LOCO 10Q Quarterly Report

El Pollo Loco Earnings 2020-03-25