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Table of Contents

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 30, 2021

or

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

For the transition period from                      to                     

Commission File Number: 001-36556

EL POLLO LOCO HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware

20-3563182

(State or other jurisdiction of incorporation or organization)

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

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

92626

(Address of principal executive offices)

(Zip Code)

(714) 599-5000

(Registrant’s telephone number, including area code)

N/A

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

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

Accelerated Filer

Non-accelerated Filer

Smaller Reporting Company

Emerging Growth Company

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

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

As of July 30, 2021, there were 36,637,761 shares of the issuer’s common stock outstanding.

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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 30,

    

December 30,

    

2021

    

2020

Assets

  

Current assets:

  

  

Cash and cash equivalents

$

12,624

$

13,219

Accounts and other receivables, net

 

10,470

 

9,963

Inventories

 

2,027

 

2,100

Prepaid expenses and other current assets

 

3,308

 

3,865

Income tax receivable

 

507

 

2,522

Assets held for sale

3,772

-

Total current assets

 

32,708

 

31,669

Property and equipment, net

 

74,215

 

79,642

Property and equipment held under finance lease, net

 

1,797

 

1,661

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

 

175,020

 

177,129

Goodwill

 

248,674

 

248,674

Trademarks

 

61,888

 

61,888

Deferred tax assets

 

3,047

 

3,166

Other assets

 

1,578

 

1,392

Total assets

$

598,927

$

605,221

Liabilities and Stockholders’ Equity

 

  

 

  

Current liabilities:

 

  

 

  

Current portion of obligations under finance leases

$

147

$

70

Current portion of obligations under operating leases

 

19,572

 

19,907

Accounts payable

 

6,119

 

7,472

Accrued salaries and vacation

 

10,446

 

10,166

Accrued insurance

 

10,777

 

10,416

Accrued interest

 

85

 

89

Current portion of income tax receivable agreement payable

 

1,597

 

1,577

Other accrued expenses and current liabilities

 

24,655

 

16,715

Total current liabilities

 

73,398

 

66,412

Revolver loan

 

40,000

 

62,800

Obligations under finance leases, net of current portion

 

1,780

 

1,692

Obligations under operating leases, net of current portion

 

175,192

 

178,658

Deferred taxes

 

6,073

 

5,227

Income tax receivable agreement payable, net of current portion

 

1,492

 

1,562

Other noncurrent liabilities

 

8,606

 

11,292

Total liabilities

 

306,541

 

327,643

Commitments and contingencies (Note 7)

 

  

 

  

Stockholders’ Equity

 

  

 

  

Preferred stock, $0.01 par value, 100,000,000 shares authorized; none issued or outstanding

 

 

Common stock, $0.01 par value, 200,000,000 shares authorized; 36,637,761 and 36,423,505 shares issued and outstanding as of June 30, 2021 and December 30, 2020, respectively

 

367

 

364

Additional paid-in-capital

 

341,358

 

339,561

Accumulated deficit

 

(48,732)

 

(61,514)

Accumulated other comprehensive loss

 

(607)

 

(833)

Total stockholders’ equity

 

292,386

 

277,578

Total liabilities and stockholders’ equity

$

598,927

$

605,221

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 30, 2021

June 24, 2020

June 30, 2021

June 24, 2020

Revenue

 

  

 

  

 

  

 

  

 

Company-operated restaurant revenue

$

106,970

$

87,707

$

201,131

$

180,341

Franchise revenue

 

8,389

 

6,719

 

16,001

 

13,781

Franchise advertising fee revenue

 

6,626

 

5,178

 

12,574

 

10,645

Total revenue

 

121,985

 

99,604

 

229,706

 

204,767

Cost of operations

 

  

 

  

 

  

 

  

Food and paper cost

 

27,882

 

22,873

 

52,273

 

48,435

Labor and related expenses

 

31,526

 

25,759

 

62,258

 

54,452

Occupancy and other operating expenses

 

25,336

 

21,922

 

49,180

 

44,031

Company restaurant expenses

 

84,744

 

70,554

 

163,711

 

146,918

General and administrative expenses

 

10,523

 

10,465

 

20,997

 

19,796

Franchise expenses

 

8,161

 

6,627

 

15,912

 

13,538

Depreciation and amortization

 

3,917

 

4,168

 

7,855

 

8,537

Loss on disposal of assets

 

85

 

27

 

111

 

127

Recovery of securities lawsuits related legal expenses and other insurance claims

 

 

(123)

 

 

(123)

Loss on assets held for sale

1,524

1,524

Impairment and closed-store reserves

 

360

 

437

 

924

 

2,839

Total expenses

 

109,314

 

92,155

 

211,034

 

191,632

Income from operations

 

12,671

 

7,449

 

18,672

 

13,135

Interest expense, net

 

433

 

908

 

950

 

1,813

Income tax receivable agreement expense (income)

 

27

 

290

 

(50)

 

170

Income before provision for income taxes

 

12,211

 

6,251

 

17,772

 

11,152

Provision for income taxes

 

3,393

 

752

 

4,990

 

2,053

Net income

$

8,818

$

5,499

$

12,782

$

9,099

Net income per share

 

  

 

  

 

  

 

  

Basic

$

0.25

$

0.16

$

0.36

$

0.26

Diluted

$

0.24

$

0.16

$

0.35

$

0.26

Weighted-average shares used in computing net income per share

 

  

 

  

 

  

 

  

Basic

 

35,927,781

 

34,836,410

 

35,861,493

 

34,747,785

Diluted

 

36,416,686

 

35,410,198

 

36,423,394

 

35,382,607

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)

    

Thirteen Weeks Ended

    

Twenty-Six Weeks Ended

    

June 30, 2021

June 24, 2020

June 30, 2021

    

June 24, 2020

Net income

$

8,818

$

5,499

$

12,782

$

9,099

Other comprehensive income (loss)

 

  

 

  

 

 

Changes in derivative instruments

 

  

 

  

 

 

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

 

(2)

 

(296)

 

76

 

(1,755)

Reclassifications of losses into net income

 

119

 

81

 

234

 

42

Income tax (expense) benefit

 

(32)

 

58

 

(84)

 

461

Other comprehensive income (loss), net of taxes

 

85

 

(157)

226

 

(1,252)

Comprehensive income

$

8,903

$

5,342

$

13,008

$

7,847

See notes to condensed consolidated financial statements (unaudited).

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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 30, 2021

    

    

    

    

    

Accumulated

    

  

    

    

    

Additional

    

    

Other

    

Total

Common Stock

Paid-in

Accumulated

Comprehensive

Stockholders’

    

Shares

    

Amount

    

Capital

    

Deficit

    

(Loss) Income

    

Equity

Balance, March 31, 2021

36,478,683

$

365

$

340,739

$

(57,550)

$

(692)

$

282,862

Stock-based compensation

 

 

1,041

 

 

 

1,041

Issuance of common stock related to restricted stock

206,098

2

(2)

Issuance of common stock upon exercise of stock options

30,125

240

240

Shares repurchased for employee tax withholdings

(37,938)

(660)

(660)

Forfeiture of common stock related to restricted shares

(39,207)

 

 

 

 

 

Other comprehensive (loss) income, net of tax

 

 

 

 

85

 

85

Net income

 

 

 

8,818

 

 

8,818

Balance, June 30, 2021

36,637,761

$

367

$

341,358

$

(48,732)

$

(607)

$

292,386

Thirteen Weeks Ended June 24, 2020

    

    

    

    

    

Accumulated

    

  

    

    

    

Additional

    

    

Other

    

Total

Common Stock

Paid-in

Accumulated

Comprehensive

Stockholders’

    

Shares

    

Amount

    

Capital

    

Deficit

    

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 shares

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) income, 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

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Twenty-Six Weeks Ended June 30, 2021

    

    

    

    

    

Accumulated

    

  

    

    

    

Additional

    

    

Other

    

Total

Common Stock

Paid-in

Accumulated

Comprehensive

Stockholders’

    

Shares

    

Amount

    

Capital

    

Deficit

    

(Loss) Income

    

Equity

Balance, December 30, 2020

36,423,505

$

364

$

339,561

$

(61,514)

$

(833)

$

277,578

Stock-based compensation

 

 

1,894

 

 

 

1,894

Issuance of common stock related to restricted stock

206,098

2

(2)

Issuance of common stock upon exercise of stock options

91,544

1

565

566

Shares repurchased for employee tax withholdings

(37,938)

(660)

(660)

Forfeiture of common stock related to restricted shares

(45,448)

 

 

 

 

 

Other comprehensive (loss) income, net of tax

 

 

 

 

226

 

226

Net income

 

 

 

12,782

 

 

12,782

Balance, June 30, 2021

36,637,761

$

367

$

341,358

$

(48,732)

$

(607)

$

292,386

Twenty-Six Weeks Ended June 24, 2020

    

    

    

    

    

Accumulated

    

  

    

    

    

Additional

    

    

Other

    

Total

Common Stock

Paid-in

Accumulated

Comprehensive

Stockholders’

    

Shares

    

Amount

    

Capital

    

Deficit

    

(Loss) Income

    

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 shares

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) income, 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

See notes to condensed consolidated financial statements (unaudited)

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EL POLLO LOCO HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Amounts in thousands)

    

Twenty-Six Weeks Ended

    

    

June 30, 2021

June 24, 2020

    

Cash flows from operating activities:

  

  

Net income

$

12,782

$

9,099

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

 

 

Depreciation and amortization

 

7,855

 

8,537

Stock-based compensation expense

 

1,894

 

1,261

Income tax receivable agreement expense (income)

 

(50)

 

170

Loss on assets held for sale

1,524

Loss on disposal of assets

 

111

 

127

Impairment of property and equipment

 

666

 

1,972

Amortization of deferred financing costs

 

126

 

126

Deferred income taxes, net

 

881

 

(363)

Changes in operating assets and liabilities:

 

 

Accounts and other receivables

 

(507)

 

(7,610)

Inventories

 

73

 

55

Prepaid expenses and other current assets

 

558

 

3,021

Income taxes receivable/payable

 

2,014

 

Other assets

 

(312)

 

339

Accounts payable

 

(557)

 

3,610

Accrued salaries and vacation

 

279

 

(2,342)

Accrued insurance

 

362

 

698

Payment related to tax receivable agreement

 

 

2,069

Other accrued expenses and liabilities

 

(1,075)

 

(9,687)

Net cash flows provided by operating activities

 

26,624

 

11,082

Cash flows from investing activities:

 

Proceeds from deposit for disposition of restaurants

 

4,556

 

Purchase of property and equipment

 

(8,828)

 

(2,479)

Net cash flows used in investing activities

 

(4,272)

 

(2,479)

Cash flows from financing activities:

 

  

 

  

Proceeds from borrowings on revolver and swingline loans

 

 

52,500

Payments on revolver and swingline loan

 

(22,800)

 

(10,700)

Minimum tax withholdings related to net share settlements

 

(660)

 

(280)

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

566

2,165

Payment of obligations under finance leases

 

(53)

 

(16)

Net cash flows (used in) provided by financing activities

 

(22,947)

 

43,669

Increase (decrease) in cash and cash equivalents

 

(595)

 

52,272

Cash and cash equivalents, beginning of period

 

13,219

 

8,070

Cash and cash equivalents, end of period

$

12,624

$

60,342

    

Twenty-Six Weeks Ended

    

June 30, 2021

June 24, 2020

Supplemental cash flow information

 

  

 

  

 

Cash paid during the period for interest

$

598

$

1,738

Cash paid during the period for income taxes

$

2,094

$

434

Unpaid purchases of property and equipment

$

1,038

$

846

See notes to 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 30, 2021, the Company operated 198 and franchised 282 El Pollo Loco restaurants.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments consisting of normal recurring adjustments necessary for a fair statement of the Company’s 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 20% of the Company’s sales are associated with dine-in service. Some state and local governments continue to periodically implement certain restrictions to try and contain the spread of the virus. As of June 30, 2021, nearly all of the Company’s restaurants have dining rooms open at full capacity and continue to maintain take-away, mobile pick-up, delivery, and drive-thru operations where available.

During the thirteen and twenty-six weeks ended June 30, 2021, the Company temporarily closed 5 and 45 restaurants, respectively, of which all have reopened as of June 30, 2021. Similarly, during both thirteen and twenty-six weeks ended June 30, 2021, certain of the Company’s franchisees temporarily closed 27 restaurants, all of which have reopened as of June 30, 2021. For both franchise-operated and company-operated restaurants, this represents total temporary closures and may include more than one closure for the same restaurant. These closures typically lasted from one to three days. As of June 30, 2021, the Company had not permanently closed any restaurants due to the COVID-19 pandemic.

During the thirteen and twenty-six weeks ended June 30, 2021, the Company incurred $0.2 million and $3.0 million, respectively, in COVID-19 related expenses, primarily due to leaves of absence and overtime pay. During both thirteen and twenty-six weeks ended June 24, 2020, the Company incurred $1.1 million in COVID-19 related expenses, primarily due to leaves of absence and overtime pay.

Subsequent Events

Subsequent to June 30, 2021, the Company completed the sale of eight restaurants in the Sacramento area to an existing franchisee. See "Assets Held For Sale" below for further details related to the accounting impact as of and for the thirteen and twenty-six weeks ended June 30, 2021.

As of August 5, 2021, all company-operated and franchise locations remained open.

The Company has evaluated subsequent events that have occurred after June 30, 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 June 30, 2021, the Company’s total debt was $40.0 million. The Company’s ability to make payments on its indebtedness and to fund planned capital expenditures depends on available cash and its ability to generate adequate cash flows in the future, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory, and other factors that are beyond the Company’s control. Based on current operations, the Company believes that its cash flow from operations and available cash of $12.6 million at June 30, 2021 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.

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Assets Held For Sale

During the thirteen and twenty-six weeks ended June 30, 2021, the Company agreed in principle to sell eight restaurants within the Sacramento area to an existing franchisee. Assets are classified as held for sale if they meet the criteria outlined in Accounting Standards Codification (“ASC”) 360, Property, Plant and Equipment. In accordance with applicable accounting guidance, the net assets of the eight restaurants were recorded at the lower of carrying value or fair value less costs to sell. The Company classified $3.8 million of assets as held for sale, consisting of leasehold improvements and other property equipment, as of June 30, 2021, and recognized a loss on held for sale assets of $1.5 million for the thirteen and twenty-six weeks ended June 30, 2021. Prior to June 30, 2021, we received $4.6 million of cash primarily representing the purchase price of the transaction. The funds were recorded within our cash and cash equivalents and other accrued expenses and current liabilities within our condensed consolidated balance sheet.

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 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 no suppliers to whom amounts due totaled greater than 10% of the Company’s accounts payable at June 30, 2021. At December 30, 2020, the Company had two suppliers to whom amounts due totaled 24.2% and 11.4% of the Company’s accounts payable. Purchases from the Company’s largest supplier totaled 26.2% and 26.6% of total expenses for the thirteen and twenty-six weeks ended June 30, 2021, respectively, and 26.4% and 27.0% of total expenses for the thirteen and twenty-six weeks ended June 24, 2020, respectively.

Company-operated and franchised restaurants in the greater Los Angeles area generated, in the aggregate, approximately 70.6% and 70.4% of total revenue for the thirteen and twenty-six weeks ended June 30, 2021, respectively, and 71.1% and 71.7% twenty-six weeks ended June 24, 2020, respectively.

Goodwill and Indefinite Lived Intangible Assets

The Company’s indefinite-lived intangible assets consist of trademarks. Goodwill represents the excess of cost over fair value of net identified assets acquired in business combinations accounted for under the purchase method. The Company

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does not amortize its goodwill and indefinite-lived intangible assets. Goodwill resulted from the acquisition of certain franchise locations.

Upon the sale or closure of a restaurant, the Company evaluates whether there is a decrement of goodwill. The amount of goodwill included in the cost basis of the asset sold is determined based on the relative fair value of the portion of the reporting unit disposed of compared to the fair value of the reporting unit retained.

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

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

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

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

The Company determined that there were no indicators of potential impairment of its goodwill and indefinite-lived intangible assets during the thirteen and twenty-six weeks ended June 30, 2021. 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 30, 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

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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 June 30, 2021 (in thousands):

Fair Value Measurements Using

    

Fair Value

    

Level 1

    

Level 2

    

Level 3

    

Other non-current liabilities - Interest rate swap

$

830

$

$

830

$

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

    

Other non-current liabilities - Interest rate swap

$

1,139

$

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