SEC Filing | El Pollo Loco Holdings, Inc.

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)


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

For the quarterly period ended June 24, 2020


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

For the transition period from to

Commission File Number: 001-36556

EL POLLO LOCO HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware		20-3563182
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

3535 Harbor Blvd., Suite 100, Costa Mesa, California		92626
(Address of principal executive offices)		(Zip Code)

(714) 599-5000

(Registrant’s telephone number, including area code)

N/A

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

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	LOCO	The Nasdaq Stock Market LLC

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

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

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

Large Accelerated Filer	☐	Accelerated Filer	☒

Non-accelerated Filer	☐	Smaller Reporting Company	☒

		Emerging Growth Company	☐

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

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

As of July 24, 2020, there were 35,922,099 shares of the issuer’s common stock outstanding.

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Table of Contents		Page

PART I—FINANCIAL INFORMATION		3
Item 1. Financial Statements.		3
Condensed Consolidated Balance Sheets (Unaudited)		3
Condensed Consolidated Statements of Income (Unaudited)		4
Condensed Consolidated Statements of Comprehensive Income (Unaudited)		5
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)		6
Condensed Consolidated Statements of Cash Flows (Unaudited)		8
Notes to Condensed Consolidated Financial Statements (Unaudited)		9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.		31
Item 3. Quantitative and Qualitative Disclosures About Market Risk.		49
Item 4. Controls and Procedures.		50
PART II—OTHER INFORMATION		51
Item 1. Legal Proceedings.		51
Item 1A. Risk Factors.		51
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.		51
Item 3. Defaults of Senior Securities.		51
Item 4. Mine Safety Disclosures.		51
Item 5. Other Information.		51
Item 6. Exhibits.		52
Signatures		53

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

EL POLLO LOCO HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Amounts in thousands, except share data)


	June 24,		December 25,
	2020		2019
Assets
Current assets:
Cash and cash equivalents	$	60,342	$	8,070
Accounts and other receivables, net		16,115		8,505
Inventories		1,954		2,009
Prepaid expenses and other current assets		2,696		5,718
Income tax receivable		—		376
Total current assets		81,107		24,678
Property and equipment owned, net		84,262		91,778
Property held under operating leases, net ("ROU asset")		184,308		192,395
Goodwill		248,674		248,674
Trademarks		61,888		61,888
Deferred tax assets		4,185		3,709
Other assets		1,168		1,630
Total assets	$	665,592	$	624,752
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of obligations under finance leases	$	37	$	34
Current portion of obligations under operating leases		17,979		16,406
Accounts payable		9,338		5,627
Accrued salaries and vacation		6,277		8,618
Accrued insurance		10,138		9,440
Accrued income taxes payable		1,693		—
Accrued interest		217		302
Current portion of income tax receivable agreement payable		4,987		4,935
Other accrued expenses and current liabilities		16,376		28,597
Total current liabilities		67,042		73,959
Revolver loan		138,800		97,000
Obligations under finance leases, net of current portion		63		83
Obligations under operating leases, net of current portion		189,060		197,492
Deferred taxes		1,671		1,672
Income tax receivable agreement payable, net of current portion		3,419		3,301
Other noncurrent liabilities		8,978		5,679
Total liabilities		409,033		379,186
Commitments and contingencies
Stockholders’ Equity
Preferred stock, $0.01 par value, 100,000,000 shares authorized; none issued or outstanding		—		—
Common stock, $0.01 par value, 200,000,000 shares authorized; 35,854,122 and 35,126,582 shares issued and outstanding		359		351
Additional paid-in-capital		334,088		330,950
Accumulated deficit		(76,889)		(85,988)
Accumulated other comprehensive (loss) income		(999)		253
Total stockholders’ equity		256,559		245,566
Total liabilities and stockholders’ equity	$	665,592	$	624,752

See notes to condensed consolidated financial statements (unaudited).

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EL POLLO LOCO HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Amounts in thousands, except share data)


	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	June 24, 2020		June 26, 2019		June 24, 2020		June 26, 2019
Revenue
Company-operated restaurant revenue	$	87,707	$	100,139	$	180,341	$	197,289
Franchise revenue		6,719		7,918		13,781		14,362
Franchise advertising fee revenue		5,178		5,683		10,645		11,066
Total revenue		99,604		113,740		204,767		222,717
Cost of operations
Food and paper cost		22,873		27,886		48,435		55,038
Labor and related expenses		25,759		29,272		54,452		58,848
Occupancy and other operating expenses		21,922		23,032		44,031		46,259
Company restaurant expenses		70,554		80,190		146,918		160,145
General and administrative expenses		10,465		9,348		19,796		20,696
Franchise expenses		6,627		7,542		13,538		13,686
Depreciation and amortization		4,168		4,454		8,537		9,215
Loss on disposal of assets		27		134		127		178
Recovery of securities lawsuits related legal expenses and other insurance claims		(123)		(10,000)		(123)		(10,000)
Impairment and closed-store reserves		437		565		2,839		874
Loss on disposition of restaurants		—		927		—		5,051
Total expenses		92,155		93,160		191,632		199,845
Income from operations		7,449		20,580		13,135		22,872
Interest expense, net		908		922		1,813		1,781
Income tax receivable agreement expense (income)		290		(94)		170		77
Income before provision for income taxes		6,251		19,752		11,152		21,014
Provision for income taxes		752		5,665		2,053		6,014
Net income	$	5,499	$	14,087	$	9,099	$	15,000
Net income per share
Basic	$	0.16	$	0.37	$	0.26	$	0.39
Diluted	$	0.16	$	0.37	$	0.26	$	0.38
Weighted-average shares used in computing net income per share
Basic		34,836,410		37,939,912		34,747,785		38,296,807
Diluted		35,410,198		38,580,722		35,382,607		39,043,477

See notes to condensed consolidated financial statements (unaudited).

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EL POLLO LOCO HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Amounts in thousands, except share data)


	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	June 24, 2020		June 26, 2019		June 24, 2020		June 26, 2019
Net income	$	5,499	$	14,087	$	9,099	$	15,000
Other comprehensive loss (income)
Changes in derivative instruments
Unrealized net losses arising during the period from interest rate swap		296		—		1,755		—
Reclassifications of losses into net income		(81)		—		(42)		—
Income benefit		(58)		—		(461)		—
Other comprehensive loss, net of taxes		157		—		1,252		—
Comprehensive income	$	5,342	$	14,087	$	7,847	$	15,000

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EL POLLO LOCO HOLDINGS, INC.

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

(Amounts in thousands, except share data)


	Thirteen Weeks Ended June 24, 2020
								Accumulated
				Additional				Other		Total
	Common Stock			Paid-in		Accumulated		Comprehensive		Stockholders’
	Shares	Amount		Capital		Deficit		Income (Loss)		Equity
Balance, March 25, 2020	35,089,983	$	351	$	331,484	$	(82,388)	$	(842)	$	248,605
Stock-based compensation	—		—		727		—		—		727
Issuance of common stock related to restricted stock	436,263		4		(4)		—		—		—
Issuance of common stock upon exercise of stock options	372,556		4		2,161		—		—		2,165
Shares repurchased for employee tax withholdings	(20,193)		—		(280)		—		—		(280)
Forfeiture of common stock related to restricted shares	(24,487)		—		—		—		—		—
Other comprehensive loss, net of tax	—		—		—		—		(157)		(157)
Net income	—		—		—		5,499		—		5,499
Balance, June 24, 2020	35,854,122	$	359	$	334,088	$	(76,889)	$	(999)	$	256,559

	Thirteen Weeks Ended June 26, 2019
								Accumulated
				Additional				Other		Total
	Common Stock			Paid-in		Accumulated		Comprehensive		Stockholders’
	Shares	Amount		Capital		Deficit		Income		Equity
Balance, March 27, 2019	38,730,204	$	388	$	372,825	$	(109,975)	$	—		263,238
Stock-based compensation	—		—		641		—		—		641
Issuance of common stock related to restricted shares	323,489		3		(3)		—		—		—
Issuance of common stock upon exercise of stock options	6,709		—		80		—		—		80
Shares repurchased for employee tax withholdings	(24,172)		(1)		(278)		—		—		(279)
Repurchase of common stock	(1,303,282)		(13)		(14,930)		—		—		(14,943)
Net income	—		—		—		14,087		—		14,087
Balance, June 26, 2019	37,732,948	$	377	$	358,335	$	(95,888)	$	—	$	262,824

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	Twenty-Six Weeks Ended June 24, 2020
								Accumulated
				Additional				Other		Total
	Common Stock			Paid-in		Accumulated		Comprehensive		Stockholders’
	Shares	Amount		Capital		Deficit		Income (Loss)		Equity
Balance, December 25, 2019	35,126,582	$	351	$	330,950	$	(85,988)	$	253	$	245,566
Stock-based compensation	—		—		1,261		—		—		1,261
Issuance of common stock related to restricted stock	436,263		4		(4)		—		—		—
Issuance of common stock upon exercise of stock options	372,556		4		2,161		—		—		2,165
Shares repurchased for employee tax withholdings	(20,193)		—		(280)		—		—		(280)
Forfeiture of common stock related to restricted shares	(61,086)		—		—		—		—		—
Other comprehensive loss, net of tax	—		—		—		—		(1,252)		(1,252)
Net income	—		—		—		9,099		—		9,099
Balance, June 24, 2020	35,854,122	$	359	$	334,088	$	(76,889)	$	(999)	$	256,559

	Twenty-Six Weeks Ended June 26, 2019
								Accumulated
				Additional				Other		Total
	Common Stock			Paid-in		Accumulated		Comprehensive		Stockholders’
	Shares	Amount		Capital		Deficit		Income		Equity
Balance, December 26, 2018	39,009,451	$	390	$	375,734	$	(110,888)	$	—		265,236
Stock-based compensation	—		—		1,129		—		—		1,129
Issuance of common stock related to restricted shares	301,371		3		(3)		—		—		—
Issuance of common stock upon exercise of stock options	6,709		—		80		—		—		80
Shares repurchased for employee tax withholdings	(25,747)		(1)		(294)		—		—		(295)
Repurchase of common stock	(1,558,836)		(15)		(18,311)		—		—		(18,326)
Net income	—		—		—		15,000		—		15,000
Balance, June 26, 2019	37,732,948	$	377	$	358,335	$	(95,888)	$	—	$	262,824

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EL POLLO LOCO HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Amounts in thousands)


	Twenty-Six Weeks Ended
	June 24, 2020		June 26, 2019
Cash flows from operating activities:
Net income	$	9,099	$	15,000
Adjustments to reconcile net income to net cash flows provided by operating activities:
Depreciation and amortization		8,537		9,215
Stock-based compensation expense		1,261		1,129
Income tax receivable agreement expense		170		77
Loss on disposition of restaurants		—		5,051
Loss on disposal of assets		127		178
Impairment of property and equipment		1,972		227
Amortization of deferred financing costs		126		126
Amortization of favorable and unfavorable leases, net		—		(362)
Deferred income taxes, net		(363)		5,799
Changes in operating assets and liabilities:
Accounts and other receivables, net		(7,610)		(2,084)
Inventories		55		277
Prepaid expenses and other current assets		3,021		(450)
Other assets		339		23
Accounts payable		3,610		1,057
Accrued salaries and vacation		(2,342)		(487)
Accrued insurance		698		1,163
Income taxes payable		2,069		(3)
Other accrued expenses and liabilities		(9,687)		(23,077)
Net cash flows provided by operating activities		11,082		12,859
Cash flows from investing activities:
Proceeds from disposition of restaurants		—		4,770
Purchase of property and equipment		(2,479)		(5,898)
Net cash flows used in investing activities		(2,479)		(1,128)
Cash flows from financing activities:
Minimum tax withholdings related to net share settlements		(280)		(295)
Payments on revolver and swingline loan		(10,700)		(15,000)
Borrowings on revolver and swingline loan		52,500		26,000
Proceeds from issuance of common stock upon exercise of stock options, net of expenses		2,165		80
Payment of obligations under finance leases		(16)		(53)
Stock buybacks		—		(18,151)
Net cash flows provided by (used in) financing activities		43,669		(7,419)
Increase in cash and cash equivalents		52,272		4,312
Cash and cash equivalents, beginning of period		8,070		6,969
Cash and cash equivalents, end of period	$	60,342	$	11,281


	Twenty-Six Weeks Ended
	June 24, 2020		June 26, 2019
Supplemental cash flow information
Cash paid during the period for interest	$	1,738	$	1,694
Cash paid during the period for income taxes	$	434	$	218
Unpaid purchases of property and equipment	$	846	$	980
Unpaid stock buybacks	$	—	$	310

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

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EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Overview

El Pollo Loco Holdings, Inc. (“Holdings”) is a Delaware corporation headquartered in Costa Mesa, California. Holdings and its direct and indirect subsidiaries are collectively referred to herein as “we,” “us” or the “Company.” The Company’s activities are conducted principally through its indirect wholly-owned subsidiary, El Pollo Loco, Inc. (“EPL”), which develops, franchises, licenses, and operates quick-service restaurants under the name El Pollo Loco® and operates under one operating segment. At June 24, 2020, the Company operated 196 and franchised 283 El Pollo Loco restaurants.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments consisting of normal recurring adjustments necessary for a fair presentation of the Company’s consolidated financial position and results of operations and cash flows for the periods presented. Interim results of operations are not necessarily indicative of the results that may be achieved for the full year. The condensed consolidated financial statements and related notes do not include all information and footnotes required by GAAP for annual reports. This quarterly report should be read in conjunction with the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 25, 2019.

The Company uses a 52- or 53-week fiscal year ending on the last Wednesday of the calendar year. In a 52-week fiscal year, each quarter includes 13 weeks of operations; in a 53-week fiscal year, the first, second and third quarters each include 13 weeks of operations, and the fourth quarter includes 14 weeks of operations. Every six or seven years, a 53-week fiscal year occurs. Fiscal 2020 is a 53-week year ending on December 30, 2020, and fiscal 2019 was a 52-week year ending on December 25, 2019. Revenues, expenses, and other financial and operational figures may be elevated in a 53-week year.

Holdings has no material assets or operations. Holdings and Holdings’ direct subsidiary, EPL Intermediate, Inc. (“Intermediate”), guarantee EPL’s 2018 Revolver (as defined below) on a full and unconditional basis (see Note 4), and Intermediate has no subsidiaries other than EPL. EPL is a separate and distinct legal entity and has no obligation to make funds available to Intermediate. EPL and Intermediate may pay dividends to Intermediate and to Holdings, respectively, subject to the terms of the 2018 Revolver.

Principles of Consolidation

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

Use of Estimates

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

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COVID-19

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

The COVID-19 pandemic has significantly disrupted consumer demand, as well as the Company’s restaurant operations. Following the pandemic declaration in March 2020, federal, state and local governments began to respond to the public health crisis by requiring social distancing, "stay at home" directives, and restaurant restrictions - including government-mandated dining room closures - that limited business to off-premise services only (take-out, drive-thru and delivery). Historically, approximately 20% of the Company’s sales are associated with dine-in service. In May 2020, the “stay at home” directive was modified in most areas in which the Company operates, allowing for the opening of lower-risk workplaces, including restaurants, but with restrictions such as limited capacity. However, in recent months a surge in the COVID-19 pandemic has caused many state and local governments to re-implement certain restrictions to try and contain the spread of the virus. Except for nine restaurants in Houston and one in Utah, all of the Company’s restaurants are operating on a take-away, mobile pick-up and delivery basis, as well as maintaining drive-thru operations where available, in order to protect its employees and customers from the spread of the COVID-19 pandemic and to comply with the government mandates. Due to the impact of the COVID-19 pandemic, during the thirteen and twenty-six weeks ended June 24, 2020, the Company has temporarily closed 31 restaurants, typically for one to three days, 30 of which have reopened and 1 remained closed as of June 24, 2020. Similarly, franchisees have temporarily closed 21 restaurants, of which 17 have reopened and four remain closed as of June 24, 2020. As of June 24, 2020, the Company had not permanently closed any restaurants due to the COVID-19 pandemic.

The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. Management has taken precautionary actions, such as drawing on its 2018 Revolver (see Note 4), temporarily suspending all but essential capital spending and share repurchase activity, reevaluating essential support center general and administrative expenses and fine-tuning its restaurant labor model based on indoor dining room restrictions, limited dining room capacity in restaurants located in geographies where indoor dining is permitted, dining room closures and fluctuating sales volumes. Additionally, Management has delayed making April, May and June rent payments on the majority of its leased properties and has reached agreements for rent abatement and/or deferment with the Company’s landlords for those properties. See Note 5 “Other Accrued Expenses and Current Liabilities” and Note 6 “Other Noncurrent Liabilities” for details of these balances. For the Company’s franchisees, the Company deferred 50% of their April royalties as well as 100% of their 2020 remodel and new restaurant build requirements until 2021. Management is continually evaluating the impact of the global crisis on its financial condition, liquidity, operations, suppliers, industry, and workforce and will take additional actions as necessary. The disruption in operations led to the Company considering the impact of the COVID-19 pandemic on its liquidity, debt covenant compliance, and recoverability of long-lived and ROU assets, goodwill and intangible assets, among others. If these disruptions to the Company’s operations from the COVID-19 pandemic continue, they may have a material negative impact on the Company’s consolidated financial condition, future results of operations and liquidity. The extent of such negative impact will depend, in part, on the longevity and severity of the pandemic.

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

Subsequent Events

Subsequent to June 24, 2020, the Company has temporarily closed 36 restaurants, typically for one to three days, and franchisees have temporarily closed 11 restaurants. As of July 31, 2020, four company-operated and three franchise locations remained closed.

Subsequent to June 24, 2020, the Surety, from whom the Company procured an appeal bond to secure the judgement against the Company in the matter of Janice P. Handlers-Bryman and Michael D. Bryman v. El Pollo Loco, Inc., released its collateral demand, freeing the $2.7 million Letter of Credit previously issued in April 2020. Additionally,

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subsequent to June 24, 2020, the Company reached an agreement in principle with the plaintiffs to resolve the lawsuit. See Note 7, “Commitments and Contingencies, Legal Matters” for more details.

The Company has evaluated subsequent events that have occurred after June 24, 2020, and determined that there were no other events or transactions occurring during this reporting period that require recognition or disclosure in the condensed consolidated financial statements.

Cash and Cash Equivalents

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

Liquidity

The Company’s principal liquidity and capital requirements are new restaurants, existing restaurant capital investments (remodels and maintenance), interest payments on our debt, lease obligations and working capital and general corporate needs. At June 24, 2020, the Company’s total debt was $138.8 million. The Company’s ability to make payments on its indebtedness and to fund planned capital expenditures depends on available cash and its ability to generate adequate cash flows in the future, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory, and other factors that are beyond the Company’s control. Based on current operations, the Company believes that its cash flow from operations and available cash of $60.3 million at June 24, 2020 will be adequate to meet the Company’s liquidity needs for the next twelve months from the date of filing of these condensed consolidated financial statements. However, depending on the severity and longevity of the COVID-19 pandemic, the Company’s financial performance and liquidity could be further impacted and could impact the Company’s ability to meet certain covenants required in its 2018 Credit Agreement (as defined below), specifically the lease-adjusted coverage ratio and fixed-charge coverage ratio.

Recovery of Securities Class Action Legal Expenses and Other Insurance Claims

During the thirteen and twenty-six weeks ended June 24, 2020, the Company received insurance proceeds of $0.1 million related to a property claim. During the thirteen and twenty-six weeks ended June 26, 2019, the Company received insurance proceeds of $10.0 million related to the settlement of a securities class action lawsuit. See Note 7, “Commitments and Contingencies, Legal Matters.’

Loss on Disposition of Restaurants

During the thirteen and twenty-six weeks ended June 26, 2019, the Company completed the sale of four company-operated restaurants within the San Francisco area to an existing franchisee and seven company-operated restaurants in the Phoenix area to another existing franchisee. The Company determined that these restaurant dispositions represent multiple element arrangements, and as a result, the cash consideration received was allocated to the separate elements based on their relative selling price. Cash proceeds included upfront consideration for the sale of the restaurants and franchise fees, as well as future cash consideration for royalties and lease payments. The Company considered the future lease payments in allocating the initial cash consideration received. The cash consideration per restaurant for franchise fees is consistent with the amounts stated in the related franchise agreements, which are charged for separate standalone arrangements. The Company initially defers and subsequently recognizes the franchise fees over the term of the franchise agreement. Future royalty income is also recognized in revenue as earned.

These sales resulted in cash proceeds of $4.8 million and a net loss on sale of restaurants of $0.9 million and $5.1 million for the thirteen and twenty-six weeks ended June 26, 2019, respectively. These restaurants are now included in the total number of franchised El Pollo Loco restaurants.

Recently Adopted Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting," which provides optional guidance, for a limited time, to ease the potential burden in accounting for or

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recognizing the effects of reference rate reform on financial reporting. ASU 2020-04 is effective for a limited time, from March 12, 2020, through December 31, 2022. The Company adopted this ASU on March 12, 2020. The adoption of ASU 2020-04 did not have a significant impact on the Company’s consolidated financial position or results of operations.

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

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

Recent Accounting Pronouncements Not Yet Adopted

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

Concentration of Risk

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

The Company had one supplier for which amounts due totaled 44.5% and 11.7% of the Company’s accounts payable at June 24, 2020 and December 25, 2019, respectively. Purchases from the Company’s largest supplier totaled 26.4% and 27.0% of total expenses for the thirteen and twenty-six weeks ended June 24, 2020, respectively, and 30.3% and 28.8% of total expenses for the thirteen and twenty-six weeks ended June 26, 2019.

Company-operated and franchised restaurants in the greater Los Angeles area generated, in the aggregate, approximately 71.1% and 71.7% of total revenue for the thirteen and twenty-six weeks ended June 24, 2020, respectively, and 69.3% for each of the thirteen and twenty-six weeks ended June 26, 2019.

Goodwill and Indefinite Lived Intangible Assets

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

Upon the sale or closure of a restaurant, the Company evaluates whether there is a decrement of goodwill. The amount of goodwill included in the cost basis of the asset sold is determined based on the relative fair value of the portion of the reporting unit disposed of compared to the fair value of the reporting unit retained. The Company determined there was no decrement of goodwill related to the disposition of restaurants during the thirteen and twenty-six weeks ended June 26, 2019.

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

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

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

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

Due to the recent impact of the COVID-19 pandemic to the global economy, including but not limited to, the volatility of the Company’s stock price as well as that of its competitors and the challenging environment for the restaurant industry generally, the Company determined that there were indicators of potential impairment of its goodwill and indefinite-lived intangible assets during the thirteen and twenty-six weeks ended June 24, 2020. As such, the Company performed an impairment assessment for both goodwill and indefinite-lived intangible assets and concluded that the fair value of these assets substantially exceeded their carrying values. Accordingly, the Company did not record any impairment to its goodwill or indefinite-lived intangible assets during the thirteen and twenty-six weeks ended June 24, 2020. The ultimate severity and longevity of the COVID-19 pandemic is unknown, and therefore, it is possible that impairments could be identified in future periods, and such amounts could be material.

Fair Value Measurements

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

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Level 1: Quoted prices for identical instruments in active markets.

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Level 2: Observable prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs or significant value drivers are observable.

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Level 3: Unobservable inputs used when little or no market data is available.

During fiscal 2019, the Company entered into an interest rate swap, which is required to be measured at fair value on a recurring basis. The fair value was determined based on Level 2 inputs, which include valuation models, as reported by the Company’s counterparty. These valuation models use a discounted cash flow analysis on the cash flows of the derivative based on the terms of the contract and the forward yield curves adjusted for the Company’s credit risk. The key inputs for the valuation models are observable market prices, discount rates, and forward yield curves. See "Note 4.

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Long-Term Debt" for further discussion regarding our interest rate swaps. The following table presents fair value for the interest rate swap at June 24, 2020 (in thousands):


			Fair Value Measurements Using
	Fair Value		Level 1		Level 2		Level 3
Other non-current liabilities - Interest rate swap	$	1,408	$	—	$	1,408	$	—

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


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

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

The following non-financial instruments were measured at fair value, on a nonrecurring basis, as of and for the thirteen and twenty-six weeks ended June 24, 2020 (in thousands):


									Thirteen Weeks		Twenty-Six Weeks
			Fair Value Measurements at June 24, 2020 Using						Ended June 24, 2020		Ended June 24, 2020
	Total		Level 1		Level 2		Level 3		Impairment Losses		Impairment Losses
Certain property and equipment owned, net	$	—	$	—	$	—	$	—	$	52	$	1,429
Certain ROU assets, net	$	918	$	—	$	—	$	918	$	—	$	543

The following non-financial instruments were measured at fair value on a nonrecurring basis as of and for the thirteen and twenty-six weeks ended June 26, 2019 (in thousands):