UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark one)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
For the transition period from to
Commission File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices) | (Zip Code) |
(
(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 |
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. ☒
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). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer | ☐ | ☒ | |
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).
As of April 30, 2021, there were
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
EL POLLO LOCO HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Amounts in thousands, except share data)
| March 31, |
| December 30, | |||
| 2021 |
| 2020 | |||
Assets |
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Current assets: |
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Cash and cash equivalents | $ | | $ | | ||
Accounts and other receivables, net |
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Inventories |
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Prepaid expenses and other current assets |
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Income tax receivable |
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Total current assets |
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Property and equipment, net |
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Property and equipment held under finance lease, net |
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Property and equipment held under operating leases, net (“ROU asset”) |
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Goodwill |
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Trademarks |
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Deferred tax assets |
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Other assets |
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Total assets | $ | | $ | | ||
Liabilities and Stockholders’ Equity |
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Current liabilities: |
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Current portion of obligations under finance leases | $ | | $ | | ||
Current portion of obligations under operating leases |
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Accounts payable |
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Accrued salaries and vacation |
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Accrued insurance |
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Accrued interest |
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Current portion of income tax receivable agreement payable |
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Other accrued expenses and current liabilities |
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Total current liabilities |
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Revolver loan |
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Obligations under finance leases, net of current portion |
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Obligations under operating leases, net of current portion |
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Deferred taxes |
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Income tax receivable agreement payable, net of current portion |
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Other noncurrent liabilities |
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Total liabilities |
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Commitments and contingencies (Note 7) |
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Stockholders’ Equity |
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Preferred stock, $ |
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Common stock, $ |
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Additional paid-in-capital |
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Accumulated deficit |
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Accumulated other comprehensive loss |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity | $ | | $ | |
See notes to condensed consolidated financial statements (unaudited).
3
EL POLLO LOCO HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Amounts in thousands, except share data)
| Thirteen Weeks Ended |
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March 31, 2021 | March 25, 2020 | ||||||
Revenue |
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Company-operated restaurant revenue | $ | | $ | | |||
Franchise revenue |
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Franchise advertising fee revenue |
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Total revenue |
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Cost of operations |
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Food and paper cost |
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Labor and related expenses |
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Occupancy and other operating expenses |
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Company restaurant expenses |
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General and administrative expenses |
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Franchise expenses |
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Depreciation and amortization |
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Loss on disposal of assets |
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Impairment and closed-store reserves |
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Total expenses |
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Income from operations |
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Interest expense, net |
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Income tax receivable agreement income |
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Income before provision for income taxes |
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Provision for income taxes |
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Net income | $ | | $ | | |||
Net income per share |
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Basic | $ | | $ | | |||
Diluted | $ | | $ | | |||
Weighted-average shares used in computing net income per share |
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Basic |
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Diluted |
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See notes to condensed consolidated financial statements (unaudited).
4
EL POLLO LOCO HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(Amounts in thousands)
| Thirteen Weeks Ended |
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March 31, 2021 |
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Net income | $ | | $ | | |||
Other comprehensive income |
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Changes in derivative instruments |
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Unrealized net gains arising during the period from interest rate swap |
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Reclassifications of losses into net income |
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Income tax expense |
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Other comprehensive income (loss), net of taxes | |
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Comprehensive income | $ | | $ | |
See notes to condensed consolidated financial statements (unaudited).
5
EL POLLO LOCO HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
(Amounts in thousands, except share data)
Thirteen Weeks Ended March 31, 2021 | |||||||||||||||||
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Common Stock | Paid-in | Accumulated | Comprehensive | Stockholders’ | |||||||||||||
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| Amount |
| Capital |
| Deficit |
| Income (Loss) |
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Balance, December 30, 2020 | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
Stock-based compensation | — |
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Issuance of common stock upon exercise of stock options | | | | — | — | | |||||||||||
Forfeiture of common stock related to restricted shares | ( |
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Other comprehensive loss, net of tax | — |
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Net income | — |
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Balance, March 31, 2021 | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
Thirteen Weeks Ended March 25, 2020 | |||||||||||||||||
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Common Stock | Paid-in | Accumulated | Comprehensive | Stockholders’ | |||||||||||||
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| Capital |
| Deficit |
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Balance, December 25, 2019 | | $ | | $ | | $ | ( | $ | | $ | | ||||||
Stock-based compensation | — |
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Forfeiture of common stock related to restricted shares | ( | — | — | — | — | — | |||||||||||
Other comprehensive income, net of tax | — | — | — | — | ( | ( | |||||||||||
Net income | — |
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Balance, March 25, 2020 | | $ | | $ | | $ | ( | $ | ( | $ | |
See notes to condensed consolidated financial statements (unaudited)
6
EL POLLO LOCO HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
| Thirteen Weeks Ended |
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| March 31, 2021 | March 25, 2020 |
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Cash flows from operating activities: |
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Net income | $ | | $ | | |||
Adjustments to reconcile net income to net cash flows provided by operating activities: |
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Depreciation and amortization |
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Stock-based compensation expense |
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Income tax receivable agreement income |
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Loss on disposal of assets |
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Impairment of property and equipment |
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Amortization of deferred financing costs |
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Deferred income taxes, net |
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Changes in operating assets and liabilities: |
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Accounts and other receivables |
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Inventories |
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Prepaid expenses and other current assets |
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Income taxes receivable/payable |
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Other assets |
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Accounts payable |
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Accrued salaries and vacation |
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Accrued insurance |
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Other accrued expenses and liabilities |
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Net cash flows provided by (used in) operating activities |
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Cash flows from investing activities: |
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Purchase of property and equipment |
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Net cash flows used in investing activities |
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Cash flows from financing activities: |
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Proceeds from borrowings on revolver and swingline loans |
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Payments on revolver and swingline loan |
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Proceeds from issuance of common stock upon exercise of stock options, net of expenses | | — | |||||
Payment of obligations under finance leases |
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Net cash flows (used in) provided by financing activities |
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Increase (decrease) in cash and cash equivalents |
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Cash and cash equivalents, beginning of period |
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Cash and cash equivalents, end of period | $ | | $ | |
| Thirteen Weeks Ended |
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March 31, 2021 | March 25, 2020 | ||||||
Supplemental cash flow information |
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Cash paid during the period for interest | $ | | $ | | |||
Unpaid purchases of property and equipment | $ | | $ | |
See notes to condensed consolidated financial statements (unaudited).
7
EL POLLO LOCO HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Overview
El Pollo Loco Holdings, Inc. (“Holdings”) is a Delaware corporation headquartered in Costa Mesa, California. Holdings and its direct and indirect subsidiaries are collectively referred to herein as “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
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments consisting of normal recurring adjustments necessary for a fair statement of the Company’s 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 30, 2020.
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 2021 is a 52-week year ending on December 29, 2021, and fiscal 2020 was a 53-week year ended on December 30, 2020. Revenues, expenses, and other financial and operational figures may be elevated in a 53-week year.
Holdings has no material assets or operations. Holdings and Holdings’ direct subsidiary, EPL Intermediate, Inc. (“Intermediate”), guarantee EPL’s 2018 Revolver (as defined below) on a full and unconditional basis (see Note 4, “Long-Term Debt”), and Intermediate has no subsidiaries other than EPL. EPL is a separate and distinct legal entity and has no obligation to make funds available to Intermediate. EPL and Intermediate may pay dividends to Intermediate and to Holdings, respectively, subject to the terms of the 2018 Revolver.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of Holdings and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and revenue and expenses during the periods reported. Actual results could materially differ from those estimates. The Company’s significant estimates include estimates for impairment of goodwill, intangible assets and property and equipment, insurance reserves, lease accounting matters, stock-based compensation, income tax receivable agreement liability, contingent liabilities and income tax valuation allowances.
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COVID-19
The COVID-19 pandemic has significantly disrupted our 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
During the thirteen weeks ended March 31, 2021, the Company incurred $
Subsequent Events
Subsequent to March 31, 2021, the Company has temporarily closed
The Company has evaluated subsequent events that have occurred after March 31, 2021, 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 liquid instruments with an original maturity of three months or less at the date of purchase to be cash equivalents.
Liquidity
The Company’s principal liquidity and capital requirements are new restaurants, existing restaurant capital investments (remodels and maintenance), interest payments on our debt, lease obligations and working capital and general corporate needs. At March 31, 2021, the Company’s total debt was $
Recently Adopted Accounting Pronouncements
In January 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2021-01, “Reference Rate Reform (Topic 848): Scope” which clarifies the FASB’s recent rate reform guidance in
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Topic 848, Reference Rate Reform, that optional expedients and exceptions therein for contract modification and hedge accounting apply to derivatives that are affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) and the use of new interest rate benchmarks. ASU 2021-01 is effective immediately. Entities may choose to apply the amendments retrospectively as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively to new modifications from any date within an interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. The Company adopted this ASU on January 7, 2021. The adoption of ASU 2021-01 did not have a significant impact on the Company’s consolidated financial position or results of operations.
In October 2020, the FASB issued ASU No. 2020-10, “Codification Improvements,” which improve the consistency of the codification by including all disclosure guidance in the appropriate Disclosure Section (Section 50). ASU 2020-10 is effective for annual periods beginning after December 15, 2020, and for interim periods within annual periods beginning after December 15, 2020. The Company adopted this ASU during the first quarter of 2021. The adoption of ASU 2020-10 did not have a significant impact on the Company’s consolidated financial position or results of operations.
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 Company adopted this ASU during the first quarter of 2021. The adoption of ASU 2019-12 did not 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
Company-operated and franchised restaurants in the greater Los Angeles area generated, in the aggregate, approximately
Goodwill and Indefinite Lived Intangible Assets
The Company’s indefinite-lived intangible assets consist of trademarks. Goodwill represents the excess of cost over fair value of net identified assets acquired in business combinations accounted for under the purchase method. The Company does not amortize its goodwill and indefinite-lived intangible assets. Goodwill resulted from the acquisition of certain franchise locations.
Upon the sale or closure of a restaurant, the Company evaluates whether there is a decrement of goodwill. The amount of goodwill included in the cost basis of the asset sold is determined based on the relative fair value of the portion of the reporting unit disposed of compared to the fair value of the reporting unit retained. The Company determined there was no decrement of goodwill related to the disposition of restaurants during the thirteen weeks ended March 25, 2020.
The Company performs an annual impairment test for goodwill during the fourth fiscal quarter of each year, or more frequently if impairment indicators arise.
The Company reviews goodwill for impairment utilizing either a qualitative assessment or a fair value test by comparing the fair value of a reporting unit with its carrying amount. If the Company decides that it is appropriate to perform a qualitative assessment and concludes that the fair value of a reporting unit more likely than not exceeds its carrying value, no further evaluation is necessary. If the Company performs the fair value test, the Company will compare the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit
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exceeds its fair value, the Company will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized cannot exceed the total amount of goodwill allocated to that reporting unit.
The Company performs an annual impairment test for indefinite-lived intangible assets during the fourth fiscal quarter of each year, or more frequently if impairment indicators arise. An impairment test consists of either a qualitative assessment or a comparison of the fair value of an intangible asset with its carrying amount. The excess of the carrying amount of an intangible asset over its fair value is recognized as an impairment loss.
The assumptions used in the estimate of fair value are generally consistent with the past performance of the Company’s reporting segment and are also consistent with the projections and assumptions that are used in current operating plans. These assumptions are subject to change as a result of changing economic and competitive conditions.
The Company determined that there were no indicators of potential impairment of its goodwill and indefinite-lived intangible assets during the thirteen weeks ended March 31, 2021. Accordingly, the Company did not record any impairment to its goodwill or indefinite-lived intangible assets during the thirteen weeks ended March 31, 2021. The ultimate severity and longevity of the COVID-19 pandemic is unknown, and therefore, it is possible that impairments could be identified in future periods, and such amounts could be material.
Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:
● | Level 1: Quoted prices for identical instruments in active markets. |
● | Level 2: Observable prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs or significant value drivers are observable. |
● | Level 3: Unobservable inputs used when little or no market data is available. |
During fiscal 2019, the Company entered into an interest rate swap, which is required to be measured at fair value on a recurring basis. The fair value was determined based on Level 2 inputs, which include valuation models, as reported by the Company’s counterparty. These valuation models use a discounted cash flow analysis on the cash flows of the derivative based on the terms of the contract and the forward yield curves adjusted for the Company’s credit risk. The key inputs for the valuation models are observable market prices, discount rates, and forward yield curves. See Note 4, “Long-Term Debt” for further discussion regarding our interest rate swaps.
The following table presents fair value for the interest rate swap at March 31, 2021 (in thousands):
Fair Value Measurements Using | |||||||||||||
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| Level 3 |
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Other non-current liabilities - Interest rate swap | $ | | $ | | $ | | $ | |
The following table presents fair value for the interest rate swap at December 30, 2020 (in thousands):
Fair Value Measurements Using | ||||||||||||||
| Fair Value |
| Level 1 |
| Level 2 |
| Level 3 |
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Other non-current liabilities - Interest rate swap | $ | | $ | — | $ | | $ | — |
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).
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The following non-financial instruments were measured at fair value, on a nonrecurring basis, as of and for the thirteen weeks ended March 31, 2021 reflecting certain property and equipment assets and right-of-use (“ROU”) assets, for which an impairment loss was recognized during the corresponding periods, as discussed immediately below under “Impairment of Long-Lived Assets and ROU Assets” (in thousands):
| Total |
| Level 1 |
| Level 2 |
| Level 3 | Impairment Losses | |||||||
Certain property and equipment, net | $ | — | $ | | $ | | $ | — |
| $ | | ||||
Certain ROU assets, net | $ | | $ | | $ | | $ | | $ | |
The following non-financial instruments were measured at fair value on a nonrecurring basis as of and for the thirteen weeks ended March 25, 2020 reflecting certain property and equipment assets for which an impairment loss was recognized during the corresponding periods, as discussed immediately below under “Impairment of Long-Lived Assets and ROU Assets” (in thousands):
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| Impairment Losses | ||||||
Certain property and equipment, net | $ | | $ | — | $ | — | $ | |
| $ | | ||||
Certain ROU assets, net | $ | | | |
Impairment of Long-Lived Assets and ROU Assets
The Company reviews its long-lived and ROU assets for impairment on a restaurant-by-restaurant basis whenever events or changes in circumstances indicate that the carrying value of certain long-lived and ROU assets may not be recoverable. The Company considers a triggering event related to long-lived assets or ROU assets in a net asset position to have occurred related to a specific restaurant if the restaurant’s cash flows for the last twelve months are less than a minimum threshold or if consistent levels of undiscounted cash flows for the remaining lease period are less than the carrying value of the restaurant’s assets. Additionally, the Company considers a triggering event related to ROU assets to have occurred related to a specific lease if the location has been subleased and future estimated sublease income is less than lease payments under the head lease. If the Company concludes that the carrying value of certain long-lived and ROU assets will not be recovered based on expected undiscounted future cash flows, an impairment loss is recorded to reduce the long-lived or ROU assets to their estimated fair value. The fair value is measured on a nonrecurring basis using unobservable (Level 3) inputs. There is uncertainty in the projected undiscounted future cash flows used in the Company’s impairment review analysis, which requires the use of estimates and assumptions. If actual performance does not achieve the projections, or if the assumptions used change in the future, the Company may be required to recognize impairment charges in future periods, and such charges could be material. The Company determined that triggering events occurred for certain restaurants during the thirteen weeks ended March 31, 2021 that required an impairment review of certain of the Company’s long-lived and ROU assets. Based on the results of the analysis, the Company recorded non-cash impairment charges of $
The Company recorded a non-cash impairment charge of $
Closed-Store Reserves
When a restaurant is closed, the Company will evaluate the ROU asset for impairment, based on anticipated sublease recoveries. The remaining value of the ROU asset is amortized on a straight-line basis, with the expense recognized in closed-store reserve expense. Additionally, any property tax and common area maintenance (“CAM”) payments relating to closed restaurants are included within closed-store expense. During the thirteen weeks ended March 31, 2021, the Company recognized $
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recognized $
Derivative Financial Instruments
The Company uses an interest rate swap, a derivative instrument, to hedge interest rate risk and not for trading purposes. The derivative contract is entered into with a financial institution.
The Company records the derivative instrument on its condensed consolidated balance sheets at fair value. The derivative instrument qualifies as a hedging instrument in a qualifying cash flow hedge relationship, and the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive (loss) income (“AOCI”) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. For any derivative instruments not designated as hedging instruments, the gain or loss will be recognized in earnings immediately. If a derivative previously designated as a hedge is terminated, or no longer meets the qualifications for hedge accounting, any balances in AOCI will be reclassified to earnings immediately.
As a result of the use of an interest rate swap, the Company is exposed to risk that the counterparty will fail to meet their contractual obligations. To mitigate the counterparty credit risk, the Company will only enter into contracts with major financial institutions, based upon their credit ratings and other factors, and will continue to assess the creditworthiness of the counterparty. As of March 31, 2021, the counterparty to the Company’s interest rate swap has performed in accordance with its contractual obligation.
Income Taxes
The provision for income taxes, income taxes payable and deferred income taxes is determined using the asset and liability method. Deferred tax assets and liabilities are determined based on temporary differences between the financial carrying amounts and the tax bases of assets and liabilities using enacted tax rates in effect in the years in which the temporary differences are expected to reverse. On a periodic basis, the Company assesses the probability that its net deferred tax assets, if any, will be recovered. If, after evaluating all of the positive and negative evidence, a conclusion is made that it is more likely than not that some portion or all of the net deferred tax assets will not be recovered, a valuation allowance is provided by charging to tax expense a reserve for the portion of deferred tax assets which are not expected to be realized.
The Company reviews its filing positions for all open tax years in all U.S. federal and state jurisdictions where the Company is required to file.
When there are uncertainties related to potential income tax benefits, in order to qualify for recognition, the position the Company takes has to have at least a “more likely than not” chance of being sustained (based on the position’s technical merits) upon challenge by the respective authorities. The term “more likely than not” means a likelihood of more than 50 percent. Otherwise, the Company may not recognize any of the potential tax benefit associated with the position. The Company recognizes a benefit for a tax position that meets the “more likely than not” criterion at the largest amount of tax benefit that is greater than 50 percent likely of being realized upon its effective resolution. Unrecognized tax benefits 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
On July 30, 2014, the Company entered into the income tax receivable agreement (the “TRA”), which calls for the Company to pay to its pre-initial public offering (“IPO”) stockholders
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agreement income of less than $
On March 27, 2020, President Trump signed into a law a stimulus package, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), which contains several tax provisions and deferral of employer Social Security taxes that are otherwise owed for wage payments. The tax provisions include a correction of a previous drafting error related to quality improvement property (“QIP”) and immediate refundability of all remaining alternative minimum tax (“AMT”) credits. The new provisions did not have a material impact on the Company’s condensed consolidated financial statements.
During the thirteen weeks ended March 25, 2020, the Company received a NOPA for the years ended December 27, 2017 and December 28, 2016, related to the Company’s methodology regarding its ordering of utilization of AMT NOL. This resulted in payment of $
2. PROPERTY AND EQUIPMENT
The costs and related accumulated depreciation and amortization of major classes of property and equipment are as follows (in thousands):
| March 31, 2021 |
| December 30, 2020 | |||
Land | $ | | $ | | ||
Buildings and improvements |
| |
| | ||
Other property and equipment |
| |
| | ||
Construction in progress |
| |
| | ||
| |
| | |||
Less: accumulated depreciation and amortization |
| ( |
| ( | ||
$ | | $ | |
Depreciation expense was $
Based on the Company’s review of its long-lived assets for impairment, the Company recorded non-cash impairment charges of $
3. STOCK-BASED COMPENSATION
At March 31, 2021, options to purchase
Weighted-Average |
| Aggregate | |||||||||
|
| Weighted-Average |
| Contractual Life |
| Intrinsic Value | |||||
Shares | Exercise Price |
| Life (Years) |
| (in thousands) | ||||||
Outstanding - December 30, 2020 |
| | $ | | |||||||
Exercised |
| ( |
| |
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Outstanding - March 31, 2021 |
| | $ | | $ | | |||||
Vested and expected to vest at March 31, 2021 |
| | $ | | $ | | |||||
Exercisable at March 31, 2021 |
| | $ | | $ | |
At March 31, 2021, the Company had total unrecognized compensation expense of $
A summary of restricted share activity as of March 31, 2021 and changes during the thirteen weeks ended March 31, 2021 is as follows:
|
| Weighted-Average | |||
Shares | Fair Value | ||||
Unvested shares at December 30, 2020 |
| | $ | | |
Forfeited, cancelled, or expired |
| ( | $ | | |
Unvested shares at March 31, 2021 |
| | $ | |
Unvested shares at March 31, 2021, included
At March 31, 2021, the Company had unrecognized compensation expense of $
Total stock-based compensation expense was $
4. LONG-TERM DEBT
On July 13, 2018, the Company refinanced a credit agreement with Bank of America, N.A., initially entered into on December 11, 2014 (the “2014 Revolver”), pursuant to a credit agreement (the “2018 Credit Agreement”) among EPL, as borrower, and the Company and Intermediate, as guarantors, Bank of America, N.A., as administrative agent, swingline lender, and letter of credit issuer, the lenders party thereto, and the other parties thereto, which provides for a $
Under the 2018 Revolver, Holdings may not make certain payments such as cash dividends, except that it may, inter alia, (i) pay up to $
Borrowings under the 2018 Credit Agreement (other than any swingline loans) bear interest, at the borrower’s option, at rates based upon either LIBOR or a base rate, plus, for each rate, a margin determined in accordance with a lease-adjusted consolidated leverage ratio-based pricing grid. The base rate is calculated as the highest of (a) the federal funds
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rate plus
The 2018 Credit Agreement contains certain financial covenants. The Company was in compliance with the financial covenants as of March 31, 2021. However, depending on the severity and longevity of the COVID-19 pandemic, the Company’s financial performance and liquidity could be further impacted and could impact the Company’s ability to comply with certain financial covenants required in the 2018 Credit Agreement, specifically the lease-adjusted coverage ratio and fixed-charge coverage ratio.
At March 31, 2021, $
Maturities
During the thirteen weeks ended March 31, 2021, the Company elected to pay down $
Interest Rate Swap
During the year ended December 25, 2019, the Company entered into a variable-to-fixed interest rate swap agreement with a notional amount of $
The changes in the fair value of the interest rate swap are not included in earnings, but are included in other comprehensive (loss) income (“OCI”). These changes in fair value are subsequently reclassified into net earnings as a component of interest expense as the hedged interest payments are made on the variable rate borrowings.
For the thirteen weeks ended March 31, 2021, the swap was a highly effective cash flow hedge.
As of March 31, 2021, the estimated net loss included in AOCI related to the Company’s cash flow hedge that will be reclassified into earnings in the next 12 months is $
The following table shows the financial statement line item and amount of the Company’s cash flow hedge accounting on the condensed consolidated balance sheets (in thousands):
March 31, 2021 | December 30, 2020 | |||||||||||
| Notional |
| Fair value |
| Notional |
| Fair value | |||||
Other liabilities - Interest rate swap | $ | | $ | | $ | | $ | |
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The following table summarizes the effect of the Company’s cash flow hedge accounting on the condensed consolidated statements of income (in thousands):
| Thirteen Weeks Ended |
| |||||
| March 31, 2021 |
| March 25, 2020 |
| |||
Interest expense on hedged portion of debt | $ | | $ | | |||
Interest expense (income) on interest rate swap |
| |
| ( |
| ||
Interest expense on debt and derivatives, net | $ | | $ | |
The following table summarizes the effect of the Company’s cash flow hedge accounting on AOCI for the thirteen weeks ended March 31, 2021 and March 25, 2020 (in thousands):
Thirteen Weeks Ended | ||||||||||
Loss (Gain) Reclassified from | ||||||||||
Net (Loss) Gain Recognized in OCI | AOCI into Interest expense | |||||||||
| March 31, 2021 |
| March 25, 2020 |
| March 31, 2021 |
| March 25, 2020 | |||
Interest rate swap | $ | |
| | $ | |
| ( |
See Note 1, “Basis of Presentation and Summary of Significant Accounting Policies” for information about the fair value of the Company’s derivative asset.
5. OTHER ACCRUED EXPENSES AND CURRENT LIABILITIES
Other accrued expenses and current liabilities consist of the following (in thousands):
| March 31, 2021 |
| December 30, 2020 | |||
Accrued sales and property taxes | $ | | $ | | ||
Gift card liability |
| |
| | ||
Accrued legal settlements and professional fees |
| |
| | ||
Deferred franchise and development fees |
| |
| | ||
Current portion of lease payment deferrals | | | ||||
Current portion of employer social security tax deferral | | — | ||||
Other |
| |
| | ||
Total other accrued expenses and current liabilities | $ | | $ | |
6. OTHER NONCURRENT LIABILITIES
Other noncurrent liabilities consist of the following (in thousands):
| March 31, 2021 |
| December 30, 2020 | |||
Deferred franchise and development fees | $ | | $ | | ||
Derivative liability | | | ||||
Employer social security tax deferral | | | ||||
Other |
| |
| | ||
Total other noncurrent liabilities | $ | | $ | |
7. COMMITMENTS AND CONTINGENCIES
Legal Matters
On or about
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On or about November 5, 2015, a purported Holdings shareholder filed a derivative complaint on behalf of Holdings in the Court of Chancery of the State of Delaware against certain Holdings officers, directors and Trimaran Pollo Partners, L.L.C., under the caption Armen Galustyan v. Sather, et al. (Case No. 11676-VCL). The derivative complaint alleges that these defendants breached their fiduciary duties to Holdings and were unjustly enriched when they sold shares of Holdings at artificially inflated prices due to alleged misrepresentations and omissions regarding EPL’s comparable store sales in the second quarter of 2015. The Holdings shareholder’s requested remedies include an award of compensatory damages to Holdings, as well as a court order to improve corporate governance by putting forward for stockholder vote certain resolutions for amendments to Holdings’ Bylaws or Certificate of Incorporation. The Holdings shareholder voluntarily dismissed the action on October 7, 2020. A second purported Holdings shareholder filed a derivative complaint on or about September 23, 2016, under the caption Diep v. Sather, CA 12760-VCL in the Delaware Court of Chancery. The Diep action is also purportedly brought on behalf of Holdings, names the same defendants and asserts substantially the same claims on substantially the same alleged facts as does Galustyan. Defendants moved to stay or dismiss the Diep action.
On March 17, 2017, the Delaware court granted in part, and denied in part, the motion to stay the Diep action. The court denied defendants’ motion to dismiss the complaint for failure to state a claim. On January 17, 2018, the court entered an order granting the parties’ stipulation staying all proceedings in the Diep action for
Janice P. Handlers-Bryman and Michael D. Bryman v. El Pollo Loco, Inc., Los Angeles Superior Court (Case No. MC026045) (the “Lancaster Lawsuit”) was filed on February 9, 2016. Existing El Pollo Loco franchisees, Janice P. Handlers-Bryman and Michael D. Bryman, as individuals and in their capacities as trustees of the Handlers Bryman Trust (collectively, “Plaintiffs”), filed suit against us alleging, among other things, that we “imposed unreasonable time limitations” on their development of additional restaurant locations in Lancaster, California, and that we thereafter developed company-operated El Pollo Loco restaurants in the “market area” of Plaintiffs’ existing El Pollo Loco restaurant in Lancaster. Plaintiffs asserted claims against us for, among other things, (i) breach of the implied covenant of good faith and fair dealing, (ii) intentional interference with prospective business, and (iii) unfair business practices. In addition to an unspecified amount of damages and costs of the lawsuit, Plaintiffs sought reformation of the contract, declaratory relief, disgorgement of alleged revenues and profits, injunctive relief, and a judicial mandate requiring us to either transfer the company-operated locations to Plaintiffs or to continuously disgorge to Plaintiffs the unjust enrichment allegedly obtained by us through the operation of the company-operated restaurants in Lancaster. We denied Plaintiffs’ allegations as the franchise agreement did not grant Plaintiffs any exclusive territorial rights and, instead, expressly reserved for us the right to open and operate - and the right to grant others the right to open and operate - El
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Pollo Loco restaurants “in the immediate vicinity of or adjacent to” Plaintiffs’ restaurant in Lancaster. On April 24, 2017,
The damages phase of the trial commenced on April 20, 2018. On May 1, 2018, the jury returned a verdict on damages in favor of Plaintiffs in the following amounts: (1) $
On August 27, 2018, the Company filed a notice of appeal as to the entire judgment. As required by California law, on or about August 16, 2018, the Company obtained an appeal bond through a Surety company to secure the trial court’s judgment during the pendency of the appeal.
On March 19, 2020, the Surety, One Beacon, from whom the Company procured the appeal bond to secure the judgment against the Company in the matter of Janice P. Handlers-Bryman and Michael D. Bryman v. El Pollo Loco, Inc., issued a collateral demand to the Company. On April 17, 2020, the Company provided to One Beacon a Letter of Credit in the amount of $
During fiscal 2020, the Company reached an agreement with the Plaintiffs to resolve the lawsuit for a payment by the Company of $
On or about November 9, 2020, a former employee filed a representative action for violation of the Private Attorneys General Act of 2004 (“PAGA”) pursuant to Labor Code sections 2698 et seq. in the Superior Court of the State of California, County of Los Angeles, under the caption Kenneth E. Reising, et al v. El Pollo Loco, Inc., et al (Case No. 20STCV42951) on behalf of all non-exempt employees from June 19, 2020 to the present, alleging certain violations of California labor laws. The claims include failure to pay overtime compensation, failure to provide meal periods and rest breaks, failure to reimburse employees for business expenses, failure to provide suitable seating, and failure to provide accurate itemized wage statements. The requested remedies include statutory penalties and reasonable attorneys’ fees
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and costs.
On or about February 4, 2021, a former employee filed a class action in the Superior Court of the State of California, County of Riverside, under the caption Brandie Crispin, et al v. El Pollo Loco, Inc. et al (Case No. CVRI2100490) on behalf of all putative class members (all non-exempt General Managers from February 4, 2017 to the present) alleging certain violations of California labor laws. The claims include failure to pay overtime compensation, failure to provide meal periods and rest breaks, and failure to provide accurate itemized wage statements. The putative lead plaintiff’s requested remedies include compensatory damages, statutory penalties, injunctive relief, and reasonable attorneys’ fees and costs.
The Company is also involved in various other claims and legal actions that arise in the ordinary course of business. The Company does not believe that the ultimate resolution of these other actions will have a material adverse effect on its financial position, results of operations, liquidity, or capital resources. A significant increase in the number of claims, or an increase in amounts owing under successful claims, could materially and adversely affect its business, consolidated financial condition, results of operations, and cash flows.
Purchasing Commitments
The Company has long-term beverage supply agreements with certain major beverage vendors. Pursuant to the terms of these arrangements, marketing rebates are provided to the Company and its franchisees from the beverage vendors based upon the dollar volume of purchases for system-wide restaurants which will vary according to their demand for beverage syrup and fluctuations in the market rates for beverage syrup. These contracts have terms extending through the end of 2024.
At March 31, 2021, the Company’s total estimated commitment to purchase chicken was $
Contingent Lease Obligations
As a result of assigning the Company’s interest in obligations under real estate leases in connection with the sale of company-operated restaurants to some of the Company’s franchisees, the Company is contingently liable on four lease agreements. These leases have various terms, the latest of which expires in
Employment Agreements
The Company has employment agreements with
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Indemnification Agreements
The Company has entered into indemnification agreements with each of its current directors and officers. These agreements require the Company to indemnify these individuals to the fullest extent permitted under Delaware law against liabilities that may arise by reason of their service to the Company and to advance expenses incurred as a result of any proceeding against them as to which they could be indemnified. The Company also intends to enter into indemnification agreements with future directors and officers.
8. EARNINGS PER SHARE
Basic earnings per share (“EPS”) is calculated using the weighted-average number of shares of common stock outstanding during the thirteen weeks ended March 31, 2021 and March 25, 2020. Diluted EPS is calculated using the weighted-average number of shares of common stock outstanding and potentially dilutive during the period, using the treasury stock method.
Below are basic and diluted EPS data for the periods indicated (in thousands except for share and per share data):
Thirteen Weeks Ended | |||||||
March 31, 2021 |
| March 25, 2020 |
| ||||
Numerator: |
|
|
|
| |||
Net income | $ | | $ | | |||
Denominator: |
|
|
|
| |||
Weighted-average shares outstanding—basic |
| |
| | |||
Weighted-average shares outstanding—diluted |
| |
| | |||
Net income per share—basic | $ | | $ | | |||
Net income per share—diluted | $ | | $ | | |||
Anti-dilutive securities not considered in diluted EPS calculation |
| — |
| |
Below is a reconciliation of basic and diluted share counts:
| Thirteen Weeks Ended |
| |||
March 31, 2021 | March 25, 2020 | ||||
Weighted-average shares outstanding—basic |
| |
| |
|
Dilutive effect of stock options and restricted shares |
| |
| |
|
Weighted-average shares outstanding—diluted |
| |
| |
|