# El Pollo Loco Holdings, Inc.: Form 10-Q for the period ended Sep 27, 2023

- Company: [El Pollo Loco Holdings, Inc.](/companies/loco.md) (CIK 1606366)
- Form: 10-Q
- Filed: 2023-11-03
- Accepted by EDGAR: Nov 3, 2023, 16:20 ET
- Period: 2023-09-27
- Accession: 0001606366-23-000047
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1606366/000160636623000047/loco-20230927x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1606366/000160636623000047/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-27.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-06-29 to 2023-09-27 | $120.4m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Revenue | 9 months, 2022-12-29 to 2023-09-27 | $356.4m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Operating income | 3 months, 2023-06-29 to 2023-09-27 | $13.7m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2022-12-29 to 2023-09-27 | $32.3m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-06-29 to 2023-09-27 | $1.4m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2022-12-29 to 2023-09-27 | $3.4m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-06-29 to 2023-09-27 | $3.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2022-12-29 to 2023-09-27 | $7.7m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-06-29 to 2023-09-27 | $9.2m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2022-12-29 to 2023-09-27 | $21.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-06-29 to 2023-09-27 | $0.28 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2022-12-29 to 2023-09-27 | $0.60 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-06-29 to 2023-09-27 | $0.28 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2022-12-29 to 2023-09-27 | $0.61 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-06-29 to 2023-09-27 | 33,490,004 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2022-12-29 to 2023-09-27 | 35,179,483 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2022-12-29 to 2023-09-27 | $32.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2022-12-29 to 2023-09-27 | $15.3m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months, 2022-12-29 to 2023-09-27 | $46.6m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-09-27 | $13.8m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-09-27 | $29.1m | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-27 | $593.0m | us-gaap:Assets |
| Current liabilities | at 2023-09-27 | $69.6m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-09-27 | $334.4m | us-gaap:Liabilities |
| Long-term debt | at 2023-09-27 | $80.0m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2023-09-27 | $258.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 75,816 characters.

### Cautionary Statement Concerning Forward-Looking Statements

This report contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this report are forward-looking statements. Forward-looking statements discuss our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements because they do not relate strictly to historical or current facts. These statements may include words such as “aim,” “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “outlook,” “potential,” “project,” “projection,” “plan,” “intend,” “seek,” “may,” “could,” “would,” “will,” “should,” “can,” “can have,” “likely,” the negatives thereof and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. They appear in a number of places throughout this report and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the industry in which we operate. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those that we expected.

While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. You should evaluate all forward-looking statements made in this report in the context of the factors that could cause outcomes to differ materially from our expectations. These factors include, but are not limited to:

- global economic or other business conditions that may affect the desire or ability of our customers to purchase our products such as inflationary pressures, high unemployment levels, increases in gas prices, and declines in median income growth, consumer confidence and consumer discretionary spending;
- our ability to open new restaurants in new and existing markets, including difficulty in finding sites and in negotiating acceptable leases;
- our ability to compete successfully with other quick-service and fast casual restaurants;
- vulnerability to changes in political and economic conditions and consumer preferences;
- our ability to attract, develop, assimilate and retain employees;
- vulnerability to conditions in the greater Los Angeles area and to natural disasters given the geographic concentration and real estate intensive nature of our business;
- the impacts of the uncertainty regarding a potential resurgence of COVID-19 or another pandemic, epidemic or infectious disease outbreak on our company, our employees, our customers, our partners, our industry and the

economy as a whole, as well as our franchisees’ ability to operate their individual restaurants without disruption;

- the possibility that we may continue to incur significant impairment of certain of our assets, in particular in our new markets;
- changes in food and supply costs, especially for chicken, labor, construction and utilities;
- social media and negative publicity, whether or not valid, and our ability to respond to and effectively manage the accelerated impact of social media;
- our ability to continue to expand our digital business, delivery orders and catering;
- concerns about food safety and quality and about food-borne illness;
- dependence on frequent and timely deliveries of food and supplies;
- our ability to service our level of indebtedness;
- uncertainty related to the success of our marketing programs, new menu items, advertising campaigns and restaurant designs and remodels;
- adverse changes in the economic environment, including inflation and increased labor and supply costs, which may affect our franchisees, with adverse consequences to us;
- our limited control over our franchisees and potential deterioration of our relations with existing or potential franchisees;
- potential exposure to unexpected costs and losses from our self-insurance programs;
- potential obligations under long-term and non-cancelable leases, and our ability to renew leases at the end of their terms;
- the possibility that Delaware law, our organizational documents, our shareholder rights agreement, and our existing and future debt agreements may impede or discourage a takeover;
- the impact of shareholder activism on our expenses, business and stock price;
- the impact of any failure of our information technology system or any breach of our network security;
- the impact of any security breaches on our ability to protect our customers’ payment method data or personal information;
- our ability to enforce and maintain our trademarks and protect our other proprietary intellectual property;
- risks related to government regulation and litigation, including employment and labor laws; and
- other risks set forth in our filings with the SEC from time to time, including under Item 1A, Risk Factors in our annual report on Form 10-K for the year ended December 28, 2022, which filings are available online at www.sec.gov.

We caution you that the important factors referenced above may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences we anticipate or affect us or our operations in the ways that we expect. The forward-looking statements included in this report are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as required by law. If we do update one or more forward-looking statements, no inference should be made that we will make additional updates with respect to those or other forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements.

### Overview

El Pollo Loco is a differentiated and growing restaurant concept that specializes in fire-grilling citrus-marinated chicken and operates in the limited service restaurant segment. We strive to offer food that integrates the culinary traditions of Mexico with the healthier lifestyle.” Our distinctive menu features our signature product--citrus-marinated fire-grilled chicken--and a variety of Mexican and LA-inspired entrees that we create from our chicken. We serve individual and family-sized chicken meals, a variety of Mexican and LA-inspired entrees, and sides, and, throughout the year, on a limited-time basis, additional proteins like beef. Our entrees include favorites such as our Chicken Avocado Burrito, Pollo Fit entrees, chicken tostada salads, and Pollo Bowls. Our famous Creamy Cilantro dressings and salsas are prepared fresh daily, allowing our customers to create their favorite flavor profiles to enhance their culinary experience. We believe that our distinctive menu with better for you and more affordable alternatives appeals to consumers across a wide variety of socio-economic backgrounds and drives our balanced composition of sales throughout the day (our “day-part mix”), including at lunch and dinner.

### Market Trends and Uncertainties

On September 28, 2023, Governor Newsom signed AB 1228 into law, which will repeal and replace the Fast Food Accountability and Standards Recovery Act (FAST Act) on January 1, 2024 if a referendum seeking repeal of the FAST Act is withdrawn prior to that date. The FAST Act was previously signed into law in September 2022 and would have, among other things, established a council to set minimum wage standards for industry workers in California. In connection with the adoption of AB 1228, the proponents of the referendum seeking repeal of the FAST Act indicated their agreement to withdraw the referendum. If AB 1228 becomes effective January 1, 2024, the minimum wage at fast food restaurants that are part of brands which have more than 60 establishments nationwide will rise to $20 an hour on April 1, 2024, and a Fast Food Council created by AB 1228 will have limited power to approve annual wage increases until 2029. Under the law, the Fast Food Council will also have the power to develop and propose minimum standards for fast food workers, including standards for working hours, working conditions, and health and safety. As a result of AB 1228, we expect our labor and regulatory compliance costs will increase beginning in fiscal 2024 and that our results of operations and profitability will be adversely affected if we are not able to implement other measures to counter these increased costs.

We have experienced inflationary pressures affecting our operations in certain areas such as food cost, labor costs, construction costs and utility costs. We have also experienced temporary shortages in food, equipment and other goods, as well as an increase in freights costs, due in part to supply chain impacts of overall economic conditions in the markets in which we operate. We have been able to substantially offset these inflationary and other cost pressures through various actions, such as increasing menu prices, managing menu mix, and productivity improvements. However, we expect these inflationary and other cost pressures to continue throughout the remainder of fiscal year 2023 and we may not be able to offset cost increases in the future.

### Growth Strategies and Outlook

As of September 27, 2023, we had 492 locations in seven states. In fiscal 2022, we opened four new company-operated restaurants, two in Nevada and two in California, and our franchisees opened nine new restaurants, seven in California, one in Colorado and one in Utah. For the thirty-nine weeks ended September 27, 2023, we opened one new company-operated in Nevada and our franchisees opened one new restaurant in California. We plan to continue to expand our business, drive restaurant sales growth, and enhance our competitive positioning, by executing the following strategies:

- embed our unique El Pollo Loco culture;
- build awareness and own our lane;
- deliver exceptional service – profitably; and
- accelerate development.

To increase comparable restaurant sales, we plan to increase customer frequency, attract new customers, and improve per-person spend. The success of these growth plans is not guaranteed.

### Highlights and Trends

### Comparable Restaurant Sales

For the thirteen weeks ended September 27, 2023, system-wide comparable restaurant sales increased by 0.8% from the comparable period in the prior year. For the thirty-nine weeks ended September 27, 2023, system-wide comparable restaurant sales decreased by 0.7% from the comparable period in the prior year. For company-operated restaurants, comparable restaurant sales for the thirteen and thirty-nine weeks ended September 27, 2023 increased by 0.3% and 0.5%, respectively. For company-operated restaurants, the quarter’s change in comparable restaurant sales consisted of a 1.3% increase in average check size, partially offset by a 0.9% decrease in transactions, and the year-to-date change in comparable restaurant sales consisted of a 3.2% increase in average check size, partially offset by a 2.6% decrease in transactions. For franchised restaurants, comparable restaurant sales increased 1.1% and decreased 1.4% for the thirteen and thirty-nine weeks ended September 27, 2023, respectively. Refer to Comparable Restaurant Sales definition in “Key Performance Indicators” section below.

### Restaurant Development

Our restaurant counts at the beginning and end of each of the last three fiscal years and the thirty-nine weeks ended September 27, 2023, were as follows:

| ​ ​ ​ Company-operated restaurant activity: | ​ ​ | ​ Thirty-Nine Weeks Ended September 27, 2023 | ​ ​ | ​ Fiscal Year Ended 2022 | ​ ​ | ​ 2021 | ​ ​ | ​ 2020 |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| Beginning of period | ​ | 188 | ​ | 189 | ​ | 196 | ​ | 195 |
| Openings | ​ | 1 | ​ | 4 | ​ | 2 | ​ | 1 |
| Restaurant sale to franchisee | ​ | (18) | ​ | (3) | ​ | (8) | ​ | — |
| Closures | ​ | — | ​ | (2) | ​ | (1) | ​ | — |
| Restaurants at end of period | ​ | 171 | ​ | 188 | ​ | 189 | ​ | 196 |
| **Franchised restaurant activity:** | ​ |  | ​ |  | ​ |  | ​ |  |
| Beginning of period | ​ | 302 | ​ | 291 | ​ | 283 | ​ | 287 |
| Openings | ​ | 1 | ​ | 9 | ​ | 2 | ​ | 3 |
| Restaurant sale to franchisee | ​ | 18 | ​ | 3 | ​ | 8 | ​ | — |
| Closures | ​ | — | ​ | (1) | ​ | (2) | ​ | (7) |
| Restaurants at end of period | ​ | 321 | ​ | 302 | ​ | 291 | ​ | 283 |
| **System-wide restaurant activity:** | ​ |  | ​ |  | ​ |  | ​ |  |
| Beginning of period | ​ | 490 | ​ | 480 | ​ | 479 | ​ | 482 |
| Openings | ​ | 2 | ​ | 13 | ​ | 4 | ​ | 4 |
| Closures | ​ | — | ​ | (3) | ​ | (3) | ​ | (7) |
| Restaurants at end of period | ​ | 492 | ​ | 490 | ​ | 480 | ​ | 479 |

### Restaurant Remodeling

During the thirty-nine weeks ended September 27, 2023, we completed 12 company-operated restaurant remodels and 21 franchise remodels. In fiscal 2023, we plan to continue our standard practices for remodels, which includes completing a total of 14-15 company and 28-32 franchise remodels. The cost of our restaurant remodels varies depending on the scope of the work required, but on average the investment is $0.3 million to $0.4 million per restaurant.

### Loco Rewards

Our Loco Rewards loyalty program offers rewards that incentivize customers to visit our restaurants more often each month. 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 on a pro-rata basis, based on stand-alone selling price, as determined by menu pricing and loyalty point’s terms.

In addition, customers can earn additional points and free entrées for a variety of engagement activities. As points are available for redemption past the quarter earned, a portion of the revenue associated with the earned points will be deferred until redemption or expiration. As of September 27, 2023 and December 28, 2022, the revenue allocated to loyalty points that had not been redeemed was $0.6 million and $0.5 million, respectively, which is reflected in our accompanying condensed consolidated balance sheets within other accrued expenses and current liabilities. We had over 3.6 million loyalty program members as of September 27, 2023.

### Critical Accounting Policies and Use of Estimates

The preparation of our condensed consolidated financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) requires us to make estimates and judgments that affect our reported amounts of assets, liabilities, revenue, and expenses, and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under current circumstances in making judgments about the carrying value of assets and liabilities that are not readily available from other sources. We evaluate our estimates on an on-going basis. Actual results may differ from these estimates under different assumptions or conditions.

Accounting policies are an integral part of our condensed consolidated financial statements. A thorough understanding of these accounting policies is essential when reviewing our reported results of operations and our financial position. Management believes that our critical accounting policies and estimates involve the most difficult management judgments, due to the sensitivity of the methods and assumptions used. For a summary of our critical accounting policies and a discussion of our use of estimates, see “Critical Accounting Policies and Estimates” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K for the year ended December 28, 2022.

There have been no material changes to our critical accounting policies or uses of estimates since our annual report on Form 10-K for the year ended December 28, 2022.

### Key Financial Definitions

### Revenue

Our revenue is derived from three primary sources: company-operated restaurant revenue, franchise revenue, which is comprised primarily of franchise royalties and, to a lesser extent, franchise fees and sublease rental income, and franchise advertising fee revenue. See Note 10, “Revenue from Contracts with Customers” in the Notes to Condensed Consolidated Financial Statements above for further details regarding our revenue recognition policy.

### Food and Paper Costs

Food and paper costs include the direct costs associated with food, beverage and packaging of our menu items. The components of food and paper costs are variable in nature, change with sales volume, are impacted by menu mix, and are subject to increases or decreases in commodity costs.

### Labor and Related Expenses

Labor and related expenses include wages, payroll taxes, workers’ compensation expense, benefits, and bonuses paid to our restaurant management teams. Like other expense items, we expect labor costs to grow proportionately as our restaurant revenue grows. Factors that influence labor costs include minimum wage and payroll tax legislation, state labor laws (which, in California, may include AB 1228), overtime, wage inflation, the frequency and severity of workers’ compensation claims, health care costs, and the performance of our restaurants.

### Occupancy Costs and Other Operating Expenses

Occupancy costs include rent, common area maintenance (“CAM”), and real estate taxes. Other restaurant operating expenses include the costs of utilities, advertising, credit card processing fees, restaurant supplies, repairs and maintenance, and other restaurant operating costs.

### General and Administrative Expenses

General and administrative expenses are comprised of expenses associated with corporate and administrative functions that support the development and operations of our restaurants, including compensation and benefits, travel expenses, stock compensation costs, legal and professional fees, and other related corporate costs. Also included are pre-opening costs, and expenses above the restaurant level, including salaries for field management, such as area and regional managers, and franchise field operational support.

### Franchise Expenses

Franchise expenses are primarily comprised of rent expenses incurred on properties leased by us and then sublet to franchisees, expenses incurred in support of franchisee information technology systems, and the franchisee’s portion of advertising expenses.

### Depreciation and Amortization

Depreciation and amortization primarily consists of the depreciation of property and equipment, including leasehold improvements and equipment.

### Loss on Disposal of Assets

Loss on disposal of assets includes the loss on disposal of assets related to retirements and replacement or write-off of leasehold improvements or equipment.

### Impairment and Closed-Store Reserves

We review long-lived assets such as property, equipment, and intangibles on a unit-by-unit basis for impairment when events or circumstances indicate the carrying value of the assets may not be recoverable. We determine if there is impairment at the restaurant level by comparing undiscounted future cash flows from the related long-lived assets to their respective carrying values and record an impairment charge when appropriate. In determining future cash flows, significant estimates are made by us with respect to future operating results of each restaurant over its remaining lease term, including sales trends, labor rates, commodity costs and other operating cost assumptions. If assets are determined to be impaired, the impairment charge is measured by calculating the amount by which the asset’s carrying amount exceeds its fair value. This process of assessing fair values requires the use of estimates and assumptions, including our ability to sell or reuse the related assets and market conditions, which are subject to a high degree of judgment. If these assumptions change in the future, we may be required to record impairment charges for these assets and these charges could be material.

When we close a restaurant, we will evaluate the right of use (“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, in addition to property tax and CAM charges for closed restaurants.

### Interest Expense, Net

Interest expense, net, consists primarily of interest on our outstanding debt. Debt issuance costs are amortized at cost over the life of the related debt.

### Provision for Income Taxes

Provision for income taxes consists of federal and state taxes on our income.

### Comparison of Results of Operations

Our operating results for the thirteen weeks ended September 27, 2023 and September 28, 2022 and expressed as percentages of total revenue, with the exception of cost of operations and company restaurant expenses, which are expressed as percentages of company-operated restaurant revenue, are compared in the tables below.

| ​ ​ ​ ​ Statements of Income Data | ​ ​ ​ | ​ ​ Thirteen Weeks Ended September 27, 2023 ($,000) ​ ​ | ​ ​ (%) ​ ​ | ​ ​ ​ | ​ ​ September 28, 2022 ($,000) ​ ​ | ​ ​ | ​ (%) ​ | ​ ​ ​ | ​ ​ Increase / (Decrease) ($,000) ​ ​ | ​ ​ (%) ​ ​ |
| --- | --- | ---: | ---: | --- | ---: | --- | ---: | --- | ---: | ---: |
| Company-operated restaurant revenue | ​ | $102,703 | 85.3 | ​ | $103,174 |  | 86.0 | ​ | $(471) | (0.5) |
| Franchise revenue | ​ | 10,255 | 8.5 | ​ | 9,543 |  | 8.0 | ​ | 712 | 7.5 |
| Franchise advertising fee revenue | ​ | 7,441 | 6.2 | ​ | 7,161 |  | 6.0 | ​ | 280 | 3.9 |
| **Total revenue** | **​** | **120,399** | **100.0** | **​** | **119,878** |  | **100.0** | **​** | **521** | **0.4** |
| Cost of operations | ​ |  |  | ​ |  |  |  | ​ |  | ​ |
| Food and paper costs (1) | ​ | 27,552 | 26.8 | ​ | 30,163 |  | 29.2 | ​ | (2,611) | (8.7) |
| Labor and related expenses (1) | ​ | 33,092 | 32.2 | ​ | 33,279 |  | 32.3 | ​ | (187) | (0.6) |
| Occupancy and other operating expenses (1) | ​ | 27,289 | 26.6 | ​ | 26,920 |  | 26.1 | ​ | 369 | 1.4 |
| **Company restaurant expenses (1)** | **​** | **87,933** | **85.6** | **​** | **90,362** |  | **87.6** | **​** | **(2,429)** | **(2.7)** |
| General and administrative expenses | ​ | 9,144 | 7.6 | ​ | 9,855 |  | 8.2 | ​ | (711) | (7.2) |
| Franchise expenses | ​ | 9,583 | 8.0 | ​ | 9,027 |  | 7.5 | ​ | 556 | 6.2 |
| Depreciation and amortization | ​ | 3,946 | 3.3 | ​ | 3,530 |  | 2.9 | ​ | 416 | 11.8 |
| Loss on disposal of assets | ​ | 16 | 0.0 | ​ | 21 |  | 0.0 | ​ | (5) | (23.8) |
| Gain on disposition of restaurants | ​ | ​ (4,923) | (4.1) | ​ | — |  | — | ​ | (4,923) | N/A |
| Impairment and closed-store reserves | ​ | 1,008 | 0.8 | ​ | 219 |  | 0.2 | ​ | 789 | 360.3 |
| **Total expenses** | **​** | **106,707** | **88.6** | **​** | **113,014** |  | **94.3** | **​** | **(6,307)** | **(5.6)** |
| **Income from operations** | **​** | **13,692** | **11.4** | **​** | **6,864** |  | **5.7** | **​** | **6,828** | **99.5** |
| Interest expense, net of interest income | ​ | 1,382 | 1.1 | ​ | 108 |  | 0.1 | ​ | 1,274 | 1,179.6 |
| Income tax receivable agreement expense (income) | ​ | 106 | 0.1 | ​ | (29) |  | (0.1) | ​ | 135 | (465.5) |
| **Income before provision for income taxes** | **​** | **12,204** | **10.2** | **​** | **6,785** | **​** | **5.7** | **​** | **5,419** | **79.9** |
| Provision for income taxes | ​ | 2,975 | 2.5 | ​ | 1,776 |  | 1.5 | ​ | 1,199 | 67.5 |
| **Net income** | **​** | **$9,229** | **7.7** | **​** | **$5,009** |  | **4.2** | **​** | **$4,220** | **84.2** |

(1) Percentages for line items relating to cost of operations and company restaurant expenses are calculated with company-operated restaurant revenue as the denominator. All other percentages use total revenue.

Our operating results for the thirty-nine weeks ended September 27, 2023 and September 28, 2022 and expressed as percentages of total revenue, with the exception of cost of operations and company restaurant expenses, which are expressed as a percentage of company-operated restaurant revenue, are compared below.

| ​ ​ ​ ​ Statements of Income Data | ​ ​ ​ | ​ ​ Thirty-Nine Weeks Ended September 27, 2023 ($,000) ​ ​ | ​ ​ | ​ (%) ​ | ​ ​ ​ | ​ ​ September 28, 2022 ($,000) ​ ​ | ​ ​ | ​ (%) ​ | ​ ​ ​ | ​ ​ Increase / (Decrease) ($,000) ​ ​ | ​ ​ | ​ (%) ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| Company-operated restaurant revenue | ​ | $304,477 |  | 85.4 | ​ | $303,585 |  | 85.7 | ​ | $892 |  | 0.3 |
| Franchise revenue | ​ | 30,046 |  | 8.4 | ​ | 28,862 |  | 8.2 | ​ | 1,184 |  | 4.1 |
| Franchise advertising fee revenue | ​ | 21,894 |  | 6.2 | ​ | 21,590 |  | 6.1 | ​ | 304 |  | 1.4 |
| **Total revenue** | **​** | **356,417** |  | **100.0** | **​** | **354,037** |  | **100.0** | **​** | **2,380** |  | **0.7** |
| Cost of operations | ​ |  |  |  | ​ |  |  |  | ​ |  |  | ​ |
| Food and paper costs (1) | ​ | 82,928 |  | 27.2 | ​ | 89,586 |  | 29.5 | ​ | (6,658) |  | (7.4) |
| Labor and related expenses (1) | ​ | 96,910 |  | 31.8 | ​ | 98,966 |  | 32.6 | ​ | (2,056) |  | (2.1) |
| Occupancy and other operating expenses (1) | ​ | 77,751 |  | 25.5 | ​ | 76,597 |  | 25.2 | ​ | 1,154 |  | 1.5 |
| Gain on recovery of insurance proceeds, lost profits, net (1) | ​ | (151) | ​ | (0.0) | ​ | — | ​ | — | ​ | (151) | ​ | N/A |
| **Company restaurant expenses (1)** | **​** | **257,438** |  | **84.6** | **​** | **265,149** |  | **87.3** | **​** | **(7,711)** |  | **(2.9)** |
| General and administrative expenses | ​ | 31,451 |  | 8.8 | ​ | 29,488 |  | 8.3 | ​ | 1,963 |  | 6.7 |
| Franchise expenses | ​ | 28,107 |  | 7.9 | ​ | 27,315 |  | 7.7 | ​ | 792 |  | 2.9 |
| Depreciation and amortization | ​ | 11,277 |  | 3.2 | ​ | 10,745 |  | 3.0 | ​ | 532 |  | 5.0 |
| (Gain) loss on disposal of assets | ​ | (34) |  | (0.0) | ​ | 129 |  | 0.0 | ​ | (163) |  | (126.4) |
| Gain on recovery of insurance proceeds, property, equipment and expenses | ​ | (242) |  | (0.1) | ​ | — |  | — | ​ | (242) |  | N/A |
| Gain on disposition of restaurants | ​ | ​ (5,034) |  | (1.4) | ​ | — |  | — | ​ | (5,034) |  | N/A |
| Impairment and closed-store reserves | ​ | 1,123 |  | 0.3 | ​ | 598 |  | 0.2 | ​ | 525 |  | 87.8 |
| **Total expenses** | **​** | **324,086** |  | **90.9** | **​** | **333,424** |  | **94.2** | **​** | **(9,338)** |  | **(2.8)** |
| **Income from operations** | **​** | **32,331** |  | **9.1** | **​** | **20,613** |  | **5.8** | **​** | **11,718** |  | **56.8** |
| Interest expense, net of interest income | ​ | 3,362 |  | 0.9 | ​ | 957 |  | 0.3 | ​ | 2,405 |  | 251.3 |
| Income tax receivable agreement expense (income) | ​ | 105 |  | 0.0 | ​ | (345) |  | (0.1) | ​ | 450 |  | (130.4) |
| **Income before provision for income taxes** | **​** | **28,864** |  | **8.2** | **​** | **20,001** |  | **5.6** | **​** | **8,863** |  | **44.3** |
| Provision for income taxes | ​ | 7,661 |  | 2.1 | ​ | 5,736 |  | 1.6 | ​ | 1,925 |  | 33.6 |
| **Net income** | **​** | **$21,203** |  | **6.1** | **​** | **$14,265** |  | **4.0** | **​** | **$6,938** |  | **48.6** |

(1) Percentages for line items relating to cost of operations and company restaurant expenses are calculated with company-operated restaurant revenue as the denominator. All other percentages use total revenue.

### Company-Operated Restaurant Revenue

For the quarter ended September 27, 2023, company-operated restaurant revenue decreased $0.5 million, or 0.5%, from the comparable period in the prior year. The decrease in company-operated restaurant revenue was mainly due to a $1.6 million decrease in revenue primarily from the four company-operated restaurants sold by the Company to existing franchisees during the prior quarters and a $0.2 million decrease in revenue recognized for our loyalty points program. This company-operated restaurant revenue decrease was partially offset by $1.0 million of additional sales from restaurants opened during or after the third quarter of 2022 as well as an increase in company-operated comparable restaurant revenue of $0.3 million, or 0.3%. The company-operated comparable restaurant sales increase consisted of a 1.3% increase in average check size due to increases in menu prices, partially offset by an approximately 0.9% decrease in transactions.

Year-to-date, company-operated restaurant revenue increased $0.9 million, or 0.3%, from the comparable period in the prior year. The increase in company-operated restaurant revenue was primarily due to $3.8 million of additional sales from restaurants opened during or after the first quarter of 2022. In addition, the increase in company-operated restaurant sales was due to an increase in company-operated comparable restaurant revenue of $1.4 million, or 0.5%. The company-operated comparable restaurant sales increase consisted of an approximately 3.2% increase in average check size due to increases in menu prices, partially offset by a 2.6% decrease in transactions. This company-operated restaurant revenue increase was offset by a $4.2 million decrease in revenue primarily from the four company-operated restaurants sold by the Company to existing franchisees during the prior quarters.

### Franchise Revenue

For the quarter ended September 27, 2023, franchise revenue increased $0.7 million, or 7.5%, from the comparable period in the prior year. This increase was primarily due to a franchise comparable restaurant sales increase of 1.1%, seven franchise-operated restaurant openings and four company-operated restaurants sold by the Company to existing franchisees in each case, during the prior quarters.

Year-to-date, franchise revenue increased $1.2 million, or 4.1%, from the comparable period in the prior year. This increase was primarily due to ten franchise-operated restaurant openings and four company-operated restaurants sold by the Company to existing franchisees during the prior quarters. This franchise revenue increase was partially offset by a franchise comparable restaurant sales decrease of 1.4% and the closure of one franchise location during or subsequent to the first quarter of 2022.

### Franchise Advertising Fee Revenue

For the quarter ended September 27, 2023, franchise advertising fee revenue increased $0.3 million, or 3.9%, from the comparable period in the prior year. Year-to-date, franchise advertising fee revenue increased $0.3 million, or 1.4%, from the comparable period in the prior year. As advertising fee revenue is a percentage of franchisees’ revenue, both the quarter and year-to-date period fluctuations were due to the increases and decreases noted in franchise revenue above.

### Food and Paper Costs

For the quarter ended September 27, 2023, food and paper costs decreased $2.6 million, or 8.7%. Year-to-date, food and paper costs decreased $6.7 million, or 7.4%, from the comparable period in the prior year. The decrease in food and paper costs for the quarter and year-to-date resulted primarily due to lower transactions, partially offset by commodity inflation. For the quarter, food and paper costs as a percentage of company-operated restaurant revenue were 26.8%, down from 29.2% in the comparable period of the prior year. Year-to-date, food and paper costs as a percentage of company-operated restaurant revenue were 27.2%, down from 29.5% in the comparable period of the prior year. The percentage decrease for both the quarter and year-to-date period was primarily due to an increase in pricing, partially offset by commodity inflation.

### Labor and Related Expenses

For the quarter ended September 27, 2023, labor and related expenses decreased $0.2 million, or 0.6%, from the comparable period in the prior year. The decrease in labor and related expenses for the quarter was primarily due to a $0.8 million decrease related to the 0.9% decrease in quarter-over-quarter sales transactions and a $0.6 million decrease in overtime pay due to improvements in operational execution. The decrease in labor and related expenses for the quarter was partially offset by a $0.7 million increase primarily related to higher wage rates from minimum wage increases in California during fiscal 2023 and 2022 and other labor wage increases as a result of competitive pressure and a $0.6 million increase in worker’s compensation expenses.

Year-to-date, labor and related expenses decreased $2.1 million, or 2.1%, from the comparable period in the prior year. The decrease for the year-to-date period was due to a $2.9 million decrease related to the 2.6% decrease in year-over-year sales transactions, a $2.7 million decrease in overtime pay due to improvements in operational execution and a $1.5 million decrease related to COVID-19 sick pay. The decrease in labor and related expenses for the year was partially offset by a $3.1 million increase primarily related to higher wage rates from minimum wage increases in California during fiscal 2023 and 2022 and other labor wage increases as a result of competitive pressure and a $1.8 million increase in labor related costs related to improved management staffing.

For the quarter ended September 27, 2023, labor and related expenses as a percentage of company-operated restaurant revenue were 32.2%, down from 32.3% in the comparable period in the prior year. The percentage change for the quarter was impacted by the cost increases highlighted above, partially offset by an increase in pricing. Year-to-date labor and related expenses as a percentage of company-operated restaurant revenue were 31.8%, down from 32.6% in the comparable period in the prior year primarily due to the increase in pricing, and overtime and sick pay decreases, partially offset by the cost increases highlighted above.

### Occupancy and Other Operating Expenses

For the quarter ended September 27, 2023, occupancy and other operating expenses increased $0.4 million, or 1.4%, from the comparable period in the prior year. The increase was primarily due to a $0.3 million increase in occupancy costs as well as $0.1 million increase in higher utility costs.

Year-to-date, occupancy and other operating expenses increased $1.2 million, or 1.5%, from the comparable period in the prior year. The increase was primarily due to a $1.0 million increase in occupancy costs, a $0.5 million increase in other operating services and supplies and a $0.2 million increase in repairs and maintenance. The year-to-date increase in occupancy and other operating expenses was partially offset by a $0.5 million decrease in utilities.

For the quarter ended September 27, 2023, occupancy and other operating expenses as a percentage of company-operated restaurant revenue were 26.6%, up from 26.1% in the comparable period. Year-to-date, occupancy and other operating expenses as a percentage of company-operated restaurant revenue were 25.5%, up from 25.2% in the comparable period of the prior year. Both the quarter and year-to-date period increases resulted from the cost increases highlighted above.

### Gain on Recovery of Insurance Proceeds

In September 2022, one of our restaurants incurred damage resulting from a fire. In 2022, we disposed of less than $0.1 million of assets related to the fire. The restaurant was reopened for business on October 27, 2022. In fiscal 2023, we incurred costs directly related to the fire of less than $0.1 million. We 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 thirty-nine weeks ended September 27, 2023, as a reduction of company restaurant expenses. We received from the insurance company cash of $0.4 million, net of the insurance deductible, during fiscal 2023.

### General and Administrative Expenses

For the quarter ended September 27, 2023, general and administrative expenses decreased $0.7 million, or 7.2%, from the comparable period in the prior year. The decrease for the quarter was primarily due to a $0.9 million decrease in labor related costs, primarily related to a decrease in estimated management bonus expense and a $0.1 million decrease in stock compensation expense partially offset by a $0.3 million increase in other legal related costs pertaining to an adoption of a Shareholder Rights Agreement (see Note 12, “Shareholder Rights Agreement” for further details on the Shareholder Rights Agreement).

Year-to-date, general and administrative expenses increased $2.0 million, or 6.7%, from the comparable period in the prior year. The increase for the year-to-date period was due primarily to a $0.5 million increase in labor related costs, primarily related to an increase in estimated management bonus expense, a $1.1 million increase in restructuring costs related to certain positions in the organization, a $0.3 million increase in special costs related to the share distribution on March 28, 2023 and a $0.3 million increase in other legal related costs pertaining to the adoption of the Shareholder Rights Agreement (see Note 9, “Related Party Transactions” and Note 12, “Shareholder Rights Agreement” for further details on the share distribution and the Shareholder Rights Agreement, respectively). The increase in general and administrative expenses for the year was partially offset by a $0.2 million decrease in professional fees.

For the quarter ended September 27, 2023, general and administrative expenses as a percentage of total revenue were 7.6%, down from 8.2% in the comparable period of the prior year. The percentage decrease for the quarterly period is primarily due to the cost decreases noted above. Year-to-date, general and administrative expenses as a percentage of total revenue were 8.8%, up from 8.3% in the comparable period of the prior year. The percentage increase for the year-to-date period is primarily due to the cost increases discussed above.

### Gain on Disposition of Restaurants

During the thirteen and thirty-nine weeks ended September 27, 2023, we completed the sale of 17 and 18 restaurants, respectively, within California, Utah and Texas to existing franchisees. We determined that these restaurant dispositions represent multiple element arrangements, and as a result, the cash consideration received was allocated to the separate elements based on their relative standalone selling price. Cash proceeds included upfront consideration for the sale of the restaurants and franchise fees. The cash consideration per restaurant related to franchise fees is consistent with the amounts stated in the related franchise agreements, which are charged for separate standalone arrangements. We initially defer and subsequently recognize the franchise fees over the term of the franchise agreement. During the thirteen and thirty-nine weeks ended September 27, 2023, these sales resulted in cash proceeds of $7.5 million and $7.7 million, respectively, and a net gain on sale of restaurant of $4.9 million and $5.0 million, respectively. Since the date of their sale, these restaurants are now included in the total number of franchised El Pollo Loco restaurants.

### Impairment and Closed-Store Reserves

During both the thirteen and thirty-nine weeks ended September 27, 2023, we recorded non-cash impairment charges of $1.0 million, primarily related to the carrying value of the ROU assets of one restaurant in California and the carrying value of the long-lived assets of one restaurant in Nevada. During the thirteen and thirty-nine weeks ended September 28, 2022, we recorded non-cash impairment charges of $0.1 million and $0.4 million, respectively, primarily related to the long-lived assets of one restaurant in California. Given the inherent uncertainty in projecting results for newer restaurants in newer markets we are monitoring the recoverability of the carrying value of the assets of several restaurants on an ongoing basis. For these restaurants, if expected performance is not realized, an impairment charge may be recognized in future periods, and such charge could be material.

When a restaurant is closed, we 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 CAM payments relating to closed restaurants are included within closed-store expense. During both the thirteen and thirty-nine weeks ended September 27, 2023, we recognized $0.1 million of closed-store reserve expense related to the amortization of ROU assets, property taxes and CAM payments for our closed locations. During the thirteen and thirty-nine weeks ended September 28, 2022, we recognized $0.1 million and $0.2 million, respectively, of closed-store reserve expense related to the amortization of ROU assets, property taxes and CAM payments for our closed locations.

### Interest Expense, Net

For the quarter ended September 27, 2023, interest expense, net, increased $1.3 million from the comparable period in the prior year. For the year-to-date period, interest expense, net, increased $2.4 million from the comparable period in the prior year. Both the quarter and year-to-date period increase in interest expense was primarily related to the higher outstanding balances on our 2022 Revolver (as defined below) as well as the higher interest rates in the fiscal 2023 periods versus the comparable periods in the prior year. This increase was partially offset by the unwinding of our interest rate swap and the corresponding payout that was recognized as part of interest income during the thirty-nine weeks ended September 27, 2023.

### Income Tax Receivable Agreement

On July 30, 2014, we entered into the income tax receivable agreement (the “TRA”). The TRA calls for us to pay to our pre-IPO stockholders 85% of the savings in cash that we realize in our taxes as a result of utilizing our net operating losses (“NOLs”) and other tax attributes attributable to preceding periods. For both the thirteen and thirty-nine weeks ended September 27, 2023, we recorded income tax receivable agreement expense of $0.1 million and for the thirteen and thirty-nine weeks ended September 28, 2022 we recorded income tax receivable agreement income of less than $0.1 million and $0.3 million, respectively.

### Provision for Income Taxes

For the quarter ended September 27, 2023, we recorded an income tax provision of $3.0 million, reflecting an estimated effective tax rate of 24.4%. For the quarter ended September 28, 2022, we recorded an income tax provision of $1.8 million, reflecting an estimated effective tax rate of approximately 26.2%. For the year-to-date period ended

September 27, 2023, we recorded an income tax provision of $7.7 million, reflecting an estimated effective tax rate of approximately 26.5%. For the year-to-date period ended September 28, 2022, we recorded an income tax provision of $5.7 million, reflecting an estimated effective tax rate of approximately 28.7%.

The difference between the 21.0% statutory rate and our effective tax rate of 26.5% for the year-to-date period ended September 27, 2023 is primarily a result of state taxes, a non-deductible executive compensation, partially offset by a Work Opportunity Tax Credit benefit.

### Key Performance Indicators

To evaluate the performance of our business, we utilize a variety of financial and performance measures. These key measures include company-operated restaurant revenue, system-wide sales, comparable restaurant sales, restaurant contribution, restaurant contribution margin, new restaurant openings, EBITDA, and Adjusted EBITDA.

### System-Wide Sales

System-wide sales are neither required by, nor presented in accordance with GAAP. System-wide sales are the sum of company-operated restaurant revenue and sales from franchised restaurants. Our total revenue in our condensed consolidated statements of income is limited to company-operated restaurant revenue and franchise revenue from our franchisees. Accordingly, system-wide sales should not be considered in isolation or as a substitute for our results as reported under GAAP. Management believes that system-wide sales are an important figure for investors, because they are widely used in the restaurant industry, including by our management, to evaluate brand scale and market penetration.

The following table reconciles system-wide sales to company-operated restaurant revenue and total revenue:

*(Dollar amounts in thousands)*

| ​ ​ | ​ ​ | ​ ​ ​ Thirteen Weeks Ended September 27, 2023 | ​ | ​ ​ September 28, 2022 | ​ ​ | ​ ​ Thirty-Nine Weeks Ended September 27, 2023 | ​ | ​ ​ September 28, 2022 |
| --- | --- | --- | --- | --- | --- | ---: | --- | ---: |
| **Company-operated restaurant revenue** | **​** | $102,703 | **​** | $103,174 | ​ | $304,477 | ​ | $303,585 |
| Franchise revenue | ​ | ​ 10,255 | ​ | ​ 9,543 | ​ | 30,046 | ​ | 28,862 |
| Franchise advertising fee revenue | ​ | ​ 7,441 | ​ | ​ 7,161 | ​ | 21,894 | ​ | 21,590 |
| **Total Revenue** | **​** | **​** 120,399 | **​** | **​** 119,878 | ​ | 356,417 | ​ | 354,037 |
| Franchise revenue | ​ | ​ (10,255) | ​ | ​ (9,543) | ​ | (30,046) | ​ | (28,862) |
| Franchise advertising fee revenue | ​ | ​ (7,441) | ​ | ​ (7,161) | ​ | ​ (21,894) | ​ | ​ (21,590) |
| Sales from franchised restaurants | ​ | ​ 166,052 | ​ | ​ 159,742 | ​ | 488,117 | ​ | 481,351 |
| **System-wide sales** | **​** | $268,755 | **​** | $262,916 | ​ | $792,594 | ​ | $784,936 |

### Company-Operated Restaurant Revenue

Company-operated restaurant revenue consists of sales of food and beverages in company-operated restaurants net of promotional allowances, employee meals, and other discounts. Company-operated restaurant revenue in any period is directly influenced by the number of operating weeks in such period, the number of open restaurants, and comparable restaurant sales.

Seasonal factors and the timing of holidays cause our revenue to fluctuate from quarter to quarter. Our revenue per restaurant is typically lower in the first and fourth quarters due to reduced January and December traffic and higher in the second and third quarters. As a result of seasonality, our quarterly and annual results of operations and key performance indicators such as company-operated restaurant revenue and comparable restaurant sales may fluctuate.

### Comparable Restaurant Sales

Comparable restaurant sales reflect year-over-year sales changes for comparable company-operated, franchised, and system-wide restaurants. A restaurant enters our comparable restaurant base the first full week after it has operated for fifteen months. Comparable restaurant sales exclude restaurants closed during the applicable period. At September 27, 2023 and September 28, 2022, there were 470 and 466 comparable restaurants, 181 and 184 company-operated restaurants and 289 and 282 franchised restaurants, respectively. Comparable restaurant sales indicate the performance of existing restaurants, since new restaurants are excluded. Because other companies may calculate this measure differently than we do, comparable restaurant sales as presented herein may not be comparable to similarly titled measures reported by other companies. Management believes that comparable restaurant sales is a valuable metric for investors to evaluate the performance of our store base, excluding the impact of new stores and closed stores.

Comparable restaurant sales growth can be generated by an increase in the number of meals sold and/or by increases in the average check amount, resulting from a shift in menu mix and/or higher prices resulting from new products or price increases.

### Restaurant Contribution and Restaurant Contribution Margin

Restaurant contribution and restaurant contribution margin are neither required by, nor presented in accordance with, GAAP. Restaurant contribution is defined as company-operated restaurant revenue less company restaurant expenses which includes food and paper cost, labor and related expenses and occupancy and other operating expenses, where applicable. Restaurant contribution therefore excludes franchise revenue, franchise advertising fee revenue and franchise expenses as well as certain other costs, such as general and administrative expenses, franchise expenses, depreciation and amortization, asset impairment and closed-store reserve, loss on disposal of assets and other costs that are considered corporate-level expenses and are not considered normal operating costs of our restaurants. Accordingly, restaurant contribution is not indicative of overall Company results and does not accrue directly to the benefit of stockholders because of the exclusion of certain corporate-level expenses. Restaurant contribution margin is defined as restaurant contribution as a percentage of net company-operated restaurant revenue.

Restaurant contribution and restaurant contribution margin are supplemental measures of operating performance of our restaurants, and our calculations thereof may not be comparable to those reported by other companies. Restaurant contribution and restaurant contribution margin have limitations as analytical tools, and you should not consider them in isolation, or superior to, or as substitutes for the analysis of our results as reported under GAAP. Management uses restaurant contribution and restaurant contribution margin as a supplemental measure of restaurant performance. Management believes that restaurant contribution and restaurant contribution margin are important tools for investors, because they are widely-used metrics within the restaurant industry to evaluate restaurant-level productivity, efficiency, and performance. Management further believes restaurant level operating is useful to investors to highlight trends in our core business that may not otherwise be apparent to investors when relying solely on GAAP financial measures.

A reconciliation of restaurant contribution and restaurant contribution margin to company-operated restaurant revenue is provided below:

*(Dollar amounts in thousands)*

| ​ ​ Restaurant contribution: | ​ ​ | ​ ​ ​ Thirteen Weeks Ended September 27, 2023 ​ ​ ​ | ​ ​ ​ ​ September 28, 2022 ​ ​ ​ | ​ ​ ​ ​ | ​ ​ ​ Thirty-Nine Weeks Ended September 27, 2023 ​ ​ ​ | ​ ​ ​ ​ September 28, 2022 ​ ​ ​ | ​ ​ |
| --- | --- | ---: | ---: | --- | ---: | ---: | --- |
| **Income from operations** | ​ | $13,692 ​ | $6,864 ​ | ​ | $32,331 ​ | $20,613 ​ | ​ |
| Add (less): | ​ | ​ ​ | ​ ​ | ​ | ​ ​ | ​ ​ | ​ |
| General and administrative expenses | ​ | 9,144 ​ | 9,855 ​ | ​ | 31,451 ​ | 29,488 ​ | ​ |
| Franchise expenses | ​ | 9,583 ​ | 9,027 ​ | ​ | 28,107 ​ | 27,315 ​ | ​ |
| Depreciation and amortization | ​ | 3,946 ​ | 3,530 ​ | ​ | 11,277 ​ | 10,745 ​ | ​ |
| Loss (gain) on disposal of assets | ​ | 16 ​ | 21 ​ | ​ | (34) ​ | 129 ​ | ​ |
| Gain on recovery of insurance proceeds, property, equipment and expenses | ​ | ​ — ​ | ​ — ​ | ​ | ​ (242) ​ | ​ — ​ | ​ |
| Franchise revenue | ​ | (10,255) ​ | (9,543) ​ | ​ | (30,046) ​ | (28,862) ​ | ​ |
| Franchise advertising fee revenue | ​ | (7,441) ​ | (7,161) ​ | ​ | (21,894) ​ | (21,590) ​ | ​ |
| Impairment and closed-store reserves | ​ | 1,008 ​ | 219 ​ | ​ | 1,123 ​ | 598 ​ | ​ |
| Gain on disposition of restaurants | ​ | (4,923) ​ | — ​ | ​ | (5,034) ​ | — ​ | ​ |
| **Restaurant contribution** | ​ | $14,770 ​ | $12,812 ​ | ​ | $47,039 ​ | $38,436 ​ | ​ |
| ​ | ​ | ​ ​ ​ | ​ ​ ​ | ​ | ​ ​ ​ | ​ ​ ​ | ​ |
| **Company-operated restaurant revenue:** | ​ | ​ | ​ | ​ | ​ | ​ | ​ |
| **Total revenue** | ​ | $120,399 ​ | $119,878 ​ | ​ | $356,417 ​ | $354,037 ​ | ​ |
| Less: | ​ | ​ | ​ | ​ | ​ | ​ | ​ |
| Franchise revenue | ​ | (10,255) ​ | (9,543) ​ | ​ | (30,046) ​ | (28,862) ​ | ​ |
| Franchise advertising fee revenue | ​ | (7,441) ​ | (7,161) ​ | ​ | (21,894) ​ | (21,590) ​ | ​ |
| **Company-operated restaurant revenue** | ​ | $102,703 ​ | $103,174 ​ | ​ | $304,477 ​ | $303,585 ​ | ​ |
| ​ | ​ | ​ ​ ​ | ​ ​ ​ | ​ | ​ ​ ​ | ​ ​ ​ | ​ |
| Restaurant contribution margin (%) | ​ | 14.4% | 12.4% | ​ | 15.4% | 12.7% | ​ |

### New Restaurant Openings

The number of restaurant openings reflects the number of new restaurants opened by us and our franchisees during a particular reporting period. Before a new restaurant opens, we and our franchisees incur pre-opening costs, as described below. New restaurants often open with an initial start-up period of higher-than-normal sales volumes, which subsequently decrease to stabilized levels. New restaurants typically experience normal inefficiencies in the form of higher food and paper, labor, and other direct operating expenses and, as a result, restaurant contribution margins are generally lower during the start-up period of operation. The average start-up period after which our new restaurants’ revenue and expenses normalize is approximately fourteen weeks. When we enter new markets, we may be exposed to start-up times and restaurant contribution margins that are longer and lower than reflected in our average historical experience.

### EBITDA and Adjusted EBITDA

EBITDA represents net income before interest expense, provision for income taxes, depreciation, and amortization. Adjusted EBITDA represents net income before interest expense, provision for income taxes, depreciation, amortization, and other items that we do not consider representative of normal operating expenses or our on-going operating performance, as identified in the reconciliation table below.

EBITDA and Adjusted EBITDA as presented in this report are supplemental measures of our performance that are neither required by, nor presented in accordance with, GAAP. EBITDA and Adjusted EBITDA are not measurements of our financial performance under GAAP and should not be considered as alternatives to net income, operating income, or any other performance measures derived in accordance with GAAP, or as alternatives to cash flow from operating activities as a measure of our liquidity. In addition, in evaluating EBITDA and Adjusted EBITDA, you should be aware that in the future we will incur expenses or charges such as those added back to calculate EBITDA and Adjusted EBITDA. Our presentation of EBITDA and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items.

EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation, or as substitutes for analysis of our results as reported under GAAP. Some of these limitations are (i) they do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments, (ii) they do not reflect changes in, or cash requirements for, our working capital needs, (iii) they do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt, (iv) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements, (v) they do not adjust for all non-cash income or expense items that are reflected in our statements of cash flows, (vi) they do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our on-going operations, and (vii) other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures.

We compensate for these limitations by providing specific information regarding the GAAP amounts excluded from such non-GAAP financial measures. We further compensate for the limitations in our use of non-GAAP financial measures by presenting comparable GAAP measures more prominently.

We believe that EBITDA and Adjusted EBITDA facilitate operating performance comparisons from period to period by isolating the effects of some items that vary from period to period without any correlation to core operating performance or that vary widely among similar companies. These potential differences may be caused by variations in capital structures (affecting interest expense), tax positions (such as the impact on periods or companies of changes in effective tax rates or NOLs) and the age and book depreciation of facilities and equipment (affecting relative depreciation expense). We also present EBITDA and Adjusted EBITDA because (i) we believe that these measures are frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry, (ii) we believe that investors will find these measures useful in assessing our ability to service or incur indebtedness, and (iii) we use EBITDA and Adjusted EBITDA internally for a number of benchmarks, including to compare our performance to that of our competitors.

The following table sets forth reconciliations of our net income to our EBITDA and Adjusted EBITDA:

*(Amounts in thousands)*

| ​ ​ | ​ | ​ ​ Thirteen Weeks Ended September 27, 2023 | ​ | ​ ​ September 28, 2022 | ​ | ​ ​ Thirty-Nine Weeks Ended September 27, 2023 | ​ | ​ ​ September 28, 2022 | ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: | --- |
| **Net income** | ​ | **$9,229** | ​ | **$5,009** | ​ | **$21,203** | ​ | **$14,265** | ​ |
| Non-GAAP adjustments: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ |
| Provision for income taxes | ​ | 2,975 | ​ | 1,776 | ​ | 7,661 | ​ | 5,736 | ​ |
| Interest expense, net of interest income | ​ | 1,382 | ​ | 108 | ​ | 3,362 | ​ | 957 | ​ |
| Depreciation and amortization | ​ | 3,946 | ​ | 3,530 | ​ | 11,277 | ​ | 10,745 | ​ |
| **EBITDA** | ​ | **$17,532** | ​ | **$10,423** | ​ | **$43,503** | ​ | **$31,703** | ​ |
| Stock-based compensation expense (a) | ​ | 926 | ​ | 1,009 | ​ | 2,514 | ​ | 2,806 | ​ |
| Loss (gain) on disposal of assets (b) | ​ | 16 | ​ | 21 | ​ | (34) | ​ | 129 | ​ |
| Impairment and closed-store reserves (c) | ​ | 1,008 | ​ | 219 | ​ | 1,123 | ​ | 598 | ​ |
| Gain on disposition of restaurants (d) | ​ | (4,923) | ​ | — | ​ | (5,034) | ​ | — | ​ |
| Income tax receivable agreement expense (income) (e) | ​ | 106 | ​ | (29) | ​ | 105 | ​ | (345) | ​ |
| Securities class action legal expense (f) | ​ | — | ​ | (10) | ​ | 2 | ​ | 443 | ​ |
| Special dividend (g) | ​ | ​ — | ​ | ​ — | ​ | ​ 129 | ​ | ​ — | ​ |
| Legal settlements (h) | ​ | ​ — | ​ | ​ (541) | ​ | ​ — | ​ | ​ (541) | ​ |
| Special legal expenses (i) | ​ | ​ — | ​ | ​ 350 | ​ | ​ 299 | ​ | ​ 350 | ​ |
| Shareholder advisory fees (j) | ​ | ​ 293 | ​ | ​ — | ​ | ​ 293 | ​ | ​ — | ​ |
| Gain on recovery of insurance proceeds (k) | ​ | ​ — | ​ | ​ — | ​ | ​ (394) | ​ | ​ — | ​ |
| Severance (l) | ​ | — | ​ | — | ​ | 1,055 | ​ | — | ​ |
| Pre-opening costs (m) | ​ | ​ 39 | ​ | ​ 131 | ​ | ​ 227 | ​ | ​ 280 | ​ |
| **Adjusted EBITDA** | ​ | **$14,997** | ​ | **$11,573** | ​ | **$43,788** | ​ | **$35,423** | ​ |

(a) Includes non-cash, stock-based compensation.

(b) Loss (gain) on disposal of assets includes the loss (gain) on disposal of assets related to retirements and replacement or write-off of leasehold improvements or equipment.

(c) Includes costs related to impairment of long-lived and ROU assets and closing restaurants. During both the thirteen and thirty-nine weeks ended September 27, 2023, we recorded non-cash impairment charges of $1.0 million, primarily related to the carrying value of the ROU assets of one restaurant in California and the carrying value of the long-lived assets of one restaurant in Nevada. During the thirteen and thirty-nine weeks ended September 28, 2022, we recorded non-cash impairment charges of $0.1 million and $0.4 million, respectively, primarily related to the long-lived assets of one restaurant in California.

During both the thirteen and thirty-nine weeks ended September 27, 2023, we recognized $0.1 million of closed-store reserve expense related to the amortization of ROU assets, property taxes and CAM payments for our closed locations. During the thirteen and thirty-nine weeks ended September 28, 2022, we recognized $0.1 million and $0.2 million, respectively, of closed-store reserve expense related to the amortization of ROU assets, property taxes and CAM payments for our closed locations.

(d) During the thirteen and thirty-nine weeks ended September 27, 2023, we completed the sale of 17 and 18 restaurants, respectively, within California, Utah and Texas to existing franchisees. During the thirteen and thirty-nine weeks ended September 27, 2023, these sales resulted in cash proceeds of $7.5 million and $7.7 million, respectively, and a net gain on sale of restaurant of $4.9 million and $5.0 million, respectively.

(e) On July 30, 2014, we entered into the TRA. This agreement calls for us to pay to our pre-IPO stockholders 85% of the savings in cash that we realize in our taxes as a result of utilizing our NOLs and other tax attributes attributable to preceding periods. For the thirteen and thirty-nine weeks ended September 27, 2023 and September 28, 2022, income tax receivable agreement expense (income) consisted of the amortization of interest expense and changes in estimates for actual tax returns filed, related to our total expected TRA payments.

(f) Consists of costs and recoveries related to the defense of securities lawsuits.

(g) Consists of costs related to a special dividend declaration. On October 11, 2022, the Board of Directors declared a special dividend of $1.50 per share on the common stock of the Company. The special dividend was paid on November 9, 2022, to stockholders of record, including holders of restricted stock, at the close of business on October 24, 2022.

(h) Includes $0.5 million received from legal settlements, net of legal expenses.

(i) Consists of legal costs related to the share distribution that occurred on March 28, 2023. Refer to Note 9, “Related Party Transactions” for further details on the share distribution.

(j) Consists of advisory fees pertaining to a Shareholder Rights Agreement adopted in connection with a shareholder’s accumulation of a significant amount of shares of our common stock. Refer to Note 12, “Shareholder Rights Agreement” for further details on the Shareholder Rights Agreement.

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

(l) On April 13, 2023 the Company made the decision to eliminate and restructure certain positions in the organization, which resulted in one-time costs of approximately $1.1 million.

(m) Pre-opening costs are a component of general and administrative expenses, and consist of costs directly associated with the opening of new restaurants and incurred prior to opening, including management labor costs, staff labor costs during training, food and supplies used during training, marketing costs, and other related pre-opening costs. These are generally incurred over the three to five months prior to opening. Pre-opening costs also include occupancy costs incurred between the date of possession and the opening date for a restaurant.

### Liquidity and Capital Resources

Our primary sources of liquidity and capital resources have been cash provided from operations, cash and cash equivalents, and our 2022 Revolver (defined below). Our primary requirements for liquidity and capital are new restaurants, existing restaurant capital investments (remodels and maintenance), legal defense costs, lease obligations, interest payments on our debt, working capital and general corporate needs. Our working capital requirements are not significant, since our customers pay for their purchases in cash or by payment card (credit or debit) at the time of sale. Thus, we are able to sell many of our inventory items before we have to pay our suppliers. Our restaurants do not require significant inventories or receivables. We believe that these sources of liquidity and capital are sufficient to finance our continued operations, including planned capital expenditures, for at least the next 12 months from the issuance of the condensed consolidated financial statements.

The following table presents summary cash flow information for the periods indicated (in thousands):

*(Amounts in thousands)*

| ​ ​ Net cash (used in) provided by | ​ ​ | ​ ​ Thirty-Nine Weeks Ended September 27, 2023 ​ | ​ ​ | ​ ​ September 28, 2022 ​ | ​ ​ |
| --- | --- | ---: | --- | ---: | --- |
| Operating activities | ​ | $32,509 | ​ | $21,907 | ​ |
| Investing activities | ​ | (7,412) | ​ | (13,022) | ​ |
| Financing activities | ​ | (31,775) | ​ | (19,656) | ​ |
| Net decrease in cash | ​ | $(6,678) | ​ | $(10,771) | ​ |

### Operating Activities

For the thirty-nine weeks ended September 27, 2023, net cash from operating activities increased by approximately $10.6 million from the comparable period of the prior year. This change was due to favorable working capital fluctuations and higher profitability compared to the same period in the prior year.

### Investing Activities

For the thirty-nine weeks ended September 27, 2023, net cash used in investing activities decreased by $5.6 million from the comparable period of the prior year. This change was due to an increase in purchase of property and equipment mostly related to restaurant remodeling during the thirty-nine weeks ended September 27, 2023 when compared to the prior quarter. The overall decrease in use of investing activities was partially offset by the cash proceeds of $7.7 million received during the thirty-nine weeks ended September 27, 2023 related to the sale of nine company-operated restaurants within Texas to an existing franchisee, eight company-operated restaurants within California to existing franchisees and one company-operated restaurant in Utah to another existing franchisee.

### Financing Activities

For the thirty-nine weeks ended September 27, 2023, net cash used in financing activities increased by $12.1 million from the comparable period of the prior year. The increase was due primarily to repurchases of common stock of $46.6 million during the thirty-nine weeks ended September 27, 2023. This increase was partially offset by $14.0 million in net borrowings on the 2022 Revolver during the thirty-nine weeks ended September 27, 2023 compared to the net pay downs of $20.0 million on the 2022 Revolver during the thirty-nine weeks ended September 28, 2022. This change was further impacted by a $1.2 million cash inflow related to option exercises during the thirty-nine weeks ended September 27, 2023 compared to a $1.6 million cash inflow related to option exercises during thirty-nine weeks ended September 28, 2022.

### Debt and Other Obligations

The Company, as a guarantor, is a party to a credit agreement (the “2022 Credit Agreement”) among EPL, as borrower, Intermediate, as a guarantor, 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”). The 2022 Revolver, which is available pursuant to the 2022 Credit Agreement, includes a sub limit of $15.0 million for letters of credit and a sub limit of $15.0 million for swingline loans. The 2022 Revolver and 2022 Credit Agreement will mature on July 27, 2027. The obligations under the 2022 Credit Agreement and related loan documents are guaranteed by Holdings and Intermediate. The obligations of Holdings, EPL and Intermediate under the 2022 Credit Agreement and related loan documents are secured by a first priority lien on substantially all of their respective assets.

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

Borrowings under the 2022 Credit Agreement (other than any swingline loans) bear interest, at the borrower’s option, at rates based upon either the secured overnight financing rate (“SOFR”) or a base rate, plus, for each rate, a margin determined in accordance with a lease-adjusted consolidated leverage ratio-based pricing grid. The base rate is calculated as the highest of (a) the federal funds rate plus 0.50%, (b) the published Bank of America prime rate, or (c) Term SOFR with a term of one-month SOFR plus 1.00%. For Term SOFR loans, the margin is in the range of 1.25% to 2.25%, and for base rate loans the margin is in a range of 0.25% to 1.25%. Borrowings under the 2022 Revolver may be repaid and reborrowed. The interest rate range was 6.74% to 6.93% and 5.69% to 8.50% for the thirteen and thirty-nine weeks ended September 27, 2023 under the 2022 Revolver, respectively, and 2.87% to 6.00% and 1.35% to 6.00% for the thirteen and thirty-nine weeks ended September 28, 2022, respectively, under the 2022 Revolver and 2018 Revolver.

The 2022 Credit Agreement contains certain financial covenants. We were in compliance with the financial covenants as of September 27, 2023.

At September 27, 2023, we had $80.0 million in outstanding borrowings under the 2022 Revolver and $9.8 million of letters of credit that further reduce the amount available under the line of credit to $60.2 million in borrowing availability.

During the year ended December 28, 2022, we refinanced and terminated our 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”) and entered into the 2022 Credit Agreement. See Note 4, “Long-term debt” for additional information.

### Material Cash Requirements

Our material cash requirements as of September 27, 2023 have not changed materially since those disclosed under “Material Cash Requirements” in Part II, Item 7 of our annual report on Form 10-K for the year ended December 28, 2022. Our material cash requirements relate mostly to future (i) debt payments, including expected interest expense, calculated based on current interest rates, (ii) restaurant operating lease payments, (iii) income tax receivable agreement payments, (iv) purchasing commitments for chicken, (v) restaurant finance lease payments, and (vi) capital expenditures.

### Share Repurchase Program

On October 11, 2022, our Board of Directors approved the 2022 Stock Repurchase Agreement under which we were authorized to repurchase up to $20.0 million of shares of our common stock through March 28, 2024.

Under the 2022 Stock Repurchase Plan, we were permitted to repurchase our common stock from time to time, in amounts and at prices that we deemed appropriate, subject to market conditions and other considerations. Pursuant to the 2022 Stock Repurchase Plan, we were authorized to repurchase shares of our common stock using open market purchases, including pursuant to Rule 10b5-1 trading plans, and/or through privately negotiated transactions. As of September 27, 2023, the program was completed.

### Repurchase Agreement

On August 7, 2023, we entered into a Stock Repurchase Agreement (the “Repurchase Agreement”) with FS Equity Partners V, L.P. and FS Affiliates V, L.P. (together, the “Sellers”), pursuant to which we agreed to purchase an aggregate of 2,500,000 shares of our common stock from the Sellers at a price of $10.63 per share for a total purchase price of $26.6 million. The repurchase was completed in August 2023.

Prior to the repurchase, Freeman Spogli & Co. (“Freeman Spogli”), collectively with the Sellers and certain other funds managed by Freeman Spogli, was our largest stockholder. In addition, John Roth, a director of the Company until his resignation on August 16, 2023, is a general partner of Freeman Spogli and its chief executive officer.

## Market risk

As filed, 3,763 characters.

### Interest Rate Risk

On July 27, 2022, we refinanced the 2018 Revolver and entered into the 2022 Credit Agreement, which provides for a $150 million five-year senior secured revolving facility. In connection with the refinancing, the 2018 Credit Agreement was terminated. We are exposed to market risk from changes in interest rates on our debt, which bears interest, at SOFR plus a margin between 1.25% and 2.25%. As of September 27, 2023, we had outstanding borrowings of $80.0 million under our 2022 Revolver, $9.8 million of letters of credit in support of our insurance programs, and the applicable margin on outstanding borrowings under 2022 Revolver was 1.5%. A 1.0% increase in the effective interest rate applied to our 2022 Revolver borrowings would result in a pre-tax interest expense increase of $0.8 million on an annualized basis.

During the thirteen and thirty-nine weeks ended September 27, 2023, we borrowed $23.0 million and $25.0 million, respectively, and paid down $3.0 million and $11.0 million, respectively, on our 2022 Revolver and the outstanding balance as of September 27, 2023 was $80.0 million. Borrowings under the 2022 Credit Agreement (other than any swingline loans) bear interest, at the borrowers’ option, at rates based upon either SOFR or a base rate, plus, for each rate, a margin determined in accordance with a lease-adjusted consolidated leverage ratio-based pricing grid. If future rates based upon SOFR are higher than SOFR rates as currently determined, we may experience potential increases in interest rates on our variable rate debt, which could adversely impact our interest expense, results of operations and cash flows.

In connection with our entry into the 2022 Credit Agreement, we terminated the interest rate swap previously used to hedge interest rate risk. In settlement of this swap, we received approximately $0.6 million. The remaining amount in AOCI related to the hedging relationship was reclassified into earnings when the hedged forecasted transaction was reported in earnings.

### Inflation

Inflation has an impact on food, paper, construction, utility, labor and benefits, general and administrative, and other costs, all of which can materially impact our operations. In general, we have been able to substantially offset cost increases resulting from inflation by increasing menu prices, managing menu mix, improving productivity, or making other adjustments. We may not be able to offset cost increases in the future. In addition, we have a substantial number of hourly employees who are paid wage rates at or based on the applicable federal, state, or local minimum wage, and increases in the minimum wage will increase our labor costs.

### Commodity Price Risk

We are exposed to market price fluctuation in food product prices. Given the historical volatility of certain of our food product prices, including chicken, other proteins, grains, produce, dairy products, and cooking oil, these fluctuations can materially impact our food and beverage costs. While our purchasing commitments partially mitigate the risk of such fluctuations, there is no assurance that supply and demand factors such as disease or inclement weather will not cause the prices of the commodities used in our restaurant operations to fluctuate. In periods when the prices of commodities drop, we may pay higher prices under our purchasing commitments. In rapidly fluctuating commodities markets, it may prove difficult for us to adjust our menu prices in accordance with input price fluctuations. Therefore, to the extent that we do not pass along cost increases to our customers, our results of operations may be adversely affected. At this time, we do not use financial instruments to hedge our commodity risk.

## Controls and procedures

As filed, 1,894 characters.

### Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Our disclosure controls and procedures are based on assumptions about the likelihood of future events, and even effective disclosure controls and procedures can only provide reasonable assurance of achieving their objectives. Because of their inherent limitations, we cannot guarantee that our disclosure controls and procedures will succeed in achieving their stated objectives in all cases, that they will be complied with in all cases, or that they will prevent or detect all misstatements.

Our management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective, at the reasonable assurance level, as of September 27, 2023.

### Changes in Internal Control over Financial Reporting

No changes in our internal control over financial reporting occurred during the quarter ended September 27, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 9,667 characters.

There have been no material changes from the risk factors previously disclosed in our annual report on Form 10-K for the year ended December 28, 2022 filed with the SEC on March 10, 2023, except for the revision of the first and second risk factors and the addition of the third risk factor that immediately follow.

### Matters relating to employment and labor law may adversely affect our business.

Various federal, state and local labor laws govern our relationships with our employees and affect operating costs. These laws include employee classifications as exempt or non-exempt, minimum wage requirements, unemployment tax rates, workers’ compensation rates, citizenship requirements, and other wage and benefit requirements for employees classified as non-exempt. Significant additional government regulations and new laws mandating increases in minimum wages or benefits such as health insurance could materially affect our business, financial condition, operating results, and cash flow. In particular, our labor and regulatory compliance costs are expected to be adversely impacted as a result of AB 1228, signed into law by Governor Newsom on September 28, 2023, which will repeal and replace the Fast Food Accountability and Standards Recovery Act (FAST Act) on January 1, 2024 if a referendum seeking repeal of the FAST Act is withdrawn prior to that date. The FAST Act was previously signed into law in September 2022 and would have, among other things, established a council to set minimum wage standards for industry workers in California. In connection with the adoption of AB 1228, the proponents of the referendum seeking repeal of the FAST Act indicated their agreement to withdraw the referendum. If AB 1228 becomes effective January 1, 2024, the minimum wage at fast food restaurants that are part of brands which have more than 60 establishments nationwide will rise to $20 an hour on April 1, 2024, and a Fast Food Council created by AB 1228 will have limited power to approve annual wage increases until 2029. Under the law, the Fast Food Council will also have the power to develop and propose minimum standards for fast food workers, including standards for working hours, working conditions, and health and safety. As a result of AB 1228, we expect our labor and regulatory compliance costs will increase beginning in fiscal 2024 and that our results of operations and profitability will be adversely affected if we are not able to implement other measures to counter these increased costs. Further, this law could prompt similar legislation in other states. In addition, the unionization of our employees and of the employees of our franchisees could materially affect our business, financial condition, operating results, and cash flow.

Employee claims against us or our franchisees based on, among other things, wage and hour violations, discrimination, harassment, or wrongful termination may also create not only legal and financial liability but negative publicity that could adversely affect us and divert our financial and management resources that could otherwise be used to benefit the future performance of our operations. These types of employee claims could also be asserted against us, on a co-employer theory, by employees of our franchisees. A significant increase in the number of these claims, or an increase in the number of successful claims, could materially and adversely affect our business, brand image, employee recruitment, financial condition, results of operations, or cash flows.

***Delaware law, our organizational documents, our shareholder rights agreement, and our existing and future debt agreements may impede or discourage a takeover, depriving our investors of the opportunity to receive a premium for their shares.***

We are a Delaware corporation, and the anti-takeover provisions of Delaware law impose various impediments to the ability of a third-party to acquire control of us, even if a change of control would be beneficial to our existing stockholders. In addition, provisions of our amended and restated certificate of incorporation and by-laws may make it difficult for, or prevent, a third-party from acquiring control of us without the approval of our Board of Directors. Among other things, these provisions: provide for a classified board of directors with staggered three-year terms; do not permit cumulative voting in the election of directors, which would allow a minority of stockholders to elect director candidates; delegate the sole power to a majority of the board of directors to fix the number of directors; provide the power to our Board of Directors to fill any vacancy on our Board of Directors, whether such vacancy occurs as a result of an increase in the number of directors or otherwise; authorize the issuance of “blank check” preferred stock without any need for action by stockholders; eliminate the ability of stockholders to call special meetings of stockholders; establish advance notice requirements for nominations for election to our Board of Directors or for proposing matters that can be acted on by stockholders at stockholder meetings; and provide that, on or after the date that LLC ceases to beneficially own at least 40% of the total votes eligible to be cast in the election of directors, a 75% supermajority vote will be required to amend or repeal provisions relating to, among other things, the classification of the board of directors, the filling of vacancies on the board of directors, and the advance notice requirements for stockholder proposals and director nominations.

In addition, in certain circumstances, the shareholder rights plan adopted by our Board of Directors in August 2023 would cause dilution to a person or group that acquires a large block of our common stock and thereby make it more difficult for such person or group to acquire the Company. See “*Shareholder activism could cause us to incur significant expense, disrupt our business, result in a proxy contest or litigation and impact our stock price”* for additional information regarding our shareholder rights plan.

Furthermore, our secured revolving credit facility imposes, and we anticipate that documents governing our future indebtedness may impose, limitations on our ability to enter into change of control transactions. Under our secured revolving credit facility, the occurrence of a change of control transaction can constitute an event of default permitting acceleration of the debt, thereby impeding our ability to enter into change of control transactions.

The foregoing factors could impede a merger, takeover, or other business combination, or discourage a potential investor from making a tender offer for our common stock, which, under certain circumstances, could reduce the market value of our common stock.

These provisions, either alone or in combination with each other, give our current directors and executive officers a substantial ability to influence the outcome of a proposed acquisition of the Company. These provisions would apply even if an acquisition or other significant corporate transaction was considered beneficial by some of our shareholders. If a change in control or change in management is delayed or prevented by these provisions, the market price of our securities could decline.

***Shareholder activism could cause us to incur significant expense, disrupt our business, result in a proxy contest or litigation and impact our stock price.***

We may be subject to shareholder activism in the future, which could result in substantial costs and divert management’s and our Board’s attention and resources from our business. Such shareholder activism could give rise to perceived uncertainties as to our future, adversely affect our relationships with our employees, customers, or suppliers and make it more difficult to attract and retain qualified personnel. We may be required to incur significant fees and other expenses related to activist shareholder matters, including for third party advisors. We may be subjected to a proxy contest or to litigation by activist investors. Our stock price has been and could be subject to significant fluctuation or otherwise be adversely affected by the events, risks and uncertainties of any shareholder activism.

In addition, in August 2023, our Board of Directors adopted a shareholder rights plan and declared a dividend of one preferred share purchase right (a “Right”) for each share of our common stock outstanding on August 18, 2023 to the stockholders of record on that date. In the event that a person or group of affiliated or associated persons has acquired beneficial ownership of 12.5% or more of our outstanding common stock, subject to certain exceptions, each Right would entitle its holder (other than such person or members of such group) to purchase additional shares of our common stock at a substantial discount to the public market price. In addition, at any time after a person or group of affiliated or associated persons has acquired beneficial ownership of 12.5% or more of our outstanding common stock (and prior to the acquisition by any person or group of a majority of the outstanding shares of our common stock), the Board of Directors may exchange one share of our common stock for each outstanding Right (other than Rights owned by such person or group, which would have become void). The shareholder rights plan would cause dilution to a person or group that acquires a large block of our common stock on terms that are not approved by our Board of Directors and thereby make it more difficult for such person or group to acquire the Company.

Filed Nov 3, 2023.
Source: SEC EDGAR, the filing index for accession 0001606366-23-000047. Last ingested by Listed: Nov 5, 2026, 17:15 ET. No prices; not investment advice.