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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended March 27, 2024

or

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

For the transition period from                      to                     

Commission File Number: 001-36556

EL POLLO LOCO HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware

20-3563182

(State or other jurisdiction of incorporation or organization)

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

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

92626

(Address of principal executive offices)

(Zip Code)

(714) 599-5000

(Registrant’s telephone number, including area code)

N/A

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

LOCO

The Nasdaq Stock Market LLC

Rights to Purchase Series A Preferred Stock, par value $0.01 per share

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 26, 2024, there were 31,099,611 shares of the issuer’s common stock outstanding.

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

EL POLLO LOCO HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Amounts in thousands, except share data)

    

March 27,

    

December 27,

    

2024

    

2023

Assets

  

Current assets:

  

  

Cash and cash equivalents

$

9,121

$

7,288

Accounts and other receivables, net

 

10,613

 

10,148

Inventories

 

1,736

 

1,911

Prepaid expenses and other current assets

 

5,361

 

5,634

Income tax receivable

 

 

153

Total current assets

 

26,831

 

25,134

Property and equipment, net

 

86,304

 

84,027

Property and equipment held under finance lease, net

 

1,635

 

1,528

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

 

169,628

 

168,007

Goodwill

 

248,674

 

248,674

Trademarks

 

61,888

 

61,888

Other assets

 

3,063

 

3,043

Total assets

$

598,023

$

592,301

Liabilities and Stockholders’ Equity

 

  

 

  

Current liabilities:

 

  

 

  

Current portion of obligations under finance leases

$

168

$

140

Current portion of obligations under operating leases

 

19,640

 

19,490

Accounts payable

 

11,881

 

12,541

Accrued salaries and vacation

 

6,877

 

9,332

Accrued insurance

 

11,739

 

11,831

Accrued income taxes payable

 

2,185

 

70

Accrued interest

 

325

 

394

Current portion of income tax receivable agreement payable

 

422

 

422

Other accrued expenses and current liabilities

 

21,984

 

18,361

Total current liabilities

 

75,221

 

72,581

Revolver loan

 

80,000

 

84,000

Obligations under finance leases, net of current portion

 

1,703

 

1,617

Obligations under operating leases, net of current portion

 

169,617

 

168,084

Deferred taxes

 

8,813

 

8,878

Other noncurrent liabilities

 

6,380

 

6,445

Total liabilities

 

341,734

 

341,605

Commitments and contingencies (Note 7)

 

  

 

  

Stockholders’ equity

 

  

 

  

Preferred stock, $0.01 par value, 100,000,000 shares authorized; 100,000 shares designated as Series A Preferred Stock; none issued or outstanding

 

 

Common stock, $0.01 par value, 200,000,000 shares authorized; 31,179,519 and 31,353,223 shares issued and outstanding as of March 27, 2024 and December 27, 2023, respectively

 

312

 

313

Additional paid-in-capital

 

236,103

 

236,421

Retained earnings

 

19,874

 

13,962

Total stockholders’ equity

 

256,289

 

250,696

Total liabilities and stockholders’ equity

$

598,023

$

592,301

See notes to condensed consolidated financial statements (unaudited).

3

Table of Contents

EL POLLO LOCO HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Amounts in thousands, except share data)

    

Thirteen Weeks Ended

    

March 27, 2024

March 29, 2023

Revenue

 

  

 

  

 

Company-operated restaurant revenue

$

97,153

$

97,873

Franchise revenue

 

11,348

 

9,672

Franchise advertising fee revenue

 

7,652

 

6,981

Total revenue

 

116,153

 

114,526

Cost of operations

 

  

 

  

Food and paper cost

 

25,619

 

26,902

Labor and related expenses

 

30,580

 

31,541

Occupancy and other operating expenses

 

23,865

 

24,886

Gain on recovery of insurance proceeds, lost profits, net

(151)

Company restaurant expenses

 

80,064

 

83,178

General and administrative expenses

 

11,925

 

11,199

Franchise expenses

 

10,602

 

9,032

Depreciation and amortization

 

3,851

 

3,637

Loss on disposal of assets

 

41

 

30

Gain on recovery of insurance proceeds, property, equipment and expenses

 

(41)

 

(242)

Gain on disposition of restaurants

(136)

Impairment and closed-store reserves

 

32

 

77

Total expenses

 

106,474

 

106,775

Income from operations

 

9,679

 

7,751

Interest expense, net

 

1,564

 

1,004

Income tax receivable agreement income

 

 

(122)

Income before provision for income taxes

 

8,115

 

6,869

Provision for income taxes

 

2,203

 

1,951

Net income

$

5,912

$

4,918

Net income per share

 

Basic

$

0.19

$

0.14

Diluted

$

0.19

$

0.13

Weighted-average shares used in computing net income per share

 

  

 

  

Basic

 

30,777,769

 

36,234,105

Diluted

 

30,937,226

 

36,478,158

See notes to condensed consolidated financial statements (unaudited).

4

Table of Contents

EL POLLO LOCO HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Amounts in thousands)

    

Thirteen Weeks Ended

    

March 27, 2024

March 29, 2023

Net income

$

5,912

$

4,918

Other comprehensive (loss) income

 

 

Changes in derivative instruments

 

 

Reclassifications of (loss) gains into net income

 

 

(85)

Income tax benefit

 

 

22

Other comprehensive (loss) income, net of taxes

 

(63)

Comprehensive income

$

5,912

$

4,855

See notes to condensed consolidated financial statements (unaudited).

5

Table of Contents

EL POLLO LOCO HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

(Amounts in thousands, except share data)

Thirteen Weeks Ended March 27, 2024

    

    

    

    

    

Accumulated

    

  

    

    

    

Additional

    

    

Other

    

Total

Common Stock

Paid-in

Retained

Comprehensive

Stockholders’

    

Shares

    

Amount

    

Capital

    

Earnings

    

(Loss) Income

    

Equity

Balance, December 27, 2023

31,353,223

$

313

$

236,421

$

13,962

$

$

250,696

Stock-based compensation

 

 

920

 

 

 

920

Issuance of common stock upon exercise of stock options, net

5

Repurchase of common stock

(136,400)

(1)

(1,226)

(1,227)

Repurchase of common stock - excise tax

(12)

(12)

Forfeiture of common stock related to restricted shares

(37,309)

Net income

 

 

 

5,912

 

 

5,912

Balance, March 27, 2024

31,179,519

$

312

$

236,103

$

19,874

$

$

256,289

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) income, 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

See notes to condensed consolidated financial statements (unaudited).

6

Table of Contents

EL POLLO LOCO HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Amounts in thousands)

    

Thirteen Weeks Ended

    

    

March 27, 2024

March 29, 2023

    

Cash flows from operating activities:

  

  

Net income

$

5,912

$

4,918

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

 

  

 

Depreciation and amortization

 

3,851

 

3,637

Stock-based compensation expense

 

920

 

771

Income tax receivable agreement income

 

 

(122)

Fire insurance proceeds for expenses paid and lost profit

151

Gain on disposition of restaurants

(136)

Loss on disposal of assets

 

41

 

30

Gain on recovery of insurance proceeds, property, equipment and expenses, net

(242)

Impairment of property and equipment

 

 

40

Amortization of deferred financing costs

 

48

 

58

Deferred income taxes, net

 

(65)

 

723

Changes in operating assets and liabilities:

 

  

 

Accounts and other receivables

 

(312)

 

(2,218)

Inventories

 

175

 

335

Prepaid expenses and other current assets

 

273

 

(1,073)

Income taxes payable

 

2,115

 

1,142

Other assets

 

(67)

 

(51)

Accounts payable

 

(2,732)

 

(806)

Accrued salaries and vacation

 

(2,455)

 

(1,733)

Accrued insurance

 

(92)

 

173

Other accrued expenses and liabilities

 

3,551

 

(1,778)

Net cash flows provided by operating activities

 

11,163

 

3,819

Cash flows from investing activities:

 

Proceeds from disposition of restaurants

 

 

162

Proceeds from fire insurance for property and equipment

41

138

Purchase of property and equipment

 

(4,162)

 

(5,980)

Net cash flows used in investing activities

 

(4,121)

 

(5,680)

Cash flows from financing activities:

 

  

 

  

Payments on revolver and swingline loan

 

(4,000)

 

(8,000)

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

43

Payment of obligations under finance leases

 

(48)

 

(38)

Repurchases of common stock

 

(1,161)

 

(5,848)

Net cash flows used in by financing activities

 

(5,209)

 

(13,843)

Increase (decrease) in cash and cash equivalents

 

1,833

 

(15,704)

Cash and cash equivalents, beginning of period

 

7,288

 

20,493

Cash and cash equivalents, end of period

$

9,121

$

4,789

    

Thirteen Weeks Ended

    

March 27, 2024

March 29, 2023

Supplemental cash flow information

 

  

 

  

 

Cash paid during the period for interest

$

1,595

$

1,014

Cash paid during the period for income taxes

$

$

Unpaid purchases of property and equipment

$

7,105

$

3,872

Unpaid repurchases of common stock

$

65

$

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 27, 2024, the Company operated 172 and franchised 323 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 27, 2023.

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 2024 and 2023 are both 52-week years, ending on December 25, 2024 and December 27, 2023, 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.

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 and contingent liabilities.

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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 27, 2024, the Company’s total debt was $80.0 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 $9.1 million at March 27, 2024, 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 paid down $5.0 million on its 2022 Revolver resulting in outstanding borrowings as of May 2, 2024 of $75.0 million.

Concentration of Risk

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

The Company had no supplier for which amounts due totaled more than 10.0% of the Company’s accounts payable at March 27, 2024. As of December 27, 2023, the Company had one supplier to whom amounts due totaled 15.1% of the Company’s accounts payable. Purchases from the Company’s largest supplier totaled 24.7% of total expenses for the thirteen weeks ended March 27, 2024, and 26.5% of total expenses for the thirteen weeks ended March 29, 2023, respectively.

Company-operated and franchised restaurants in the greater Los Angeles area generated, in the aggregate, approximately 71.5% of total revenue for the thirteen weeks ended March 27, 2024, and 70.7% for the thirteen weeks ended March 29, 2023.

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 Company reports as one reporting unit. 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 or the thirteen weeks ended March 27, 2024.

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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 27, 2024. Accordingly, the Company did not record any impairment to its goodwill or indefinite-lived intangible assets during the thirteen weeks ended March 27, 2024.

Fair Value Measurements

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

Level 1: Quoted prices for identical instruments in active markets.
Level 2: Observable prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs or significant value drivers are observable.
Level 3: Unobservable inputs used when little or no market data is available.

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).

There were no non-financial instruments measured at fair value on a nonrecurring basis as of and for the thirteen weeks ended March 27, 2024.

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 ROU assets for which an impairment loss was recognized during the corresponding periods, as discussed immediately below under “Impairment of Property and Equipment and ROU Assets” (in thousands):

Thirteen Weeks

Fair Value Measurements at March 29, 2023 Using

Ended March 29, 2023

    

Total

    

Level 1

    

Level 2

    

Level 3

 

Impairment Losses

Certain ROU assets, net

$

275

$

$

$

275

$

39

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Impairment of Property and Equipment and ROU Assets

The Company reviews its property and equipment and ROU assets for impairment on a restaurant-by-restaurant basis whenever events or changes in circumstances indicate that the carrying value of certain property and equipment and ROU assets may not be recoverable. The Company considers a triggering event related to property and equipment 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 property and equipment and ROU assets will not be recovered based on expected undiscounted future cash flows, an impairment loss is recorded to reduce the property and equipment 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 27, 2024 that required an impairment review of certain of the Company’s property and equipment and ROU assets. Based on the results of the analysis, the Company did not record any non-cash impairment charges for the thirteen weeks ended March 27, 2024.

The Company recorded a non-cash impairment charge 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. For this restaurant, 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 to closed restaurants are included within closed-store expense. During both the thirteen weeks ended March 27, 2024 and 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.

Gain on Recovery of Insurance Proceeds, Lost Profits

During fiscal 2022, one of the Company’s restaurants incurred damage resulting from a fire. 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 the thirteen weeks ended March 29, 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.

Gain on Disposition of Restaurants

During the thirteen weeks ended March 29, 2023, the Company completed the sale of one restaurant within California to an existing franchisee. The Company has determined that this restaurant disposition represents multiple element arrangements, and as a result, the cash consideration received was allocated to the separate elements based on its relative standalone selling price. Cash proceeds included upfront consideration for the sale of the restaurant and franchise fees. The cash consideration per restaurant related to franchise fees is consistent with the amounts stated in the related franchise agreement, which are charged for separate standalone arrangements. The Company initially defers and subsequently recognizes the franchise fees over the term of the franchise agreement. During the thirteen weeks ended March 29, 2023, this sale resulted in cash proceeds of $0.2 million and a net gain on sale of restaurant of $0.1 million. Since the date of their sale, this restaurant is now included in the total number of franchised El Pollo Loco restaurants.

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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 27, 2024 or at December 27, 2023. The Company did not recognize interest or penalties during the thirteen weeks ended March 27, 2024 and March 29, 2023, 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 27, 2024, the Company did not record any income tax receivable agreement income or expense, and for the thirteen weeks ended March 29, 2023, 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.

For the quarter ended March 27, 2024, the Company recorded an income tax provision of $2.2 million, reflecting an estimated effective tax rate of 27.1%. For the quarter ended March 29, 2023, the Company recorded an income tax provision of $2.0 million, reflecting an estimated effective tax rate of approximately 28.4%. The difference between the 21.0% statutory rate and the effective tax rate of 27.1% for the quarter ended March 27, 2024 is primarily a result of state taxes, a non-deductible executive compensation, partially offset by a Work Opportunity Tax Credit benefit.

Recently Issued Accounting Pronouncements

In November 2023, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosure.” The ASU updates reportable segment disclosure requirements, primarily through requiring enhanced disclosures about significant segment expenses and information used to assess segment performance. These disclosures are required quarterly. The ASU is effective for fiscal years beginning after December 15, 2023 and interim periods beginning after December 15, 2024, with early adoption permitted. It is required to be adopted retrospectively for all prior periods presented in the financial statements The Company is currently evaluating the impact of adopting this ASU on its disclosures.

In December 2023, the FASB issued ASU No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” The ASU includes amendments requiring enhanced income tax disclosures, primarily related to

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standardization and disaggregation of rate reconciliation categories and income taxes paid by jurisdiction. The guidance is effective for fiscal years beginning after December 15, 2024, with early adoption permitted, and should be applied prospectively with the option of retrospective application. The Company is currently evaluating the impact of adopting this ASU on its disclosures.

The Company reviewed all other recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact to the condensed consolidated financial statements.

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 27, 2024

    

December 27, 2023

Land

$

12,323

$

12,323

Buildings and improvements

 

149,209

 

148,259

Other property and equipment

 

88,158

 

86,423

Construction in progress

 

10,323

 

7,270

 

260,013

 

254,275

Less: accumulated depreciation and amortization

 

(173,709)

 

(170,248)

$

86,304

$

84,027

Depreciation expense was $3.9 million and $3.6 million for the thirteen weeks ended March 27, 2024 and March 29, 2023, respectively.

Based on the Company’s review of its property and equipment assets for impairment, the Company did not record any non-cash impairment charges for the thirteen weeks ended March 27, 2024 and March 29, 2023, respectively. See Note 1, “Basis of Presentation and Summary of Significant Accounting Policies – Impairment of Property and Equipment Assets and ROU Assets” for additional information.

3. STOCK-BASED COMPENSATION

Stock Options

At March 27, 2024, options to purchase 792,165 shares of common stock were outstanding, including 375,412 vested and 416,753 unvested options. Unvested options vest over time; however, upon a change in control, the Board of Directors may accelerate vesting. At March 27, 2024, there were no premium options, which are options granted above the stock price at date of grant, that were outstanding. A summary of stock option activity at March 27, 2024 and changes during the thirteen weeks ended March 27, 2024 is as follows:

Weighted-Average

 

Aggregate

    

    

Weighted-Average

 

 Contractual Life

 

Intrinsic Value

Shares

Exercise Price

 

Life (Years)

 

(in thousands)

Outstanding – December 27, 2023

 

843,320

$

10.13

Exercised

 

(5)

9.04

Forfeited, cancelled or expired

 

(51,150)

$

9.90

Outstanding – March 27, 2024

 

792,165

$

10.14

6.08

$

94

Vested and expected to vest at March 27, 2024

 

786,160

$

11.12

6.06

$

92

Exercisable at March 27, 2024

 

375,412

$

10.15

3.01

$

7

At March 27, 2024, the Company had total unrecognized compensation expense of $1.4 million related to unvested stock options, which it expects to recognize over a weighted-average period of 2.70 years.

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Restricted Shares

A summary of restricted share activity as of March 27, 2024 and changes during the thirteen weeks ended March 27, 2024 is as follows:

    

    

Weighted-Average

Shares

Fair Value

Unvested shares at December 27, 2023

 

537,461

$

9.94

Forfeited, cancelled, or expired

 

(37,309)

$

10.91

Unvested shares at March 27, 2024

 

500,152

$

9.87

Unvested shares at March 27, 2024, included 458,189 unvested restricted shares and 41,963 unvested restricted units.

At March 27, 2024, the Company had unrecognized compensation expense of $2.7 million related to unvested restricted shares, which it expects to recognize over a weighted-average period of 2.43 years and unrecognized compensation expense of $0.2 million related to unvested restricted units, which it expects to recognize over a weighted-average period of 0.62 years.

Total stock-based compensation expense was $0.9 million for the thirteen weeks ended March 27, 2024, and $0.8 million for the thirteen weeks ended March 29, 2023.

Share Repurchase Program

On November 2, 2023, the Company announced that its Board of Directors approved a share repurchase program (“Share Repurchase Program”) under which the Company is authorized to repurchase up to $20,000,000 of shares of the Company’s common stock. Under the Share Repurchase Program, 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. Pursuant to the Share Repurchase Program, the Company is authorized to effect repurchases using open market purchases, including pursuant to Rule 10b5-1 trading plans, and/or through privately negotiated transactions. The repurchase program does not obligate the Company to acquire any particular number of shares. The repurchase program will terminate on March 31, 2025.

Further, on December 4, 2023, the Company repurchased 1.5 million shares for a total purchase price of $12.6 million under the Stock Repurchase Agreement with FS Equity Partners V, L.P. and FS Affiliates V, L.P. Following completion of this repurchase, approximately $7.4 million of the Company’s common stock remained available for repurchase under the share repurchase program at December 27, 2023.

For the thirteen weeks ended March 27, 2024, the Company repurchased 136,400 shares of common stock under the Share Repurchase Program, using open market purchases, for total consideration of approximately $1.2 million. Following completion of these repurchases, approximately $6.2 million of the Company’s common stock remained available for repurchase under the Share Repurchase Program at March 27, 2024.

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 $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

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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 subject to certain customary exceptions.

The special dividend announced by the Company’s Board of Directors on October 11, 2022 was 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 (as defined in the 2022 Credit Agreement) 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 under the 2022 Revolver was 6.92% to 6.96% for the thirteen weeks ended March 27, 2024, and 5.69% to 6.30% for the thirteen weeks ended March 29, 2023.

The 2022 Credit Agreement contains certain customary financial covenants, subject to certain exceptions. The Company was in compliance with the financial covenants as of March 27, 2024.

At March 27, 2024, the Company had $80.0 million in outstanding borrowings under the 2022 Revolver and one letter of credit in the amount of $9.8 million outstanding, and as a result, the Company had $60.2 million in borrowing availability.

Maturities, Borrowings and Paydowns

On July 27, 2022, the Company refinanced and terminated the 2018 Revolver pursuant to the 2022 Credit Agreement. During the thirteen weeks ended March 27, 2024 and March 29, 2023 the Company paid down $4.0 million and $8.0 million, respectively, on the 2022 Revolver. No amounts were borrowed on the 2022 Revolver during both the thirteen weeks ended March 27, 2024 and March 29, 2023. There are no required principal payments prior to maturity for the 2022 Revolver which matures on July 27, 2027.

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 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 was reclassified into earnings when the hedged forecasted transaction was reported in earnings.

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As of March 27, 2024, there were no estimated net gains to be included in AOCI related to the Company’s cash flow hedge that would be reclassified into earnings, 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):

    

Thirteen Weeks Ended

    

March 27, 2024

    

March 29, 2023

Interest expense on hedged portion of debt

$

$

Interest income on interest rate swap

 

 

(85)

Interest income on debt and derivatives, net

$

$

(85)

The following table summarizes the effect of the Company’s cash flow hedge accounting on AOCI for the thirteen weeks ended March 27, 2024 and March 29, 2023 (in thousands):

Thirteen Weeks Ended

Gain Reclassified from

Net Gain Recognized in OCI

AOCI into Interest Income

 

March 27, 2024

    

March 29, 2023

    

March 27, 2024

    

March 29, 2023

Interest rate swap

$

$

$

$

(85)

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 27, 2024

    

December 27, 2023

Accrued sales and property taxes

$

5,666

$

5,229

Gift card liability

 

4,497

 

4,877

Loyalty rewards program liability

711

687

Accrued advertising

6,035

3,010

Accrued legal settlements and professional fees

 

926

 

720

Deferred franchise and development fees

 

571

 

586

Other

 

3,578

 

3,252

Total other accrued expenses and current liabilities

$

21,984

$

18,361

6. OTHER NONCURRENT LIABILITIES

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

    

March 27, 2024

    

December 27, 2023

Deferred franchise and development fees

$

6,348

$

6,411

Other

 

32

 

34

Total other noncurrent liabilities

$

6,380

$

6,445

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

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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 27, 2024, the Company’s total estimated commitment to purchase chicken was $24.8 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 27, 2024, the potential amount of undiscounted payments the Company could be required to make in the event of non-payment by the primary lessee was $3.6 million. The present value of these potential payments discounted at the Company’s estimated pre-tax cost of debt at March 27, 2024 was $2.5 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 27, 2024, the Company had employment agreements with three 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 27, 2024 and March 29, 2023. 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 27, 2024

    

March 29, 2023

    

Numerator:

  

 

  

 

Net income

$

5,912

$

4,918

Denominator:

 

  

 

  

Weighted-average shares outstanding—basic

 

30,777,769

 

36,234,105

Weighted-average shares outstanding—diluted

 

30,937,226

 

36,478,158

Net income per share—basic

$

0.19

$

0.14

Net income per share—diluted

$

0.19

$

0.13

Anti-dilutive securities not considered in diluted EPS calculation

 

840,830

 

645,356

Below is a reconciliation of basic and diluted share counts:

    

Thirteen Weeks Ended

    

March 27, 2024

March 29, 2023

Weighted-average shares outstanding—basic

 

30,777,769

 

36,234,105

 

Dilutive effect of stock options and restricted shares

 

159,457

 

244,053

 

Weighted-average shares outstanding—diluted

 

30,937,226

 

36,478,158

 

9. RELATED PARTY TRANSACTIONS

None.

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 points to a customer 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 27, 2024 and December 27, 2023, the revenue allocated to loyalty points that have not been redeemed was $0.7 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.

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

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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 27, 2024, there were no performance obligations related to hardware services that were unsatisfied or partially satisfied.

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

    

March 27, 2024

    

March 29, 2023

Greater Los Angeles area market

 

71.5

%  

70.7

%  

Other markets

 

28.5

%  

29.3

%  

Total

 

100

%  

100

%  

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Contract balances

The following table provides information about the change in the franchise contract liability balances during the thirteen weeks ended March 27, 2024 and March 29, 2023 (in thousands):

December 27, 2023

$

6,997

Revenue recognized - beginning balance

 

(158)

Additional contract liability

 

80

March 27, 2024

$

6,919

December 28, 2022

$

6,377

Revenue recognized - beginning balance

 

(214)

Additional contract liability

 

289

March 29, 2023

$

6,452

The Company’s franchise contract liability includes development fees, initial franchise and license fees, franchise renewal fees, lease subsidies and royalty discounts and is included within other accrued expenses and current liabilities and other noncurrent liabilities within the accompanying condensed consolidated balance sheets. The Company receives area development fees from franchisees when they execute multi-unit area development agreements. Initial franchise and license fees, or franchise renewal fees, are received from franchisees upon the execution of, or renewal of, a franchise agreement. Revenue is recognized from these agreements as the underlying performance obligation is satisfied, which is over the term of the agreement.

The following table illustrates the estimated revenue to be recognized in future periods related to performance obligations under the applicable contracts that are unsatisfied as of March 27, 2024 (in thousands):

Franchise revenues:

    

  

2024

$

445

2025

 

560

2026

 

538

2027

 

517

2028

 

486

Thereafter

 

4,373

Total

$

6,919

Changes in the loyalty rewards program liability included in deferred revenue within other accrued expenses and current liabilities on the condensed consolidated balance sheets were as follows (in thousands):

    

March 27, 2024

    

December 27, 2023

    

Loyalty rewards liability, beginning balance

$

687

$

526

Revenue deferred

 

503

 

2,065

Revenue recognized

 

(479)

 

(1,904)

Loyalty rewards liability, ending balance

$

711

$

687

The Company expects all loyalty points revenue related to performance obligations unsatisfied as of March 27, 2024 to be recognized within one year.

Gift Cards

The gift card liability included in other accrued expenses and current liabilities on the condensed consolidated balance sheets was as follows (in thousands):

March 27, 2024

December 27, 2023

Gift card liability

$

4,497

$

4,877

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Revenue recognized from the redemption of gift cards that was included in other accrued expenses and current liabilities at the beginning of the year was as follows (in thousands):

Thirteen Weeks Ended

March 27, 2024