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 March 29, 2023


☐	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 April 28, 2023, there were 36,025,228 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)		7
Notes to Condensed Consolidated Financial Statements (Unaudited)		8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.		25
Item 3. Quantitative and Qualitative Disclosures About Market Risk.		40
Item 4. Controls and Procedures.		41

PART II—OTHER INFORMATION		42
Item 1. Legal Proceedings.		42
Item 1A. Risk Factors.		42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.		42
Item 3. Defaults Upon Senior Securities.		42
Item 4. Mine Safety Disclosures.		42
Item 5. Other Information.		42
Item 6. Exhibits.		43
Signatures		44

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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)


	March 29,		December 28,
	2023		2022
Assets
Current assets:
Cash and cash equivalents	$	4,789	$	20,493
Accounts and other receivables, net		12,303		10,084
Inventories		2,107		2,442
Prepaid expenses and other current assets		4,735		3,662
Income tax receivable		—		768
Total current assets		23,934		37,449
Property and equipment, net		80,326		78,644
Property and equipment held under finance lease, net		1,500		1,532
Property and equipment held under operating leases, net ("ROU asset")		170,762		165,584
Goodwill		248,674		248,674
Trademarks		61,888		61,888
Deferred tax assets		313		512
Other assets		2,928		2,935
Total assets	$	590,325	$	597,218
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of obligations under finance leases	$	110	$	110
Current portion of obligations under operating leases		19,592		19,995
Accounts payable		11,706		12,741
Accrued salaries and vacation		7,139		8,873
Accrued insurance		11,293		11,120
Accrued income taxes payable		374		—
Accrued interest		350		291
Current portion of income tax receivable agreement payable		269		263
Other accrued expenses and current liabilities		13,252		15,120
Total current liabilities		64,085		68,513
Revolver loan		58,000		66,000
Obligations under finance leases, net of current portion		1,598		1,626
Obligations under operating leases, net of current portion		170,779		165,149
Deferred taxes		9,105		8,517
Income tax receivable agreement payable, net of current portion		282		409
Other noncurrent liabilities		5,932		5,856
Total liabilities		309,781		316,070
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; 36,450,477 and 37,008,061 shares issued and outstanding as March 29, 2023 and December 28, 2022, respectively		364		370
Additional paid-in-capital		286,791		292,244
Accumulated deficit		(6,674)		(11,592)
Accumulated other comprehensive income		63		126
Total stockholders’ equity		280,544		281,148
Total liabilities and stockholders’ equity	$	590,325	$	597,218

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
	March 29, 2023		March 30, 2022
Revenue
Company-operated restaurant revenue	$	97,873	$	93,957
Franchise revenue		9,672		9,255
Franchise advertising fee revenue		6,981		6,836
Total revenue		114,526		110,048
Cost of operations
Food and paper cost		26,902		27,732
Labor and related expenses		31,541		32,672
Occupancy and other operating expenses		24,886		23,845
Gain on recovery of insurance proceeds, lost profits, net		(151)		—
Company restaurant expenses		83,178		84,249
General and administrative expenses		11,199		9,954
Franchise expenses		9,032		8,731
Depreciation and amortization		3,637		3,597
Loss on disposal of assets		30		66
Gain on recovery of insurance proceeds, property, equipment and expenses		(242)		—
Gain on disposition of restaurants		(136)		—
Impairment and closed-store reserves		77		131
Total expenses		106,775		106,728
Income from operations		7,751		3,320
Interest expense, net		1,004		430
Income tax receivable agreement income		(122)		(130)
Income before provision for income taxes		6,869		3,020
Provision for income taxes		1,951		905
Net income	$	4,918	$	2,115
Net income per share
Basic	$	0.14	$	0.06
Diluted	$	0.13	$	0.06
Weighted-average shares used in computing net income per share
Basic		36,234,105		36,225,747
Diluted		36,478,158		36,480,354

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
	March 29, 2023		March 30, 2022
Net income	$	4,918	$	2,115
Other comprehensive (loss) income
Changes in derivative instruments
Unrealized net gains arising during the period from interest rate swap		—		584
Reclassifications of (gains) losses into net income		(85)		117
Income tax benefit (expense)		22		(189)
Other comprehensive (loss) income, net of taxes		(63)		512
Comprehensive income	$	4,855	$	2,627

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 March 29, 2023
								Accumulated
				Additional				Other		Total
	Common Stock			Paid-in		Accumulated		Comprehensive		Stockholders’
	Shares	Amount		Capital		Deficit		(Loss) Income		Equity
Balance, December 28, 2022	37,008,061	$	370	$	292,244	$	(11,592)	$	126	$	281,148
Stock-based compensation	—		—		771		—		—		771
Issuance of common stock upon exercise of stock options, net	4,344		—		43		—		—		43
Repurchase of common stock	(552,349)		(6)		(6,205)		—		—		(6,211)
Repurchase of common stock - excise tax	—		—		(62)		—		—		(62)
Forfeiture of common stock related to restricted shares	(9,579)		—		—		—		—		—
Other comprehensive loss, net of tax	—		—		—		—		(63)		(63)
Net income	—		—		—		4,918		—		4,918
Balance, March 29, 2023	36,450,477	$	364	$	286,791	$	(6,674)	$	63	$	280,544

	Thirteen Weeks Ended March 30, 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	—		—		826		—		—		826
Issuance of common stock upon exercise of stock options, net	141,848		1		1,529		—		—		1,530
Other comprehensive income, net of tax	—		—		—		—		512		512
Net income	—		—		—		2,115		—		2,115
Balance, March 30, 2022	36,743,496	$	366	$	345,296	$	(30,278)	$	222	$	315,606

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)


	Thirteen Weeks Ended
	March 29, 2023		March 30, 2022
Cash flows from operating activities:
Net income	$	4,918	$	2,115
Adjustments to reconcile net income to net cash flows provided by operating activities:
Depreciation and amortization		3,637		3,597
Stock-based compensation expense		771		826
Income tax receivable agreement income		(122)		(130)
Fire insurance proceeds for expenses paid and lost profit		151		—
Loss on disposal of assets		30		66
Gain on recovery of insurance proceeds, property, equipment and expenses, net		(242)		—
Impairment of property and equipment		40		89
Gain on disposition of restaurants		(136)		—
Amortization of deferred financing costs		58		63
Deferred income taxes, net		723		(1,039)
Changes in operating assets and liabilities:
Accounts and other receivables		(2,218)		(645)
Inventories		335		(45)
Prepaid expenses and other current assets		(1,073)		(867)
Income taxes payable		1,142		1,938
Other assets		(51)		(357)
Accounts payable		(806)		(846)
Accrued salaries and vacation		(1,733)		(5,302)
Accrued insurance		173		396
Other accrued expenses and liabilities		(1,778)		(2,164)
Net cash flows provided by (used in) operating activities		3,819		(2,305)
Cash flows from investing activities:
Proceeds from disposition of restaurants		162		—
Proceeds from fire insurance for property and equipment		138		—
Purchase of property and equipment		(5,980)		(3,772)
Net cash flows used in investing activities		(5,680)		(3,772)
Cash flows from financing activities:
Payments on revolver and swingline loan		(8,000)		—
Repurchases of common stock		(5,848)		—
Proceeds from issuance of common stock upon exercise of stock options, net of expenses		43		1,530
Payment of obligations under finance leases		(38)		(48)
Net cash flows (used in) provided by financing activities		(13,843)		1,482
Decrease in cash and cash equivalents		(15,704)		(4,595)
Cash and cash equivalents, beginning of period		20,493		30,046
Cash and cash equivalents, end of period	$	4,789	$	25,451



	Thirteen Weeks Ended
	March 29, 2023		March 30, 2022
Supplemental cash flow information
Cash paid during the period for interest	$	1,014	$	236
Cash paid during the period for income taxes	$	—	$	5
Unpaid purchases of property and equipment	$	3,872	$	2,725
Unpaid repurchases of common stock	$	425	$	—

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 March 29, 2023, the Company operated 187 and franchised 303 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 28, 2022.

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 2023 and 2022 are both 52-week years, ending on December 27, 2023 and December 28, 2022, 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 2022 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 2022 Revolver (as defined below).

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 Company may face future business disruption and related risks resulting from the uncertainty regarding a potential resurgence of the COVID-19 pandemic or another pandemic, epidemic or infectious disease outbreak, or from broader macroeconomic trends, any of which could have a significant impact on our business. During the thirteen weeks ended March 29, 2023, the Company incurred $0.1 million in COVID-19 related expenses, primarily due to leaves of absence. During the thirteen weeks ended March 30, 2022, the Company incurred $2.3 million in COVID-19 related expenses, primarily due to leaves of absence and overtime pay. While the Company continues to experience staffing challenges, higher wages, overtime costs and increased commodity prices, these cost pressures are starting to moderate.

While the Company believes the trend towards more moderate labor related costs and less inflationary pressure continues, the Company cannot determine the ultimate impact of a potential resurgence of the COVID-19 pandemic (and related economic effects) and the current macroeconomic environment will have on the Company’s condensed consolidated financial condition, liquidity, and future results of operations. 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 March 29, 2023, the Company’s total debt was $58.0 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, available cash of $4.8 million at March 29, 2023 and the outstanding borrowing availability under the 2022 Revolver 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.

Subsequent Events

Subsequent to the quarter-end, the Company borrowed $2.0 million on its 2022 Revolver and outstanding borrowings as of May 4, 2023 were $60.0 million. Additionally, in an effort to reduce costs and redirect resources and to better support restaurant operations and future sales growth, on April 13, 2023 the Company made the decision to eliminate and restructure certain positions in the organization, which resulted in estimated one-time costs of approximately $1.1 million that will be recorded in the second quarter.

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 21.5% and 41.7% of the Company’s accounts payable at March 29, 2023 and December 28, 2022, respectively. Purchases from the Company’s largest supplier totaled 26.5% of total expenses for the thirteen weeks ended March 29, 2023 and 29.7% of total expenses for the thirteen weeks ended March 30, 2022.

Company-operated and franchised restaurants in the greater Los Angeles area generated, in the aggregate, approximately 70.7% of total revenue for the thirteen weeks ended March 29, 2023 and 70.8% for the thirteen weeks ended March 30, 2022, 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 refranchising 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 fair value of the portion of the reporting unit disposed of in a refranchising is determined by reference to the discounted value of the future cash flows expected to be generated by the restaurant and retained by the franchisee, which includes a deduction for the anticipated, future royalties the franchisee will pay the Company associated with the franchise agreement entered into simultaneously with the refranchising transition. The fair value of the reporting unit retained is based on the price a willing buyer would pay for the reporting unit and includes the value of franchise agreements. As such, the fair value of the reporting unit retained can include expected cash flows from future royalties from those restaurants currently being refranchised, future royalties from existing franchise businesses and company restaurant operations. The Company did not record any decrement to goodwill related to the disposition of restaurants in fiscal 2023 and 2022.

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 weeks ended March 29, 2023. Accordingly, the Company did not record any impairment to its goodwill or indefinite-lived intangible assets during the thirteen weeks ended March 29, 2023.

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.

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●

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

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 weeks ended March 29, 2023, 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, “Property and Equipment” and immediately below under “Impairment of Long-Lived Assets and ROU Assets” (in thousands):


	Total		Level 1		Level 2		Level 3		Impairment Losses
Certain ROU assets, net	$	275	$	—	$	—	$	275	$	39

The following non-financial instruments were measured at fair value on a nonrecurring basis as of and for the thirteen weeks ended March 30, 2022, reflecting certain property and equipment assets and ROU assets for which an impairment loss was recognized during the corresponding periods, as discussed immediately below under “Impairment of Long-Lived Assets and ROU Assets” (in thousands):


	Total		Level 1		Level 2		Level 3		Impairment Losses
Certain property and equipment, net	$	—	$	—	$	—	$	—	$	89

Impairment of Long-Lived Assets and ROU Assets

The Company reviews its long-lived and ROU assets for impairment on a restaurant-by-restaurant basis whenever events or changes in circumstances indicate that the carrying value of certain long-lived and ROU assets may not be recoverable. The Company considers a triggering event related to long-lived assets or ROU assets in a net asset position to have occurred related to a specific restaurant if the restaurant’s average unit volume for the last twelve months is less than a minimum threshold or if consistent levels of undiscounted cash flows for the remaining lease period are less than the carrying value of the restaurant’s assets. Additionally, the Company considers a triggering event related to ROU assets to have occurred related to a specific lease if the location has closed or been subleased and future estimated sublease income is less than lease payments under the head lease. If the Company concludes that the carrying value of certain long-lived and ROU assets will not be recovered based on expected undiscounted future cash flows, an impairment loss is recorded to reduce the long-lived or ROU assets to their estimated fair value. The fair value is measured on a nonrecurring basis using unobservable (Level 3) inputs. There is uncertainty in the projected undiscounted future cash flows used in the Company’s impairment review analysis, which requires the use of estimates and assumptions. If actual performance does not achieve the projections, or if the assumptions used change in the future, the Company may be required to recognize impairment charges in future periods, and such charges could be material. The Company determined that triggering events occurred for certain restaurants during the thirteen weeks ended March 29, 2023 that required an impairment review of certain of the Company’s long-lived and ROU assets. Based on the results of the analysis, the Company recorded non-cash impairment charges of less than $0.1 million for the thirteen weeks ended March 29, 2023, primarily related to the carrying value of the ROU assets of one restaurant in California.

The Company recorded a non-cash impairment charge of $0.1 million for the thirteen weeks ended March 30, 2022 primarily related to the long-lived assets of one restaurant in California. Given the inherent uncertainty in projecting results for newer restaurants in newer markets, as well as the impact of the COVID-19 pandemic (and related economic effects), the Company is monitoring the recoverability of the carrying value of the assets of several restaurants on an ongoing basis. For these restaurants, if expected performance is not realized, an impairment charge may be recognized in future periods, and such charge could be material.

Closed-Store Reserves

When a restaurant is closed, the Company will evaluate the ROU asset for impairment, based on anticipated sublease recoveries. The remaining value of the ROU asset is amortized on a straight-line basis, with the expense recognized in closed-store reserve expense. Additionally, any property tax and common area maintenance (“CAM”) payments relating

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to closed restaurants are included within closed-store expense. During the thirteen weeks ended March 29, 2023, the Company recognized less than $0.1 million of closed-store reserve expense related to the amortization of ROU assets, property taxes and CAM payments for its closed locations. During the thirteen weeks ended March 30, 2022, the Company recognized less than $0.1 million of closed-store reserve expense primarily related to the amortization of ROU assets, property taxes and CAM payments for its closed locations.

Derivative Financial Instruments

The Company used an interest rate swap, a derivative instrument, to hedge interest rate risk and not for trading purposes. The derivative contract was entered into with a financial institution. In connection with the Company’s entry into the 2022 Credit Agreement (as defined below), it terminated the interest rate swap on July 28, 2022.

The Company recorded the derivative instrument on its condensed consolidated balance sheets at fair value. The derivative instrument qualified as a hedging instrument in a qualifying cash flow hedge relationship, and the gain or loss on the derivative instrument was reported as a component of accumulated other comprehensive (loss) income (“AOCI”) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. For any derivative instruments not designated as hedging instruments, the gain or loss will be recognized in earnings immediately. If a derivative previously designated as a hedge is terminated, or no longer meets the qualifications for hedge accounting, any balances in AOCI will be reclassified to earnings immediately.

Gain on Recovery of Insurance Proceeds, Lost Profits

In September 2022, one of the Company’s restaurants incurred damage resulting from a fire. In 2022, the Company disposed of less than $0.1 million of assets related to the fire. The restaurant was reopened for business on October 27, 2022. In fiscal 2023, the Company incurred costs directly related to the fire of less than $0.1 million. The Company recognized gains of $0.2 million, related to the reimbursement of property and equipment and expenses incurred and $0.2 million related to the reimbursement of lost profits. The gain on recovery of insurance proceeds and reimbursement of lost profits, net of the related costs, is included in the accompanying condensed consolidated statements of income, for fiscal 2023, as a reduction of company restaurant expenses. The Company received from the insurance company cash of $0.4 million, net of the insurance deductible, during fiscal 2023.

Income Taxes

The provision for income taxes, income taxes payable and deferred income taxes is determined using the asset and liability method. Deferred tax assets and liabilities are determined based on temporary differences between the financial carrying amounts and the tax bases of assets and liabilities using enacted tax rates in effect in the years in which the temporary differences are expected to reverse. On a periodic basis, the Company assesses the probability that its net deferred tax assets, if any, will be recovered. If, after evaluating all of the positive and negative evidence, a conclusion is made that it is more likely than not that some portion or all of the net deferred tax assets will not be recovered, a valuation allowance is provided by charging to tax expense a reserve for the portion of deferred tax assets which are not expected to be realized.

The Company reviews its filing positions for all open tax years in all U.S. federal and state jurisdictions where the Company is required to file.

When there are uncertainties related to potential income tax benefits, in order to qualify for recognition, the position the Company takes has to have at least a “more likely than not” chance of being sustained (based on the position’s technical merits) upon challenge by the respective authorities. The term “more likely than not” means a likelihood of more than 50 percent. Otherwise, the Company may not recognize any of the potential tax benefit associated with the position. The Company recognizes a benefit for a tax position that meets the “more likely than not” criterion at the largest amount of tax benefit that is greater than 50 percent likely of being realized upon its effective resolution. Unrecognized tax benefits involve management’s judgment regarding the likelihood of the benefit being sustained. The final resolution of uncertain tax positions could result in adjustments to recorded amounts and may affect the Company’s condensed consolidated financial position, results of operations, and cash flows.

The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. The Company had no accrual for interest or penalties at March 29, 2023 or at December 28, 2022. The Company did not

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recognize interest or penalties during the thirteen weeks ended March 29, 2023 and March 30, 2022, respectively, since there were no material unrecognized tax benefits. Management believes no significant changes to the amount of unrecognized tax benefits will occur within the next twelve months.

On July 30, 2014, the Company entered into the income tax receivable agreement (the “TRA”), which calls for the Company to pay to its pre-initial public offering (“IPO”) stockholders 85% of the savings in cash that the Company realizes in its income taxes as a result of utilizing its net operating losses (“NOLs”) and other tax attributes attributable to preceding periods. For the thirteen weeks ended March 29, 2023, the Company recorded income tax receivable agreement income of $0.1 million and for the thirteen weeks ended March 30, 2022, the Company recorded income tax receivable agreement income of $0.1 million, in each case, related to the amortization of interest expense related to the total expected TRA payments and changes in estimates for actual tax returns filed and future forecasted taxable income.

The Coronavirus Aid, Relief and Economic Security Act provides for the deferral of employer Social Security taxes that are otherwise owed for wage payment and the creation of refundable employee retention credits. The total amount deferred as of December 30, 2020 was $4.9 million, of which 50% was paid at the end of 2021 and the remaining 50% was paid at the end of 2022. As of December 28, 2022, the Company made all deferred payroll tax payments and did not have any corresponding balances included in other non-current liabilities on the Company’s consolidated balance sheet.

Additionally, the Company assessed its eligibility for the business relief provision under the Coronavirus Aid, Relief and Economic Security Act known as the Employee Retention Credit (“ERC”), a refundable payroll tax credit for 50% of qualified wages paid during 2020. The American Rescue Plan passed into law on March 11, 2021 extended the ERC through September 30, 2021, and the credit was increased to 70% of qualified wages paid from January 1, 2021 through September 30, 2021. During fiscal 2021, the Company recognized the ERC credit in the amount of $3.4 million as income as it is probable that it will comply with the ERC eligibility requirements. The Company has elected an accounting policy to present government assistance as a reduction of the related expense. The ERC credit was initially recorded as a receivable as part of the accounts and other receivable on the consolidated balance sheet for the year ended December 29, 2021 and as an offset to the corresponding payroll expense which is classified as part of the labor and other operating expenses on the consolidated statements of income for the year ended December 29, 2021. During fiscal 2022, the Company received $3.1 million in ERC and the remaining $0.3 million continues to be recorded as a receivable as part of the accounts and other receivable on the condensed consolidated balance sheet for the thirteen weeks ended March 29, 2023.

2. PROPERTY AND EQUIPMENT

The costs and related accumulated depreciation and amortization of major classes of property and equipment are as follows (in thousands):


	March 29, 2023		December 28, 2022
Land	$	12,323	$	12,323
Buildings and improvements		154,422		153,377
Other property and equipment		84,500		83,035
Construction in progress		4,599		3,196
		255,844		251,931
Less: accumulated depreciation and amortization		(175,518)		(173,287)
	$	80,326	$	78,644

Depreciation expense was $3.6 million for both the thirteen weeks ended March 29, 2023 and March 30, 2022, respectively.

Based on the Company’s review of its long-lived assets for impairment, the Company did not record any non-cash impairment charges for the thirteen weeks ended March 29, 2023. During the thirteen weeks ended March 30, 2022, the Company recorded non-cash impairment charges of $0.1 million, primarily related to the carrying value of the long-lived assets of one restaurant in California. See Note 1, “Basis of Presentation and Summary of Significant Accounting Policies – Impairment of Long-Lived Assets and ROU Assets” for additional information.

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3. STOCK-BASED COMPENSATION

At March 29, 2023, options to purchase 1,056,119 shares of common stock were outstanding, including 613,376 vested and 442,743 unvested. Unvested options vest over time; however, upon a change in control, the Board of Directors may accelerate vesting. At March 29, 2023, 179,950 premium options, which are options granted above the stock price at date of grant, remained outstanding. A summary of stock option activity as of March 29, 2023 and changes during the thirteen weeks ended March 29, 2023 is as follows:


				Weighted-Average		Aggregate
		Weighted-Average		Contractual Life		Intrinsic Value
	Shares	Exercise Price		Life (Years)		(in thousands)
Outstanding - December 28, 2022	1,068,179	$	9.92
Exercised	(4,344)		9.90
Forfeited, cancelled or expired	(7,716)	$	16.05
Outstanding - March 29, 2023	1,056,119	$	9.87		5.50	$	1,407
Vested and expected to vest at March 29, 2023	1,049,913	$	9.87		5.48	$	1,401
Exercisable at March 29, 2023	613,376	$	9.42		3.18	$	991

At March 29, 2023, the Company had total unrecognized compensation expense of $1.9 million related to unvested stock options, which it expects to recognize over a weighted-average period of 2.81 years.

A summary of restricted share activity as of March 29, 2023 and changes during the thirteen weeks ended March 29, 2023 is as follows:


		Weighted-Average
	Shares	Fair Value
Unvested shares at December 28, 2022	545,480	$	12.02
Forfeited, cancelled, or expired	(9,579)	$	12.53
Unvested shares at March 29, 2023	535,901	$	12.01

At March 29, 2023, the Company had unrecognized compensation expense of $4.4 million related to unvested restricted shares, which it expects to recognize over a weighted-average period of 2.46 years.

Total stock-based compensation expense was $0.8 million for both the thirteen weeks ended March 29, 2023 and March 30, 2022.

On October 11, 2022, the Company’s Board of Directors approved a share repurchase program (the “2022 Stock Repurchase Plan”) under which the Company is authorized to repurchase up to $20.0 million of shares of its common stock. The 2022 Stock Repurchase Plan will terminate on March 28, 2024, may be modified, suspended or discontinued at any time, and does not obligate the Company to acquire any particular number of shares.

Under the 2022 Stock Repurchase Plan, the Company is permitted to repurchase its common stock from time to time, in amounts and at prices that the Company deemed appropriate, subject to market conditions and other considerations. The Company’s repurchases will be executed using open market purchases, including pursuant to Rule 10b5-1 trading plans, and/or through privately negotiated transactions.

For the thirteen weeks ended March 29, 2023, the Company repurchased 552,349 shares of common stock under the 2022 Stock Repurchase Plan, using open market purchases, for total consideration of approximately $6.2 million. The common stock repurchased under 2022 Stock Repurchase Plan were retired upon repurchase.

4. LONG-TERM DEBT

On July 27, 2022, the Company refinanced and terminated its credit agreement (the “2018 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 provided for a

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$150.0 million five-year senior secured revolving credit facility (the “2018 Revolver”). The 2018 Revolver was refinanced 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 $150.0 million five-year senior secured revolving credit facility (the “2022 Revolver”). In connection with the refinancing, the 2018 Credit Agreement 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. The 2022 Revolver and 2022 Credit Agreement will mature on July 27, 2027. The obligations under the 2022 Credit Agreement and related loan documents are guaranteed by Holdings and Intermediate. The obligations of Holdings, EPL and Intermediate under the 2022 Credit Agreement and related loan documents are secured by a first priority lien on substantially all of their respective assets.

The special dividend announced by the Company’s Board of Directors on October 11, 2022 is permitted under the terms of 2022 Revolver pursuant to both subclause (iii)(d) and (iii)(e) of the following sentence. Under the 2022 Revolver, Holdings is restricted from making certain payments such as cash dividends, except that it may, inter alia, (i) pay up to $1.0 million per year to repurchase or redeem qualified equity interests of Holdings held by past or present officers, directors, or employees (or their estates) of the Company upon death, disability, or termination of employment, (ii) pay under its TRA, and (iii) so long as no default or event of default has occurred and is continuing, (a) make non-cash repurchases of equity interests in connection with the exercise of stock options by directors, officers and management, provided that those equity interests represent a portion of the consideration of the exercise price of those stock options, (b) pay up to $0.5 million in any 12 month consecutive period to redeem, repurchase or otherwise acquire equity interests of any subsidiary that is not a wholly-owned subsidiary from any holder of equity interest in such subsidiary, (c) pay up to $2.5 million per year pursuant to stock option plans, employment agreements, or incentive plans, (d) make up to $5.0 million in other restricted payments per year, and (e) make other restricted payments, subject to its compliance, on a pro forma basis, with (x) a lease-adjusted consolidated leverage ratio not to exceed 4.25 times and (y) the financial covenants applicable to the 2022 Revolver.

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 Bank of America prime rate, or (c) Term SOFR with a term of one-month SOFR 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 interest rate range was 5.69% to 6.30% for the thirteen weeks ended March 29, 2023 under the 2022 Revolver and 1.35% to 1.70% for the thirteen weeks ended March 30, 2022 under the 2018 Revolver.

The 2022 Credit Agreement contains certain financial covenants. The Company was in compliance with the financial covenants as of March 29, 2023.

At March 29, 2023, $9.8 million of letters of credit and $58.0 million in borrowings under the 2022 Revolver were outstanding. The Company had $82.2 million in borrowing availability under the 2022 Revolver at March 29, 2023.

Maturities

On July 27, 2022, the Company refinanced and terminated the 2018 Revolver pursuant to the 2022 Credit Agreement. During the thirteen weeks ended March 29, 2023 the Company paid down $8.0 million on the 2022 Revolver. No amounts were paid on the 2018 Revolver during the thirteen weeks ended March 30, 2022. There are no required principal payments prior to maturity for the 2022 Revolver.

Interest Rate Swap

During the year ended December 25, 2019, the Company entered into a variable-to-fixed interest rate swap agreement with a notional amount of $40.0 million with a maturity date in June 2023. The objective of the interest rate swap was to reduce the Company’s exposure to interest rate risk for a portion of its variable-rate interest payments on its borrowings under the 2018 Revolver. The interest rate swap was designated as a cash flow hedge, as the changes in the future cash

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flows of the swap were expected to offset changes in expected future interest payments on the related variable-rate debt, in accordance with Accounting Standards Codification (“ASC”) 815 “Derivatives and Hedging.”

In connection with the Company’s entry into the 2022 Credit Agreement, it terminated the interest rate swap on July 28, 2022 which was previously used to hedge interest rate risk. Prior to the interest rate swap termination, the swap was a highly effective cash flow hedge. In settlement of this swap, the Company received approximately $0.6 million and derecognized the corresponding interest rate swap asset. The remaining amount in AOCI related to the hedging relationship will be reclassified into earnings when the hedged forecasted transaction is reported in earnings.

As of March 29, 2023, the estimated net gains included in AOCI related to the Company’s cash flow hedge that will be reclassified into earnings in the next 12 months is $0.1 million, based on current Term SOFR interest rates.

The following table summarizes the effect of the Company’s cash flow hedge accounting on the condensed consolidated statements of income (in thousands):


	March 29, 2023		March 30, 2022
Interest expense on hedged portion of debt	$	—	$	143
Interest (income) expense on interest rate swap		(85)		117
Interest (income) expense on debt and derivatives, net	$	(85)	$	260

The following table summarizes the effect of the Company’s cash flow hedge accounting on AOCI for the thirteen weeks ended March 29, 2023 and March 30, 2022 (in thousands):


					(Gain) Loss Reclassified from
	Net Gain Recognized in OCI				AOCI into Interest (Income) Expense
	March 29, 2023		March 30, 2022		March 29, 2023		March 30, 2022
Interest rate swap	$	—	$	584	$	(85)	$	117

See Note 1, “Basis of Presentation and Summary of Significant Accounting Policies” for information about the fair value of the Company’s derivative asset.

5. OTHER ACCRUED EXPENSES AND CURRENT LIABILITIES

Other accrued expenses and current liabilities consist of the following (in thousands):


	March 29, 2023		December 28, 2022
Accrued sales and property taxes	$	5,111	$	5,270
Gift card liability		4,217		4,667
Loyalty rewards program liability		469		526
Accrued advertising		—		831
Accrued legal settlements and professional fees		1,255		1,303
Deferred franchise and development fees		601		610
Other		1,599		1,913
Total other accrued expenses and current liabilities	$	13,252	$	15,120

6. OTHER NONCURRENT LIABILITIES

Other noncurrent liabilities consist of the following (in thousands):


	March 29, 2023		December 28, 2022
Deferred franchise and development fees	$	5,851	$	5,767
Other		81		89
Total other noncurrent liabilities	$	5,932	$	5,856

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7. COMMITMENTS AND CONTINGENCIES

Legal Matters

The Company is involved in various claims such as wage and hour and other legal actions that arise in the ordinary course of business. The outcomes of these actions are not predictable but the Company does not believe that the ultimate resolution of these other actions will have a material adverse effect on its financial position, results of operations, liquidity, or capital resources. A significant increase in the number of claims, or an increase in amounts owing under successful claims, could materially and adversely affect its business, condensed consolidated financial condition, results of operations, and cash flows.

Purchasing Commitments

The Company has long-term beverage supply agreements with certain major beverage vendors. Pursuant to the terms of these arrangements, marketing rebates are provided to the Company and its franchisees from the beverage vendors based upon the dollar volume of purchases for system-wide restaurants which will vary according to their demand for beverage syrup and fluctuations in the market rates for beverage syrup. These contracts have terms extending through the end of 2024.

At March 29, 2023, the Company’s total estimated commitment to purchase chicken was $32.7 million.

Contingent Lease Obligations

As a result of assigning the Company’s interest in obligations under real estate leases in connection with the sale of company-operated restaurants to some of the Company’s franchisees, the Company is contingently liable on three lease agreements. These leases have various terms, the latest of which expires in 2038. As of March 29, 2023, the potential amount of undiscounted payments the Company could be required to make in the event of non-payment by the primary lessee was $4.1 million. The present value of these potential payments discounted at the Company’s estimated pre-tax cost of debt at March 29, 2023 was $2.8 million. The Company’s franchisees are primarily liable on the leases. The Company has cross-default provisions with these franchisees that would put them in default of their franchise agreements in the event of non-payment under the leases. The Company believes that these cross-default provisions reduce the risk that payments will be required to be made under these leases.

Employment Agreements

As of March 29, 2023, the Company had employment agreements with two of the officers of the Company. These agreements provide for minimum salary levels, possible annual adjustments for cost-of-living changes, and incentive bonuses that are payable under certain business conditions.

Indemnification Agreements

The Company has entered into indemnification agreements with each of its current directors and officers. These agreements require the Company to indemnify these individuals to the fullest extent permitted under Delaware law against liabilities that may arise by reason of their service to the Company and to advance expenses incurred as a result of any proceeding against them as to which they could be indemnified. The Company also intends to enter into indemnification agreements with future directors and officers.

8. EARNINGS PER SHARE

Basic earnings per share (“EPS”) is calculated using the weighted-average number of shares of common stock outstanding during the thirteen weeks ended March 29, 2023 and March 30, 2022. Diluted EPS is calculated using the weighted-average number of shares of common stock outstanding and potentially dilutive during the period, using the treasury stock method.

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Below are basic and diluted EPS data for the periods indicated (in thousands except for share and per share data):



	Thirteen Weeks Ended
	March 29, 2023		March 30, 2022
Numerator:
Net income	$	4,918	$	2,115
Denominator:
Weighted-average shares outstanding—basic		36,234,105		36,225,747
Weighted-average shares outstanding—diluted		36,478,158		36,480,354
Net income per share—basic	$	0.14	$	0.06
Net income per share—diluted	$	0.13	$	0.06
Anti-dilutive securities not considered in diluted EPS calculation		645,356		305,632

Below is a reconciliation of basic and diluted share counts:



	Thirteen Weeks Ended
	March 29, 2023	March 30, 2022
Weighted-average shares outstanding—basic	36,234,105	36,225,747
Dilutive effect of stock options and restricted shares	244,053	254,607
Weighted-average shares outstanding—diluted	36,478,158	36,480,354

9. RELATED PARTY TRANSACTIONS

On March 28, 2023, Trimaran Pollo Partners, L.L.C. (“LLC”) and certain of LLC’s affiliates (collectively, the “Trimaran Group”) distributed substantially all of the shares of the Company’s common stock held by the Trimaran Group to their respective investors, members and limited partners. The Trimaran Group intends to subsequently liquidate or distribute its remaining assets and wind up.

10. REVENUE FROM CONTRACTS WITH CUSTOMERS

Revenue Recognition

Nature of products and services

The Company has two revenue streams, company-operated restaurant revenue and franchise related revenue.

Company-operated restaurant revenue

Revenues from the operation of company-operated restaurants are recognized as food and beverage products are delivered to customers and payment is tendered at the time of sale. The Company presents sales, net of sales-related taxes and promotional allowances.

The Company offers a loyalty rewards program, which awards a customer points for dollars spent. Customers earn points for each dollar spent and points can be redeemed for multiple redemption options. If a customer does not earn or use points within a one-year period, their account is deactivated and all points expire. When a customer is part of the rewards program, the obligation to provide future discounts related to points earned is considered a separate performance obligation, to which a portion of the transaction price is allocated. The performance obligation related to loyalty points is deemed to have been satisfied, and the amount deferred in the balance sheet is recognized as revenue, when the points are transferred to a reward and redeemed, the reward or points have expired, or the likelihood of redemption is remote. A portion of the transaction price is allocated to loyalty points, if necessary, on a pro-rata basis, based on stand-alone selling price, as determined by menu pricing and loyalty points terms. As of both March 29, 2023 and December 28, 2022, the revenue allocated to loyalty points that have not been redeemed was $0.5 million, which is reflected in the Company’s accompanying condensed consolidated balance sheets within other accrued expenses and current liabilities. The Company expects the loyalty points to be redeemed and recognized over a one-year period.

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The Company sells gift cards to its customers in the restaurants and through selected third parties. The gift cards sold to customers have no stated expiration dates and are subject to actual and/or potential escheatment rights in several of the jurisdictions in which the Company operates. Furthermore, due to these escheatment rights, the Company does not recognize breakage related to the sale of gift cards due to the immateriality of the amount remaining after escheatment. The Company recognizes income from gift cards when redeemed by the customer. Unredeemed gift card balances are deferred and recorded as other accrued expenses on the accompanying condensed consolidated balance sheets.

Franchise and franchise advertising revenue

Franchise revenue consists of franchise royalties, initial franchise fees, license fees due from franchisees, IT support services, and rental income for subleases to franchisees. Franchise advertising revenue consists of advertising contributions received from franchisees. These revenue streams are made up of the following performance obligations:

●

Franchise license - inclusive of advertising services, development agreements, training, access to plans and help desk services.

●

Discounted renewal option.

●

Hardware services.

The Company satisfies the performance obligation related to the franchise license over the term of the franchise agreement, which is typically 20 years. Payment for the franchise license consists of three components, a fixed-fee related to the franchise/development agreement, a sales-based royalty fee and a sales-based advertising fee. The fixed fee, as determined by the signed development and/or franchise agreement, is due at the time the development agreement is entered into, and/or when the franchise agreement is signed, and does not include a finance component.

The sales-based royalty fee and sales-based advertising fee are considered variable consideration and will continue to be recognized as revenue as such sales are earned by the franchisees. Both sales-based fees qualify under the royalty constraint exception, and do not require an estimate of future transaction price. Additionally, the Company is utilizing the practical expedient available under ASC Topic 606, “Revenue from Contracts with Customers” (“Topic 606”) regarding disclosure of the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied for sales-based royalties.

In certain franchise agreements, the Company offers a discounted renewal to incentivize future renewals after the end of the initial franchise term. As this is considered a separate performance obligation, the Company allocates a portion of the initial franchise fee to this discounted renewal, on a pro-rata basis, assuming a 20-year renewal. This performance obligation is satisfied over the renewal term, typically 10 or 20 years, while payment is fixed and due at the time the renewal is signed.

The Company purchases hardware, such as scanners, printers, cash registers and tablets, from third party vendors, which it then sells to franchisees. As the Company is considered the principal in this relationship, payment for the hardware is considered revenue, and is received upon transfer of the goods from the Company to the franchisee. As of March 29, 2023, there were no performance obligations related to hardware services that were unsatisfied or partially satisfied.

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Disaggregated revenue

The following table presents the Company’s revenues disaggregated by revenue source and market (in thousands):


		March 29,		March 30,
		2023		2022
Core Market⁽¹⁾:
Company-operated restaurant revenue	$	92,872	$	89,627
Franchise revenue		4,570		4,350
Franchise advertising fee revenue		3,221		3,198
Total core market	$	100,663	$	97,175
Non-Core Market⁽²⁾:
Company-operated restaurant revenue	$	5,002	$	4,330
Franchise revenue		5,102		4,905
Franchise advertising fee revenue		3,759		3,638
Total non-core market	$	13,863	$	12,873
Total revenue	$	114,526	$	110,048

(1)	Core Market includes markets with existing company-operated restaurants at the time of the Company’s IPO on July 28, 2014.

(2)	Non-Core Market includes markets entered into by the Company subsequent to the IPO date.

The following table presents the Company’s revenues disaggregated by geographic market:


	March 29, 2023		March 30, 2022
Greater Los Angeles area market	70.7	%	70.8	%
Other markets	29.3	%	29.2	%
Total	100	%	100	%

Contract balances

The following table provides information about the change in the franchise contract liability balances during the thirteen weeks ended March 29, 2023 and March 30, 2022 (in thousands):


December 28, 2022	$	6,377
Revenue recognized - beginning balance		(214)
Additional contract liability		289
March 29, 2023	$	6,452

December 29, 2021	$	6,328
Revenue recognized - beginning balance		(167)
Additional contract liability		265
March 30, 2022	$	6,426

The Company’s franchise contract liability includes development fees, initial franchise and license fees, franchise renewal fees, lease subsidies and royalty discounts and is i