El Pollo Loco, Inc.
El Pollo Loco Holdings, Inc. (Form: 10-Q, Received: 11/03/2017 12:50:02)


 
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 September 27, 2017
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-36556
   
 
EL POLLO LOCO HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
 
 
Delaware
 
20-3563182
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
3535 Harbor Blvd., Suite 100, Costa Mesa, California
 
92626
(Address of principal executive offices)
 
(Zip Code)
 
(714) 599-5000
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
 
 
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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
☐ (Do not check if a smaller reporting company)
Smaller reporting company
 
 
 
 
 
 
Emerging growth company




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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ☐  Yes    ☒  No
As of October 23, 2017 , there were 38,652,918 shares of the issuer’s common stock outstanding.
 




Table of Contents
Page


3



PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
EL POLLO LOCO HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Amounts in thousands, except share data)
 
September 27, 2017
 
December 28, 2016
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
7,062

 
$
2,168

Restricted cash

 
125

Accounts and other receivables, net
7,994

 
6,919

Inventories
2,233

 
2,112

Prepaid expenses and other current assets
3,016

 
3,104

Total current assets
20,305

 
14,428

Property and equipment owned, net
114,903

 
118,470

Property held under capital leases, net
46

 
64

Goodwill
248,674

 
248,674

Trademarks
61,888

 
61,888

Other intangible assets, net
403

 
484

Deferred tax assets
6,317

 
25,905

Other assets
1,136

 
1,392

Total assets
$
453,672

 
$
471,305

Liabilities and Stockholders' Equity
 

 
 

Current liabilities:
 

 
 

Current portion of obligations under capital leases
$
129

 
$
144

Accounts payable
10,358

 
11,637

Accrued salaries and vacation
9,315

 
5,754

Accrued insurance
5,548

 
5,444

Accrued income taxes payable
3

 
120

Accrued interest
151

 
198

Other accrued expenses and current liabilities
32,732

 
22,021

Total current liabilities
58,236

 
45,318

Revolver loan
85,000

 
104,000

Obligations under capital leases, net of current portion
219

 
317

Deferred taxes
3,966

 
18,488

Other intangible liabilities, net
843

 
1,012

Other noncurrent liabilities
30,739

 
36,988

Total liabilities
179,003

 
206,123

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; 38,652,918
   and 38,473,772 shares issued and outstanding
387

 
385

Additional paid-in-capital
372,671

 
371,843

Accumulated deficit
(98,389
)
 
(107,046
)
Total stockholders' equity
274,669

 
265,182

Total liabilities and stockholder’s equity
$
453,672

 
$
471,305

 
See notes to condensed consolidated financial statements (unaudited).

4



EL POLLO LOCO HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Amounts in thousands, except share data)
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
September 27, 2017
 
September 28, 2016
 
September 27, 2017
 
September 28, 2016
Revenue
 
 
 
 
 
 
 
Company-operated restaurant revenue
$
94,982

 
$
89,738

 
$
287,316

 
$
268,984

Franchise revenue
6,173

 
6,078

 
19,183

 
18,660

Total revenue
101,155

 
95,816

 
306,499

 
287,644

Cost of operations
 

 
 

 
 

 
 

Food and paper cost
27,851

 
26,960

 
84,069

 
80,760

Labor and related expenses
27,514

 
24,455

 
80,939

 
73,323

Occupancy and other operating expenses
22,242

 
20,071

 
64,358

 
58,401

Gain on recovery of insurance proceeds, lost profit

 
(502
)
 

 
(502
)
Company restaurant expenses
77,607

 
70,984

 
229,366

 
211,982

General and administrative expenses
8,285

 
8,252

 
27,594

 
25,776

Franchise expenses
709

 
797

 
2,532

 
2,960

Depreciation and amortization
4,697

 
4,074

 
13,646

 
11,796

Loss on disposal of assets
65

 
58

 
724

 
524

Expenses related to fire loss

 

 

 
48

Loss (gain) on recovery of insurance proceeds, property, equipment and expenses

 
148

 

 
(741
)
Recovery of securities lawsuits related legal expenses
(634
)
 

 
(1,145
)
 

Asset impairment and closed-store reserves
16,038

 
2,490

 
17,293

 
2,624

Total expenses
106,767

 
86,803

 
290,010

 
254,969

(Loss) gain on disposition of restaurants

 
(5
)
 

 
28

(Loss) income from operations
(5,612
)
 
9,008

 
16,489

 
32,703

Interest expense, net of interest income of $6 and $7 for the quarters ended September 27, 2017 and September 28, 2016, respectively and $17 and $22 for year-to-date ended September 27, 2017 and September 28, 2016, respectively.
903

 
785

 
2,471

 
2,441

Income tax receivable agreement (income) expense
(19
)
 
182

 
107

 
411

(Loss) income before (benefit) provision for income taxes
(6,496
)
 
8,041

 
13,911

 
29,851

(Benefit) provision for income taxes
(2,457
)
 
2,830

 
5,254

 
11,930

Net (loss) income
$
(4,039
)
 
$
5,211

 
$
8,657

 
$
17,921

Net (loss) income per share
 

 
 

 
 

 
 

Basic
$
(0.11
)
 
$
0.14

 
$
0.23

 
$
0.47

Diluted
$
(0.11
)
 
$
0.13

 
$
0.22

 
$
0.46

Weighted-average shares used in computing net (loss) income per share
 

 
 

 
 

 
 

Basic
38,462,100

 
38,415,189

 
38,449,453

 
38,331,400

Diluted
38,462,100

 
39,083,577

 
39,101,214

 
39,020,127

 
See notes to condensed consolidated financial statements (unaudited).

5



EL POLLO LOCO HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
 
Thirty-Nine Weeks Ended
 
September 27, 2017
 
September 28, 2016
Cash flows from operating activities:
 

 
 

Net income
$
8,657

 
$
17,921

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

 
 

Depreciation and amortization
13,646

 
11,796

Stock-based compensation expense
738

 
244

Fire insurance proceeds for expenses paid and lost profit

 
257

Income tax receivable agreement expense
107

 
411

Gain on disposition of restaurants

 
(28
)
Loss on disposal of assets
724

 
524

Gain on recovery of insurance proceeds, property, equipment and expenses

 
(741
)
Gain on recovery of insurance proceeds, lost profits

 
(502
)
Impairment of property and equipment
15,480

 
2,508

Closed-store reserve
1,813

 
116

Amortization of deferred financing costs
228

 
229

Amortization of favorable and unfavorable leases, net
(88
)
 
(51
)
Excess income tax benefit related to share-based compensation plans

 
(169
)
Deferred income taxes, net
5,066

 
11,624

Changes in operating assets and liabilities:
 

 
 

Accounts and other receivables, net
(1,075
)
 
(2,066
)
Inventories
(121
)
 
57

Prepaid expenses and other current assets
88

 
(770
)
Income taxes (receivable) payable
(117
)
 
134

Other assets
28

 
94

Accounts payable
747

 
(6,269
)
Accrued salaries and vacation
3,561

 
2,538

Accrued insurance
104

 
140

Other accrued expenses and liabilities
2,499

 
1,673

Restricted cash
125

 

Net cash flows provided by operating activities
52,210

 
39,670

Cash flows from investing activities:
 

 
 

Proceeds from sale of restaurant

 
1,465

Fire insurance proceeds for property and equipment

 
743

Purchase of property and equipment
(28,295
)
 
(26,465
)
Net cash flows used in investing activities
(28,295
)
 
(24,257
)
Cash flows from financing activities:
 

 
 

Payments on revolver loan
(19,000
)
 
(16,000
)
Proceeds from issuance of common stock upon exercise of stock options, net of expenses
93

 
978

Payment of obligations under capital leases
(114
)
 
(132
)
Excess income tax benefit related to share-based compensation plans

 
169

Net cash flows used in financing activities
(19,021
)
 
(14,985
)
Increase in cash and cash equivalents
4,894

 
428

Cash and cash equivalents, beginning of period
2,168

 
6,101

Cash and cash equivalents, end of period
$
7,062

 
$
6,529


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Thirty-Nine Weeks Ended
Supplemental cash flow information
September 27, 2017
 
September 28, 2016
Cash paid during the period for interest
$
2,475

 
$
2,355

Cash paid during the period for income taxes
$
320

 
$
173

Unpaid purchases of property and equipment
$
3,131

 
$
4,599

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

7



EL POLLO LOCO HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Overview
El Pollo Loco Holdings, Inc. (“Holdings”) is a Delaware corporation headquartered in Costa Mesa, California. Holdings and its direct and indirect subsidiaries are collectively known as “we,” “us” or the “Company.” The Company's activities are conducted principally through its indirect wholly-owned subsidiary, El Pollo Loco, Inc. (“EPL”), which develops, franchises, licenses, and operates quick-service restaurants under the name El Pollo Loco® and operates under one operating segment. At September 27, 2017 , the Company operated 208 and franchised 265 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 28, 2016 .
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 2016 and 2017 are both 52-week years, ending on December 28, 2016 and December 27, 2017, respectively. Revenues, expenses, and other financial and operational figures may be elevated in a 53-week year.
Holdings has no material assets or operations. Holdings and Holdings’ direct subsidiary, EPL Intermediate, Inc. (“Intermediate”), guarantee EPL’s 2014 Revolver (see Note 4) on a full and unconditional basis, and Intermediate has no subsidiaries other than EPL. EPL is a separate and distinct legal entity and has no obligation to make funds available to Intermediate. EPL and Intermediate may pay dividends to Intermediate and to Holdings, respectively.
Under the 2014 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 income tax receivable agreement (the “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 and officers, provided that those equity interests represent a portion of the consideration of the exercise price of those stock options, (b) pay up to $2.5 million per year pursuant to stock option plans, employment agreements, or incentive plans, (c) make up to $5.0 million in other restricted payments per year, and (d) make other restricted payments, provided that such payments would not cause, in each case, on a pro forma basis, (x) its lease-adjusted consolidated leverage ratio to equal or exceed 4.25 times and (y) its consolidated fixed charge coverage ratio to be less than 1.75 times.
 
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 period reported. Actual results could materially differ from those estimates. The Company’s significant estimates include estimates for

8



impairment of goodwill, intangible assets and property and equipment, insurance reserves, lease termination liabilities, closed-store reserves, stock-based compensation, income tax receivable agreement liability, and income tax valuation allowances.
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.
Restricted Cash
The Company’s restricted cash represented cash collateral to one commercial bank for Company credit cards. During the thirty-nine weeks ended September 27, 2017 , the cash collateral was returned by the bank, and the Company reclassified such amounts to cash and cash equivalents.
 
Liquidity
The Company’s principal liquidity requirements are to service its debt and to meet capital expenditure needs. At September 27, 2017 , the Company’s total debt (including capital lease liabilities) was $85.3 million . The Company’s ability to make payments on its indebtedness and to fund planned capital expenditures depends on available cash and on 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, available cash of $7.1 million at September 27, 2017 , and available borrowings under the 2014 Revolver (which availability was approximately $106.9 million at September 27, 2017 ) will be adequate to meet the Company’s liquidity needs for the next 12 months.

(Loss) Gain on Recovery of Insurance Proceeds

In November 2015, one of the Company’s restaurants incurred damage resulting from a fire. During the thirty-nine weeks ended September 28, 2016 , the Company incurred costs directly related to the fire of less than $0.1 million , disposed of an additional $0.1 million in assets, and recognized gains of $0.7 million , related to the reimbursement of property and equipment, and $0.5 million , related to the reimbursement of lost profits. The reimbursement of lost profits is included in the accompanying consolidated financial statements of operations, for the thirteen and thirty-nine weeks ended September 28, 2016 , as a reduction of company restaurant expenses. The Company received from the insurance company cash of $1.0 million during the thirty-nine weeks ended September 28, 2016 , and $0.4 million on October 5, 2016, net of the insurance deductible. The $0.4 million is included in accounts and other receivables in the condensed consolidated balance sheet as of September 28, 2016 . The restaurant was reopened for business on March 14, 2016.

Recovery of Securities Class Action Legal Expense

During the thirteen and thirty-nine weeks ended September 27, 2017 , the Company received insurance proceeds of $0.6 million and $1.1 million , respectively, related to the reimbursement of certain legal expenses paid in prior years for the defense of securities lawsuits. The Company subsequently received an additional $0.5 million of insurance reimbursements on October 12, 2017. See Note 7, Commitments and Contingencies, Legal Matters.
 
Recent Accounting Pronouncements
 
In May 2017, the FASB issued ASU 2017-09, which provides clarity, reduces diversity in practice, and reduces cost and complexity when applying the guidance in Topic 718 Compensation—Stock Compensation, regarding a change to the terms or conditions of a share-based payment award. Specifically, an entity is to account for the effects of a modification, unless all of the following are satisfied: (1) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (3) the classification of the modified award as an equity instrument or as a liability instrument is the same as the classification of the original award immediately before the original award is modified. ASU 2017-09 is effective for financial statements issued for annual periods beginning after December 15, 2017. The adoption of ASU 2017-09 is not expected to have a significant impact on the Company’s consolidated financial position or results of operations.


9



In January 2017, the FASB issued ASU 2017-04, simplifying the manner in which an entity is required to test for goodwill impairment by eliminating Step 2 from the goodwill impairment test. ASU 2017-04 is effective for financial statements issued for annual periods beginning after December 15, 2019. The adoption of ASU 2017-04 is not expected to have a significant impact on the Company’s consolidated financial position or results of operations.

In January 2017, the FASB issued ASU 2017-01, clarifying the definition of a business. ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for financial statements issued for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The adoption of ASU 2017-01 is not expected to have a significant impact on the Company’s consolidated financial position or results of operations.

In November 2016, the FASB issued ASU 2016-18, "Restricted Cash." ASU 2016-18 addresses the diversity in practice that exists regarding the classification and the presentation of changes in restricted cash on the statements of cash flows under Topic 230, Statements of Cash Flow, and other Topics. The amendments in ASU No. 2016-18 require that amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and the end-of-period total amounts set forth on the statements of cash flows. ASU 2016-18 is effective for financial statements issued for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The adoption of ASU 2016-18 is not expected to have a significant impact on the Company’s consolidated financial position or results of operations.

In August 2016, the FASB issued ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments." ASU 2016-15 addresses how certain cash receipts and cash payments are presented and classified in the statements of cash flows under Topic 230, Statements of Cash Flow, and other Topics. ASU 2016-15 is effective for financial statements issued for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The adoption of ASU 2016-15 is not expected to have a significant impact on the Company’s consolidated financial position or results of operations.

In February 2016, the FASB issued ASU 2016-02, “Leases.” The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Although early adoption is permitted, the Company will adopt these provisions in the first quarter of 2019. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company has $307.5 million of operating lease obligations as of September 27, 2017 and upon adoption of this standard will record a ROU asset and lease liability equal to the present value of these leases, which will have a material impact on the consolidated balance sheet. However, the recognition of lease expense in the consolidated statement of operations is not expected to change from the current methodology.

In January 2016, the FASB issued ASU 2016-01, "Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities." The pronouncement requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. These changes become effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The adoption of ASU 2016-01 is not expected to have a significant impact on the Company’s consolidated financial position or results of operations.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (ASU 2014-09)”, which supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP.

The revised revenue standard is effective for public entities for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach

10



with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures).

In addition, the FASB has issued the following Technical Corrections, Practical Expedients and Improvements to Topic 606, Revenue from Contracts with Customers: ASU 2017-13 in September 2017, ASU No. 2016-20, in December 2016, ASU No. 2016-12, in May 2016, and ASU No. 2016-10, in April 2016. All amendments are effective for financial statements issued for annual periods beginning after December 15, 2017, including interim periods within those annual periods, and early application is permitted, but no earlier than fiscal years beginning after December 15, 2016.

The Company generates a substantial amount of its revenues from company-operated restaurants. This revenue stream is not expected to be impacted by the adoption of ASU No. 2014-09, or any of the subsequent related ASU’s. The Company has completed its initial analysis of the impact of the standard on franchise revenue. The revenue recognition for franchise fees that are based on future sales is not impacted. However, revenue recognition for franchise and development fees that are not related to subsequent sales will be impacted. The Company does not believe the adoption of ASU 2014-09 will have a material impact to future results of operations. In addition, the Company has determined to take a modified retrospective approach of transition and will recognize an adjustment to retained earnings, related to the cumulative effect of adopting ASU 2014-09 at the date of adoption. The Company is in the process of analyzing the disclosure requirements and the impact on advertising fees, and plans to complete its analysis by the end of fiscal 2017.

Subsequent Events
Subsequent to September 27, 2017 , the Company received an additional $0.5 million of insurance proceeds related to the reimbursement of certain legal expenses paid in prior years for the defense of securities lawsuits. In addition one of our franchisees closed one restaurant in California.
The Company evaluated subsequent events that have occurred after September 27, 2017 , 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.
Concentration of Risk
Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally-insured limits. The Company has never experienced any losses related to these balances.
The Company had one supplier for which amounts due totaled 17.4% of the Company's accounts payable at September 27, 2017 . As of December 28, 2016 , the Company had one supplier for which amounts due totaled 16% of the Company’s accounts payable. Purchases from the Company’s largest supplier totaled 27% of total expenses for the thirteen weeks ended September 27, 2017 , and 33% of total expenses for the thirteen weeks ended September 28, 2016 . Purchases from the Company’s largest supplier totaled 30% of total expenses for the thirty-nine weeks ended September 27, 2017 , and 33% of total expenses for the thirty-nine weeks ended September 28, 2016 , of the Company’s purchases. Company-operated and franchised restaurants in the greater Los Angeles area generated, in the aggregate, approximately 73% and 75% of total revenue for the thirteen and thirty-nine weeks ended September 27, 2017 and September 28, 2016 , respectively.
Goodwill and Indefinite Lived Intangible Assets
The Company’s indefinite lived intangible assets consist of trademarks. Goodwill represents the excess of cost over fair value of net identified assets acquired in business combinations accounted for under the purchase method. The Company does not amortize its goodwill and indefinite lived intangible assets. Goodwill resulted from historical acquisitions.
Upon a sale of a restaurant, the Company evaluates whether there is a decrement of goodwill. The amount of goodwill included in the cost basis of the asset sold is determined based on the relative fair value of the portion of the reporting unit disposed of compared to the fair value of the reporting unit retained.
The Company performs annual impairment tests for goodwill during the fourth fiscal quarter of each fiscal year, or more frequently if impairment indicators arise.
The Company reviews goodwill for impairment utilizing either a qualitative assessment or a two-step process. 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 two-step process, the first

11



step of the goodwill impairment test is used to identify potential impairment by comparing 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 and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step is performed to measure the amount of impairment by comparing the carrying amount of the goodwill to a determination of the implied value of the goodwill. If the carrying amount of goodwill is greater than the implied value, an impairment charge is recognized for the difference.
The Company performs annual impairment tests for indefinite lived intangible assets during the fourth fiscal quarter of each fiscal year, or more frequently if impairment indicators arise. An impairment test consists of either a qualitative assessment or a comparison of the fair value of an intangible asset with its carrying amount. The excess of the carrying amount of an intangible asset over its fair value is its impairment loss.
The assumptions used in the estimate of fair value are generally consistent with the past performance of the Company’s reporting segment and are also consistent with the projections and assumptions that are used in current operating plans. These assumptions are subject to change as a result of changing economic and competitive conditions.
The Company did not identify any indicators of potential impairment of its goodwill or indefinite-lived intangible assets during the thirteen and thirty-nine weeks ended September 27, 2017 or September 28, 2016 , and therefore did not record any impairment during the respective periods.
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: Quoted 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.

As of September 27, 2017 and December 28, 2016 , the Company had no assets or liabilities measured at fair value on a recurring basis.

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 (for example, when there is evidence of impairment).

The following non-financial instruments were measured at fair value, on a nonrecurring basis, as of and for the thirteen and thirty-nine weeks ended  September 27, 2017 and September 28, 2016 (in thousands), reflecting certain property and equipment assets for which an impairment loss was recognized during the corresponding period, as discussed immediately below under "Impairment of Long-Lived Assets":
 
 
 
Fair Value Measurements at September 27, 2017 Using
 
Impairment Loss
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Thirteen Weeks Ended September 27, 2017
 
Thirty-Nine Weeks Ended September 27, 2017
Property and equipment owned, net
$
280

 
$

 
$

 
$
280

 
$
15,035

 
15,480



12



 
 
 
Fair Value Measurements at September 28, 2016 Using
 
Impairment Loss
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Thirteen Weeks Ended September 28, 2016
 
Thirty-Nine Weeks Ended September 28, 2016
Property and equipment owned, net
$

 
$

 
$

 
$

 
$
2,508

 
2,508


Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment on a restaurant-by-restaurant basis whenever events or changes in circumstances indicate that the carrying value of certain assets may not be recoverable. The Company considers a triggering event to have occurred related to a specific restaurant if the restaurant’s 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. If the Company concludes that the carrying value of certain assets will not be recovered based on expected undiscounted future cash flows, an impairment write-down is recorded to reduce the assets to their estimated fair value. The fair value is measured on a nonrecurring basis using unobservable (Level 3) inputs. There is uncertainty in the projected undiscounted future cash flows used in the Company's impairment review analysis. If actual performance does not achieve the projections, the Company may recognize impairment charges in future periods, and such charges could be material. Based on the results of the analysis, during the thirteen weeks ended September 27, 2017 , the Company recorded a non-cash impairment charge of $15.0 million , primarily related to the non-recoverable assets of 10 stores in Texas and California. In addition, for the thirty-nine weeks ended September 27, 2017 the Company recorded a non-cash impairment charge of $15.5 million , primarily related to the non-recoverable assets of 11 stores, in Texas and California. For the thirteen and thirty-nine weeks ended September 28, 2016 , the Company recorded a $2.5 million non-cash impairment charge, primarily related to non-recoverable assets of two restaurants in Arizona and Texas. The Company continues to monitor the recoverability of the carrying value of the assets of several restaurants on an ongoing basis.  In particular, most of the Company’s (and its franchisees’) restaurants in Texas have been open since the beginning of 2015, and many since the beginning of 2016. Accordingly, given the difficulty in projecting results for newer restaurants in newer markets, the Company intends to continue to closely monitor the performance of its Texas portfolio. Based on the most recent results in the Texas market, if management's plans to grow sales and improve profitability are not successful, future significant impairment to the Company’s assets may occur as a result of the performance of these restaurants and the related future cash flow assumptions over the remaining lease term.
Closed-Store Reserves
 
When the Company makes the determination to close a restaurant, it reviews the future minimum lease payments and related ancillary costs from the date of the restaurant closure to the end of the remaining lease term and records a lease charge for the lease liabilities to be incurred, net of any estimated sublease recoveries. There is uncertainty in the estimates of future lease costs and sublease recoveries. In addition an impairment charge is recognized for any remaining carrying value of certain restaurant assets. During the thirteen weeks ended September 27, 2017 , the Company closed three restaurants in Texas, recognizing a closed-store reserve of $1.0 million . During the thirty-nine weeks ended September 27, 2017 , the Company closed four restaurants in Texas and one in Arizona, recognizing a closed-store reserve of $1.8 million . For the thirty-nine weeks ended September 28, 2016 , the Company recognized $0.1 million of expense related to adjustments to closed-store reserves recognized in prior periods.

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. In the first quarter of fiscal 2017 the Company implemented ASU 2015-17, "Balance Sheet Classification of Deferred Taxes," resulting in the classification of all deferred tax assets as non-current. As the Company implemented this ASU retrospectively, $21.5 million of deferred tax assets previously classified as current in fiscal year 2016 are now classified as noncurrent liabilities within the Company's consolidated balance sheets.

13



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 September 27, 2017 or at December 28, 2016 , and did not recognize interest or penalties during the thirteen or thirty-nine weeks ended September 27, 2017 or September 28, 2016 , 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.
On July 30, 2014, the Company entered into the TRA. The TRA calls for the Company to pay to its pre-IPO stockholders 85% of the savings in cash that the Company realizes in its taxes as a result of utilizing its net operating losses and other tax attributes attributable to preceding periods. For the thirteen weeks ended September 27, 2017 we recorded income tax receivable agreement income of less than $0.1 million and for the thirteen weeks ended September 28, 2016 we recorded income tax receivable agreement expense of $0.2 million , and for the thirty-nine weeks ended September 27, 2017 and September 28, 2016 , we recorded income tax receivable agreement expense of $0.1 million and $0.4 million , respectively, related to the amortization of interest expense related to our total expected TRA payments and changes in estimates for actual tax returns filed.

2. PROPERTY AND EQUIPMENT
The costs and related accumulated depreciation and amortization of major classes of property and equipment are as follows (in thousands):
 
September 27, 2017
 
December 28, 2016
Land
$
12,323

 
$
12,323

Buildings and improvements
132,297

 
125,159

Other property and equipment
68,157

 
65,831

Construction in progress
8,470

 
11,539

 
221,247

 
214,852

Less: accumulated depreciation and amortization
(106,344
)
 
(96,382
)
 
$
114,903

 
$
118,470

 
The gross value of assets under capital leases for buildings and improvements was $1.6 million at September 27, 2017 and December 28, 2016 . Accumulated depreciation for assets under capital leases was $1.5 million as of September 27, 2017 and December 28, 2016 .

Depreciation expense was $4.7 million and $4.1 million for the thirteen weeks ended September 27, 2017 and September 28, 2016 , respectively, and $13.6 million and $11.8 million for the thirty-nine weeks ended September 27, 2017 and September 28, 2016 , respectively. For the thirteen weeks ended September 27, 2017 , capital expenditures totaled $9.3 million , including $0.1 million for restaurant remodeling and $7.1 million for new restaurant expenditures. For the thirty-nine weeks ended September 27, 2017 , capital expenditures totaled $28.3 million , including $2.9 million for restaurant remodeling and $21.0 million for new restaurant expenditures. For the thirteen weeks ended September 28, 2016 , capital expenditures totaled $12.1 million , including $0.1 million for restaurant remodeling and $10.8 million for new restaurant expenditures. For the thirty-nine weeks ended September 28, 2016 , capital expenditures totaled $26.5 million , including $1.6 million for restaurant remodeling and $20.8 million for new restaurant expenditures. Capital expenditures for these periods exclude unpaid purchases of property and equipment.

14



Based on the Company’s review of its long-lived assets for impairment, the Company recorded non-cash impairment charges of $15.0 million and $15.5 million for the thirteen and thirty-nine weeks ended September 27, 2017 , respectively. For the thirteen and thirty-nine weeks ended September 28, 2016 , the Company recorded a $2.5 million non-cash impairment charge, primarily related to non-recoverable assets of two restaurants in Arizona and Texas.

3. STOCK-BASED COMPENSATION
At September 27, 2017 , options to purchase 2,302,319 shares of common stock were outstanding, including 1,892,062 vested and 410,257 unvested. Unvested options vest over time. However, upon a change in control, the board may accelerate vesting. At September 27, 2017 , 1,563,549 premium options, options granted above the stock price at date of grant, remained outstanding. There were no stock option exercises during the thirteen weeks ended September 27, 2017 and 17,661 stock option exercises during the thirty-nine weeks ended September 27, 2017 . For the thirteen and thirty-nine weeks ended September 28, 2016 , there were stock option exercises of 32,386 and 147,726 shares, respectively. For the thirteen weeks ended September 27, 2017 , there were no stock options granted, and for the thirty-nine weeks ended September 27, 2017 , 128,252 stock options were granted at the fair market value on the date of grant. For the thirteen and thirty-nine weeks ended September 28, 2016 , there were stock option grants of 9,875 and 329,673 , respectively, granted at the fair market value on the date of grant. At September 27, 2017 , the Company had total unrecognized compensation expense of $1.4 million related to unvested stock options, which it expects to recognize over a weighted-average period of 2.9 years.
For the thirteen and thirty-nine weeks ended September 27, 2017 , 1,248 and 170,924 restricted shares were granted, respectively, at the fair market value on the date of grant. There were 21,453 and 29,259 restricted shares granted at the fair market value on the date of grant during the thirteen and thirty-nine weeks ended September 28, 2016 , respectively. The restricted shares will vest ratably over four years for employees and three years for directors, from their grant date. At September 27, 2017 , there were 187,710 unvested restricted shares outstanding. At September 27, 2017 , the Company had total unrecognized compensation expense of $2.4 million related to unvested restricted shares, which it expects to recognize over a weighted-average period of 3.4 years.
Total stock-based compensation expense was $0.3 million and $0.7 million for the thirteen and thirty-nine weeks ended September 27, 2017 , respectively, and $0.1 million and $0.2 million for the thirteen and thirty-nine weeks ended September 28, 2016 , respectively. In connection with the separation of its former audit committee chair, during the thirty-nine weeks ended September 27, 2017 , the Company modified previously granted equity awards to allow for additional time to exercise previously vested awards following his separation date. As a result, the Company incurred incremental stock-based compensation expense of less than $ 0.1 million for the thirty-nine weeks ended September 27, 2017 .

4. CREDIT AGREEMENTS
On December 11, 2014, the Company refinanced its debt, with EPL, Intermediate, and Holdings entering into a credit agreement with 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 $200.0 million five -year senior secured revolving facility (the “2014 Revolver”). The 2014 Revolver includes a sub limit of $15.0 million for letters of credit and a sub limit of $15.0 million for swingline loans. At September 27, 2017 , $8.1 million of letters of credit, and $85.0 million of the revolving line of credit were outstanding. The amount available under the revolving line of credit was $106.9 million at September 27, 2017 . The 2014 Revolver will mature on or about December 11, 2019 .
Borrowings under the 2014 Revolver (other than any swingline loans) bear interest, at the borrower’s option, at rates based upon either LIBOR or a base rate, plus, for each rate, a margin determined in accordance with a lease-adjusted consolidated leverage ratio-based pricing grid. The base rate is calculated as the highest of (a) the federal funds rate plus 0.50% , (b) the prime rate of Bank of America, or (c) LIBOR plus 1.00% . For LIBOR loans, the margin is in the range of 1.75% to 2.50% , and for base rate loans the margin is in the range of 0.75% to 1.50% . The interest rate range was 2.96% to 2.99% and 2.44% to 2.99% for the thirteen and thirty-nine weeks ended September 27, 2017 , respectively, and 2.20% to 2.27% and 2.02% to 2.27% for the thirteen and thirty-nine weeks ended September 28, 2016 , respectively.
The 2014 Revolver includes a number of negative and financial covenants, including, among others, the following (all subject to certain exceptions): a maximum lease-adjusted consolidated leverage ratio covenant, a minimum consolidated fixed charge coverage ratio, and limitations on indebtedness, liens, investments, asset sales, mergers, consolidations, liquidations, dissolutions, restricted payments, and negative pledges. The 2014 Revolver also includes certain customary affirmative covenants and events of default. The Company was in compliance with all such covenants at September 27, 2017 . See Note 1 for restrictions on the payment of dividends under the 2014 Revolver.

15



Maturities
There are no required principal payments prior to maturity for the 2014 Revolver. During the thirteen and thirty-nine weeks ended September 27, 2017 , the Company elected to pay down $9.5 million and $19.0 million , respectively, of outstanding borrowings on the Company's 2014 Revolver, primarily from its cash flow from operations. During the thirteen and thirty-nine weeks ended September 28, 2016 , the Company elected to pay down $9.5 million and $16.0 million , respectively, of outstanding borrowings on the Company's 2014 Revolver.

5. OTHER ACCRUED EXPENSES AND CURRENT LIABILITIES
Other accrued expenses and current liabilities consist of the following (in thousands):
 
September 27, 2017
 
December 28, 2016
Accrued sales and property taxes
$
5,255

 
$
4,223

Income tax receivable agreement payable
20,506

 
12,349

Gift card liability
1,786

 
1,870

Other
5,185

 
3,579

Total other accrued expenses and current liabilities
$
32,732

 
$
22,021


6. OTHER NONCURRENT LIABILITIES
Other noncurrent liabilities consist of the following (in thousands):
 
September 27, 2017
 
December 28, 2016
Deferred rent
$
8,835

 
$
8,328

Income tax receivable agreement payable
18,256

 
26,306

Other
3,648

 
2,354

Total other noncurrent liabilities
$
30,739

 
$
36,988


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 parties executed a Stipulation of Class Settlement and Release which the court refused to approve on the grounds that it did not provide sufficient compensation for the putative class members. Further settlement discussions were not successful, and the litigation is moving forward with the filing deadline for plaintiff’s class certification motion postponed until February 1, 2018. Purported class actions alleging wage and hour violations are commonly filed against California employers. The Company has similar cases pending and 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, L.L.C., 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

16



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. Defendants intend to continue to defend against the claims asserted.
In addition, on September 16, 2015, Holdings and certain of its officers and directors received an informal, non-public inquiry from the SEC requesting voluntary production of documents and information. All parties cooperated fully with the SEC's request. On July 15, 2016, Holdings was informed that the SEC was closing its inquiry as to all parties.
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. No trial date for the Diep action has been set.
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 September 27, 2017 , the Company’s total estimated commitment to purchase chicken was $11.3 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 five lease agreements. These leases have various terms, the latest of which expires in 2036 . As of September 27, 2017 , 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 September 27, 2017 was $2.5 million . The Company’s franchisees are primarily liable on the leases. The Company has cross-default provisions with

17



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. Accordingly, no liability has been recorded in the Company’s condensed consolidated financial statements related to these contingent liabilities.
Employment Agreements
The Company has employment agreements with four of the officers of the Company on an at will basis. 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 (LOSS) INCOME PER SHARE
Basic net (loss) income per share is calculated using the weighted-average number of shares of common stock outstanding during the thirteen weeks ended September 27, 2017 and September 28, 2016 . Diluted net (loss) income per share is calculated using the weighted-average number of shares of common stock outstanding and potentially dilutive during the period, using the treasury stock method.
Below are basic and diluted net (loss) income per share data for the periods indicated, which are in thousands except for per share data.  
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
September 27, 2017
 
September 28, 2016
 
September 27, 2017
 
September 28, 2016
Numerator:
 

 
 

 
 

 
 

Net (loss) income
$
(4,039
)
 
$
5,211

 
$
8,657

 
$
17,921

Denominator:
 

 
 

 
 

 
 

Weighted-average shares
   outstanding—basic
38,462,100

 
38,415,189

 
38,449,453

 
38,331,400

Weighted-average shares
   outstanding—diluted
38,462,100

(a)
39,083,577

 
39,101,214

 
39,020,127

Net (loss) income per share—basic
$
(0.11
)
 
$
0.14

 
$
0.23

 
$
0.47

Net (loss) income per share—diluted
$
(0.11
)
 
$
0.13

 
$
0.22

 
$
0.46

Anti-dilutive securities not considered in
   diluted EPS calculation
2,490,029

 
451,325

 
749,421

 
451,325

 (a) Due to a loss for the period, zero incremental shares are included because the effect would be antidilutive.

Below is a reconciliation of basic and diluted share counts.
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
September 27, 2017
 
September 28, 2016
 
September 27, 2017
 
September 28, 2016
Weighted-average shares outstanding—
   basic
38,462,100

 
38,415,189

 
38,449,453

 
38,331,400

Dilutive effect of stock options and
   restricted shares

(a)
668,388

 
651,761

 
688,727

Weighted-average shares outstanding—
   diluted
38,462,100

 
39,083,577

 
39,101,214

 
39,020,127

(a) Due to a loss for the period, zero incremental shares are included because the effect would be antidilutive.

9. RELATED PARTY TRANSACTIONS

18



Trimaran Pollo Partners, L.L.C. (“LLC”), owns approximately 43.3% 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 certificate of incorporation or by-laws, and the Company’s winding up and dissolution. So long as LLC maintains at least 40% ownership, (i) any member of the board of directors may be removed at any time without cause by affirmative vote of a majority of the Company’s common stock, and (ii) stockholders representing 40% or greater ownership may cause special stockholder meetings to be called.


19



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary Statement Concerning Forward-Looking Statements
This discussion and analysis should be read in conjunction with Item 1 above and with the consolidated financial statements contained in our annual report on Form 10-K for the year ended December 28, 2016 . This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Outcomes may differ materially from our expectations. For more information, we direct you to the sections “Risk Factors” (as updated by “PART II-OTHER INFORMATION-Item 1A. Risk Factors.” below) and “Forward-Looking Statements” in our annual report. We make no guarantees regarding outcomes, and assume no obligations to update the forward-looking statements herein, except pursuant to law.
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 believe that we offer the quality of food and dining experience typical of fast casual restaurants while providing the speed, convenience, and value typical of traditional quick-service restaurants (“QSRs”), a combination that we call “QSR+” and that we believe provides a value-oriented fast casual dining experience. Our distinctive menu features our signature product—citrus-marinated fire-grilled chicken—and a variety of Mexican-inspired entrees that we create from our chicken. We offer our customers healthier alternatives to traditional food on the go, served by our team members in a colorful, bright, and contemporary restaurant environment. We serve individual and family-sized chicken meals, a variety of Mexican-inspired entrees and sides, and, throughout the year, on a limited-time basis, additional proteins like shrimp, carnitas, and beef. Our entrees include favorites such as our Chicken Avocado Burrito, Under 500 Calorie entrees, Ultimate Pollo Bowl and Stuffed Chicken Avocado Quesadilla. Our salsas and dressings 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.
Growth Strategies and Outlook
We plan to continue to expand our business, drive restaurant sales growth, and enhance our competitive positioning, by executing on the following strategies:
expand our restaurant base;
increase our comparable restaurant sales; and
enhance operations and leverage our infrastructure.
As of September 27, 2017 , we had 473 locations in five states. In fiscal 2016, we opened 18 new company-operated and 13 new franchised restaurants across Arizona, California, Nevada, Utah and Texas. For the quarter ended September 27, 2017 , we opened 3 new company-operated restaurants and 1 franchised restaurant in California, Texas and Arizona. For the year-to-date period ended September 27, 2017 , we opened 12 new company-operated restaurants and 6 franchised restaurants in California, Texas and Arizona. In 2017, we intend to open 15 to 16 new company-operated and 7 to 9 new franchised restaurants. 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 and thirty-nine weeks ended September 27, 2017 , comparable restaurant sales increased 1.7% and 1.5% year over year, respectively. For company-operated restaurants, comparable restaurant sales, for the thirteen and thirty-nine weeks ended September 27, 2017 , increased by 0.9% and 1.0% , respectively. For company-operated restaurants, the quarter’s change in comparable restaurant sales consisted of a 1.7% increase in average check size, partially offset by a 0.8% decline in transactions, while year to date consisted of a 1.9% increase in average check size, partially offset by a 0.8% decline in transactions. For franchised restaurants, comparable restaurant sales increased 2.4% and 1.8% for the thirteen and thirty-nine weeks ended September 27, 2017 , respectively.

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Restaurant Development
Our restaurant counts at the beginning and end of each of the last three fiscal years and the thirty-nine weeks ended September 27, 2017 , were as follows.  
 
Thirty-Nine Weeks Ended
 
Fiscal Year Ended
 
September 27, 2017
 
2016
 
2015
 
2014
Company-operated restaurant activity:
 

 
 

 
 

 
 

Beginning of period
201

 
186

 
172

 
168

Openings
12

 
18

 
14

 
11

Restaurant sale to franchisee

 
(1
)
 

 
(6
)
Closures
(5
)
 
(2
)
 

 
(1
)
Restaurants at end of period
208

 
201

 
186

 
172

Franchised restaurant activity:
 

 
 

 
 

 
 

Beginning of period
259

 
247

 
243

 
233

Openings
6

 
13

 
5

 
5

Restaurant sale to franchisee

 
1

 

 
6

Closures

 
(2
)
 
(1
)
 
(1
)
Restaurants at end of period
265

 
259

 
247

 
243

System-wide restaurant activity:
 

 
 

 
 

 
 

Beginning of period
460

 
433

 
415

 
401

Openings
18

 
31

 
19

 
16

Closures
(5
)
 
(4
)
 
(1
)
 
(2
)
Restaurants at end of period
473

 
460

 
433

 
415

Restaurant Remodeling
We and our franchisees commenced our remodeling program in 2011 and, as of September 27, 2017 , together we had remodeled 113 company-operated and 196 franchised restaurants, or 309 system-wide, over 75% of our restaurant system due to be remodeled. This includes 8 company-operated and 3 franchised restaurants that have been remodeled using our newest restaurant design called Vision. 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 September 27, 2017 , including new builds and remodels, we had 33 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 operations, 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.
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. 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. As of September 27, 2017 the amount of revenue deferred related to the earned points, net of redemptions, is $0.3 million.
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

21



are not readily available from other sources. We evaluate our estimates on an on-going basis. Actual results may differ from these estimates under different assumptions or conditions.
Accounting policies are an integral part of our financial statements. A thorough understanding of these accounting policies is essential when reviewing our reported results of operations and our financial position. Management believes that the critical accounting policies and estimates discussed below involve the most difficult management judgments, due to the sensitivity of the methods and assumptions used. 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 28, 2016 , and Note 2, “Summary of Significant Accounting Policies,” to Item 8, “Financial Statements and Supplementary Data,” in our annual report. For a summary of our significant accounting policies and a discussion of our use of estimates, see also Note 1 to Item 1 above.
There have been no material changes to our critical accounting policies or uses of estimates since our annual report on Form 10-K. However, as discussed in (i) our annual report, in the aforementioned critical accounting policies section, “Long-Lived Assets” subsection, and (ii) “Impairment of Long-Lived Assets,” in Note 1 to Item 1 above, we evaluate our assets based on factors including economic conditions and operating performance, and our assumptions are subject to change. As described in Note 1 to Item 1 above, we intend to monitor the performance and related future cash flow assumptions of our Texas portfolio, which could result in the significant impairment of our assets. In particular, most of our (and our franchisees’) restaurants in Texas have been open since the beginning of 2015, and many since the beginning of 2016. Accordingly, given the difficulty in projecting results for newer restaurants in newer markets, we intend to continue to closely monitor the performance of our Texas portfolio. Based on the most recent results in the Texas market, if our plans to grow sales and improve profitability are not successful, future significant impairment to our assets may occur as a result of the performance of these restaurants and the related future cash flow assumptions over the remaining lease term. The combined carrying values of the restaurants in Texas is $15.6 million as of September 27, 2017. This number only applies to our current company-operated Texas portfolio. Asset impairments outside of Texas, or impairments to new units or future capital expenditures could present additional exposure. Closures could also require additional expenditures. Furthermore, franchised unit closings could result in the loss of franchise revenue and have other adverse effects on us.
Recent Accounting Pronouncements
 
In May 2017, the FASB issued ASU 2017-09, which provides clarity, reduces diversity in practice, and reduces cost and complexity when applying the guidance in Topic 718 Compensation—Stock Compensation, regarding a change to the terms or conditions of a share-based payment award. Specifically, an entity is to account for the effects of a modification, unless all of the following are satisfied: (1) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (3) the classification of the modified award as an equity instrument or as a liability instrument is the same as the classification of the original award immediately before the original award is modified. ASU 2017-09 is effective for financial statements issued for annual periods beginning after December 15, 2017. The adoption of ASU 2017-09 is not expected to have a significant impact on our consolidated financial position or results of operations.

In January 2017, the FASB issued ASU 2017-04, simplifying the manner in which an entity is required to test for goodwill impairment by eliminating Step 2 from the goodwill impairment test. ASU 2017-04 is effective for financial statements issued for annual periods beginning after December 15, 2019. The adoption of ASU 2017-04 is not expected to have a significant impact on our consolidated financial position or results of operations.

In January 2017, the FASB issued ASU 2017-01, clarifying the definition of a business. ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for financial statements issued for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The adoption of ASU 2017-01 is not expected to have a significant impact on our consolidated financial position or results of operations.

In November 2016, the FASB issued ASU 2016-18, "Restricted Cash." ASU 2016-18 addresses the diversity in practice that exists regarding the classification and the presentation of changes in restricted cash on the statements of cash flows under Topic 230, Statements of Cash Flow, and other Topics. The amendments in ASU No. 2016-18 require that amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and the end-of-period total amounts set forth on the statements of cash flows. ASU 2016-18 is effective

22



for financial statements issued for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The adoption of ASU 2016-18 is not expected to have a significant impact on our consolidated financial position or results of operations.

In August 2016, the FASB issued ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments." ASU 2016-15 addresses how certain cash receipts and cash payments are presented and classified in the statements of cash flows under Topic 230, Statements of Cash Flow, and other Topics. ASU 2016-15 is effective for financial statements issued for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The adoption of ASU 2016-15 is not expected to have a significant impact on our consolidated financial position or results of operations.

In February 2016, the FASB issued ASU 2016-02, “Leases.” The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Although early adoption is permitted, we will adopt these provisions in the first quarter of 2019. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We have $307.5 million of operating lease obligations as of September 27, 2017 and upon adoption of this standard will record a ROU asset and lease liability equal to the present value of these leases, which will have a material impact on the consolidated balance sheet. However, the recognition of lease expense in the consolidated statement of operations is not expected to change from the current methodology.

In January 2016, the FASB issued ASU 2016-01, "Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities." The pronouncement requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. These changes become effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The adoption of ASU 2016-01 is not expected to have a significant impact on our consolidated financial position or results of operations.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (ASU 2014-09)”, which supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP.

The revised revenue standard is effective for public entities for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures).

In addition, the FASB has issued the following Technical Corrections, Practical Expedients and Improvements to Topic 606, Revenue from Contracts with Customers: ASU 2017-13 in September 2017, ASU No. 2016-20, in December 2016, ASU No. 2016-12, in May 2016, and ASU No. 2016-10, in April 2016. All amendments are effective for financial statements issued for annual periods beginning after December 15, 2017, including interim periods within those annual periods, and early application is permitted, but no earlier than fiscal years beginning after December 15, 2016.

We generate a substantial amount of our revenues from company-operated restaurants. This revenue stream is not expected to be impacted by the adoption of ASU No. 2014-09, or any of the subsequent related ASU’s. We have completed our initial analysis of the impact of the standard on franchise revenue. The revenue recognition for franchise fees that are based on future sales is not impacted. However, revenue recognition for franchise and development fees that are not related to subsequent sales will be impacted. We do not believe the adoption of ASU 2014-09 will have a material impact to future results of operations. In addition, we have determined to take a modified retrospective approach of transition and will recognize an adjustment to retained earnings, related to the cumulative effect of adopting ASU 2014-09 at the date of adoption. We are in the process of

23



analyzing the disclosure requirements and the impact on advertising fees, and plan to complete our analysis by the end of fiscal 2017.
JOBS Act
We presently qualify as an “emerging growth company” (“EGC”) under section 2(a) of the Securities Act, pursuant to the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). An EGC has reduced public company reporting, accounting, and corporate governance requirements. We may take advantage of some of these benefits. In addition, the JOBS Act provides that an EGC can take advantage of an extended transition period for complying with new or revised accounting standards, delaying the adoption of these accounting standards until they would apply to private companies. We have irrevocably elected not to avail ourselves of this exemption and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not EGCs.
We will cease to be an EGC following the earliest of (i) five years after our IPO, (ii) $1.07 billion in annual revenue, (iii) $700.0 million in common stock market capitalization held by non-affiliates, or (iv) $1.0 billion in non-convertible debt security issuance on a three-year rolling basis. Please refer to our annual report on Form 10-K for more information.
Key Financial Definitions
Revenue
Our revenue is derived from two primary sources: company-operated restaurant revenue and franchise revenue, the latter of which is comprised primarily of franchise royalties and, to a lesser extent, franchise fees and sublease rental income.
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.
Franchise Expenses
Franchise expenses are primarily comprised of rent expenses incurred on properties leased by us and then sublet to franchisees, and expenses incurred in support of franchisee information technology systems.
Depreciation and Amortization

24



Depreciation and amortization primarily consist of the depreciation of property and equipment, including leasehold improvements and equipment.
Loss on Disposal of Assets
Loss on disposal of assets includes the loss on disposal of assets related to retirements and replacement or write-off of leasehold improvements or equipment.
Asset 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. Closure costs include non-cash restaurant charges such as up-front expensing the net present value of unpaid rent remaining on the life of a lease offset by assumed sublease income.
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.
Key Performance Indicators
To evaluate the performance of our business, we utilize a variety of financial and performance measures. These key measures include company-operated restaurant revenue, comparable restaurant sales, company-operated average unit volumes, restaurant contribution, restaurant contribution margin, new restaurant openings, EBITDA, and Adjusted EBITDA.
Company-Operated Restaurant Revenue
Company-operated restaurant revenue consists of sales of food and beverages in company-operated restaurants net of promotional allowances, employee meals, and other discounts. Company-operated restaurant revenue in any period is directly influenced by the number of operating weeks in such period, the number of open restaurants, and comparable restaurant sales.
Seasonal factors and the timing of holidays cause our revenue to fluctuate from quarter to quarter. Our revenue per restaurant is typically lower in the first and fourth quarters due to reduced January and December traffic and higher in the second and third quarters. As a result of seasonality, our quarterly and annual results of operations and key performance indicators such as company-operated restaurant revenue and comparable restaurant sales may fluctuate.
Comparable Restaurant Sales
Comparable restaurant sales reflect year-over-year sales changes for comparable company-operated, franchised, and system-wide restaurants. A restaurant enters our comparable restaurant base the first full week after it has operated for fifteen months. Comparable restaurant sales exclude restaurants closed during the applicable period. At September 27, 2017 and September 28, 2016 , there were 423 and 410 comparable restaurants, 179 and 170 company-operated and 244 and 240 franchised, respectively. Comparable restaurant sales indicate the performance of existing restaurants, since new restaurants are excluded.
Comparable restaurant sales growth can be generated by an increase in the number of meals sold and/or by increases in the average check amount, resulting from a shift in menu mix and/or higher prices resulting from new products or price increases.

25



Company-Operated Average Unit Volumes
We measure company-operated average unit volumes (“AUVs”) on both a weekly and an annual basis. Weekly AUVs consist of comparable restaurant sales over a seven-day period from Thursday to Wednesday. Annual AUVs are calculated using the following methodology: First, we divide our total net sales for all company-operated restaurants for the fiscal year by the total number of restaurant operating weeks during the same period. Second, we annualize that average weekly per-restaurant sales figure by multiplying it by 52. An operating week is defined as a restaurant open for business over a seven-day period from Thursday to Wednesday. This measurement allows management to assess changes in consumer spending patterns at our restaurants and the overall performance of our restaurant base.
Restaurant Contribution and Restaurant Contribution Margin
Restaurant contribution and restaurant contribution margin are neither required by, nor presented in accordance with, GAAP. Restaurant contribution is defined as company-operated restaurant revenue less company restaurant expenses. Restaurant contribution margin is defined as restaurant contribution as a percentage of net company-operated restaurant revenue. Restaurant contribution and restaurant contribution margin are supplemental measures of operating performance of our restaurants, and our calculations thereof may not be comparable to those reported by other companies. Restaurant contribution and restaurant contribution margin have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. Management believes that restaurant contribution and restaurant contribution margin are important tools for investors, because they are widely-used metrics within the restaurant industry to evaluate restaurant-level productivity, efficiency, and performance. Management uses restaurant contribution and restaurant contribution margin as key metrics to evaluate the profitability of incremental sales at our restaurants, to evaluate our restaurant performance across periods, and to evaluate our restaurant financial performance compared with our competitors.
A reconciliation of restaurant contribution and restaurant contribution margin to company-operated restaurant revenue is provided below:
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
(Dollar amounts in thousands)
September 27, 2017
 
September 28, 2016
 
September 27, 2017
 
September 28, 2016
Company-operated restaurant revenue
$
94,982

 
$
89,738

 
$
287,316

 
$
268,984

Company restaurant expenses
77,607

 
70,984

 
229,366

 
211,982

Restaurant contribution
$
17,375

 
$
18,754

 
$
57,950

 
$
57,002

Restaurant contribution margin (%)
18.3
%
 
20.9
%
 
20.2
%
 
21.2
%
New Restaurant Openings
The number of restaurant openings reflects the number of new restaurants opened by us and our franchisees during a particular reporting period. Before a new restaurant opens, we and our franchisees incur pre-opening costs, as described below. New restaurants often open with an initial start-up period of higher than normal sales volumes, which subsequently decrease to stabilized levels. New restaurants typically experience normal inefficiencies in the form of higher food and paper, labor, and other direct operating expenses and, as a result, restaurant contribution margins are generally lower during the start-up period of operation. The average start-up period after which our new restaurants’ revenue and expenses normalize is approximately fourteen weeks. When we enter new markets, we may be exposed to start-up times and restaurant contribution margins that are longer and lower than reflected in our average historical experience.
EBITDA and Adjusted EBITDA
EBITDA represents net income before interest expense, provision for income taxes, depreciation, and amortization. Adjusted EBITDA represents net income before interest expense, provision for income taxes, depreciation, amortization, and items that we do not consider representative of our on-going operating performance, as identified in the reconciliation table below.
EBITDA and Adjusted EBITDA as presented in this report are supplemental measures of our performance that are neither required by, nor presented in accordance with, GAAP. EBITDA and Adjusted EBITDA are not measurements of our financial performance under GAAP and should not be considered as alternatives to net income, operating income, or any other performance measures derived in accordance with GAAP, or as alternatives to cash flow from operating activities as a measure of our liquidity. In addition, in evaluating EBITDA and Adjusted EBITDA, you should be aware that in the future we will incur expenses or charges such as those added back to calculate EBITDA and Adjusted EBITDA. Our presentation of EBITDA and

26



Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items.
EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation, or as substitutes for analysis of our results as reported under GAAP. Some of these limitations are (i) they do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments, (ii) they do not reflect changes in, or cash requirements for, our working capital needs, (iii) they do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt, (iv) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements, (v) they do not adjust for all non-cash income or expense items that are reflected in our statements of cash flows, (vi) they do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our on-going operations, and (vii) other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures.
We compensate for these limitations by providing specific information regarding the GAAP amounts excluded from such non-GAAP financial measures. We further compensate for the limitations in our use of non-GAAP financial measures by presenting comparable GAAP measures more prominently.
We believe that EBITDA and Adjusted EBITDA facilitate operating performance comparisons from period to period by isolating the effects of some items that vary from period to period without any correlation to core operating performance or that vary widely among similar companies. These potential differences may be caused by variations in capital structures (affecting interest expense), tax positions (such as the impact on periods or companies of changes in effective tax rates or net operating losses) and the age and book depreciation of facilities and equipment (affecting relative depreciation expense). We also present EBITDA and Adjusted EBITDA because (i) we believe that these measures are frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry, (ii) we believe that investors will find these measures useful in assessing our ability to service or incur indebtedness, and (iii) we use EBITDA and Adjusted EBITDA internally for a number of benchmarks including to compare our performance to that of our competitors and for compensation performance benchmarks.
The following table sets forth reconciliations of EBITDA and Adjusted EBITDA to our net (loss) income:
 
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
(Amounts in thousands)
September 27, 2017
 
September 28, 2016
 
September 27, 2017
 
September 28, 2016
Net (loss) income
$
(4,039
)
 
$
5,211

 
$
8,657

 
$
17,921

Non-GAAP adjustments:
 

 
 

 
 

 
 

(Benefit) provision for income taxes
(2,457
)
 
2,830

 
5,254

 
11,930

Interest expense, net of interest income
903

 
785

 
2,471

 
2,441

Depreciation and amortization
4,697

 
4,074

 
13,646

 
11,796

EBITDA
$
(896
)
 
$
12,900

 
$
30,028

 
$
44,088

Stock-based compensation expense (a)
324

 
105

 
738

 
244

Loss on disposal of assets (b)(c)
65

 
58

 
724

 
524

Expenses related to fire loss (c)

 

 

 
48

Loss (gain) on recovery of insurance proceeds, property, equipment and expenses (c)

 
148

 

 
(741
)
Recovery of securities lawsuits related legal expense(d)
(634
)
 

 
(1,145
)
 

Asset impairment and closed-store reserves (e)
16,038

 
2,490

 
17,293

 
2,624

Loss (gain) on disposition of restaurants (f)

 
5

 

 
(28
)
Income tax receivable agreement (income) expense(g)
(19
)
 
182

 
107

 
411

Securities lawsuits related legal expense (h)
933

 
519

 
2,341

 
2,327

Pre-opening costs (i)
429

 
918

 
1,526

 
1,775

Executive transition costs (j)

 

 
271

 

Adjusted EBITDA
$
16,240

 
$
17,325

 
$
51,883

 
$
51,272

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

27



(b)
Loss on disposal of assets includes the loss on disposal of assets related to retirements and replacement or write-off of leasehold improvements or equipment.
(c)
In November 2015, one of our restaurants incurred damage resulting from a fire. During the thirty-nine weeks ended September 28, 2016 , we incurred costs directly related to the fire of less than $0.1 million , disposed of an additional $0.1 million in assets, and recognized gains of $0.7 million , related to the reimbursement of property and equipment and $0.5 million , related to the reimbursement of lost profits. The reimbursement of lost profits is included in the accompanying consolidated financial statements of operations, for the thirteen and thirty-nine weeks ended September 28, 2016 , as a reduction of company restaurant expenses. We received from the insurance company cash of $1.0 million during the thirty-nine weeks ended September 28, 2016 , and $0.4 million on October 5, 2016, net of the insurance deductible. The $0.4 million is included in accounts and other receivables in the condensed consolidated balance sheet as of September 28, 2016 . The restaurant was reopened for business on March 14, 2016.
(d)
During the thirteen and thirty-nine weeks ended September 27, 2017 , we received insurance proceeds of $0.6 million and $1.1 million , respectively, related to the reimbursement of certain legal expenses paid in prior years for the defense of securities lawsuits. See the Notes to the Condensed Consolidated Financial Statements, Note 7, Commitments and Contingencies, Legal Matters.
(e)
Includes costs related to impairment of long-lived assets and closing restaurants. During the thirteen and thirty-nine weeks ended September 27, 2017 , we determined that the carrying value of the assets of 10 and 11 restaurants, respectively, in Texas and California may not be recoverable. As a result, we recorded a $15.0 million and $15.5 million expense, respectively, related to the impairment of the assets of the restaurants. During the thirteen and thirty-nine weeks ended September 27, 2017 we closed three restaurants in Texas, one of which was fully impaired during the fourth quarter of 2016. During the thirty-nine weeks ended September 27, 2017 , we closed an additional two restaurants, one in Arizona and one in Texas, which were fully impaired in the third quarter of 2016. These closures resulted in closed-store reserve expenses of $1.0 million and $1.8 million for the thirteen and thirty-nine weeks ended September 27, 2017 , respectively. During the thirteen and thirty-nine weeks ended September 28, 2016 , we determined the carrying value of two restaurants in Arizona and Texas may not be recoverable. As a result we recognized an expense of $2.5 million , primarily related to the impairment of the assets of the two restaurants. We continue to monitor the recoverability of the carrying value of the assets of several other restaurants.
(f)
On June 16, 2016, we completed an agreement to sell one company-operated restaurant in Tucson, Arizona to a franchisee, resulting in cash proceeds of $1.5 million and a net gain of less than $0.1 million, which is recorded as a gain on disposition of restaurants in the accompanying consolidated statement of operations. This restaurant is now included in our franchised restaurant totals.
(g)
On July 30, 2014, we entered into the TRA. This agreement calls for us to pay to our pre-IPO stockholders 85% of the savings in cash that we realize in our taxes as a result of utilizing our net operating losses and other tax attributes attributable to preceding periods. For the thirteen and thirty-nine weeks ended September 27, 2017 and September 28, 2016 , income tax receivable agreement (income) expense consisted of the amortization of interest expense and changes in estimates for actual tax returns filed, related to our total expected TRA payments.
(h)
Consists of costs related to the defense of securities lawsuits. See the Notes to the Condensed Consolidated Financial Statements, Note 7, Commitments and Contingencies, Legal Matters.
(i)
Pre-opening costs are a component of general and administrative expenses, and consist of costs directly associated with the opening of new restaurants and incurred prior to opening, including management labor costs, staff labor costs during training, food and supplies used during training, marketing costs, and other related pre-opening costs. These are generally incurred over the three to five months prior to opening. Pre-opening costs also include occupancy costs incurred between the date of possession and the opening date for a restaurant.
(j)
Includes costs associated with the transition of our CEO, such as executive recruiter costs.

28



Comparison of Results of Operations
Our operating results for the thirteen weeks ended September 27, 2017 and September 28, 2016 , in absolute terms, 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
 
September 27, 2017
 
September 28, 2016
 
Increase /
(Decrease)
Statements of Operations Data
($ ,000)
 
(%)
 
($ ,000)
 
(%)
 
($ ,000)
 
(%)
Company-operated restaurant revenue
$
94,982

 
93.9

 
$
89,738

 
93.7

 
$
5,244

 
5.8

Franchise revenue
6,173

 
6.1

 
6,078

 
6.3

 
95

 
1.6

Total revenue
101,155

 
100

 
95,816

 
100

 
5,339

 
5.6

Cost of operations
 

 
 

 
 

 
 

 
 

 
 

Food and paper costs (1)
27,851

 
29.3

 
26,960

 
30.0

 
891

 
3.3

Labor and related expenses (1)
27,514

 
29.0

 
24,455

 
27.3

 
3,059

 
12.5

Occupancy and other operating expenses (1)
22,242

 
23.4

 
20,071

 
22.4

 
2,171

 
10.8

Gain on recovery of insurance proceeds, lost profit (1)

 

 
(502
)
 
(0.6
)
 
502

 
(100.0
)
Company restaurant expenses (1)
77,607

 
81.7

 
70,984

 
79.1

 
6,623

 
9.3

General and administrative expenses
8,285

 
8.2

 
8,252

 
8.6

 
33

 
0.4

Franchise expenses
709

 
0.7

 
797

 
0.8

 
(88
)
 
(11.0
)
Depreciation and amortization
4,697

 
4.6

 
4,074

 
4.3

 
623

 
15.3

Loss on disposal of assets
65

 
0.1

 
58

 
0.1

 
7

 
12.1

Loss on recovery of insurance proceeds, property, equipment and expenses

 

 
148

 
0.2

 
(148
)
 
(100.0
)
Recovery of securities lawsuits related legal expenses
(634
)
 
(0.6
)
 

 

 
(634
)
 
N/A

Asset impairment and closed-store reserves
16,038

 
15.9

 
2,490

 
2.6

 
13,548

 
544.1

Total expenses
106,767

 
105.5

 
86,803

 
90.6

 
19,964

 
23.0

(Loss) gain on disposition of restaurants

 

 
(5
)
 
0.0

 
5

 
(100.0
)
(Loss) income from operations
(5,612
)
 
(5.5
)
 
9,008

 
9.4

 
(14,620
)
 
(162.3
)
Interest expense, net of interest income
903

 
0.9

 
785

 
0.8

 
118

 
15.0

Income tax receivable agreement (income) expense
(19
)
 
0.0

 
182

 
0.2

 
(201
)
 
(110.4
)
(Loss) income before (benefit) provision for income taxes
(6,496
)
 
(6.4
)
 
8,041

 
8.4

 
(14,537
)
 
(180.8
)
(Benefit) provision for income taxes
(2,457
)
 
(2.4
)
 
2,830

 
3.0

 
(5,287
)
 
(186.8
)
Net (loss) income
$
(4,039
)
 
(4.0
)
 
$
5,211

 
5.4

 
$
(9,250
)
 
(177.5
)
 
 
 
 
 
 
 
 
 
 
 


 
(1)
Percentages for line items relating to cost of operations and company restaurant expenses are calculated with company-operated restaurant revenue as the denominator. All other percentages use total revenue.

29



Our operating results for the thirty-nine weeks ended September 27, 2017 and September 28, 2016 , in absolute terms, 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.
 
Thirty-Nine Weeks Ended
 
September 27, 2017
 
September 28, 2016
 
Increase /
(Decrease)
Statement of Operations Data
($ ,000)
 
(%)
 
($ ,000)
 
(%)
 
($ ,000)
 
(%)
Company-operated restaurant revenue
$
287,316

 
93.7

 
$
268,984

 
93.5

 
$
18,332

 
6.8

Franchise revenue
19,183

 
6.3

 
18,660

 
6.5

 
523

 
2.8

Total revenue
306,499

 
100.0

 
287,644

 
100.0

 
18,855

 
6.6

Cost of operations
 

 
 

 
 

 
 

 
 

 
 

Food and paper costs (1)
84,069

 
29.3

 
80,760

 
30.0

 
3,309

 
4.1

Labor and related expenses (1)
80,939

 
28.2

 
73,323

 
27.3

 
7,616

 
10.4

Occupancy and other operating expenses (1)
64,358

 
22.4

 
58,401

 
21.7

 
5,957

 
10.2

Gain on recovery of insurance proceeds, lost profit (1)

 

 
(502
)
 
(0.2
)
 
502

 
(100
)
Company restaurant expenses (1)
229,366

 
79.8

 
211,982

 
78.8

 
17,384

 
8.2

General and administrative expenses
27,594

 
9.0

 
25,776

 
9.0

 
1,818

 
7.1

Franchise expenses
2,532

 
0.8

 
2,960

 
1.0

 
(428
)
 
(14.5
)
Depreciation and amortization
13,646

 
4.5

 
11,796

 
4.1

 
1,850

 
15.7

Loss on disposal of assets
724

 
0.2

 
524

 
0.2

 
200

 
38.2

Expenses related to fire loss

 

 
48

 
0.0

 
(48
)
 
(100.0
)
Gain on recovery of insurance proceeds, property, equipment and expenses

 

 
(741
)
 
(0.3
)
 
741

 
(100.0
)
Recovery of securities lawsuits related legal expenses
(1,145
)
 
(0.4
)
 

 

 
(1,145
)
 
N/A

Asset impairment and closed-store reserves
17,293

 
5.6

 
2,624

 
0.9

 
14,669

 
559.0

Total expenses
290,010

 
94.6

 
254,969

 
88.6

 
35,041

 
13.7

Gain on disposition of restaurants

 

 
28

 
0.0

 
(28
)
 
(100.0
)
Income from operations
16,489

 
5.4

 
32,703

 
11.4

 
(16,214
)
 
(49.6
)
Interest expense, net of interest income
2,471

 
0.8

 
2,441

 
0.8

 
30

 
1.2

Income tax receivable agreement expense
107

 
0.0

 
411

 
0.1

 
(304
)
 
(74.0
)
Income before provision for income taxes
13,911

 
4.5

 
29,851

 
10.4

 
(15,940
)
 
(53.4
)
Provision for income taxes
5,254

 
1.7

 
11,930

 
4.1

 
(6,676
)
 
(56.0
)
Net income
$
8,657

 
2.8

 
$
17,921

 
6.2

 
$
(9,264
)
 
(51.7
)
(1)
Percentages for line items relating to cost of operations and company restaurant expenses are calculated with company-operated restaurant revenue as the denominator. All other percentages use total revenue.


Company-Operated Restaurant Revenue
For the quarter, company-operated restaurant revenue increased $5.2 million , or 5.8% , from the comparable period in the prior year.  The growth in company-operated restaurant sales was due to $5.4 million of non-comparable restaurant sales on restaurants that had not been open the fifteen months required to be included in comparable restaurant sales and a $0.8 million increase resulting from a 0.9% increase in company-operated comparable sales. This was partially offset by the closure of three restaurants in the third quarter of 2017 and two restaurants in the first quarter of 2017, and temporary closures during the third quarter of 2017, primarily related to Hurricane Harvey. The company-operated comparable restaurant sales increase consisted of an increase in average check size of 1.7% , partially offset by a decline in transactions of 0.8% .
Year-to-date, company-operated restaurant revenue increased $18.3 million , or 6.8% , from the comparable period in the prior year.  The growth in company-operated restaurant sales was due to $19.0 million of non-comparable restaurant sales on restaurants that had not been open the fifteen months required to be included in comparable restaurant sales, a $2.7 million increase resulting from a 1.0% increase in company-operated comparable restaurant sales, and $0.7 million related to a restaurant closed during the first quarter of 2016, due to fire damage, that was open for all of 2017. These increases were partially offset by the closure of two restaurants in 2016 and five restaurants in the current year, and the sale of one restaurant

30



in 2016 to a franchisee. The company-operated comparable restaurant sales increase consisted of an increase in average check size of 1.9% , partially offset by a decrease in transactions of 0.8% .
Franchise Revenue
For the quarter, franchise revenue increased $0.1 million , or 1.6% , from the comparable period in the prior year. This increase was primarily due to 15 new franchised restaurants opened during or after the prior year quarter, and franchise comparable restaurant sales growth of 2.4% , partially offset by a decline in franchise agreement and development agreement fees and lower franchise fees received from franchised restaurants related to their use of our point-of-sales system.
Year-to-date, franchise revenue increased $0.5 million , or 2.8% , from the comparable period in the prior year. This increase was primarily due to 19 new franchised restaurants opened during or after the first quarter of 2016 and franchise comparable restaurant sales growth of 1.8% , partially offset by a decline in franchise agreement and development agreement fees and lower franchise fees received from franchised restaurants related to their use of our point-of-sales system.
Food and Paper Costs
For the quarter, food and paper costs increased $0.9 million , or 3.3% , from the comparable period in the prior year, due to a $0.5 million increase in food costs and a $0.4 million increase in paper costs. Year-to-date, food and paper costs increased $3.3 million , or 4.1% , from the comparable period in the prior year, due to a $2.5 million increase in food costs and a $0.8 million increase in paper costs. The increases in food and paper costs, for the quarter and year-to-date periods, resulted primarily from higher restaurant revenue, increased food waste and loyalty program incentives, partially offset by lower commodity costs related to chicken.
For the quarter, food and paper costs as a percentage of company-operated restaurant revenue were 29.3% , from 30.0% in the comparable period of the prior year. Year-to-date, food and paper costs as a percentage of company-operated restaurant revenue were 29.3% , from 30.0% in the comparable period of the prior year. The percentage decrease for the quarter and year-to-date periods was due primarily to the lower commodity costs, noted above, partially offset by increased food waste and loyalty program incentives.
Labor and Related Expenses
For the quarter, payroll and benefit expenses increased $3.1 million , or 12.5% , from the comparable period in the prior year. Year-to-date, payroll and benefit expenses increased $7.6 million , or 10.4% , from the comparable period in the prior year. The increase for the quarter and year-to-date periods was due primarily to increased labor costs resulting from the opening of new restaurants in fiscal 2016 and the first three quarters of fiscal 2017, the impact of the wage increases in California and Los Angeles during fiscal 2016 and the first three quarters of fiscal 2017, and higher workers' compensation expense due to increased claims activity.
For the quarter, payroll and benefit expenses as a percentage of company-operated restaurant revenue were 29.0% , up from 27.3% in the comparable period in the prior year. Year-to-date, payroll and benefit expenses as a percentage of company-operated restaurant revenue were 28.2% , from 27.3% in the comparable period in the prior year. The increases for the quarter and year-to-date periods, were due primarily to wage increases in California and Los Angeles, the impact of the incremental labor required for 30 new restaurants opened during or after the first quarter of 2016, an increase in workers compensation expense due to an increase in claims and wage continuation paid to employees at our Houston locations during hurricane related closures.
Occupancy and Other Operating Expenses
For the quarter, occupancy and other operating expenses increased $2.2 million , or 10.8% , from the comparable period of the prior year. The increase for the quarter was primarily due to a $1.1 million increase in occupancy costs, due primarily to additional rent, a $0.4 million increase in utilities costs, a $0.2 million increase advertising costs, and a $0.5 million increase in other operating expenses, resulting primarily from an increase in credit card fees and restaurant security expenses. Year-to-date, occupancy and other operating expenses increased $6.0 million , or 10.2% , from the comparable period of the prior year. The increase for the year-to-date period was due to a $2.8 million increase in occupancy costs, due primarily to additional rent and property tax, a $1.1 million increase in utilities costs, a $0.7 million increase advertising costs, and a $1.4 million increase in other operating expenses, resulting primarily from an increase in credit card fees, restaurant security expenses and repair and maintenance costs. The increases for the quarter and year-to-date periods resulted primarily from the new restaurants opened during or after the first quarter of 2016.

31



For the quarter, occupancy and other operating expenses as a percentage of company-operated restaurant revenue were 23.4% , up from 22.4% in the comparable period of the prior year. Year-to-date, occupancy and other operating expenses as a percentage of company-operated restaurant revenue were 22.4% , up from 21.7% in the comparable period of the prior year. Both the quarter and year-to-date increases resulted primarily from rent expense, relative to revenue volume generated, and other incremental costs related to opening new restaurants in 2016 and the thirty-nine weeks ended September 27, 2017 .
General and Administrative Expenses
For the quarter, general and administrative expenses increased less than $0.1 million, or 0.4% , from the comparable period in the prior year. The slight increase for the quarter was due primarily to (i) a $0.8 million increase in legal expense related primarily to an increase in securities class action litigation costs, (ii) a $0.2 million increase in dead site costs related to costs incurred for potential new restaurant locations that we chose not to continue to pursue, (iii) a $0.2 million increase in stock compensation related expenses, and (iv) a $0.2 million increase in other general and administrative costs. These increases were offset by a $0.9 million decrease in our accrual for our annual bonus program and a $0.5 million decrease in restaurant pre-opening costs.
Year-to-date, general and administrative expenses increased $1.8 million , or 7.1% , from the comparable period in the prior year. The increase for the year-to-date period was due primarily to (i) a $0.9 million increase in legal expense, (ii) a $0.5 million increase in payroll expense, due primarily to an increase in the number of corporate employees, partially offset by a decline in our accrual for our annual bonus program, (iii) a $0.5 million increase in stock compensation related expenses, and (iv) a $0.3 million increase in other general and administrative costs, primarily related to an increase in recruiting costs. These increases were partially offset by a $0.4 million decrease in travel related costs.
For the quarter, general and administrative expenses as a percentage of total revenue were 8.2% down from 8.6% in the comparable period of the prior year. Year-to-date general and administrative expenses as a percentage of total revenue were consistent at 9.0% , when compared to the comparable period of the prior year. The percentage decrease for the quarter is primarily due to higher total revenue, as well as the cost reductions noted above.
(Loss) Gain on Recovery of Insurance Proceeds

In November 2015, one of our restaurants incurred damage resulting from a fire. During the thirty-nine weeks ended September 28, 2016 , we incurred costs directly related to the fire of less than $0.1 million , disposed of an additional $0.1 million in assets, and recognized gains of $0.7 million , related to the reimbursement of property and equipment and $0.5 million , related to the reimbursement of lost profits. The reimbursement of lost profits is included in the accompanying consolidated financial statements of operations, for the thirteen and thirty-nine weeks ended September 28, 2016 , as a reduction of our company restaurant expenses. We received from the insurance company cash of $1.0 million during the thirty-nine weeks ended September 28, 2016 , and $0.4 million on October 5, 2016, net of the insurance deductible. The $0.4 million is included in accounts and other receivables in the condensed consolidated balance sheet as of September 28, 2016 . The restaurant was reopened for business on March 14, 2016.
Recovery of Securities Class Action Legal Expense
During the thirteen and thirty-nine weeks ended September 27, 2017 , we received insurance proceeds of $0.6 million and $1.1 million , respectively, related to the reimbursement of certain legal expenses paid in prior years for the defense of securities lawsuits. Subsequent to September 27, 2017 , we received an additional $0.5 million . See the Notes to the Condensed Consolidated Financial Statements, Note 7, Commitments and Contingencies, Legal Matters.
Asset Impairment and Closed-Store Reserves
During the thirteen and thirty-nine weeks ended September 27, 2017 , we determined that the carrying value of the assets of 10 and 11 restaurants, respectively, in Texas and California may not be recoverable. As a result, we recorded a $15.0 million and $15.5 million expense, respectively, related to the impairment of the assets of the restaurants. During the thirteen and thirty-nine weeks ended September 27, 2017 , we closed three restaurants in Texas, one of which was fully impaired during the fourth quarter of 2016 and the other two are included in the impairment expense discussed above. During the thirty-nine weeks ended September 27, 2017 , we closed an additional two restaurants, one in Arizona and one in Texas, which were fully impaired in the third quarter of 2016. These closures resulted in closed-store reserve expenses of $1.0 million and $1.8 million for the thirteen and thirty-nine weeks ended September 27, 2017 , respectively, During the thirteen and thirty-nine weeks ended September 28, 2016 , we determined the carrying value of two restaurants in Arizona and Texas may not be recoverable. As a

32



result we recognized an expense of $2.5 million , primarily related to the impairment of the assets of the two restaurants. We continue to monitor the recoverability of the carrying value of the assets of several other restaurants.
(Loss) Gain on Disposition of Restaurants

On June 16, 2016, we completed an agreement to sell one company-operated restaurant in Tucson, Arizona to a franchisee, resulting in cash proceeds of $1.5 million and a net gain of less than $0.1 million, which is recorded as a gain on disposition of restaurants in the accompanying consolidated statement of operations. This restaurant is now included in our franchised restaurant totals.
Interest Expense, Net
For the quarter and year-to-date periods, interest expense, net was comparable with the same periods of the prior year.
Income Tax Receivable Agreement
On July 30, 2014, we entered into the TRA. The TRA calls for us to pay to our pre-IPO stockholders 85% of the savings in cash that we realize in our taxes as a result of utilizing our net operating losses and other tax attributes attributable to preceding periods. For the quarter ended September 27, 2017 we recorded income tax receivable agreement income of less than $0.1 million and for the quarter ended September 28, 2016 , we recorded income tax receivable agreement expense of $0.2 million . For the year-to-date periods we recorded income tax receivable agreement expense of $0.1 million and $0.4 million , respectively, related to the amortization of interest expense related to our total expected TRA payments and changes in estimates for actual tax returns filed. During the fourth quarter of 2017 we anticipate making a TRA payment of approximately $11.0 million to our pre-IPO stockholders.
(Benefit) Provision for Income Taxes
For the quarter ended September 27, 2017 , we recorded an income tax benefit of $2.5 million , reflecting an estimated effective tax rate of 37.8% . For the quarter ended September 28, 2016 , we recorded an income tax provision of $2.8 million , reflecting an estimated effective tax rate of approximately 35.2% . Year-to-date ended September 27, 2017 , we recorded an income tax provision of $5.3 million , reflecting an estimated effective tax rate of approximately 37.8% . Year-to-date ended September 28, 2016 , we recorded an income tax provision of $11.9 million , reflecting an estimated effective tax rate of approximately 40.0% . These rates are in line with our estimated long-term federal and state tax rates.
Liquidity and Capital Resources
Our primary sources of liquidity and capital resources have been cash provided from operations, cash and cash equivalents, and our secured revolving credit facility. Our primary requirements for liquidity and capital are new restaurants, existing restaurant capital investments (remodels and maintenance), interest payments on our debt, lease obligations, and working capital and general corporate needs. Our working capital requirements are not significant, since our customers pay for their purchases in cash or by payment card (credit or debit) at the time of sale. Thus, we are able to sell many of our inventory items before we have to pay our suppliers for them. Our restaurants do not require significant inventories or receivables. We believe that these sources of liquidity and capital are sufficient to finance our continued operations and expansion plans for at least the next 12 months.
The following table presents summary cash flow information for the periods indicated.
 
Thirty-Nine Weeks Ended
(Amounts in thousands)
September 27, 2017
 
September 28, 2016
Net cash provided (used) by
 

 
 

Operating activities
$
52,210

 
$
39,670

Investing activities
(28,295
)
 
(24,257
)
Financing activities
(19,021
)
 
(14,985
)
Net increase in cash
$
4,894

 
$
428

 
Operating Activities

33



For the thirty-nine weeks ended September 27, 2017 , net cash provided by operating activities increased by approximately $12.5 million from the comparable period of the prior year. This was due primarily to higher profitability after non-cash items and favorable working capital fluctuations.
Investing Activities
For the thirty-nine weeks ended September 27, 2017 , net cash used by investing activities increased by $4.0 million from the comparable period of the prior year. This was due primarily to opening 12 new company restaurants and seven remodels completed in the thirty-nine weeks ended September 27, 2017 compared to 10 new restaurants and one remodel completed in the thirty-nine weeks ended September 28, 2016 , as well as insurance proceeds related to fire damage and proceeds from the sale of a restaurant received in the prior year period.
For the year ending December 27, 2017, we expect to incur capital expenditures of $39.0 million to $41.0 million, consisting of $26.0 to $28.0 million related to new restaurants, $7.0 million related to the remodeling of existing restaurants, and $6.0 million related to major maintenance and other corporate capital expenditures.
Financing Activities
For the thirty-nine weeks ended September 27, 2017 , net cash used by financing activities increased by $4.0 million from the comparable period of the prior year. This was due primarily to the prepayment of $19.0 million on the 2014 Revolver during the thirty-nine weeks ended September 27, 2017 compared to a prepayment of $16.0 million for the thirty-nine weeks ended September 28, 2016 .
Debt and Other Obligations
New Credit Agreement
On December 11, 2014, we refinanced our debt, with EPL, Intermediate, and Holdings entering into a credit agreement with 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 the 2014 Revolver. The 2014 Revolver includes a sub limit of $15.0 million for letters of credit and a sub limit of $15.0 million for swingline loans. At September 27, 2017 , $8.1 million of letters of credit were outstanding and $106.9 million was available to borrow under the revolving line of credit. The 2014 Revolver will mature on or about December 11, 2019.
Borrowings under the 2014 Revolver (other than any swingline loans) bear interest, at the borrower’s option, at rates based upon either LIBOR or a base rate, plus, for each rate, a margin determined in accordance with a lease-adjusted consolidated leverage ratio-based pricing grid. The base rate is calculated as the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate of Bank of America, or (c) LIBOR plus 1.00%. For LIBOR loans, the margin is in the range of 1.75% to 2.50%, and for base rate loans the margin is in the range of 0.75% to 1.50%. The interest rate range was 2.96% to 2.99% and 2.44% to 2.99% for the thirteen and thirty-nine weeks ended September 27, 2017 , respectively, and 2.20% to 2.27% and 2.02% to 2.27% for the thirteen and thirty-nine weeks ended September 28, 2016 , respectively.
The 2014 Revolver includes a number of negative and financial covenants, including, among others, the following (all subject to certain exceptions): a maximum lease-adjusted consolidated leverage ratio covenant, a minimum consolidated fixed charge coverage ratio, and limitations on indebtedness, liens, investments, asset sales, mergers, consolidations, liquidations, dissolutions, restricted payments, and negative pledges. The 2014 Revolver also includes certain customary affirmative covenants and events of default. We were in compliance with all such covenants at September 27, 2017 .
Under the 2014 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 the 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 and officers, provided that those equity interests represent a portion of the consideration of the exercise price of those stock options, (b) pay up to $2.5 million per year pursuant to stock option plans, employment agreements, or incentive plans, (c) make up to $5.0 million in other restricted payments per year, and (d) make other restricted payments, provided that such payments would not cause, in each case, on a pro forma basis, (x) its lease-adjusted consolidated leverage ratio to equal or exceed 4.25 times and (y) its consolidated fixed charge coverage ratio to be less than 1.75 times.

34



Contractual Obligations
Our contractual commitments outstanding on September 27, 2017 , have not changed materially since our annual report on Form 10-K for the year ended December 28, 2016 . These relate to future (i) debt payments, including expected interest expense, calculated based on current interest rates, (ii) restaurant operating lease payments, (iii) income tax receivable agreement payments, and (iv) purchasing commitments for chicken and beverage. During the fourth quarter of 2017 we anticipate making a TRA payment of approximately $11.0 million to our pre-IPO stockholders.
Off-Balance Sheet and Other Arrangements
As of September 27, 2017 , we were using $8.1 million of borrowing capacity on the 2014 Revolver for letters of credit in support of our insurance programs.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
We are exposed to market risk from changes in the interest rate on our debt, which bears interest at USD LIBOR plus a margin between 1.75% and 2.50%. As of September 27, 2017 , we had outstanding borrowings of $85.0 million and another $8.1 million of letters of credit in support of our insurance programs. A 1.0% increase in the effective interest rate applied to these borrowings would result in a pre-tax interest expense increase of $0.9 million on an annualized basis.
We manage our interest rate risk through normal operating and financing activities and, when determined appropriate, through the use of derivative financial instruments.
Inflation
Inflation has an impact on food, paper, construction, utility, labor and benefits, general and administrative, and other costs, all of which can materially impact our operations. We have a substantial number of hourly employees who are paid wage rates at or based on the applicable federal, state, or local minimum wage, and increases in the minimum wage will increase our labor costs. In general, we have been able to substantially offset cost increases resulting from inflation by increasing menu prices, managing menu mix, improving productivity, or making other adjustments. We may not be able to offset cost increases in the future.
Commodity Price Risk
We are exposed to market price fluctuation in food product prices. Given the historical volatility of certain of our food product prices, including chicken, other proteins, grains, produce, dairy products, and cooking oil, these fluctuations can materially impact our food and beverage costs. While our purchasing commitments partially mitigate the risk of such fluctuations, there is no assurance that supply and demand factors such as disease or inclement weather will not cause the prices of the commodities used in our restaurant operations to fluctuate. In periods when the prices of commodities drop, we may pay higher prices under our purchasing commitments. In rapidly fluctuating commodities markets, it may prove difficult for us to adjust our menu prices in accordance with input price fluctuations. Therefore, to the extent that we do not pass along cost increases to our customers, our results of operations may be adversely affected. At this time, we do not use financial instruments to hedge our commodity risk.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the required time periods, and designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Our disclosure controls and procedures are based on assumptions about the likelihood of future events, and even effective disclosure controls and procedures can only provide reasonable assurance of achieving their objectives. Because of their inherent limitations, we cannot guarantee that our disclosure controls and procedures will succeed in achieving their stated objectives in all cases, that they will be complied with in all cases, or that they will prevent or detect all misstatements.

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Our management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
Other than the remediation discussed below, no other change in our internal control over financial reporting occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Remediation Efforts to Address Material Weaknesses in Internal Control over Financial Reporting
We previously reported material weaknesses that were identified as of December 28, 2016 relating to the design and operating effectiveness of our internal control over financial reporting. The material weaknesses resulted from:
1.
Certain accounting staff shared accounting system password information and access with an external consultant, who was not engaged through standard Company channels and subject to standard terms and conditions of engagement, who conducted standard accounting functions and had system administrator access.
2.
Certain accounting staff, on several occasions, used passwords from other Company employees to enter data for approval on those employees’ behalf and then approved the resulting transactions in the accounting system, thereby circumventing controls over segregation of duties.
Based on these findings, we have remediated these material weaknesses by:
1.
Increased awareness among accounting and information system employees of our existing password, data security and access, and accounting entry policies.
2.
Designed and implemented controls over system access and password assignments so that users cannot circumvent these controls.
3.
Changed our vendor approval and payment procedures so that accounting staff in relevant positions cannot engage or pay vendors without additional review and adherence to standard Company policies and provisions for engagement.




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PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
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 parties executed a Stipulation of Class Settlement and Release which the court refused to approve on the grounds that it did not provide sufficient compensation for the putative class members. Further settlement discussions were not successful, and the litigation is moving forward with the filing deadline for plaintiff’s class certification motion postponed until February 1, 2018. Purported class actions alleging wage and hour violations are commonly filed against California employers. The Company has similar cases pending and 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, L.L.C., 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. Defendants intend to continue to defend against the claims asserted.
In addition, on September 16, 2015, Holdings and certain of its officers and directors received an informal, non-public inquiry from the SEC requesting voluntary production of documents and information. All parties cooperated fully with the SEC's request. On July 15, 2016, Holdings was informed that the SEC was closing its inquiry as to all parties.
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-

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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. No trial date for the Diep action has been set.
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.
Item 1A. Risk Factors.
There have been no material changes from the risk factors previously disclosed in our annual report on Form 10-K for the year ended December 28, 2016 , except for (i) the addition of the risk factors that immediately follow, and (ii) the revision of the risk factors that follow them, which are revised and restated in their entirety.
Additional Risk Factors
The process of finding a new CEO may negatively affect our business.
On March 7, 2017, Steve Sather, our President and Chief Executive Officer, informed our board that he intends to retire on or before December 31, 2017, subject to the Company hiring his replacement. At this time, Mr. Sather retains his positions while a search for his successor is underway. As President and CEO, Mr. Sather is responsible for the general supervision of our business. Turnover in the CEO position could lead to operational or strategic uncertainty or inefficiency, or increased turnover among managers and executives, or among employees generally, affecting our operations and performance. Such effects could occur before Mr. Sather retires, after his successor’s tenure begins, and during any gap between the two. Similarly, a new CEO may require time to become familiar with our business and during this period his or her lack of familiarity with our organization could pose an impediment to the efficient operation of our business and the development and execution of our business strategy. We are not guaranteed to be able to find a replacement with suitable skills and personality promptly and for an amount of compensation that we consider appropriate. Compensation for a new CEO may include equity grants, which may result in dilution to shareholders. Any successor may be less effective than Mr. Sather, or change our Company’s direction, and any such changes could be disruptive or unsuccessful. Additionally, any retirement agreements that we may enter into with Mr. Sather may provide certain compensation or benefits that may be material, but we have not yet resolved the terms of such agreements, if any.
Our business is geographically concentrated and real estate intensive, making it vulnerable to natural disasters.
As stated in our Form 10-K risk factor, “Our business is geographically concentrated in the greater Los Angeles area, and we could be negatively affected by conditions specific to that region,” including fires, earthquakes, or other natural disasters. Additionally, outside of Los Angeles, many of our restaurants are clustered around major cities in Northern California, Texas, and elsewhere. Localized disasters, especially exacerbated by climate change, including wildfires, hurricanes, and flooding, could impair our assets and operations in those areas. For example, in the third quarter of 2017, the Houston metropolitan area was impacted by Hurricane Harvey and resultant flooding. This caused for us, among other effects, temporary store closures and food spoilage, as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Comparison of Results of Operations.”
Revised Risk Factors

Our growth strategy depends in part on opening new restaurants in existing and new markets and expanding our franchise system. We may be unsuccessful in opening new company-operated or franchised restaurants or in establishing new markets, which could adversely affect our growth.
One of the key means to achieving our growth strategy is and will be through opening new restaurants and operating those restaurants on a profitable basis. We opened 18 new company-operated restaurants in fiscal 2016 and plan to open an estimated

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15 to 16 in fiscal 2017. Our franchisees opened 13 new restaurants in fiscal 2016 and plan to open 7 to 9 in fiscal 2017. The ability to open new restaurants is dependent upon a number of factors, many of which are beyond our control, including our and our franchisees’ abilities to:
identify available and suitable restaurant sites;
compete for restaurant sites;
reach acceptable agreements regarding the lease or purchase of locations;
obtain or have available the financing required to acquire and operate a restaurant, including construction and opening costs;
respond to unforeseen engineering or environmental problems with leased premises;
avoid the impact of inclement weather and natural and man-made disasters;