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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 September 29, 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 October 29, 2021, there were 36,560,966 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)

    

September 29,

    

December 30,

    

2021

    

2020

Assets

  

Current assets:

  

  

Cash and cash equivalents

$

24,669

$

13,219

Accounts and other receivables, net

 

11,510

 

9,963

Inventories

 

2,127

 

2,100

Prepaid expenses and other current assets

 

3,041

 

3,865

Income tax receivable

 

 

2,522

Total current assets

 

41,347

 

31,669

Property and equipment, net

 

74,836

 

79,642

Property and equipment held under finance lease, net

 

1,666

 

1,661

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

 

172,823

 

177,129

Goodwill

 

248,674

 

248,674

Trademarks

 

61,888

 

61,888

Deferred tax assets

 

2,136

 

3,166

Other assets

 

915

 

1,392

Total assets

$

604,285

$

605,221

Liabilities and Stockholders’ Equity

 

  

 

  

Current liabilities:

 

  

 

  

Current portion of obligations under finance leases

$

149

$

70

Current portion of obligations under operating leases

 

19,718

 

19,907

Accounts payable

 

7,391

 

7,472

Accrued salaries and vacation

 

8,050

 

10,166

Accrued insurance

 

11,031

 

10,416

Accrued income taxes payable

 

1,094

 

-

Accrued interest

 

90

 

89

Current portion of income tax receivable agreement payable

 

1,638

 

1,577

Other accrued expenses and current liabilities

 

20,546

 

16,715

Total current liabilities

 

69,707

 

66,412

Revolver loan

 

40,000

 

62,800

Obligations under finance leases, net of current portion

 

1,742

 

1,692

Obligations under operating leases, net of current portion

 

172,797

 

178,658

Deferred taxes

 

6,334

 

5,227

Income tax receivable agreement payable, net of current portion

 

1,432

 

1,562

Other noncurrent liabilities

 

8,355

 

11,292

Total liabilities

 

300,367

 

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; 36,671,447 and 36,423,505 shares issued and outstanding as of September 29, 2021 and December 30, 2020, respectively

 

366

 

364

Additional paid-in-capital

 

342,656

 

339,561

Accumulated deficit

 

(38,571)

 

(61,514)

Accumulated other comprehensive loss

 

(533)

 

(833)

Total stockholders’ equity

 

303,918

 

277,578

Total liabilities and stockholders’ equity

$

604,285

$

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

    

Thirty-Nine Weeks Ended

    

September 29, 2021

September 23, 2020

September 29, 2021

September 23, 2020

Revenue

 

  

 

  

 

  

 

  

 

Company-operated restaurant revenue

$

99,986

$

97,276

$

301,117

$

277,617

Franchise revenue

 

8,918

 

7,781

 

24,919

 

21,562

Franchise advertising fee revenue

 

6,796

 

5,922

 

19,370

 

16,567

Total revenue

 

115,700

 

110,979

 

345,406

 

315,746

Cost of operations

 

  

 

  

 

  

 

  

Food and paper cost

 

26,698

 

24,922

 

78,971

 

73,357

Labor and related expenses

 

27,802

 

28,756

 

90,060

 

83,208

Occupancy and other operating expenses

 

25,108

 

23,836

 

74,288

 

67,867

Gain on recovery of insurance proceeds, lost profits

(2,000)

(2,000)

Company restaurant expenses

 

79,608

 

75,514

 

243,319

 

222,432

General and administrative expenses

 

9,357

 

9,803

 

30,354

 

29,599

Franchise expenses

 

8,545

 

7,572

 

24,457

 

21,110

Depreciation and amortization

 

3,685

 

4,092

 

11,540

 

12,629

Loss on disposal of assets

 

83

 

29

 

194

 

156

Recovery of securities lawsuits related legal expenses and other insurance claims

 

 

 

 

(123)

Loss on disposition of restaurants

10

1,534

Impairment and closed-store reserves

 

167

 

1,776

 

1,091

 

4,615

Total expenses

 

101,455

 

98,786

 

312,489

 

290,418

Income from operations

 

14,245

 

12,193

 

32,917

 

25,328

Interest expense, net

 

449

 

770

 

1,399

 

2,583

Income tax receivable agreement expense (income)

 

(19)

 

(144)

 

(69)

 

26

Income before provision for income taxes

 

13,815

 

11,567

 

31,587

 

22,719

Provision for income taxes

 

3,654

 

1,647

 

8,644

 

3,700

Net income

$

10,161

$

9,920

$

22,943

$

19,019

Net income per share

 

  

 

  

 

Basic

$

0.28

$

0.28

$

0.64

$

0.54

Diluted

$

0.28

$

0.28

$

0.63

$

0.53

Weighted-average shares used in computing net income per share

 

  

 

  

 

  

 

  

Basic

 

36,067,754

 

35,471,452

 

35,930,246

 

34,989,007

Diluted

 

36,525,424

 

36,064,559

 

36,457,110

 

35,609,320

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

    

Thirty-Nine Weeks Ended

    

September 29, 2021

September 23, 2020

September 29, 2021

    

September 23, 2020

Net income

$

10,161

$

9,920

$

22,943

$

19,019

Other comprehensive income (loss)

 

  

 

  

 

 

Changes in derivative instruments

 

  

 

  

 

 

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

 

(32)

 

(36)

 

44

 

(1,791)

Reclassifications of losses into net income

 

133

 

114

 

367

 

156

Income tax (expense) benefit

 

(27)

 

(20)

 

(111)

 

441

Other comprehensive income (loss), net of taxes

 

74

 

58

300

 

(1,194)

Comprehensive income

$

10,235

$

9,978

$

23,243

$

17,825

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 September 29, 2021

    

    

    

    

    

Accumulated

    

  

    

    

    

Additional

    

    

Other

    

Total

Common Stock

Paid-in

Accumulated

Comprehensive

Stockholders’

    

Shares

    

Amount

    

Capital

    

Deficit

    

(Loss) Income

    

Equity

Balance, June 30, 2021

36,637,761

$

367

$

341,358

$

(48,732)

$

(607)

$

292,386

Stock-based compensation

 

 

1,042

 

 

 

1,042

Issuance of common stock upon exercise of stock options

41,216

300

300

Shares repurchased for employee tax withholdings

(2,446)

(45)

(45)

Forfeiture of common stock related to restricted shares

(5,084)

 

(1)

 

1

 

 

 

Other comprehensive income, net of tax

 

 

 

 

74

 

74

Net income

 

 

 

10,161

 

 

10,161

Balance, September 29, 2021

36,671,447

$

366

$

342,656

$

(38,571)

$

(533)

$

303,918

Thirteen Weeks Ended September 23, 2020

    

    

    

    

    

Accumulated

    

  

    

    

    

Additional

    

    

Other

    

Total

Common Stock

Paid-in

Accumulated

Comprehensive

Stockholders’

    

Shares

    

Amount

    

Capital

    

Deficit

    

Loss

    

Equity

Balance, June 24, 2020

35,854,122

$

359

$

334,088

$

(76,889)

$

(999)

256,559

Stock-based compensation

 

 

909

 

 

 

909

Issuance of common stock related to restricted shares

2,798

 

 

 

 

 

Issuance of common stock upon exercise of stock options

593,180

 

6

 

3,675

 

 

 

3,681

Shares repurchased for employee tax withholdings

(2,925)

 

 

(51)

 

 

 

(51)

Forfeiture of common stock related to restricted shares

(5,806)

(1)

1

Other comprehensive income, net of tax

58

58

Net income

 

 

 

9,920

 

 

9,920

Balance, September 23, 2020

36,441,369

$

364

$

338,622

$

(66,969)

$

(941)

$

271,076

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Thirty-Nine Weeks Ended September 29, 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

 

 

2,936

 

 

 

2,936

Issuance of common stock related to restricted shares

206,098

2

(2)

Issuance of common stock upon exercise of stock options

132,760

1

865

866

Shares repurchased for employee tax withholdings

(40,384)

(705)

(705)

Forfeiture of common stock related to restricted shares

(50,532)

 

(1)

 

1

 

 

 

Other comprehensive income, net of tax

 

 

 

 

300

 

300

Net income

 

 

 

22,943

 

 

22,943

Balance, September 29, 2021

36,671,447

$

366

$

342,656

$

(38,571)

$

(533)

$

303,918

Thirty-Nine Weeks Ended September 23, 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

 

 

2,170

 

 

 

2,170

Issuance of common stock related to restricted shares

439,061

 

4

 

(4)

 

 

 

Issuance of common stock upon exercise of stock options

965,736

 

10

 

5,836

 

 

 

5,846

Shares repurchased for employee tax withholdings

(23,118)

 

 

(331)

 

 

 

(331)

Forfeiture of common stock related to restricted shares

(66,892)

(1)

1

Other comprehensive income, net of tax

(1,194)

(1,194)

Net income

 

 

 

19,019

 

 

19,019

Balance, September 23, 2020

36,441,369

$

364

$

338,622

$

(66,969)

$

(941)

$

271,076

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)

    

Thirty-Nine Weeks Ended

    

    

September 29, 2021

September 23, 2020

    

Cash flows from operating activities:

  

  

Net income

$

22,943

$

19,019

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

 

 

Depreciation and amortization

 

11,540

 

12,629

Bad debt expense

190

Stock-based compensation expense

 

2,936

 

2,170

Income tax receivable agreement (income) expense

 

(69)

 

26

Loss on disposition of restaurants

1,534

Loss on disposal of assets

 

194

 

156

Impairment of property and equipment

 

701

 

3,478

Amortization of deferred financing costs

 

188

 

189

Deferred income taxes, net

 

2,026

 

(110)

Changes in operating assets and liabilities:

 

 

Accounts and other receivables

 

(1,547)

 

(2,527)

Inventories

 

(27)

 

72

Prepaid expenses and other current assets

 

825

 

3,163

Income taxes payable

 

3,616

 

2,264

Other assets

 

289

 

159

Accounts payable

 

(507)

 

476

Accrued salaries and vacation

 

(2,116)

 

1,311

Accrued insurance

 

615

 

816

Other accrued expenses and liabilities

 

(809)

 

(9,962)

Net cash flows provided by operating activities

 

42,332

 

33,519

Cash flows from investing activities:

 

Proceeds from disposition of restaurants

 

4,556

 

Purchase of property and equipment

 

(12,699)

 

(4,349)

Net cash flows used in investing activities

 

(8,143)

 

(4,349)

Cash flows from financing activities:

 

  

 

  

Proceeds from borrowings on revolver and swingline loans

 

 

52,500

Payments on revolver and swingline loan

 

(22,800)

 

(65,700)

Minimum tax withholdings related to net share settlements

 

(705)

 

(331)

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

866

5,846

Payment of obligations under finance leases

 

(100)

 

(26)

Net cash flows used in financing activities

 

(22,739)

 

(7,711)

Increase in cash and cash equivalents

 

11,450

 

21,459

Cash and cash equivalents, beginning of period

 

13,219

 

8,070

Cash and cash equivalents, end of period

$

24,669

$

29,529

    

Thirty-Nine Weeks Ended

    

September 29, 2021

September 23, 2020

Supplemental cash flow information

 

  

 

  

 

Cash paid during the period for interest

$

828

$

2,381

Cash paid during the period for income taxes

$

4,088

$

1,632

Unpaid purchases of property and equipment

$

2,259

$

881

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 September 29, 2021, the Company operated 190 and franchised 290 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

During the COVID-19 pandemic, the Company has experienced periods of significant disruption to its restaurant operations. Following the pandemic declaration in March 2020, federal, state and local governments have periodically responded to the public health crisis by requiring social distancing, issuing “stay at home” directives, and implementing restaurant restrictions - including government-mandated dining room closures - that limited business to off-premise services only (take-out, drive-thru and delivery). Many state and local governments continue to periodically implement certain restrictions to try and contain the spread of the virus. As of September 29, 2021, 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. The Company continues to experience staffing challenges which resulted in reduced operating hours and service channels. Further, there have been inflationary pressures due to supply chain disruptions that impacted the Company’s business and results of operations during the thirteen and thirty-nine weeks ended September 29, 2021.

During the thirteen and thirty-nine weeks ended September 29, 2021, the Company incurred $0.5 million and $3.5 million, respectively, in COVID-19 related expenses, primarily due to leaves of absence and overtime pay. During the thirteen and thirty-nine weeks ended September 23, 2020, the Company incurred $0.9 million and $2.0 million, respectively, in COVID-19 related expenses, primarily due to leaves of absence and overtime pay.

Subsequent Events

Bernard Acoca, the Company’s Chief Executive Officer and President, resigned from his position as Chief Executive Officer and President and as a member of the Board of Directors of the Company (the “Board”), effective as of October 15, 2021. In connection with Mr. Acoca’s resignation, the Board appointed Laurance Roberts as interim Chief Executive Officer of the Company (“Interim CEO”), effective as of October 15, 2021. Mr. Roberts currently also serves as Chief Financial Officer of the Company and will continue in that role during his tenure as Interim CEO.

The Company has evaluated subsequent events that have occurred after September 29, 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 its debt, lease obligations and working capital and general corporate needs. At September 29, 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 $24.7 million at September 29, 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.

Loss on Disposition of Restaurants

On July 1, 2021 the Company completed the sale of eight restaurants within the Sacramento area to an existing franchisee. The Company has 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 standalone selling price. Cash proceeds included upfront consideration for the sale of the restaurants and franchise fees, as well as

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future cash consideration for royalties. The cash consideration per restaurant related to 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.

This sale resulted in cash proceeds of $4.6 million and a net loss on sale of restaurants of less than $0.1 million and $1.5 million for the thirteen and thirty-nine weeks ended September 29, 2021, respectively. These restaurants are now included in the total number of franchised El Pollo Loco restaurants.

Recently Adopted Accounting Pronouncements

In July 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2021-05, “Leases (Topic 842): Lessors – Certain Leases with Variable Lease Payments” which no longer requires a lessor to recognize a selling loss upon commencement of a lease with variable lease payments that prior to the amendment would have been classified as a sales-type or direct financing lease. The Company adopted this ASU during the third quarter of 2021. The adoption of ASU 2021-05 did not have a significant impact on the Company’s consolidated financial position or results of operations.

In January 2021, the FASB issued 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 September 29, 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 27.0% and 28.1% of total expenses for the thirteen and thirty-nine weeks ended September 29, 2021, respectively, and 26.7% and 26.8% of total expenses for the thirteen and thirty-nine weeks ended September 23, 2020, respectively.

Company-operated and franchised restaurants in the greater Los Angeles area generated, in the aggregate, approximately 71.6% and 70.8% of total revenue for the thirteen and thirty-nine weeks ended September 29, 2021, respectively, and 71.2% and 71.5% for the thirteen and thirty-nine weeks ended September 23, 2020, respectively.

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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 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 thirty-nine weeks ended September 29, 2021. Accordingly, the Company did not record any impairment to its goodwill or indefinite-lived intangible assets during the thirteen and thirty-nine weeks ended September 29, 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 September 29, 2021 (in thousands):

Fair Value Measurements Using

    

Fair Value

    

Level 1

    

Level 2

    

Level 3

    

Other non-current liabilities - Interest rate swap

$

729

$

$

729

$

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

$

$

1,139

$

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 thirty-nine weeks ended September 29, 2021, reflecting certain property and equipment assets and right-of-use (“ROU”) assets for which certain assets were classified as held for sale, and an impairment loss was recognized during the corresponding periods, as discussed under Note 2, “Property and Equipment” and immediately below under “Impairment of Long-Lived Assets and ROU Assets” (in thousands):