SEC Filing | El Pollo Loco Holdings, Inc.

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)


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

For the quarterly period ended June 29, 2022


☐	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 29, 2022, there were 37,002,513 shares of the issuer’s common stock outstanding.

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Table of Contents		Page

PART I—FINANCIAL INFORMATION		3
Item 1. Financial Statements.		3
Condensed Consolidated Balance Sheets (Unaudited)		3
Condensed Consolidated Statements of Income (Unaudited)		4
Condensed Consolidated Statements of Comprehensive Income (Unaudited)		5
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)		6
Condensed Consolidated Statements of Cash Flows (Unaudited)		8
Notes to Condensed Consolidated Financial Statements (Unaudited)		9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.		28
Item 3. Quantitative and Qualitative Disclosures About Market Risk.		44
Item 4. Controls and Procedures.		45

PART II—OTHER INFORMATION		46
Item 1. Legal Proceedings.		46
Item 1A. Risk Factors.		46
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.		46
Item 3. Defaults Upon Senior Securities.		46
Item 4. Mine Safety Disclosures.		46
Item 5. Other Information.		46
Item 6. Exhibits.		47
Signatures		49

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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 29,		December 29,
	2022		2021
Assets
Current assets:
Cash and cash equivalents	$	34,311	$	30,046
Accounts and other receivables, net		13,999		13,407
Inventories		2,250		2,318
Prepaid expenses and other current assets		3,470		3,732
Income tax receivable		1,428		—
Total current assets		55,458		49,503
Property and equipment, net		76,073		75,668
Property and equipment held under finance lease, net		1,598		1,635
Property and equipment held under operating leases, net ("ROU asset")		170,816		171,981
Goodwill		248,674		248,674
Trademarks		61,888		61,888
Deferred tax assets		2,017		2,245
Other assets		2,879		2,192
Total assets	$	619,403	$	613,786
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of obligations under finance leases	$	109	$	143
Current portion of obligations under operating leases		20,154		19,959
Accounts payable		9,288		10,626
Accrued salaries and vacation		9,648		11,539
Accrued insurance		11,474		11,193
Accrued income taxes payable		—		889
Current portion of income tax receivable agreement payable		440		437
Other accrued expenses and current liabilities		19,020		19,796
Total current liabilities		70,133		74,582
Revolver loan		40,000		40,000
Obligations under finance leases, net of current portion		1,681		1,712
Obligations under operating leases, net of current portion		170,354		171,651
Deferred taxes		6,712		5,464
Income tax receivable agreement payable, net of current portion		782		1,101
Other noncurrent liabilities		5,898		8,653
Total liabilities		295,560		303,163
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; 37,002,513 and 36,601,648 shares issued and outstanding as June 29, 2022 and December 29, 2021, respectively		369		365
Additional paid-in-capital		346,095		342,941
Accumulated deficit		(23,137)		(32,393)
Accumulated other comprehensive income (loss)		516		(290)
Total stockholders’ equity		323,843		310,623
Total liabilities and stockholders’ equity	$	619,403	$	613,786

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 29, 2022		June 30, 2021		June 29, 2022		June 30, 2021
Revenue
Company-operated restaurant revenue	$	106,454	$	106,970	$	200,411	$	201,131
Franchise revenue		10,064		8,389		19,319		16,001
Franchise advertising fee revenue		7,593		6,626		14,429		12,574
Total revenue		124,111		121,985		234,159		229,706
Cost of operations
Food and paper cost		31,691		27,882		59,423		52,273
Labor and related expenses		33,015		31,526		65,687		62,258
Occupancy and other operating expenses		25,832		25,336		49,677		49,180
Company restaurant expenses		90,538		84,744		174,787		163,711
General and administrative expenses		9,679		10,523		19,633		20,997
Franchise expenses		9,557		8,161		18,288		15,912
Depreciation and amortization		3,618		3,917		7,215		7,855
Loss on disposal of assets		42		85		108		111
Loss on assets held for sale		—		1,524		—		1,524
Impairment and closed-store reserves		248		360		379		924
Total expenses		113,682		109,314		220,410		211,034
Income from operations		10,429		12,671		13,749		18,672
Interest expense, net		419		433		849		950
Income tax receivable agreement expense (income)		(186)		27		(316)		(50)
Income before provision for income taxes		10,196		12,211		13,216		17,772
Provision for income taxes		3,055		3,393		3,960		4,990
Net income	$	7,141	$	8,818	$	9,256	$	12,782
Net income per share
Basic	$	0.20	$	0.25	$	0.26	$	0.36
Diluted	$	0.20	$	0.24	$	0.25	$	0.35
Weighted-average shares used in computing net income per share
Basic		36,331,099		35,927,781		36,278,423		35,861,493
Diluted		36,473,960		36,416,686		36,478,808		36,423,394

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 29, 2022		June 30, 2021		June 29, 2022		June 30, 2021
Net income	$	7,141	$	8,818	$	9,256	$	12,782
Other comprehensive income (loss)
Changes in derivative instruments
Unrealized net gains arising during the period from interest rate swap		347		(2)		931		76
Reclassifications of losses into net income		55		119		172		234
Income tax expense		(108)		(32)		(297)		(84)
Other comprehensive income, net of taxes		294		85		806		226
Comprehensive income	$	7,435	$	8,903	$	10,062	$	13,008

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)


	Thirteen Weeks Ended June 29, 2022
								Accumulated
				Additional				Other		Total
	Common Stock			Paid-in		Accumulated		Comprehensive		Stockholders’
	Shares	Amount		Capital		Deficit		Income		Equity
Balance, March 30, 2022	36,743,496	$	366	$	345,296	$	(30,278)	$	222	$	315,606
Stock-based compensation	—		—		970		—		—		970
Issuance of common stock related to restricted shares	298,638		3		(3)		—		—		—
Issuance of common stock upon exercise of stock options	8,627		—		50		—		—		50
Shares repurchased for employee tax withholdings	(20,317)		—		(218)		—		—		(218)
Forfeiture of common stock related to restricted shares	(27,931)		—		—		—		—		—
Other comprehensive income, net of tax	—		—		—		—		294		294
Net income	—		—		—		7,141		—		7,141
Balance, June 29, 2022	37,002,513	$	369	$	346,095	$	(23,137)	$	516	$	323,843

	Thirteen Weeks Ended June 30, 2021
								Accumulated
				Additional				Other		Total
	Common Stock			Paid-in		Accumulated		Comprehensive		Stockholders’
	Shares	Amount		Capital		Deficit		Loss		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 shares	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 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

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	Twenty-Six Weeks Ended June 29, 2022
								Accumulated
				Additional				Other		Total
	Common Stock			Paid-in		Accumulated		Comprehensive		Stockholders’
	Shares	Amount		Capital		Deficit		(Loss) Income		Equity
Balance, December 29, 2021	36,601,648	$	365	$	342,941	$	(32,393)	$	(290)	$	310,623
Stock-based compensation	—		—		1,796		—		—		1,796
Issuance of common stock related to restricted shares	298,638		3		(3)		—		—		—
Issuance of common stock upon exercise of stock options	150,475		1		1,579		—		—		1,580
Shares repurchased for employee tax withholdings	(20,317)		—		(218)		—		—		(218)
Forfeiture of common stock related to restricted shares	(27,931)		—		—		—		—		—
Other comprehensive income, net of tax	—		—		—		—		806		806
Net income	—		—		—		9,256		—		9,256
Balance, June 29, 2022	37,002,513	$	369	$	346,095	$	(23,137)	$	516	$	323,843

	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 shares	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)
Repurchase of common stock	—		—		—		—		—		—
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

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 29, 2022		June 30, 2021
Cash flows from operating activities:
Net income	$	9,256	$	12,782
Adjustments to reconcile net income to net cash flows provided by provided by operating activities:
Depreciation and amortization		7,215		7,855
Stock-based compensation expense		1,796		1,894
Income tax receivable agreement income		(316)		(50)
Loss on assets held for sale		—		1,524
Loss on disposal of assets		108		111
Impairment of property and equipment		253		666
Amortization of deferred financing costs		126		126
Deferred income taxes, net		1,180		881
Changes in operating assets and liabilities:
Accounts and other receivables		(592)		(507)
Inventories		68		73
Prepaid expenses and other current assets		262		558
Income taxes receivable		(2,316)		2,014
Other assets		(812)		(312)
Accounts payable		(454)		(557)
Accrued salaries and vacation		(1,891)		279
Accrued insurance		281		362
Other accrued expenses and liabilities		(2,344)		(1,075)
Net cash flows provided by operating activities		11,820		26,624
Cash flows from investing activities:
Proceeds from disposition of restaurants		—		4,556
Purchase of property and equipment		(8,831)		(8,828)
Net cash flows used in investing activities		(8,831)		(4,272)
Cash flows from financing activities:
Payments on revolver and swingline loan		—		(22,800)
Minimum tax withholdings related to net share settlements		(218)		(660)
Proceeds from issuance of common stock upon exercise of stock options, net of expenses		1,580		566
Payment of obligations under finance leases		(86)		(53)
Net cash flows provided by (used in) financing activities		1,276		(22,947)
Increase (decrease) in cash and cash equivalents		4,265		(595)
Cash and cash equivalents, beginning of period		30,046		13,219
Cash and cash equivalents, end of period	$	34,311	$	12,624



	Twenty-Six Weeks Ended
	June 29, 2022		June 30, 2021
Supplemental cash flow information
Cash paid during the period for interest	$	531	$	598
Cash paid during the period for income taxes	$	5,097	$	2,094
Unpaid purchases of property and equipment	$	1,388	$	1,038

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 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 29, 2022, the Company operated 188 and franchised 293 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 condensed 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 29, 2021.

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 2022 and 2021 are both 52-week years, ending on December 28, 2022 and December 29, 2021, respectively. Revenues, expenses, and other financial and operational figures may be elevated in a 53-week year.

Holdings has no material assets or operations. Holdings and Holdings’ direct subsidiary, EPL Intermediate, Inc. (“Intermediate”), guarantee EPL’s 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

While all of the Company’s restaurants had dining rooms open as of June 29, 2022, the Company continues to experience staffing challenges, which resulted in reduced operating hours and service channels at some of the Company restaurants, as well as higher wage inflation, overtime costs and other labor related costs. Further, the Company experienced inflationary pressures and supply chain disruptions that resulted in increased commodity prices and impacted the Company’s business and results of operations during the thirteen and twenty-six weeks ended June 29, 2022. The Company expects these pressures to continue during the rest of fiscal 2022. During the thirteen and twenty-six weeks ended June 29, 2022, the Company incurred $0.3 million and $2.6 million, respectively, in COVID-19 related expenses, primarily due to leaves of absence and overtime pay. 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.

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

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 June 29, 2022, 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 $34.3 million at June 29, 2022 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.

Recently Adopted Accounting Pronouncements

None.

Subsequent Events

2022 Credit Agreement

On July 27, 2022, the Company refinanced the 2018 Revolver, pursuant to a credit agreement (the “2022 Credit Agreement”) among EPL, as borrower, 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 $150 million five-year senior secured revolving facility (the “2022 Revolver”). In connection with the refinancing, the 2018 Credit Agreement (as defined below) was terminated. The 2022 Revolver includes a sub limit of $15.0 million for letters of credit and a sub limit of $15.0 million for swingline loans. On July 29, 2022, the Company made a $20.0 million payment to the 2022 Revolver and the outstanding balance as of August 4, 2022 was $20.0 million. The proceeds of the 2022 Revolver were used to refinance and terminate the 2018 Revolver and may also be used from time to time for general corporate purposes. The 2022 Revolver will mature on July 27, 2027. The obligations of EPL under the 2022 Credit Agreement and related loan documents are guaranteed by the Company and Intermediate and the obligations of each of the Company, EPL and Intermediate under the 2022 Credit Agreement and related loan documents are secured by a first priority (subject to permitted liens) lien on substantially all of their respective assets (subject to customary exceptions).

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Borrowings under the 2022 Credit Agreement (other than any swingline loans) bear interest, at the borrower’s option, at rates based upon either the secured overnight financing rate (“SOFR”) or a base rate, plus, for each rate, a margin determined in accordance with a lease-adjusted consolidated leverage ratio-based pricing grid. The base rate is calculated as the highest of (a) the federal funds rate plus 0.50%, (b) the published of Bank of America prime rate, or (c) Term SOFR with a term of one-month plus 1.00%. For Term SOFR loans, the margin is in the range of 1.25% to 2.25%, and for base rate loans the margin is in a range of 0.25% to 1.25%. Borrowings under the 2022 Revolver may be repaid and reborrowed.

The 2022 Credit Agreement includes negative covenants and financial covenants, including, among others, the following (all subject to certain exceptions): a maximum lease-adjusted consolidated leverage ratio covenant, a minimum consolidated fixed charge coverage ratio, and limitations on (among others) indebtedness, liens, investments, asset sales, mergers, consolidations, liquidations, dispositions, restricted payments, negative pledges, transactions with affiliates, sale-leaseback transactions and prepayments of certain debt. The 2022 Credit Agreement also includes certain affirmative covenants and events of default.

In connection with the Company’s entry into the 2022 Credit Agreement, it terminated the interest rate swap previously used to hedge interest rate risk. In settlement of this swap, the Company received approximately $0.6 million. The remaining amount in accumulated other comprehensive income (“AOCI”) related to the hedging relationship will be reclassified into earnings when the hedged forecasted transaction is reported in earnings.

Concentration of Risk

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

The Company had one supplier to whom amounts due totaled 24.1% and 26.1% of the Company’s accounts payable at June 29, 2022 and December 29, 2021, respectively. Purchases from the Company’s largest supplier totaled 27.4% and 28.5% of total expenses for the thirteen and twenty-six weeks ended June 29, 2022 and 26.2% and 26.6% of total expenses for the thirteen and twenty-six weeks ended June 30, 2021.

Company -operated and franchised restaurants in the greater Los Angeles area generated, in the aggregate, approximately 70.9% of total revenue for both the thirteen and twenty-six weeks ended June 29, 2022 and 70.6% and 70.4% for the thirteen and twenty-six weeks ended June 30, 2021, respectively.

Goodwill and Indefinite Lived Intangible Assets

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

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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 29, 2022. 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 29, 2022.

Fair Value Measurements

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

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

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

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

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

The following table presents fair value for the interest rate swap at June 29, 2022 (in thousands):


			Fair Value Measurements Using
	Fair Value		Level 1		Level 2		Level 3
Other assets - Interest rate swap	$	706	$	—	$	706	$	—

The following table presents fair value for the interest rate swap at December 29, 2021 (in thousands):


			Fair Value Measurements Using
	Fair Value		Level 1		Level 2		Level 3
Other non-current liabilities - Interest rate swap	$	396	$	—	$	396	$	—

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

The following non-financial instruments were measured at fair value, on a nonrecurring basis, as of and for the thirteen and twenty-six weeks ended June 29, 2022, 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 under Note 2,

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“Property and Equipment” and immediately below under “Impairment of Long-Lived Assets and ROU Assets” (in thousands):

Thirteen Weeks

Twenty-Six Weeks

Fair Value Measurements at June 29, 2022 Using

Ended June 29, 2022

Total

Level 1

Level 2