SEC Filing | El Pollo Loco Holdings, Inc.

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)


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

For the quarterly period ended June 26, 2024


☐	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 July 26, 2024, there were 29,928,318 shares of the issuer’s common stock outstanding.

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Table of Contents		Page

PART I—FINANCIAL INFORMATION		3
Item 1. Financial Statements.		3
Condensed Consolidated Balance Sheets (Unaudited)		3
Condensed Consolidated Statements of Income (Unaudited)		4
Condensed Consolidated Statements of Comprehensive Income (Unaudited)		5
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)		6
Condensed Consolidated Statements of Cash Flows (Unaudited)		8
Notes to Condensed Consolidated Financial Statements (Unaudited)		9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.		27
Item 3. Quantitative and Qualitative Disclosures About Market Risk.		44
Item 4. Controls and Procedures.		44

PART II—OTHER INFORMATION		46
Item 1. Legal Proceedings.		46
Item 1A. Risk Factors.		46
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.		46
Item 3. Defaults Upon Senior Securities.		47
Item 4. Mine Safety Disclosures.		47
Item 5. Other Information.		47
Item 6. Exhibits.		48
Signatures		50

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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 and per share data)


	June 26,		December 27,
	2024		2023
Assets
Current assets:
Cash and cash equivalents	$	10,465	$	7,288
Accounts and other receivables, net		10,279		10,148
Inventories		1,743		1,911
Prepaid expenses and other current assets		3,518		5,634
Income tax receivable		—		153
Total current assets		26,005		25,134
Property and equipment, net		86,178		84,027
Property and equipment held under finance lease, net		1,511		1,528
Property and equipment held under operating leases, net ("ROU asset")		166,507		168,007
Goodwill		248,674		248,674
Trademarks		61,888		61,888
Other assets		3,083		3,043
Total assets	$	593,846	$	592,301
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of obligations under finance leases	$	156	$	140
Current portion of obligations under operating leases		19,903		19,490
Accounts payable		11,704		12,541
Accrued salaries and vacation		11,782		9,332
Accrued insurance		11,930		11,831
Accrued income taxes payable		156		70
Accrued interest		378		394
Current portion of income tax receivable agreement payable		23		422
Other accrued expenses and current liabilities		18,854		18,361
Total current liabilities		74,886		72,581
Revolver loan		87,000		84,000
Obligations under finance leases, net of current portion		1,597		1,617
Obligations under operating leases, net of current portion		166,408		168,084
Deferred taxes		9,076		8,878
Other noncurrent liabilities		6,301		6,445
Total liabilities		345,268		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; 29,988,771 and 31,353,223 shares issued and outstanding as of June 26, 2024 and December 27, 2023, respectively		299		313
Additional paid-in-capital		220,772		236,421
Retained earnings		27,507		13,962
Total stockholders’ equity		248,578		250,696
Total liabilities and stockholders’ equity	$	593,846	$	592,301

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 and per share data)



	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	June 26, 2024		June 28, 2023		June 26, 2024		June 28, 2023
Revenue
Company-operated restaurant revenue	$	102,307	$	103,901	$	199,460	$	201,774
Franchise revenue		11,651		10,119		22,999		19,791
Franchise advertising fee revenue		8,218		7,472		15,870		14,453
Total revenue		122,176		121,492		238,329		236,018
Cost of operations
Food and paper cost		25,731		28,474		51,350		55,376
Labor and related expenses		32,868		32,277		63,448		63,818
Occupancy and other operating expenses		24,656		25,576		48,521		50,462
Gain on recovery of insurance proceeds, lost profits, net		—		—		—		(151)
Company restaurant expenses		83,255		86,327		163,319		169,505
General and administrative expenses		11,787		11,108		23,712		22,307
Franchise expenses		10,871		9,492		21,473		18,524
Depreciation and amortization		3,870		3,694		7,721		7,331
Loss (gain) on disposal of assets		63		(80)		104		(50)
Gain on recovery of insurance proceeds, property, equipment and expenses		—		—		(41)		(242)
Loss (gain) on disposition of restaurants		7		25		7		(111)
Impairment and closed-store reserves		5		38		37		115
Total expenses		109,858		110,604		216,332		217,379
Income from operations		12,318		10,888		21,997		18,639
Interest expense, net		1,527		976		3,091		1,980
Income tax receivable agreement expense (income)		—		121		—		(1)
Income before provision for income taxes		10,791		9,791		18,906		16,660
Provision for income taxes		3,158		2,735		5,361		4,686
Net income	$	7,633	$	7,056	$	13,545	$	11,974
Net income per share
Basic	$	0.25	$	0.20	$	0.44	$	0.33
Diluted	$	0.25	$	0.20	$	0.44	$	0.33
Weighted-average shares used in computing net income per share
Basic		30,240,170		35,433,414		30,508,970		35,833,759
Diluted		30,378,048		35,534,104		30,661,830		36,018,288

See notes to condensed consolidated financial statements (unaudited).

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EL POLLO LOCO HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Amounts in thousands)



	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	June 26, 2024		June 28, 2023		June 26, 2024		June 28, 2023
Net income	$	7,633	$	7,056	$	13,545	$	11,974
Other comprehensive loss
Changes in derivative instruments
Reclassifications of loss into net income		—		(85)		—		(170)
Income tax benefit		—		22		—		44
Other comprehensive loss, net of taxes		—		(63)		—		(126)
Comprehensive income	$	7,633	$	6,993	$	13,545	$	11,848

See notes to condensed consolidated financial statements (unaudited).

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EL POLLO LOCO HOLDINGS, INC.

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

(Amounts in thousands, except share data)


	Thirteen Weeks Ended June 26, 2024
								Accumulated
				Additional				Other		Total
	Common Stock			Paid-in		Retained		Comprehensive		Stockholders’
	Shares	Amount		Capital		Earnings		(Loss) Income		Equity
Balance, March 27, 2024	31,179,519	$	312	$	236,103	$	19,874	$	—	$	256,289
Stock-based compensation	—		—		897		—		—		897
Issuance of common stock related to restricted shares	493,496		5		(5)		—		—		—
Issuance of common stock upon exercise of stock options, net	110,375		1		1,056		—		—		1,057
Shares repurchased for employee tax withholdings	(14,294)		—		(148)		—		—		(148)
Repurchase of common stock	(1,737,786)		(18)		(16,986)		—		—		(17,004)
Repurchase of common stock - excise tax	—		—		(146)		—		—		(146)
Forfeiture of common stock related to restricted shares	(42,539)		(1)		1		—		—		—
Net income	—		—		—		7,633		—		7,633
Balance, June 26, 2024	29,988,771	$	299	$	220,772	$	27,507	$	—	$	248,578

	Thirteen Weeks Ended June 28, 2023
								Accumulated
				Additional				Other		Total
	Common Stock			Paid-in		Accumulated		Comprehensive		Stockholders’
	Shares	Amount		Capital		Deficit		(Loss) Income		Equity
Balance, March 29, 2023	36,450,477	$	364	$	286,791	$	(6,674)	$	63	$	280,544
Stock-based compensation	—		—		842		—		—		842
Issuance of common stock related to restricted shares	363,210		4		(4)		—		—		—
Issuance of common stock upon exercise of stock options, net	179,950		2		779		—		—		781
Shares repurchased for employee tax withholdings	(18,490)		—		(171)		—		—		(171)
Repurchase of common stock	(1,272,287)		(13)		(11,928)		—		—		(11,941)
Repurchase of common stock - excise tax	—		—		(88)		—		—		(88)
Forfeiture of common stock related to restricted shares	(59,113)		(1)		1		—		—		—
Other comprehensive income, net of tax	—		—		—		—		(63)		(63)
Net income	—		—		—		7,056		—		7,056
Balance, June 28, 2023	35,643,747	$	356	$	276,222	$	382	$	—	$	276,960

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	Twenty-Six Weeks Ended June 26, 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	—		—		1,817		—		—		1,817
Issuance of common stock related to restricted shares	493,496		5		(5)		—		—		—
Issuance of common stock upon exercise of stock options, net	110,380		1		1,056		—		—		1,057
Shares repurchased for employee tax withholdings	(14,294)		—		(148)		—		—		(148)
Repurchase of common stock	(1,874,186)		(19)		(18,212)		—		—		(18,231)
Repurchase of common stock - excise tax	—		—		(158)		—		—		(158)
Forfeiture of common stock related to restricted shares	(79,848)		(1)		1		—		—		—
Net income	—		—		—		13,545		—		13,545
Balance, June 26, 2024	29,988,771	$	299	$	220,772	$	27,507	$	—	$	248,578

	Twenty-Six Weeks Ended June 28, 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	—		—		1,613		—		—		1,613
Issuance of common stock related to restricted shares	363,210		4		(4)		—		—		—
Issuance of common stock upon exercise of stock options, net	184,294		2		822		—		—		824
Shares repurchased for employee tax withholdings	(18,490)		—		(171)		—		—		(171)
Repurchase of common stock	(1,824,636)		(19)		(18,133)		—		—		(18,152)
Repurchase of common stock - excise tax	—		—		(150)		—		—		(150)
Forfeiture of common stock related to restricted shares	(68,692)		(1)		1		—		—		—
Other comprehensive (loss) income, net of tax	—		—		—		—		(126)		(126)
Net income	—		—		—		11,974		—		11,974
Balance, June 28, 2023	35,643,747	$	356	$	276,222	$	382	$	—	$	276,960

See notes to condensed consolidated financial statements (unaudited).

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EL POLLO LOCO HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Amounts in thousands)



	Twenty-Six Weeks Ended
	June 26, 2024		June 28, 2023
Cash flows from operating activities:
Net income	$	13,545	$	11,974
Adjustments to reconcile net income to net cash flows provided by operating activities:
Depreciation and amortization		7,721		7,331
Stock-based compensation expense		1,817		1,613
Income tax receivable agreement income		—		(1)
Fire insurance proceeds for expenses paid and lost profit		—		151
Loss (gain) on disposition of restaurants		7		(111)
Loss (gain) on disposal of assets		104		(50)
Gain on recovery of insurance proceeds, property, equipment and expenses, net		(41)		(242)
Impairment of property and equipment		—		53
Amortization of deferred financing costs		96		106
Deferred income taxes, net		198		249
Changes in operating assets and liabilities:
Accounts and other receivables		22		(1,355)
Inventories		169		401
Prepaid expenses and other current assets		2,116		189
Income taxes payable		86		4,227
Other assets		(134)		(81)
Accounts payable		259		(1,095)
Accrued salaries and vacation		2,450		1,826
Accrued insurance		99		360
Payment related to tax receivable agreement		(399)		—
Other accrued expenses and liabilities		2		(3,749)
Net cash flows provided by operating activities		28,117		21,796
Cash flows from investing activities:
Proceeds from disposition of restaurants		100		175
Proceeds from fire insurance for property and equipment		41		163
Purchase of property and equipment		(10,687)		(9,237)
Net cash flows used in investing activities		(10,546)		(8,899)
Cash flows from financing activities:
Proceeds from borrowings on revolver and swingline loans		14,000		2,000
Payments on revolver and swingline loan		(11,000)		(8,000)
Minimum tax withholdings related to net share settlements		(148)		(171)
Proceeds from issuance of common stock upon exercise of stock options, net of expenses		1,057		824
Payment of obligations under finance leases		(101)		(76)
Repurchases of common stock		(18,202)		(17,784)
Net cash flows used in by financing activities		(14,394)		(23,207)
Increase (decrease) in cash and cash equivalents		3,177		(10,310)
Cash and cash equivalents, beginning of period		7,288		20,493
Cash and cash equivalents, end of period	$	10,465	$	10,183



	Twenty-Six Weeks Ended
	June 26, 2024		June 28, 2023
Supplemental cash flow information
Cash paid during the period for interest	$	3,061	$	2,077
Cash paid during the period for income taxes	$	4,925	$	45
Unpaid purchases of property and equipment	$	4,351	$	5,894
Unpaid repurchases of common stock and excise tax	$	742	$	518

See notes to condensed consolidated financial statements (unaudited).

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EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Overview

El Pollo Loco Holdings, Inc. (“Holdings”) is a Delaware corporation headquartered in Costa Mesa, California. Holdings and its direct and indirect subsidiaries are collectively referred to herein as the “Company.” The Company’s activities are conducted principally through its indirect wholly owned subsidiary, El Pollo Loco, Inc. (“EPL”), which develops, franchises, licenses, and operates quick-service restaurants under the name El Pollo Loco® and operates under one operating segment. At June 26, 2024, the Company operated 171 and franchised 324 El Pollo Loco restaurants in the United States. The Company also licenses 10 restaurants in the Philippines.

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 in Note 4 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 June 26, 2024, the Company’s total debt was $87.0 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 $10.5 million at June 26, 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 $4.0 million on its 2022 Revolver resulting in outstanding borrowings of $83.0 million as of August 1, 2024.

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 11.9% and 15.1% of the Company’s accounts payable at June 26, 2024 and December 27, 2023, respectively. Purchases from the Company’s largest supplier totaled 24.2% and 24.4% of total expenses for the thirteen and twenty-six weeks ended June 26, 2024, respectively, and 27.8% and 27.3% of total expenses for the thirteen and twenty-six weeks ended June 28, 2023, respectively.

Company-operated and franchised restaurants in the greater Los Angeles area generated, in the aggregate, approximately 71.8% and 71.7% of total revenue for the thirteen and twenty-six weeks ended June 26, 2024, respectively, and 70.9% and 70.8% for the thirteen and twenty-six weeks ended June 28, 2023, respectively.

Goodwill and Indefinite Lived Intangible Assets

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

Upon the sale or 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 twenty-six weeks ended June 26, 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 and twenty-six weeks ended June 26, 2024. Accordingly, the Company did not record any impairment to its goodwill or indefinite-lived intangible assets during the thirteen and twenty-six weeks ended June 26, 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.

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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).

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There were no non-financial instruments measured at fair value on a nonrecurring basis as of and for the thirteen and twenty-six weeks ended June 26, 2024.

The following non-financial instruments were measured at fair value on a nonrecurring basis as of and for the thirteen and twenty-six weeks ended June 28, 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 immediately below under “Impairment of Property and Equipment and ROU Assets” (in thousands):


									Thirteen Weeks		Twenty-Six Weeks
			Fair Value Measurements at June 28, 2023 Using						Ended June 28, 2023		Ended June 28, 2023
	Total		Level 1		Level 2		Level 3		Impairment Losses		Impairment Losses
Certain ROU assets, net	$	265	$	—	$	—	$	265	$	—	$	39

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 twenty-six weeks ended June 26, 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 and twenty-six weeks ended June 26, 2024.

The Company recorded a non-cash impairment charge of less than $0.1 million for the thirteen and twenty-six weeks ended June 28, 2023, primarily related to the carrying value of the ROU assets of one restaurant in California. Given the inherent uncertainty in projecting results for newer restaurants in newer markets, the Company monitors 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 to closed restaurants are included within closed-store expense. During both the thirteen and twenty-six weeks ended June 26, 2024 and June 28, 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 received $0.4 million in cash, net of the insurance deductible, from the insurance company during fiscal 2023 for which 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 for the reimbursement of property and

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equipment and expenses and the reimbursement of lost profits, net of the related costs, is included in the accompanying condensed consolidated statements of income, for the twenty-six weeks ended June 28, 2023, as a reduction of company restaurant expenses.

Loss (Gain) on Disposition of Restaurants

During the thirteen and twenty-six weeks ended June 26, 2024, the Company completed the sale of one restaurant within California to an existing franchisee due to an expiring lease term on April 30, 2024. During the twenty-six weeks ended June 28, 2023, the Company completed the sale of one restaurant within California to an existing franchisee. The Company determined that these restaurant dispositions represented 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 twenty-six weeks ended June 26, 2024 and June 28, 2023, these sales resulted in cash proceeds of $0.1 million and $0.2 million, respectively, and a net loss of sale of restaurant of less than $0.1 million and a net gain on sale of restaurant of $0.1 million, respectively. Since the date of sale, this restaurant is now included in the total number of franchised El Pollo Loco restaurants.

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 June 26, 2024 or at December 27, 2023. The Company did