El Pollo Loco Annual Report 2018

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-K (Mark one)☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 26, 2018or☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to Commission file number 001-36556 EL POLLO LOCO HOLDINGS, INC.(Exact name of registrant as specified in its charter) Delaware 20-3563182State or other jurisdiction ofincorporation or organization (I.R.S. EmployerIdentification No.) 3535 Harbor Blvd., Suite 100, Costa Mesa, California 92626(Address of principal executive offices) (Zip Code)(714) 599-5000Registrant’s telephone number, including area codeSecurities registered pursuant to Section 12(b) of the Act:Title of each class Name of each exchange on which registeredCommon Stock, par value $0.01 per share The NASDAQ Stock Market LLCSecurities registered pursuant to section 12(g) of the Act:None(Title of class) Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit andpost such files). Yes ☒ No ☐Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☒If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financialaccounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒As of June 27, 2018, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s common equity held bynon-affiliates was approximately $245 million, deeming purely for purposes of this calculation all directors and executive officers and Trimaran Pollo Partners, L.L.C. to beaffiliates.As of February 28, 2019, there were 38,962,766 shares of the registrant’s common stock outstanding.DOCUMENTS INCORPORATED BY REFERENCEPart III hereof incorporates by reference certain portions of the registrant’s definitive proxy statement for its 2019 annual meeting of stockholders to be filed not later than 120 daysafter the end of the registrant’s 2018 fiscal year. TABLE OF CONTENTSPART I Item 1. Business3Item 1A. Risk Factors11Item 1B. Unresolved Staff Comments27Item 2. Properties27Item 3. Legal Proceedings28Item 4. Mine Safety Disclosures28 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities29Item 6. Selected Financial Data32Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations34Item 7A. Quantitative and Qualitative Disclosures About Market Risk55Item 8. Financial Statements and Supplementary Data56Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure91Item 9A. Controls and Procedures91Item 9B. Other Information92 PART III Item 10. Directors, Executive Officers and Corporate Governance93Item 11. Executive Compensation93Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters93Item 13. Certain Relationships and Related Transactions, and Director Independence93Item 14. Principal Accounting Fees and Services93 PART IV Item 15. Exhibits, Financial Statement Schedules94Item 16. Form 10-K Summary97Signatures98FORWARD-LOOKING STATEMENTSCertain statements in this report are forward-looking. Those statements reflect our current views with respect to our business, future events, financialperformance, and our industry in general. Statements that include the words such as “expect,” “intend,” "strive," “plan,” “believe,” “project,” “forecast,”“estimate,” “may,” “should,” and “anticipate” may be forward-looking. We base forward-looking statements on history, experience, expectations, andprojections. Forward-looking statements address matters that involve risks and uncertainties. We caution you therefore not to place undue reliance onforward-looking statements. We make no guarantees regarding outcomes, and assume no obligations to update the forward-looking statements herein, exceptpursuant to law. A non-exhaustive list of factors that could cause outcomes to differ materially from our expectations includes:•the adverse impact of economic conditions on our (i) operating results and financial condition, (ii) ability to comply with the terms and covenants ofour debt agreements, and (iii) ability to pay or refinance our existing debt or to obtain additional financing;•vulnerability to changes in consumer preferences and economic conditions;•vulnerability to conditions in the greater Los Angeles area;•vulnerability to natural disasters given the geographic concentration and real estate intensive nature of our business;•ability to open new restaurants in new and existing markets, including difficulty in finding sites and in negotiating acceptable leases;•delayed or canceled future restaurant openings;•restaurant closures, due to financial performance or otherwise;•increases in chicken and other input costs;•negative publicity, whether or not valid;•concerns about food safety and quality and about food-borne illness, particularly avian flu;•dependence on frequent and timely deliveries of food and supplies;•problems with our primary distributor;•our history of net losses, including the possibility of future net losses;•our ability to service our level of indebtedness;•our ability to compete successfully with other quick-service and fast casual restaurants;•underperformance of new menu items, advertising campaigns, and restaurant designs and remodeling activity;•our reliance on our franchisees, who may incur financial hardships, lose access to credit, close restaurants, or declare bankruptcy;•our limited control over our franchisees;•potential liability for franchisee acts;•ability to protect our name and logo and other proprietary intellectual property;•loss of the abilities, experience, and knowledge of current directors and officers;•matters relating to employment and labor laws;•impact from litigation such as wage and hour class action lawsuits;•labor shortages and increased labor costs;•our ability and the ability of our franchisees to renew leases at the end of their terms;•status of our relationships with franchisees;•impact from federal, state, and local regulations relating to preparation and sale of food, zoning and building codes, and employee, environmental,taxation and other matters;•impact from our income tax receivable agreement;•conflicts of interest with our largest stockholders;1•that El Pollo Loco Holdings, Inc. is a holding company with no operations that relies on its operating subsidiaries to provide it with funds;•timing of our emerging growth company eligibility under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”);•the impact of any security breaches of confidential customer information in connection with our electronic process of credit and debit cardtransactions;•the impact of any failure of our information technology system or any breach of our network security;•changes in accounting standards; and•other risks described under Risk Factors.2PART IUnless otherwise specified in this Annual Report on Form 10-K ("Annual Report"), or the context otherwise requires, terms “El Pollo Loco,” “the Company,”“our company,” “we,” “us,” and “our” mean El Pollo Loco Holdings, Inc. (“Holdings”), together with its subsidiaries.ITEM 1.BUSINESSOur CompanyEl Pollo Loco is a differentiated and growing restaurant concept that specializes in fire-grilling citrus-marinated chicken and operates in the limited servicerestaurant (“LSR”) segment. We strive to offer the quality of food and dining experience typical of fast casual restaurants while providing the speed,convenience, and value typical of traditional quick-service restaurants (“QSRs”), a combination that we call “QSR+.” Our distinctive menu features oursignature product—citrus-marinated fire-grilled chicken—and a variety of Mexican-inspired entrees that we create from our chicken. Every day in everyrestaurant, we marinate and fire-grill our chicken over open flames, and slice whole tomatoes, avocados, serrano peppers, and cilantro to make our salsas,guacamole, and cilantro dressings from scratch. The design of our kitchens reveals our Mexican-inspired cooking process and allows our customers to watchour Grill Masters and team members fire-grill and hand-cut our signature chicken, as well as team members make burritos, salads, tostadas, bowls, stuffedquesadillas, and chicken entrees.We offer our customers healthier alternatives to traditional food on the go, served by our team members in a colorful, bright, and contemporary restaurantenvironment. We serve individual and family-sized chicken meals, a variety of Mexican-inspired entrees, and sides, and, throughout the year, on a limited-time basis, additional proteins like shrimp. Our entrees include favorites such as our Chicken Avocado Burrito, Under 500 Calorie entrees, Double PolloBowl, and Stuffed Chicken Avocado Quesadilla. Our famous Creamy Cilantro dressings and salsas are prepared fresh daily, allowing our customers to createtheir favorite flavor profiles to enhance their culinary experience. Our distinctive menu with healthier alternatives appeals to consumers across a wide varietyof socio-economic backgrounds and drives our balanced composition of sales throughout the day (our “day-part mix”), including at lunch and dinner.El Pollo Loco is Spanish for “The Crazy Chicken.” We were organized as a Delaware corporation in 2005. We opened our first location on Alvarado Street inLos Angeles, California, in 1980, and have grown our restaurant system to 484 restaurants, comprised of 213 company-operated and 271 franchisedrestaurants as of December 26, 2018. Our restaurants are located in California, Arizona, Nevada, Texas, Utah and Louisiana. Our typical restaurant is a free-standing building with drive-thru service that ranges in size from 2,200 to 3,000 square feet with seating for approximately 50-70 people.The Company operates in one operating segment. Financial information about our operations, including our revenues and expenses for fiscal 2018, 2017 and2016, and our total assets as of the end of fiscal 2018 and 2017, is included in our "Audited Consolidated Financial Statements" and accompanying "Notes toConsolidated Financial Statements" in this Annual Report, see "Item 8. Financial Statements and Supplementary Data."Our IndustryThe restaurant industry is divided into two segments: full service and limited service. Full service is comprised of the casual dining, mid-scale, and finedining sub-segments. Limited service is comprised of the QSR and fast casual sub-segments. QSRs are traditional fast food restaurants with average checksizes of $3.00 to $8.00. Fast casual is a limited or self-service format with average check sizes of $8.00 to $12.00 that offers food prepared to order within agenerally more upscale establishment.We operate within the broader LSR segment, and we strive to offer the food and dining experience of a fast casual restaurant and the speed, value, andconvenience of a QSR. We strive to offer menu options that are made with fresh ingredients and provide a healthier alternative to typical fast food, which arealso inspired by the culinary and cultural traditions of Mexico and our hometown of Los Angeles.Our Competitive StrengthsWe believe that the following strengths differentiate us from our competitors and serve as the foundation for our continued growth:Differentiated Restaurant Concept with Broad Appeal. We believe that our food, served in contemporary restaurant environments at reasonable prices,positions us well to satisfy the needs of our core Hispanic family market and appeal to the broader general market who seek convenient and high-qualitymeals at reasonable prices. We provide our customers with the opportunity to enjoy citrus-marinated, fire-grilled chicken and Mexican-inspired entreescontaining distinctive ingredients such3as avocados, mangos, and serrano peppers at price points that appeal to a broad consumer base. We believe that our entree prices are typically lower than thefast casual segment, and a slight premium to the QSR segment. We prepare our entrees to order in approximately four minutes and allow our customers theoption to create their favorite flavor profiles using our freshly-prepared salsas before they enjoy their meals in our dining rooms or take their meals to go fromthe counter or the drive-thru. We also believe that our concept, which integrates the complexity of creating real food in real kitchens with the speed of ourservice model and the skill of our trained Grill Masters, provides a layer of competitive insulation around our restaurant model. We believe that ourpositioning appeals to a broad customer base, and that our brand crosses over traditional age, ethnic, and income demographics, giving consumers the best ofboth the fast casual and QSR segments. We seek to position ourselves as a differentiated restaurant concept, which we believe sources traffic from both diningsegments and, as a result, we expect it to drive transaction growth in the future.Mexican-Inspired, Fresh-Made Fire-Grilled Chicken and Entrees. Our signature product is our chicken, marinated with a proprietary recipe of citrus juice,garlic, and spices, which serves as the foundation of our distinctive menu of flavorful bone-in chicken meals and Mexican-inspired entrees. With menu itemssuch as our signature individual chicken meals, family dinners, Chicken Tostada Salad, Pollo Bowl®, Chicken Avocado Burrito, and Double ChickenAvocado Salad, we believe that we offer our customers a healthier alternative to traditional food on-the-go. Our entrees are prepared using fresh ingredientswith recipes inspired by Mexican cuisine. The majority of our menu items are prepared in-restaurant using fresh ingredients, including our bone-in chickenand chicken breast filets, rice, salsas, and cilantro dressing. These items start with our chicken, which is marinated in our restaurants daily. From there, ourGrill Masters fire-grill and hand-chop our chicken to order. Our team members create our salsas, and cilantro dressings with fresh tomatoes, avocados, serranopeppers, and cilantro. In addition, our rice is seasoned, and simmered in our restaurants throughout each day.Our bone-in chicken meals and Mexican-inspired entrees accounted for 46% and 54% of our company-operated restaurant sales, respectively, in 2018. Ourindividual and family-sized chicken meals appeal to customers looking to dine at the restaurant or take out during dinnertime, while our more-portableMexican-inspired entrees draw traffic from customers at lunchtime or for an afternoon snack, enabling us to generate sales almost equally between lunch anddinner. We believe that our family-sized chicken meals provide a healthier and convenient alternative for mothers and families looking to solve the“dinnertime dilemma” of providing their families with high-quality meals without investing significant time or money. In 2018, approximately 28% of ourcompany-operated sales were generated from family-sized meals.Inviting Experience that Welcomes Our Customers. We believe that our restaurant design creates an inviting restaurant environment. The interiors of ourrestaurants feature large, open kitchens that allow customers to watch our Grill Masters prepare our fire-grilled chicken. Our restaurants also featurecomplimentary self-serve salsa bars showcasing our variety of fresh salsas. The salsa bars invite customers to customize their meals with several salsasprepared in our kitchens every day. Our dining rooms include comfortable booths and chairs, while large windows and soft lighting fill our restaurants withlight and warmth.Operations Infrastructure that Allows for Real-Time Control, Fast Feedback, and Innovation. We believe that satisfying our customers’ dining needs is thefoundation for our business, and we have an operations platform that allows us to measure our performance in meeting and exceeding those needs. We utilizean operations dashboard that aggregates real-time, restaurant-level information for many aspects of our business. The dashboard provides corporate and fieldmanagement, as well as restaurant-level operators, with insight into how we are performing both from the customer’s perspective and also through the eyes ofexperienced third-party auditors.Developing High Average Unit Volumes (“AUVs”) and Strong Unit Economics One Chicken at a Time. We seek to position ourselves as a differentiatedQSR+ business, which we believe drives restaurant operating results that are competitive with other leading restaurant concepts in both the fast casual andQSR industry segments. We believe that our restaurant model is designed to generate strong cash flow, consistent restaurant-level financial results, and highreturns on invested capital. In 2018, our company-operated restaurants generated average annual sales per restaurant of approximately $1.8 million andrestaurant-level contribution margins of 19.0%.Experienced Leadership. Most of our senior management team has extensive operating experience in the restaurant industry. Effective March 12, 2018,Bernard Acoca commenced as our new President and Chief Executive Officer ("CEO"). Stephen J. Sather, our CEO since 2010 retired effective March 12,2018.Other members of the senior leadership team include Larry Roberts as our Chief Financial Officer, Hector Munoz as our Chief Marketing Officer and JenniferJaffe as our Chief People Officer.Our Growth StrategyWe believe that we are well-positioned for sales growth because of our strong appeal to our core Hispanic family market, appeal to the broader generalmarket, signature fire-grilled chicken, disciplined business model, and strong unit economics. We4plan to continue to expand our business, drive restaurant sales growth, maintain strong margins, and enhance our competitive positioning by executing onthe following strategies:Expand Our Restaurant Base. As discussed below under “Site Selection and Expansion—Restaurant Development,” we plan to continue to expand ourrestaurant base.We believe that our restaurant model is designed to generate strong cash flow, attractive restaurant-level financial results and high returns on invested capital.Our investment model targets an average new unit cash investment of approximately $0.8 to $1.7 million, net of tenant allowances, and in a restaurant's thirdfull year of operations, an AUV of approximately $1.8 million and a cash on cash return in excess of 20%, although there is no guarantee these targets will bemet. New restaurant performance in outer markets, which include San Francisco/San Jose, Sacramento, Phoenix, Houston and Dallas are currently below thesetargets.Increase Our Comparable Restaurant Sales. Our system has experienced annual comparable restaurant sales growth for eight consecutive years through ourfiscal year ended December 26, 2018. We aim to build on this momentum by increasing customer frequency, attracting new customers, and improving per-person spend. Furthermore, we believe that we are well positioned to benefit from shifting culinary and demographic trends in the United States.Menu Strategy and Evolution. We will continue to adapt our menu to create family-sized dinner options and lunch entrees that complement our signaturefire-grilled chicken, and are inspired by the culinary and cultural traditions of Mexico and our hometown of Los Angeles. We believe that we haveopportunities for menu innovation as we look to increase customer frequency and target the dinner segment. In addition, we will continue to tap into the needfor healthier offerings by building on the success of our fire-grilled chicken and “better for you” products. Our marketing and operations teams collaborate toensure that the items developed in our test kitchen can be executed to our high standards in our restaurants with the convenience and value that ourcustomers have come to expect.Increase Brand Awareness and Consumer Engagement. We engage customers through our seasonal product calendar, which features new variations of menuitems like our Chicken Tostada Salads and Stuffed Quesadillas. Our key points of differentiation are communicated through our advertising campaign, whichhighlights the brand's authenticity and our Grill Masters' expertise and dedication to high-quality grilled chicken. We tailor our message from television anddirect mail, which garners broad exposure, to our Loco Rewards loyalty program and social media platform where we engage in more personalized marketing.The Loco Rewards loyalty program was launched on June 13, 2017. As of December 26, 2018, there were 1,164,217 members in the Loco Rewards loyaltyprogram. The program offers one point for every dollar customers spend and a $10 reward when they achieve 100 points. Customers earn points primarily byscanning the El Pollo Loco app on Apple iOS or Android at the point of purchase, or by using the app to scan the barcode on their paper receipt anytimewithin 24 hours of their purchase. We build segmented dynamic campaigns with special offers tailored to each customer segment with the goals of increasingvisit frequency and growing overall spend.Within our restaurants we continue to engage our customers with point-of-purchase marketing material at various points along their path to purchase tofurther drive our differentiation.Restaurant Design. In 2016 we launched our newest restaurant design called Vision. The Vision design elevates the brand image with exterior and interiorfeatures that embrace the brand’s authentic roots with warm textures, rustic elements and a focus on the signature open kitchen layout established in previousdesigns. As of December 26, 2018, including new builds and remodels, we had 99 restaurants open with the Vision design in our system.Maintain Strong Margins. Since 2011, our restaurant contribution margin has ranged from 18.7% in 2011 to a high of 21.9% in 2014. Restaurantcontribution margin was 19.0% in fiscal 2018. While rising labor costs as a result of tighter labor markets and rising minimum wages, along with moderatecommodity inflation, continue to challenge unit profitability, we believe we can maintain strong margins through a combination of growing sales, priceincreases, labor efficiencies and other cost savings.Site Selection and ExpansionRestaurant DevelopmentWe believe that our restaurant model is designed to generate strong cash flow, attractive restaurant-level financial results, and high returns on investedcapital, which we believe provide us with a strong foundation for unit growth over the long-term. In 2018, we opened eight new company-operatedrestaurants and nine new franchised restaurants.Sales and profit performance in our outer markets are below our expectations. While we continue to execute operations and marketing initiatives to improvethe sales and profit performance in these markets, we are slowing our overall unit growth. As a result, we expect that overall unit development in 2019 will belower than 2018. During 2018, we closed seven company-5operated restaurants in Texas, California and Arizona. For a discussion of the impairment of these restaurants, see below in "Item 1A. Risk Factors—RisksRelated to Our Business and Industry—We have incurred, and may continue to incur, significant impairment of certain of our assets, in particular in our newmarkets."In fiscal 2019, we intend to open three to four new company-operated and three to five new franchised restaurants. There is no guarantee that we will be ableto open new company-operated or franchised restaurants, or to increase the overall number of our restaurants. We may be unsuccessful in expanding withinexisting or into new markets for a variety of reasons as described below in "Item 1A. Risk Factors," including competition for customers, sites, franchisees,employees, licenses, and financing.Site Selection ProcessWe consider the location of a restaurant to be a critical variable in its long-term success and as such, we devote significant effort to the investigation andevaluation of potential restaurant locations. Our in-house development team has extensive experience building such brands as Taco Bell, The Habit, Carl'sJr., Baskin Robbins, Wendy’s, Denny's, Johnny Rockets and Dunkin’ Brands. We use a combination of our in-house development team and outside real estateconsultants to locate, evaluate, and negotiate new sites using various criteria, including demographic characteristics, daytime population thresholds, andtraffic patterns, along with the potential visibility of, and accessibility to, the restaurant. The process for selecting locations incorporates management’sexperience and expertise and includes extensive data collection and analysis. Additionally, we use information and intelligence gathered from managers andother restaurant personnel that live in or near the neighborhoods that we are considering.Based on our experience and results, we are currently focused on developing freestanding sites with drive-thrus along with select in-line locations. Ourrestaurants perform well in a variety of neighborhoods, which gives us greater flexibility and lowers operating risk when selecting new restaurant locations.We approve new restaurants only after formal review by our real estate site approval committee, which includes most of our senior management, and wemonitor restaurants’ on-going performances to inform future site selection decisions.Restaurant ConstructionAfter identifying a lease site, we commence our restaurant build-out. Our new restaurants are either ground-up prototypes or retail space conversions. Onaverage, it takes approximately 12 to 18 months from specific site identification to restaurant opening. Our restaurants are constructed in approximately 10 to15 weeks. In order to maintain consistency of food and customer service, as well as our colorful, bright, and contemporary restaurant environment, we haveset processes and timelines to follow for all restaurant openings.Restaurant Management and OperationsServiceWe are extremely focused on customer service. We aim to provide fast, friendly service on a solid foundation of dedicated, driven team members andmanagers. Our cashiers are trained on the menu items that we offer and offer customers thoughtful suggestions to enhance the ordering process. Our teammembers and managers are responsible for our service and dining room environment with a focus on hospitality, team members seek to engage inconversation with our customers to ensure satisfaction. In addition, constant monitoring of the dining room occurs to ensure the fresh salsa bar and beveragestation are clean and supplied with products.OperationsWe utilize systems that are aimed at measuring our ability to deliver a “best in class” experience for our customers. These systems include customer surveys,mystery shopper scores, and speed-of-service performance trends. The operational results from all of these sources are then presented on an operationsdashboard that displays the measures in an easy-to-read online format that corporate and restaurant-level management and franchisees can utilize in order toidentify strengths and opportunities and to develop specific plans for continuous performance improvement.We have food safety and quality assurance programs designed to maintain the highest standards for the food and the food preparation procedures that areused by both company-operated and franchised restaurants. We have a quality assurance team and employ third-party auditors that perform our work placeand food safety restaurant audits.Managers and Team MembersEach of our restaurants typically has a general manager, an assistant manager and two to three shift leaders. There are between 20 and 35 team members perrestaurant, who prepare our food fresh daily and provide customer service. To lead our restaurant management teams, we have area leaders, each of whom isresponsible for 8 to 12 restaurants. Overseeing the area leaders are6three directors of operations who report to a senior director of operations. An additional senior director of operations oversees our area leaders and franchiseesin Texas. Franchise operations are supported by three directors of franchise and the restaurant development team is supported by four directors who allcurrently report to the Vice President, Development and Franchise.TrainingOur people are the center of the El Pollo Loco customer experience. Creating a culture of constant learning has been essential in equipping our people withthe skills to deliver our high standards and commitments to our guests and employees. We strive to find ways to simplify our methodology and invest inelevating our people. In a rapidly evolving landscape, effective training is not only dependent on quality of content, but also on method of delivery. Toengage our growing base of millennial employees, we employ a Learning Management System called Pollo Zone, our tablet-based learning tool. Thisplatform is a central hub for all training efforts and features individual learner profiles to support engagement and accountability on our path towardinvesting in our people and their growth. Franchise ProgramWe use a franchising strategy to increase new restaurant growth in certain markets, leveraging the ownership of entrepreneurs with specific local marketexpertise and requiring a relatively minimal capital commitment by us. As of December 26, 2018, there were a total of 271 franchised restaurants. Franchiseesrange in size from single-restaurant operators to the largest franchisee, which owned 60 restaurants as of December 26, 2018. Our existing franchise baseconsists of many successful, longstanding, multi-unit restaurant operators. As of December 26, 2018, approximately 75% of franchised restaurants wereowned and operated by franchisees that had been with us for over 20 years.We believe that the franchise revenue generated from our franchise base has historically served as an important source of stable and recurring cash flows to us,and we accordingly plan to expand our base of franchised restaurants. In existing markets, we encourage growth from current franchisees. In our expansionmarkets, we seek highly-qualified and experienced new franchisees for multi-unit development opportunities.We believe that creating a foundation of initial and on-going support is important for future success, both for our franchisees and for our brand. Therefore, wehave structured our corporate staff, programs, and communication systems to ensure that we are delivering high-quality support to our franchisees.Our franchise training program is a key element in ensuring our franchise owners and their managers are equipped with the knowledge and skills necessary forsuccess. The program introduces new franchise members to El Pollo Loco with hands-on training in the operation and management of our restaurants. Thisfoundational training is conducted by a general training manager who has been certified by our operations group. Training must be successfully completedbefore a trainee can be assigned to a restaurant as a manager.Once introductory training has been completed, we offer a path toward constant learning for all crew members by providing instructional materials that spanmanagement training, operations, new product introductions, food safety and a number of other essential restaurant functions. Many of these programs aredistributed through Pollo Zone, as a central hub for all training efforts and features individual learner profiles that will provide our franchise owners with real-time access to the progress of learning in their restaurants.Marketing and AdvertisingWe strive to distinguish the El Pollo Loco brand by building a brand equity that we believe not only accentuates our strengths but also deepens the strongemotional connections we have with our customers. In October 2018, we completed codifying our brand architecture in a comprehensive brand book, whichwill shape our strategic brand decisions and influence how we communicate the El Pollo Loco brand to consumers. We promote our restaurants and productsby emphasizing our points of differentiation, from our fresh ingredients and made-from-scratch preparation, to the cooking of our citrus-marinated chicken onopen fire grills in our kitchens, as well as the convenience and quality we offer for families.We use multiple marketing channels, including television, digital, and print, to broadly drive brand awareness and purchases of our featured products. Weadvertise on local broadcast and cable television.Through our public relations efforts, we engage notable food editors and bloggers on a range of topics to help promote our products. In addition, we engagein one-on-one conversations using a portfolio of social media platforms, including Facebook, Instagram and Twitter. We also use social media as a researchand customer service tool, and apply insights gained to future marketing efforts.7Our Loco Rewards loyalty program uses points, rewards, and offers to build engagement with our customers. Customers access the program onelpolloloco.com and the El Pollo Loco iOS Apple and Android app. We build segmented dynamic campaigns with special offers tailored to each customersegment with the goals of increasing visit frequency and growing overall spend. To keep customers engaged with the program, unannounced offers, called"Surprise and Delights" are awarded based on that customer’s transaction history. We communicate offers, loyalty updates and other Loco Rewardscampaigns to customers via in-app messaging, mobile phone push notifications and email.Our online ordering program makes it easy for customers to skip the line and order ahead. Available for every location and accessible from elpolloloco.comor the El Pollo Loco mobile app, any order can be placed and paid for before arriving at the restaurant. During the third quarter of 2018, we added the abilityfor customers to pay for online orders with their mobile phones using a stored value component built into our app, as well as the capability to e-gift El PolloLoco to a friend or a family member. For additional convenience, as of December 26, 2018, 200 company and 176 franchise locations offered integrateddelivery through a third party service.In 2004 we created El Pollo Loco Charities, a non-profit charity, to support the communities surrounding our restaurants. El Pollo Loco Charities hasprovided over 15,000 meals per year to underprivileged families, through organizations like Food on Foot, Habitat for Humanity, Children’s Institute, andCourt Appointed Special Advocates.Purchasing and DistributionMaintaining a high degree of quality in our restaurants depends in part on our ability to acquire fresh ingredients, and other necessary supplies that meet ourspecifications, from reliable suppliers. We regularly inspect our vendors to ensure that products purchased conform to our standards and that prices offered arecompetitive. We have a quality assurance team and third party accredited auditors that perform comprehensive supplier audits on a frequency schedule basedon the potential food safety risk for each product. We contract with McLane Company (our “primary distributor”), a major foodservice distributor, forsubstantially all of our food and supplies, including the poultry that our restaurants receive from suppliers. Our primary distributor delivers supplies to mostof our restaurants three times per week. Our restaurants in Texas utilize regional distributors for produce. Our franchisees are required to use our primarydistributor or an approved regional distributor, and franchisees must purchase food and supplies from approved suppliers. Poultry is our largest product costitem and represented approximately 40% of our total food and paper costs for 2018. Fluctuations in supply and in price can significantly impact ourrestaurant service and profit performance. We actively manage cost volatility for poultry by negotiating with multiple suppliers and entering into what webelieve are the most favorable contract terms given existing market conditions. In the past, we have entered into contracts ranging from one to two yearsdepending on current and expected market conditions. We currently source poultry from six suppliers, with two accounting for approximately 67% of ourplanned purchases for fiscal 2019. We have fixed prices for 100% of our poultry supply through the end of 2019.Intellectual PropertyWe have registered El Pollo Loco ® , Pollo Bowl ® , The Crazy Chicken ® , and certain other names used by our restaurants as trademarks or service markswith the U.S. Patent and Trademark Office (the “PTO”), and El Pollo Loco ® in approximately 42 foreign countries. In addition, the El Pollo Loco logo,website name and address, Facebook, Twitter, Instagram and YouTube accounts are our intellectual property. Our policy is to pursue and maintainregistration of service marks and trademarks in those countries where business strategy requires us to do so, and to oppose vigorously any infringement ordilution of the service marks or trademarks in those countries. We maintain the recipe for our chicken marinade, as well as certain proprietary standards,specifications, and operating procedures, as trade secrets or as confidential proprietary information.CompetitionWe operate in the restaurant industry, which is highly competitive and fragmented. The number, size, and strength of competitors varies by region. Ourcompetition includes a variety of locally-owned restaurants and national and regional chains that offer dine-in, carry-out, and delivery services. Ourcompetition from the broadest perspective includes restaurants, pizza parlors, convenience food stores, delicatessens, supermarkets, and club stores. There areno significant direct competitors with respect to menus that feature marinated, fire-grilled chicken. However, we indirectly compete with fast casualrestaurants, including Chipotle, Panera, Qdoba, and Rubio’s, among others, and with chicken-specialty QSRs and Mexican QSRs, such as Chick-fil-A,Church’s Chicken, KFC, Popeyes Louisiana Kitchen, Del Taco and Taco Bell, among others.We believe that competition within the fast casual restaurant segment is based primarily on ambience, price, taste, quality, and freshness of menu items, aswell as on the convenience of drive-thru service. We also believe that QSR competition is based8primarily on quality, taste, speed of service, value, brand recognition, restaurant location, and customer service. In addition, we compete with franchisors ofother restaurant concepts for prospective franchisees.Environmental MattersOur operations are also subject to federal, state, and local laws and regulations relating to environmental protection, including regulation of discharges intothe air and water, storage and disposal of waste, and clean-up of contaminated soil and groundwater. Under various federal, state, and local laws, an owner oroperator of real property may be liable for the cost of removal or remediation of hazardous or toxic substances on, in, or emanating from that property. Suchliability may be imposed without regard to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances.Certain of our properties may be located on sites that we know or suspect have been used by prior owners or operators as retail gas stations. Such propertiespreviously contained underground storage tanks (“USTs”), and while we are not aware of any sites with USTs remaining, it is possible that some of theseproperties may currently contain abandoned USTs. We are aware of contamination from a release of hazardous materials by a previous owner at two of ourowned properties and one of our leased properties. We do not believe that we have contributed to the contamination at any of these properties. Theappropriate state agencies have been notified, and these issues are being handled without disruption to our business. It is possible that petroleum productsand other contaminants may have been released at other properties into the soil or groundwater. Under applicable federal and state environmental laws, we, asthe current owner or operator of these sites, may be jointly and severally liable for the costs of investigation and remediation for any contamination.Although we lease most of our properties, and, when we own, we obtain certain assurances from the prior owner or often obtain indemnity agreements fromthird parties, we cannot assure you that we will not be liable for environmental conditions relating to our prior, existing, or future restaurants or restaurantsites. If we were found liable for the cost of remediation of contamination at, or emanating from, any of our properties, our operating expenses would likelyincrease and our operating results would likely be materially and adversely affected.Since 2000, we have obtained “Phase One” environmental reports for new restaurants. Where warranted, we obtain updated reports, and, if necessary, in rarecases, we obtain “Phase Two” reports. We have not conducted a comprehensive environmental review of all of our properties or operations. No assurance canbe given that we have identified all of the potential environmental liabilities at our properties or that such liabilities will not have a material adverse effect onour financial condition.Regulation and ComplianceWe are subject to extensive federal, state, and local government regulations, including those relating to, among other things, public health and safety, zoningand fire codes, and franchising. Failures to obtain or retain food or other licenses and registrations, or exemptions thereto, would adversely affect theoperations of restaurants. Although we have not experienced, and do not anticipate, any significant problems in obtaining required licenses, permits, orapprovals, any difficulties, delays, or failures in obtaining such licenses, permits, registrations, exemptions, or approvals could delay or prevent the openingof, or adversely impact the viability of, a restaurant in a particular area.The development and construction of additional restaurants will be subject to compliance with applicable zoning, land use and environmental regulations.We believe that federal and state environmental regulations have not had a material effect on operations, but more stringent and varied requirements of localgovernment bodies with respect to zoning, land use, and environmental factors could delay construction and increase development costs for new restaurants.We are also subject to the Fair Labor Standards Act, the Immigration Reform and Control Act of 1986, and various federal, state and local laws governingsuch matters as minimum wages, overtime, unemployment tax rates, workers’ compensation rates, citizenship requirements, and other working requirementsand conditions. A significant portion of our hourly staff is paid at rates consistent with the applicable federal, state, or local minimum wage and, accordingly,increases in the applicable minimum wage will increase our labor costs. We are also subject to the Americans with Disabilities Act, which prohibitsdiscrimination on the basis of disability in public accommodations and employment, and which may require us to design or modify our restaurants to makereasonable accommodations for disabled individuals.For a discussion of the various regulatory and compliance risks that we face, see below under "Item 1A. Risk Factors.”Management Information SystemsAll of our company-operated and franchised restaurants use computerized point-of-sale and back-office systems, which we believe can scale to support ourlong-term growth plans. Our point-of-sale system provides a touch-screen interface and is integrated with segmented Europay, Mastercard and Visa tokenizedhigh speed credit and gift card processing hardware. Our9point-of-sale system is used to collect daily transaction data, which provides daily sales and product mix information that we actively analyze.Our in-restaurant back-office computer system is designed to assist in the management of our restaurants and to provide labor and food cost managementtools. The system also provides corporate headquarters and restaurant operations management quick access to detailed business data, and reduces the timespent by restaurant managers on administrative needs. The system further provides sales, bank deposit, and variance data to our accounting department on adaily basis. For company-operated restaurants, we use this data to generate weekly consolidated reports regarding sales and other key measures, as well aspreliminary weekly profit and loss statements for each location, with final reports following the end of each period.EmployeesAs of December 26, 2018, we had approximately 5,573 employees, of whom approximately 5,410 were hourly restaurant employees comprised of 4,522crewmembers, 198 general managers, 202 assistant managers, 438 shift leaders, and 50 employees in limited-time roles as acting managers or as managers intraining. The remaining 163 employees were corporate and office personnel. None of our employees are part of a collective bargaining agreement, and webelieve that our relationships with our employees are satisfactory.SeasonalitySeasonal factors, including weather and the timing of holidays, cause our revenue to fluctuate from quarter to quarter. Our revenue per restaurant is typicallylower in the first and fourth quarters due to reduced January and December transactions 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 restaurant revenue and comparable restaurant sales mayfluctuate.Recent DevelopmentsOn October 29, 2018, we entered into an employment agreement with Hector Munoz which sets forth the terms and conditions under which he will serve asthe Company’s Chief Marketing Officer. The term of the agreement commenced on December 1, 2018 and will expire on the eighteen-month anniversarythereof, provided that the term will automatically extend for an additional one-year period on each expiration date thereof (with non-renewal thereof by ustreated the same as termination without cause).On January 24, 2019, the parties reached an agreement in principle to settle all claims and allegations brought on behalf of putative class members inSuperior Court of the State of California, County of Orange under the caption Elliott Olvera, et al. v. El Pollo Loco, Inc., et al. (Case No. 30-2014-00707367-CU-OE-CXC), as well as all wage and hour claims brought in the class actions captioned Martha Perez v. El Pollo Loco, Inc. (Los Angeles Superior CourtCase No. BC624001), Maria Vega, et al. v. El Pollo Loco, Inc. (Los Angeles Superior Court Case No. BC649719), and Gonzalez v. El Pollo Loco, Inc. (LosAngeles Superior Court Case No. BC712867). See additional information presented in "Note 13. Commitments and Contingencies—Legal Matters" in theaccompanying "Notes to Consolidated Financial Statements" in this Annual Report.On January 23, 2019, the parties filed a Notice of Settlement and Joint Request for Order to Stay Proceedings, stating the parties have reached an agreementin principle to settle the claims and allegations brought on behalf of putative class members in United States District Court, Central District of Californiaunder the caption Turocy v. El Pollo Loco Holdings, Inc. et al., (Case No. 8:15-cv-01343-DOC-KES). See additional information presented in "Note 13.Commitments and Contingencies—Legal Matters" in the accompanying "Notes to Consolidated Financial Statements" in this Annual Report.Available InformationWe make available free of charge on our Internet website our Annual Reports, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendmentsto those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (15 U.S.C.78m(a) or 78o(d)), as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission(“SEC”). Our Internet address is www.elpolloloco.com. The contents of our Internet website are not part of this annual report, and are not incorporated byreference. Our Internet address is provided as an inactive textual reference only.The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE., Washington, DC 20549. Thepublic may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet sitethat contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, at http://www.sec.gov.10ITEM 1A.RISK FACTORSYou should carefully consider the following risk factors, as well as other information contained in this report, including our financial statements and thenotes related to those statements. The occurrence of any of the following risks could materially and adversely affect our business, prospects, financialcondition, results of operations, and cash flow.Risks Related to Our Business and IndustryA prolonged economic downturn could materially affect us in the future.The restaurant industry is dependent upon consumer discretionary spending. A prolonged economic downturn or an economic recession could impact thepublic’s ability and desire to spend discretionary dollars as a result of job losses, home foreclosures, significantly-reduced home values, investment losses,bankruptcies, and reduced access to credit, which could result in lower levels of customer transactions and lower average check sizes in our restaurants. If theeconomy experiences another significant decline, our business, results of operations, and ability to comply with the terms of our secured revolving creditfacility could be materially and adversely affected, and we and our franchisees might decelerate the number and timing of new restaurant openings.Deterioration in customer transactions or a reduction in average check size would negatively impact our revenues and our profitability and could result infurther reductions in staff levels, additional impairment charges, and potential restaurant closures.We are vulnerable to changes in consumer preferences and economic conditions that could harm our business, financial condition, results of operations,and cash flow.Food service businesses depend on consumer discretionary spending and are often affected by changes in consumer tastes, national, regional, and localeconomic conditions, and demographic trends. Factors such as traffic patterns, weather, fuel prices, local demographics, and the type, number, and locationsof competing restaurants may adversely affect the performances of individual locations. In addition, economic downturns, inflation, or increased food orenergy costs could harm the restaurant industry in general and our locations in particular. Adverse changes in any of these factors could reduce consumertransactions or impose practical limits on pricing that could harm our business, financial condition, results of operations, and cash flow. There can be noassurance that consumers will continue to regard chicken-based or Mexican-inspired food favorably or that we will be able to develop new products thatappeal to consumer preferences. Our business, financial condition, and results of operations depend in part on our ability to anticipate, identify, and respondto changing consumer preferences and economic conditions.Political and social factors, including regarding trade, immigration or customer preferences, could negatively impact our business.Our success is dependent upon continued customer acceptance of our Mexican-inspired food. Increases in tariffs, restrictions on trade, or other deteriorationin American political or economic relations with Mexico, or a decrease in American consumers’ interest in Mexican-inspired food, could harm our brand andprofitability. Additionally, changes in trade, labor, or immigration policy could raise our input prices, or reduce the supply of immigrants who are in manycases our customers or employees, diminishing our sales and increasing our labor costs.Our business is geographically concentrated in the greater Los Angeles area, and we could be negatively affected by conditions specific to that region.Our company-operated and franchised restaurants in the greater Los Angeles area generated, in the aggregate, approximately 69.2% of our revenue in fiscal2018 and approximately 72.9% in fiscal 2017. Adverse changes in demographic, unemployment, economic, or regulatory conditions in the greater LosAngeles area or in the State of California, including, but not limited to, enforcement policies for and changes in immigration law, have had and may continueto have material adverse effects on our business. We believe that an increase in unemployment would have a negative impact on transactions in ourrestaurants. As a result of our concentration in the greater Los Angeles area, we have been disproportionately affected by the above adverse economicconditions as compared to other national chain restaurants.Our business is vulnerable to natural disasters given its geographic concentration and real estate intensive nature.Since our business is geographically concentrated in the greater Los Angeles area, we could be negatively affected by weather conditions specific to thatregion, including fires, earthquakes, or other natural disasters. Additionally, outside of Los Angeles, many of our restaurants are clustered around major citiesin Northern California, Texas, and elsewhere, and prolonged or severe inclement weather could affect our sales at restaurants in locations that experience suchconditions. Localized disasters, especially exacerbated by climate change, including wildfires, hurricanes, and flooding, could impair our assets andoperations in those areas. For example, in the third quarter of 2017, the Houston metropolitan area was impacted by Hurricane Harvey and11resultant flooding. This caused for us, among other effects, temporary store closures and food spoilage. We may also suffer unexpected losses resulting fromnatural disasters or other catastrophic events affecting our areas of operation, such as earthquakes, fires, droughts, local strikes, terrorist attacks, increases inenergy prices, explosions, or other natural or man-made disasters. The incidence and severity of catastrophes are inherently unpredictable, and our losses fromcatastrophes could be substantial.Our growth strategy depends in part on opening new restaurants in existing and new markets and expanding our franchise system. We may be unsuccessfulin opening new company-operated or franchised restaurants or in establishing new markets, which could adversely affect our growth.One of the key means to achieving our growth strategy is and will be through opening new restaurants and operating those restaurants on a profitable basis.We opened eight new company-operated restaurants in fiscal 2018 and plan to open three to four in fiscal 2019. Our franchisees opened nine new restaurantsin fiscal 2018 and plan to open three to five in fiscal 2019. The ability to open new restaurants is dependent upon a number of factors, many of which arebeyond our control, including our and our franchisees’ abilities to:•identify available and suitable restaurant sites;•compete for restaurant sites;•reach acceptable agreements regarding the lease or purchase of locations;•obtain or have available the financing required to acquire and operate a restaurant, including construction and opening costs;•respond to unforeseen engineering or environmental problems with leased premises;•avoid the impact of inclement weather and natural and man-made disasters;•hire, train, and retain the skilled management and other employees necessary to meet staffing needs;•obtain, in a timely manner and for an acceptable cost, required licenses, permits, and regulatory approvals;•respond effectively to any changes in local, state, and federal law and regulations that adversely affect our and our franchisees’ costs or abilities toopen new restaurants; and•control construction and equipment cost increases for new restaurants.There is no guarantee that a sufficient number of suitable restaurant sites will be available in desirable areas or on terms that are acceptable to us in order toachieve our growth plan. If we are unable to open new restaurants or sign new franchisees, or if restaurant openings are significantly delayed, our earnings orrevenue growth and our business could be materially and adversely affected, as we expect a portion of our growth to come from new locations.As part of our longer-term growth strategy, we may enter into geographic markets in which we have little or no prior operating or franchising experience,through company-operated restaurant growth and franchise development agreements. The challenges of entering new markets include (i) difficulties in hiringexperienced personnel, (ii) unfamiliarity with local real estate markets and demographics, (iii) consumer unfamiliarity with our brand, and (iv) competitiveand economic conditions, consumer tastes, and discretionary spending patterns that are different from and more difficult to predict or satisfy than in ourexisting markets. Consumer recognition of our brand has been important for our success in our existing markets. In addition, restaurants that we open in newmarkets may take longer to reach expected sales and profit levels on a consistent basis, and may have higher construction, occupancy, and operating costs,than restaurants that we open in existing markets, thereby affecting our overall profitability. Any failure on our part to recognize or respond to thesechallenges may adversely affect the success of any new restaurants. Expanding our franchise system could require the implementation, expense, andsuccessful management of enhanced business support systems, management information systems, and financial controls, as well as additional staffing,franchise support, and capital expenditures and working capital.At the end of fiscal 2009, we had 21 system-wide restaurants, all originally developed by franchisees, open east of the Rocky Mountains. However, by 2012,all of these restaurants had been closed. We may encounter similar issues with our current growth strategy, which could materially and adversely affect ourbusiness, financial condition, results of operations, and cash flow.Due to brand recognition and logistical synergies, as part of our growth strategy, we also intend to open new restaurants in areas where we have existingrestaurants. The operating results and comparable restaurant sales for our restaurants could be adversely affected due to increasing proximity among ourrestaurants and due to market saturation.12We have incurred, and may continue to incur, significant impairment of certain of our assets, in particular in our new markets.During fiscal 2018, we determined that the carrying value of assets at certain restaurants may not be recoverable. As a result, we recorded a $5.1 millionimpairment expense primarily related to four restaurants, in Arizona, California and Texas, including a restaurant in Texas that opened in early 2018. Duringfiscal 2017, we determined that the carrying value of the assets of 21 restaurants, in Arizona, California and Texas, may not be recoverable. Additionally, wemade a strategic decision to close two additional restaurants in Texas. As a result, we recorded a $32.6 million impairment expense. The impairment expensefor fiscal 2017 included an impairment expense of $27.7 million, representing the entire remaining value of capitalized assets of all of our company-operatedrestaurants in Texas, net of previously recorded depreciation. Factors which led to the impairment of our Texas restaurants included operating results, whichindicated that the restaurants would not achieve the sales volumes required to generate positive cash flows or improve profitability in the Texas market,along with the related future cash flow assumptions, including comparable sales rate growth and restaurant operating costs, over the remaining lease termsand the age of the restaurants in Texas. The restaurants in Texas began opening in late 2014, causing a higher net book value at the time of impairmenttesting, and increased difficulty projecting results for newer restaurants in newer markets. Given the difficulty in projecting results for newer restaurants innewer markets, we are also monitoring the recoverability of the carrying value of the assets of several other restaurants on an ongoing basis, including thosein the Arizona and Northern California markets. For those restaurants, if expected performance improvements are not realized, an impairment charge may berecognized in future periods, and such charge could be material. Asset impairments outside of Texas, or impairments to new units or future capitalexpenditures could present additional exposure. Closures could also require additional expenditures. Furthermore, franchised unit closings could result in theloss of franchise revenue and have other adverse effects on us.Changes in food and supply costs, especially for chicken, could adversely affect our business, financial condition, and results of operations.Our profitability depends in part on our ability to anticipate and react to changes in food and supply costs. We are susceptible to increases in food costs as aresult of factors beyond our control, such as general economic conditions, seasonal economic fluctuations, weather conditions, global demand, food safetyconcerns, infectious diseases, fluctuations in the U.S. dollar, product recalls, and government regulations, including tariffs and other import restrictions onforeign produce and other goods. At times the costs of many foods for humans and animals, including corn, wheat, corn flour and other flour, rice, andcooking oil, have increased markedly, resulting in upward pricing pressures on almost all of our raw ingredients, including chicken and other meats, andincreasing our food costs. Environmental and weather-related issues, such as freezes, drought and climate change, may also lead to increases, temporary orpermanent, or spikes in the prices of some ingredients, such as produce and meat. Issues affecting the availability of produce, poultry, or other proteins suchas shrimp, including blight, disease, and overfishing, have in the past and may in the future also raise their prices. Any increase in the prices of the ingredientsmost critical to our menu, such as chicken, corn, cheese, avocados, beans, rice, and tomatoes, could adversely compress our margins, or cause us to raise ourprices, reducing customer demand. Alternatively, in the event of cost increases with respect to one or more of our raw ingredients, we might choose totemporarily suspend serving menu items, such as guacamole or one or more of our salsas, rather than pay the increased cost. Any such changes to our menuprices or available menu could negatively impact our restaurant transactions, business, and comparable restaurant sales during the shortage and thereafter.Our principal food product is chicken. In fiscal 2018, 2017, and 2016, the cost of chicken included in our product cost was approximately 11.0%, 11.3%, and12.4%, respectively, of our revenue from company-operated restaurants. Material increases in the cost of chicken could materially and adversely affect ourbusiness, operating results, and financial condition. Changes in the cost of chicken can result from a number of factors, including seasonality, increases in thecost of grain, disease, and other factors that affect domestic and international supply of and demand for chicken products. A major driver of the price of corn,which is the primary feed source for chicken, has been the increasing demand for corn by the ethanol industry as an alternative fuel source, as most ethanolplants in the United States primarily use corn to make ethanol. This increased demand on the nation’s corn crop has had and may continue to have anunfavorable impact on chicken prices. Additionally, environmental and animal rights regulations or voluntary programs could increase the cost or supply ofchicken and other foods. We often ask our suppliers to use fixed price contracts or other financial risk management strategies to reduce potential pricefluctuations in the cost of chicken and other commodities. We have implemented menu price increases in the past to significantly offset increased chickenprices, due to competitive pressures and compressed profit margins. We may not be able to offset all or any portion of increased food and supply coststhrough higher menu prices in the future. If we implement further menu price increases in the future to protect our margins, average check size and restauranttransactions could be materially and adversely affected, at both company-operated and franchised restaurants.Negative publicity could reduce sales at some or all of our restaurants.We are, from time to time, faced with negative publicity at one or more of our restaurants relating to (i) food quality; (ii) the safety, sanitation, and welfare ofchicken, which is our principal food product; (iii) restaurant facilities; (iv) customer13complaints or litigation alleging illness or injury; (v) health inspection scores; (vi) integrity of our or our suppliers’ food processing and other policies,practices, and procedures; (vii) employee relationships; or (viii) other matters. Negative publicity can adversely affect us, regardless of whether an allegationis valid or whether we are held to be responsible. In addition, the negative impact of adverse publicity relating to one restaurant may extend far beyond therestaurant involved to affect some or all of our other restaurants, including our franchised restaurants. For example, we, or other chicken purveyors orrestaurant companies generally, could come under criticism from animal rights and welfare activists for our business practices or those of our suppliers. Suchcriticisms could impair our brand, our restaurant sales, our hiring, our expansion plans, and the performance of our franchisees. If we changed our practicesbecause of concerns about animal welfare, or in response to such criticisms, our costs might increase, or we might have to change our suppliers or our menu.The risk of negative publicity is particularly great with respect to our franchised restaurants, because we are limited in the manner in which we can regulatethem, especially on a real-time basis. A similar risk exists with respect to food service businesses unrelated to us, if customers mistakenly associate thoseunrelated businesses with our operations.Employee claims against us or our franchisees based on, among other things, wage and hour violations, discrimination, harassment, or wrongful terminationmay also create not only legal and financial liability but negative publicity that could adversely affect us and divert our financial and management resourcesthat 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, financial condition, results of operations, and cash flows.Food-borne illness and other food safety and quality concerns may negatively impact our business and profitability.Incidents or reports of food- or water-borne illness or other food safety issues, food contamination or tampering, employee hygiene or cleanliness failures, orimproper employee conduct at our restaurants could lead to product liability or other claims. Such incidents or reports could negatively affect our brand andreputation as well as our business, revenues, and profits. Similar incidents or reports occurring at quick-service restaurants unrelated to us could likewisecreate negative publicity, which could negatively impact consumer behavior towards us.We cannot guarantee that our internal controls and training will be fully effective in preventing all food-borne illnesses. Furthermore, our reliance on third-party food processors makes it difficult to monitor food safety compliance, and may increase the risk that a food-borne illness would affect multiple locationsrather than a single restaurant. Some food-borne illness incidents could be caused by third-party food suppliers and transporters outside of our control. Newillnesses resistant to our current precautions may develop in the future, or diseases with long incubation periods could arise that could cause claims orallegations on a retroactive basis. One or more instances of food-borne illness in one of our company-operated or franchised restaurants could negativelyaffect sales at all of our restaurants if highly publicized. This risk would exist even if it were later determined that an illness had been wrongly attributed toone of our restaurants. A number of other restaurant chains have experienced incidents related to food-borne illnesses that have had material adverse impactson their operations, and we cannot guarantee that we could avoid a similar impact upon the occurrence of a similar incident at one of our restaurants.Additionally, even if food-borne illnesses were not identified at El Pollo Loco restaurants, our restaurant sales could be adversely affected if instances offood-borne illnesses at other restaurant chains were highly publicized. In addition, our restaurant sales could be adversely affected by publicity regardingother high-profile illnesses such as avian flu that customers may associate with our food products.We rely on only one company to distribute substantially all of our products to company-operated and franchised restaurants, and on a limited number ofcompanies to supply chicken. Failure to receive timely deliveries of food or other supplies could result in a loss of revenue and materially and adverselyimpact our operations.Our and our franchisees’ ability to maintain consistent quality menu items and prices significantly depends upon our ability to acquire fresh food products,including the highest-quality chicken and related items, from reliable sources, in accordance with our specifications and on a timely basis. Shortages orinterruptions in the supply of fresh food products, caused by unanticipated demand, problems in production or distribution, contamination of food products,an outbreak of poultry disease, inclement weather, or other conditions, could materially and adversely affect the availability, quality, and cost of ingredients,which would adversely affect our business, financial condition, results of operations, and cash flows. We have contracts with a limited number of suppliers forthe chicken and other food and supplies for our restaurants. In addition, one company distributes substantially all of the products that we receive fromsuppliers to company-operated and franchised restaurants. If that distributor or any supplier fails to perform as anticipated or seeks to terminate agreementswith us, or if there is any disruption in any of our supply or distribution relationships for any reason, our business, financial condition, results of operations,and cash flows could be materially and adversely affected. If we or our franchisees temporarily close a restaurant or remove popular items from a restaurant’smenu as a result of such a disruption, that restaurant may experience a significant reduction in revenue if our customers change their dining habits as a result.14We have a history of net losses, and may incur losses in the future.Although we have exhibited positive net income in 2014 to 2017, before fiscal 2014, we incurred net losses in each of the preceding seven fiscal years. Wealso incurred a net loss in 2018 due to two legal settlements. We may incur net losses in the future, and we cannot guarantee that we will sustain profitability.The failure to comply with our debt covenants, and the volatile credit and capital markets, could have material adverse effects on our financial condition.Our ability to manage our debt is dependent upon our level of positive cash flow from company-operated and franchised restaurants, net of costs. Aneconomic downturn could negatively impact our cash flow. Credit and capital markets can be volatile, making it difficult for us to refinance our existing debtor to obtain additional debt or equity financings in the future. Such constraints could increase our costs of borrowing and could restrict our access to otherpotential sources of future liquidity. Our failure to comply with the debt covenants in our secured revolving credit facility or to have sufficient liquidity tomake interest and other payments required by our debt could result in a default on our debt and acceleration of our borrowings, which would have a materialadverse effect on our business and financial condition.Our level of indebtedness could materially and adversely affect our business, financial condition, and results of operations.We have substantial debt service obligations. At December 26, 2018, our total debt was $74.2 million (including capital lease obligations), and we had $67.5million of credit available under our secured revolving credit facility, which was reduced by $8.5 million from outstanding letters of credit.Our level of indebtedness could have significant effects on our business, such as:•limiting our ability to borrow additional amounts to fund working capital, capital expenditures, acquisitions, debt service requirements, execution ofour growth strategy, and other purposes;•requiring us to dedicate a portion of our cash flow from operations to pay interest on our debt, which could reduce availability of our cash flow tofund working capital, capital expenditures, acquisitions, execution of our growth strategy, and other general corporate purposes;•making us more vulnerable to adverse changes in general economic, industry, government regulatory, and competitive conditions in our business bylimiting our ability to plan for and react to changing conditions;•placing us at a competitive disadvantage compared with our competitors with less debt; and•exposing us to risks inherent in interest rate fluctuations, because our borrowings are at variable rates of interest, which could result in higher interestexpense in the event of increases in interest rates.In addition, we may not be able to generate sufficient cash flow from our operations to repay our indebtedness when it becomes due and to meet our othercash needs. If we are not able to pay our debts as they become due, we will be required to pursue one or more alternative strategies, such as selling assets,refinancing or restructuring our indebtedness, or selling additional debt or equity securities. We may not be able to refinance our debt or sell additional debtor equity securities or our assets on favorable terms, if at all, and if we have to sell our assets, that sale may negatively affect our ability to generate revenue.Our secured revolving credit facility contains a number of covenants that, among other things, restrict, subject to certain exceptions, our ability to (i) incuradditional indebtedness, (ii) issue preferred stock, (iii) create liens on assets, (iv) engage in mergers or consolidations, (v) sell assets, (vi) make investments,loans, or advances, (vii) make certain acquisitions, (viii) engage in certain transactions with affiliates, (ix) authorize or pay dividends, and (x) change ourlines of business or fiscal year. In addition, our secured revolving credit facility requires us (i) to maintain, on a consolidated basis, a minimum consolidatedfixed charge coverage ratio and (ii) not to exceed a maximum lease adjusted consolidated leverage ratio. Our ability to borrow under our secured revolvingcredit facility depends on our compliance with these tests. Events beyond our control, including changes in general economic and business conditions, mayaffect our ability to meet these tests. We cannot guarantee that we will meet these tests in the future, or that our lenders will waive any failure to meet thesetests.We may not be able to compete successfully with other quick-service and fast casual restaurants. Intense competition in the restaurant industry could makeit more difficult to expand our business, and could also have a negative impact on our operating results, if customers favor our competitors or if we areforced to change our pricing and other marketing strategies.The food service industry, and particularly its quick-service and fast casual segments, is intensely competitive. In addition, the greater Los Angeles area, theprimary market in which we compete, consists of what we believe to be the most competitive Mexican-inspired quick-service and fast casual market in theUnited States. We expect competition in this market and in each of our other markets to continue to be intense, because consumer trends are favoring limitedservice restaurants that offer healthier15menu items made with better-quality products, and many limited service restaurants are responding to these trends. Competition in our industry is primarilybased on price, convenience, quality of service, brand recognition, restaurant location, and type and quality of food. If our company-operated and franchisedrestaurants cannot compete successfully with other quick-service and fast casual restaurants in new and existing markets, we could lose customers and ourrevenue could decline. Our market position is based on balancing price and quality, and drift in our competitive position, popular perception of our position,or popular interest in our position, could harm our sales, brand, and support among customers. Our company-operated and franchised restaurants competewith national and regional quick-service and fast casual restaurant chains for customers, restaurant locations, and qualified management and other staff.Compared with us, some of our competitors have substantially greater financial and other resources, have been in business longer, have greater brandrecognition, or are better-established in the markets where our restaurants are located or are planned to be located. These competitive factors are particularlyapplicable in markets in which we have expanded relatively rapidly and relatively recently, such as Texas. Any of these competitive factors may materiallyand adversely affect our business, financial condition, and results of operations.Our marketing programs may not be successful, and our new menu items, advertising campaigns, and restaurant designs and remodels may not generateincreased sales or profits.We incur costs and expend other resources in our marketing efforts on new menu items, advertising campaigns, and restaurant designs and remodels, to raisebrand awareness and to attract and retain customers. Our initiatives may not be successful, resulting in expenses incurred without the benefit of higherrevenues. Additionally, some of our competitors have greater financial resources than we do, enabling them to spend significantly more on marketing,advertising, and other initiatives. Should our competitors increase spending on marketing, advertising, and other initiatives, or our marketing funds decreasefor any reason, or should our advertising, promotions, new menu items, and restaurant designs and remodels be less effective than those of our competitors,there could be a material adverse effect on our results of operations and financial condition.The challenging economic environment may affect our franchisees, with adverse consequences to us.We rely in part on our franchisees and the manner in which they operate their locations to develop and promote our business. As of December 26, 2018, ourtop 10 franchisees operated 66% of our franchised restaurants and two franchisees operated 34% of our franchised restaurants. Due to the continuingchallenging economic environment, it is possible that some franchisees could file for bankruptcy or become delinquent in their payments to us, which couldhave significant adverse impacts on our business, due to loss or delay in payments of (i) royalties, (ii) information technology (“IT”) support service fees,(iii) contributions to our advertising funds, and (iv) other fees. Bankruptcies by our franchisees could (i) prevent us from terminating their franchiseagreements, so that we could offer their territories to other franchisees, (ii) negatively impact our market share and operating results, as we might have fewerwell-performing restaurants, and (iii) adversely impact our ability to attract new franchisees.As of December 26, 2018 we had executed development agreements that represent commitments to open 44 franchised restaurants at various dates through2022. Although we have developed criteria to evaluate and screen prospective developers and franchisees, we cannot be certain that the developers andfranchisees that we select will have the business acumen or financial resources necessary to open and operate successful franchises in their franchise areas,and state franchise laws may limit our ability to terminate or modify these franchise arrangements. Moreover, franchisees may fail to operate their restaurantsin fashions consistent with our standards and requirements, or to hire and train qualified managers and other restaurant personnel. Failures of developers andfranchisees to open and operate franchises successfully could materially and adversely affect our reputation, brand, business, financial condition, results ofoperations, cash flows, and ability to attract prospective franchisees.Franchisees may not have access to the financial or management resources that they need to open the restaurants contemplated by their agreements with us, orbe able to find suitable sites on which to develop those restaurants. Franchisees may not be able to negotiate acceptable lease or purchase terms for restaurantsites, obtain necessary permits and government approvals, or meet construction schedules. Any of these problems could slow our growth and reduce ourfranchise revenue. Additionally, our franchisees typically depend on financing from banks and other financial institutions, which may not always beavailable to them, in order to construct and open new restaurants. For these reasons, franchisees operating under development agreements may not be able tomeet the new restaurant opening dates required under those agreements. Also, we sublease certain restaurants to some existing California franchisees. If anysuch franchisees cannot meet their financial obligations under their subleases, or otherwise fail to honor or default under the terms of their subleases, we willbe financially obligated under a master lease and could be materially and adversely affected. In the past, franchisees have entered bankruptcy or receivership,which can lead to sale or closure of franchises, cause underperformance or underinvestment in capital expenditures, or lead to nonpayment of us or othercreditors, and these circumstances could recur in the future.16We have limited control with respect to the operations of our franchisees, which could have a negative impact on our business.Franchisees are independent business operators. They are not our employees, and we do not exercise control over the day-to-day operations of theirrestaurants. We provide training and support to franchisees, and set and monitor operational standards, but the quality of franchised restaurants may bediminished by any number of factors beyond our control. Consequently, franchisees may fail to operate their restaurants in fashions consistent with ourstandards and requirements, or to hire and train qualified managers and other restaurant personnel. If franchisees do not operate to our expectations, our imageand reputation, and the images and reputations of other franchisees, may suffer materially, and system-wide sales could decline significantly.If our relations with existing or potential franchisees deteriorate, restaurant performance and our development pipeline could suffer.Our growth depends on maintaining amicable relations with our franchisees. Franchisees, as independent business operators, may from time to time disagreewith us and our strategies regarding the business or our interpretation of our respective rights and obligations under the franchise agreement. Disagreementmay lead to disputes with our franchisees, and we expect such disputes to occur from time to time as we continue to offer franchises. Disputes between us andour franchisees, whether in court or otherwise, could relate to either party’s violation of its contractual obligations. Unfavorable judgments or settlementsrelating to franchisee disputes could result in monetary or injunctive relief against us, including the voiding of non-compete, territorial exclusivity, or otherdevelopment-related provisions upon which we rely. For example, in a recent suit where a franchisee challenged the enforceability of the territorialexclusivity clause in its franchise agreement with us, a jury found in favor of the franchisee. Although we intend to vigorously appeal the judgement, if thisor similar clauses were held unenforceable, we and other franchisors could be materially negatively impacted. To the extent that we have such disputes, theattention, time, and financial resources of our management and our franchisees will be diverted from our restaurants, which could have a material adverseeffect on our business, financial condition, results of operations, and cash flows. Even our success in franchisee disputes could damage our franchisees'finances or operations, or our relationships with them.Our self-insurance programs may expose us to significant and unexpected costs and losses.We currently maintain employee health insurance coverage on a self-insured basis. We do maintain stop loss coverage which sets a limit on our liability forboth individual and aggregate claim costs.We currently record a liability for our estimated cost of claims incurred and unpaid as of each balance sheet date. Our estimated liability is recorded on anundiscounted basis and includes a number of significant assumptions and factors, including historical trends, expected costs per claim, actuarial assumptions,and current economic conditions. Our history of claims activity for all lines of coverage is closely monitored, and liabilities are adjusted as warranted basedon changing circumstances. It is possible, however, that our actual liabilities may exceed our estimates of loss. We may also experience an unexpectedlylarge number of claims that result in costs or liabilities in excess of our projections, and therefore we may be required to record additional expenses. For theseand other reasons, our self-insurance reserves could prove to be inadequate, resulting in liabilities in excess of our available insurance and self-insurance. If asuccessful claim is made against us and is not covered by our insurance or exceeds our policy limits, our business may be negatively and materially impacted.Information technology system failures or breaches of our network security could interrupt our operations and adversely affect our business.We rely on our computer systems and network infrastructure across our operations, including point-of-sale processing at our restaurants. Our operationsdepend upon our ability to protect our computer equipment and systems against damage from physical theft, fire, power loss, telecommunications failure, andother catastrophic events, as well as from internal and external security breaches, viruses, and other disruptive problems. Any damage or failure of ourcomputer systems or network infrastructure that causes an interruption in our operations could have a material adverse effect on our business and subject us tolitigation or to actions by regulatory authorities. Moreover, these systems, infrastructures, and operations rely upon third-party software and vendors, and wemay therefore have a limited ability to guard against, learn about, or remedy problems that could harm us, including bugs and glitches, system outages, andhacks that exploit security vulnerabilities to steal or ransom information.If we are unable to protect our customers’ payment method data, we could be exposed to data loss, litigation, liability, and reputational damage.We accept electronic payment cards from our customers in our restaurants. Customers also have the ability to pay for online orders with their mobile phonesusing a stored value component built into our app. For the fiscal year ended December 26, 2018, approximately 55% of our sales were attributable tocredit/debit card transactions, and credit/debit card usage could continue to increase. A number of restaurant operators and retailers have experienced actualor potential security breaches in which credit/debit card information may have been stolen. While we have taken reasonable steps to prevent the occurrenceof17security breaches in this respect, we may in the future become subject to claims for purportedly fraudulent transactions arising out of the actual or allegedtheft of credit/debit card information, and we may also be subject to lawsuits or other proceedings in the future relating to these types of incidents.Proceedings related to theft of credit/debit card information may be brought by payment card providers, banks, and credit unions that issue cards, cardholders(either individually or as part of a class action lawsuit), and federal and state regulators. Any such proceedings could distract our management team membersfrom running our business and cause us to incur significant unplanned losses and expenses.We also sell and accept for payment, El Pollo Loco gift cards, and our loyalty rewards program provides points that can be redeemed for purchases. Likecredit and debit cards, gift cards and rewards points are vulnerable to theft, whether physical or electronic. We believe that our gift cards are primarilyvulnerable to physical theft, as we have implemented gift card policies such as requiring a physical card to be presented when redeeming value from a giftcard; however, there could be instances of non-compliance with these policies. We believe that, due to their electronic nature, rewards points and paymentinformation stored within our app are primarily vulnerable to hacking. Customers affected by any loss of data or funds could litigate against us, and securitybreaches or even unsuccessful attempts at hacking could harm our reputation, and guarding against or responding to hacks could require significant time andresources.We also receive and maintain certain personal information about our customers and team members. The use of this information by us is regulated at thefederal and state levels. If our security and information systems are compromised or our team members fail to comply with these laws and regulations and thisinformation is obtained by unauthorized persons or used inappropriately, it could adversely affect our reputation, as well as the results of operations, andcould result in litigation against us or the imposition of penalties. In addition, our ability to accept credit/debit cards as payment in our restaurants and onlinedepends on us maintaining our compliance status with standards set by the PCI Security Standards Council. These standards, set by a consortium of the majorcredit card companies, require certain levels of system security and procedures to protect our customers’ credit/debit card information as well as otherpersonal information. Privacy and information security laws and regulations change over time, including the California Consumer Privacy Act (“CCPA”)which is due to take effect January 1, 2020. Compliance with the CCPA and other legal and regulatory changes may result in cost increases due to necessarysystem and process changes. Further, despite our diligent efforts, we may not be successful in complying with such regulations due to both internal andexternal factors. Noncompliance could result in fines and/or proceedings against us by governmental agencies or others. There could also be uncertaintysurrounding compliance with privacy laws in other jurisdictions such as state-specific laws which may conflict with existing legislation or future laws andregulations.The failure to enforce and maintain our trademarks and protect our other intellectual property could materially and adversely affect our business,including our ability to establish and maintain brand awareness.We have registered El Pollo Loco ®, Pollo Bowl ®, The Crazy Chicken ®, and certain other names used by our restaurants as trademarks or service markswith the PTO and El Pollo Loco® in approximately 42 foreign countries. In addition, the El Pollo Loco logo, website name and address, and Facebook,Twitter, Instagram and YouTube accounts are our intellectual property. The success of our business strategy depends on our continued ability to use ourexisting trademarks and service marks in order to increase brand awareness and further develop our branded products. If our efforts to protect our intellectualproperty are inadequate, or if any third party misappropriates or infringes upon our intellectual property, whether in print, on the Internet, or through othermedia, our brands and branded products could fail to maintain or achieve market acceptance and the value of our brands could be harmed, materially andadversely affecting our business. There can be no assurance that all of the steps that we have taken to protect our intellectual property in the United Statesand in foreign countries will be adequate. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as dothe laws of the United States.We maintain the recipe for our chicken marinade, as well as certain proprietary standards, specifications, and operating procedures, as trade secrets orconfidential proprietary information. We may not be able to prevent the unauthorized disclosure or use of our trade secrets or proprietary information, despitethe existence of confidentiality agreements and other measures. While we try to ensure that the quality of our brands and branded products is maintained byall of our franchisees, we cannot be certain that these franchisees will not take actions that adversely affect the value of our intellectual property or reputation.If any of our trade secrets or proprietary information were to be disclosed to or independently developed by a competitor, our business, financial condition,and results of operations could be materially and adversely affected.We depend upon our board of directors, executive officers, and key employees.We rely upon the accumulated knowledge, skills, and experience of the members of our board of directors, our executive officers, and our key employees. Ifthey were to leave us or become incapacitated, we might suffer in our planning and execution of business strategy and operations, impacting our brand andfinancial results. We also do not maintain any key employee life insurance policies for any of our employees.Matters relating to employment and labor law may adversely affect our business.18Various federal, state and local labor laws govern our relationships with our employees and affect operating costs. These laws include employeeclassifications as exempt or non-exempt, minimum wage requirements, unemployment tax rates, workers’ compensation rates, citizenship requirements, andother wage and benefit requirements for employees classified as non-exempt. Significant additional government regulations and new laws mandatingincreases in minimum wages or benefits such as health insurance could materially affect our business, financial condition, operating results, and cash flow.Furthermore, the unionization of our employees and of the employees of our franchisees could materially affect our business, financial condition, operatingresults, and cash flow.We are also subject in the ordinary course of business to employee claims against us based, among other things, on discrimination, harassment, wrongfultermination, or violation of wage and labor laws. Such claims could also be asserted against us by employees of our franchisees. These claims may divert ourfinancial and management resources that would otherwise be used to benefit our operations. The on-going expense of any resulting lawsuits, and anysubstantial settlement payment or damage award against us, could adversely affect our business, brand image, employee recruitment, financial condition,operating results, or cash flows.Restaurant companies have been the targets of class action lawsuits and other proceedings alleging, among other things, violations of federal and stateworkplace and employment laws. Proceedings of this nature are costly, divert management attention, and, if successful, can result in payment ofsubstantial damages or settlement costs.Our business is subject to the risk of litigation by employees, consumers, suppliers, stockholders, and others through private actions, class actions,administrative proceedings, regulatory actions, and other litigation. The outcome of litigations, particularly class and regulatory actions, is difficult to assessor quantify. In recent years, restaurant companies, including us, have been subject to lawsuits, including class action lawsuits, alleging violations of federaland state laws regarding workplace and employment conditions, discrimination, and similar matters. A number of these lawsuits have resulted in payments ofsubstantial damages by the defendants. Similar lawsuits have been instituted from time to time alleging violations of various federal and state wage and hourlaws regarding, among other things, employee meal deductions, overtime eligibility of managers, and failure to pay for all hours worked. In the past, we havebeen a party to wage and hour class action lawsuits and are currently a party to such lawsuits on behalf of purported classes. See additional informationpresented in "Note 13. Commitments and Contingencies—Legal Matters" in the accompanying "Notes to Consolidated Financial Statements" in this AnnualReport.Occasionally, our customers file complaints or lawsuits against us alleging that we are responsible for some illnesses or injuries that they suffered at or after avisit to one of our restaurants, including actions seeking damages resulting from food-borne illnesses or accidents in our restaurants. We are also subject to avariety of other claims from third parties arising in the ordinary course of our business, including contract claims. The restaurant industry has also beensubject to a growing number of claims that the menus and actions of restaurant chains have led to the obesity of certain of their customers. We may also besubject to lawsuits from our employees, the U.S. Equal Employment Opportunity Commission, or others, alleging violations of federal or state laws regardingworkplace and employment conditions, discrimination, and similar matters.Regardless of whether any claims against us are valid and whether we are liable, claims may be expensive to defend against and divert time and money awayfrom operations. In addition, claims may generate negative publicity, which could reduce customer traffic and sales. Although we maintain what we believeto be adequate levels of insurance, insurance may not be available at all or in sufficient amounts to cover any liabilities with respect to these or other matters.A judgment or other liability in excess of our insurance coverage for any claims, or any adverse publicity resulting from claims, could adversely affect ourbusiness and results of operations.If we or our franchisees face labor shortages or increased labor costs, our results of operations and growth could be adversely affected.Labor is a primary component in the cost of operating our company-operated and franchised restaurants. If we or our franchisees face labor shortages orincreased labor costs, because of increased competition for employees, a decrease in the labor supply due to changes in immigration policy including barriersto immigrants entering, working in, or remaining in the United States, higher employee-turnover rates, unionization of restaurant workers, or increases infederal, state, or local minimum wages or in other employee benefits costs (including costs associated with health insurance coverage or workers’compensation insurance), our and our franchisees’ operating expenses could increase, and our growth could be adversely affected.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 increasesin the minimum wage will increase our labor costs and the labor costs of our franchisees. The California minimum wage rose to $10.50 per hour on January 1,2017, $11.00 per hour on January 1, 2018 and $12.00 per hour on January 1, 2019 and is scheduled to rise to (i) $13.00 per hour on January 1, 2020, (ii)$14.00 per hour on January 1, 2021, and (iii) $15.00 per hour on January 1, 2022, subject, in each case, to the governor’s ability to pause any scheduledincrease19(“off-ramp” provisions) for one year if either economy or budget conditions are met. Initial determinations are to be made by the governor by August 1 ofeach year prior to a January increase. The governor makes the final determination by September 1. Thereafter, the state minimum wage is to be indexedannually for inflation.Local minimum wages may exceed or ramp up faster than state levels. In particular, the minimum wage in the City of Los Angeles and the unincorporatedareas of the County of Los Angeles is scheduled to rise to $15.00 by July 1, 2020 in accordance with a June 2015 ordinance: (i) from July 1, 2017, $12.00, (ii)from July 1, 2018, $13.25, (iii) from July 1, 2019, $14.25, (iv) from July 1, 2020, $15.00, (v) from July 1, 2022, indexed to inflation. On September 29, 2015,the Board of Supervisors of the County of Los Angeles adopted an ordinance amending the Los Angeles County Code and establishing a countywideminimum wage covering unincorporated areas of the county following the same schedule.Other municipalities in the County of Los Angeles and elsewhere have followed and may continue to follow. For example:On January 19, 2016, the City Council of the City of Long Beach approved a plan to raise the minimum wage on the following schedule: (i) from January 1,2017, $10.50, (ii) from January 1, 2018, $12.00, and (iii) from January 1, 2019, $13.00. Thereafter, pursuant to further study, the minimum wage for the Cityof Long Beach could rise to $14.00 in 2020 and $15.00 in 2021.In 2018, approximately 69% of our revenue, excluding franchise advertising revenue, came from company-operated and franchised restaurants in the greaterLos Angeles area, including 10% from the City of Los Angeles, 37% from other incorporated cities in the County of Los Angeles, and 1% fromunincorporated areas of the County of Los Angeles. Those restaurants that are not directly covered by these ordinances may be covered by future ordinances,may face competitive or political pressures to match these wage levels, or may suffer from any regional economic distress caused by these ordinances.Federally-mandated, state-mandated, or locally-mandated minimum wages may be further raised in the future. We may be unable to increase our menu pricesin order to pass future increased labor costs on to our customers, in which case our margins would be negatively affected. Also, reduced margins of franchiseescould make it more difficult to sell franchises. And if menu prices were increased by us and our franchisees to cover increased labor costs, the higher pricescould adversely affect sales and thereby reduce our margins and the royalties that we receive from franchisees.In addition, our success depends in part upon our and our franchisees’ ability to attract, motivate, and retain a sufficient number of well-qualified restaurantoperators, management personnel, and other employees. Qualified individuals needed to fill these positions can be in short supply in some geographic areas.In addition, limited service restaurants have traditionally experienced relatively high employee turnover rates. Although we have not yet experienced anysignificant problems in recruiting or retaining employees, our and our franchisees’ inability to recruit and retain qualified individuals could delay plannedopenings of new restaurants or result in higher employee turnover in existing restaurants, which could increase our and our franchisees’ labor costs and have amaterial adverse effect on our business, financial condition, results of operations, and cash flows. If we or our franchisees are unable to recruit and retainsufficiently qualified individuals, our business and our growth could be adversely affected. Competition for qualified employees could require us or ourfranchisees to pay higher wages, which could also result in higher labor costs.We are locked into long-term and non-cancelable leases, and may be unable to renew leases at the ends of their terms.Many of our restaurant leases are non-cancelable and typically have initial terms of up to 20 years and up to three renewal terms of five years that we mayexercise at our option. Even if we close a restaurant, we may remain committed to perform our obligations under the applicable lease, which could include,among other things, payment of the base rent for the balance of the lease term. In addition, in connection with leases for restaurants that we will continue tooperate, we may, at the end of the lease term and any renewal period for a restaurant, be unable to renew the lease without substantial additional cost, if at all.As a result, we may close or relocate the restaurant, which could subject us to construction and other costs and risks. Additionally, the revenue and profit, ifany, generated at a relocated restaurant might not equal the revenue and profit generated at its prior location.We and our franchisees are subject to extensive government regulations that could result in claims leading to increased costs and restrict our ability tooperate or sell franchises.We and our franchisees are subject to extensive government regulations at the federal, state, and local levels, including, but not limited to, regulationsrelating to preparation and sale of food, zoning and building codes, franchising, land use, and employee, health, sanitation, and safety matters. We and ourfranchisees are required to obtain and maintain a wide variety of government licenses, permits, and approvals. Difficulty or failure in obtaining these in thefuture could result in delaying or canceling the opening of new restaurants. Local authorities may suspend or deny renewal of our government licenses if theydetermine that our operations do not meet their standards for initial grant or renewal. This risk will increase if there is a major change in the licensingrequirements affecting our types of restaurants.20The Patient Protection and Affordable Care Act of 2010 (the “PPACA”) requires employers such as us to provide adequate and affordable health insurance forall qualifying employees or to pay a monthly per-employee fee or penalty for non-compliance. In past years, we experienced a marginal enrollment increasein our health plans with newly eligible employees as a result of the PPACA. In early 2017, the PPACA was undermined through executive and Congressionalaction and in March 2017, the U.S. House of Representatives introduced legislation known as the American Health Care Act (the "AHCA"). The House ofRepresentatives recently voted to pass the AHCA and the Senate is currently expected to consider an alternative version of the AHCA. It is expected thatCongress will continue to consider this or similar legislation to amend or repeal significant provisions of the PPACA, but it remains uncertain when or if theprovisions of such legislation will become law, or the extent to which any changes may impact our business. Any future cost increases may be material andcould lead to future modifications to our business practices that may be disruptive to our operations and impact our ability to attract and retain personnel.We are also subject to regulation by the Federal Trade Commission and subject to state laws that govern the offer, sale, renewal, and termination of franchisesand our relationships with our franchisees. Failure to comply with these laws and regulations in any jurisdiction or to obtain required approvals could resultin a ban on or temporary suspension of franchise sales, fines, or the requirement that we make a rescission offer to our franchisees, any of which could affectour ability to open new restaurants in the future and thus could materially and adversely affect our business and operating results. Any such failure could alsosubject us to liability to our franchisees.We are increasingly subject to environmental regulations, which may increase our cost of doing business and affect the manner in which we operate.Environmental regulations could increase the level of our taxation and future regulations could impose restrictions or increase the costs associated with food,food packaging, and other supplies, transportation costs, and utility costs. Complying with environmental regulations may cause our results of operations tosuffer. We cannot predict what environmental regulations or legislation will be enacted in the future, how existing or future environmental laws will beadministered or applied, or the level of costs that we may incur to comply with, or satisfy claims relating to, such laws and regulations.Changes in health, safety, construction, labor, environmental, or other laws or regulations, including changes to or repeal of the PPACA, could impose costsupon us, including transition costs. Such transition costs could include uncertainties about how the new laws or regulations might be interpreted, enforced, orlitigated by either regulators or private parties. Such changes could also have economic implications for our customers. For example, changes to healthinsurance law could diminish our customers’ disposable incomes and thus reduce their frequency of eating or ordering out, even from QSR or fast casualrestaurants, including us.Legislation and regulations requiring the display and provision of nutritional information for our menu offerings, new information or attitudes regardingdiet and health, or adverse opinions about the health effects of consuming our menu offerings, could affect consumer preferences and negatively impactour results of operations.Government regulation and consumer eating habits may impact our business as a result of changes in attitudes regarding diet and health or new informationregarding the health effects of consuming our menu offerings. These changes have resulted in, and may continue to result in, the enactment of laws andregulations that impact the ingredients and nutritional content of our menu offerings, or laws and regulations requiring us to disclose the nutritional contentof our food offerings.The PPACA establishes a uniform, federal requirement for certain restaurants to post certain nutritional information on their menus. Specifically, the PPACAamended the Federal Food, Drug, and Cosmetic Act to require that chain restaurants with 20 or more locations, operating under the same name and offeringsubstantially the same menus, publish the total number of calories of standard menu items on menus and menu boards, along with a statement that puts thiscalorie information in the context of a total daily calorie intake. The PPACA also requires covered restaurants to provide to consumers, upon request, awritten summary of detailed nutritional information for each standard menu item, and to provide a statement on menus and menu boards about theavailability of this information. The PPACA further permits the U.S. Food and Drug Administration to require covered restaurants to make additional nutrientdisclosures, such as disclosure of trans-fat content. An unfavorable report on, or reaction to, our menu ingredients, the size of our portions, or the nutritionalcontent of our menu items could negatively influence the demand for our offerings. Currently, it is uncertain how proposed legislative changes will impactthe PPACA or the extent to which any changes may impact our business.Furthermore, a number of states, counties, and cities have enacted menu labeling laws requiring multi-unit restaurant operators to disclose certain nutritionalinformation to customers, or have enacted legislation restricting the use of certain types of ingredients in restaurants. California, our largest market, is one ofthese, although its menu labeling law has been superseded by the PPACA.While we believe that our food is generally healthier than that of our peers, customers may disagree or change their dining habits to avoid QSR-likerestaurants altogether.Compliance with current and future laws and regulations regarding the ingredients and nutritional content of our menu items may be costly and time-consuming. Additionally, if consumer health regulations or consumer eating habits change significantly,21we may be required to modify or discontinue certain menu items, and we may experience higher costs associated with the implementation of those changes.Additionally, some government authorities are increasing regulations regarding trans-fats and sodium, which may require us to limit or eliminate trans-fatsand sodium in our menu offerings, or switch to higher-cost ingredients, or which may hinder our ability to operate in certain markets. Some jurisdictions havebanned certain cooking ingredients, such as trans-fats, which a small number of our ingredients contain in trace amounts, or have discussed banning certainproducts, such as large sodas. Removal of these products and ingredients from our menus could affect product tastes, customer satisfaction levels, and salesvolumes, whereas if we were to fail to comply with these laws or regulations, our business could experience a material adverse effect.We cannot make any assurances regarding our ability to effectively respond to changes in consumer health perceptions, to successfully implement nutritionalcontent disclosure requirements, or to adapt our menu offerings to trends in eating habits. The imposition of additional menu labeling laws could have anadverse effect on our results of operations and financial position, as well as on the restaurant industry in general.We may become subject to liabilities arising from environmental laws that could likely increase our operating expenses and materially and adverselyaffect our business and results of operations.We are subject to federal, state, and local laws, regulations, and ordinances that:•govern activities or operations that may have adverse environmental effects, such as discharges into the air and water, as well as waste handling anddisposal practices for solid and hazardous wastes; and•impose liability for the costs of cleaning up, and the damage resulting from, sites of past spills, disposals, or other releases of hazardous materials.In particular, under applicable environmental laws, we may be responsible for remediation of environmental conditions and subject to associated liabilities,including liabilities for clean-up costs, personal injury, or property damage, relating to our restaurants and the land on which our restaurants are located,regardless of whether we lease or own the restaurants or land in question and regardless of whether such environmental conditions were created by us or by aprior owner or tenant. If we are found liable for the costs of remediation of contamination at any of our properties, our operating expenses would likelyincrease and our results of operations would be materially and adversely affected. See above under "Item 1. “Business—Environmental Matters.”We are required to pay our pre-IPO owners for certain tax benefits, which amounts are expected to be material.We entered into an income tax receivable agreement (the “TRA”) with the stockholders of the Company immediately prior to the initial public offering("IPO"), which provides for payment by us to our pre-IPO stockholders of 85% of the amount of cash savings, if any, in federal, state, local, and foreignincome tax that we and our subsidiaries actually realize (or are deemed to realize in the case of an early termination by us or a change of control) as a result ofthe utilization of our net operating losses and other tax attributes attributable to periods prior to July 2014 together with interest accrued at a rate of LIBORplus 200 basis points from the date the applicable tax return is due (without extension) until paid.Our payments under the TRA may be material. As of December 26, 2018, we had an accrued payable related to this agreement of approximately $13.9million. In fiscal 2018, we paid $7.3 million to our pre-IPO stockholders under the TRA.TRA payment obligations are obligations of Holdings and not of its subsidiaries. The actual amounts and utilization of net operating losses and other taxattributes, as well as the amounts and timing of any payments under the TRA, will vary depending upon a number of factors, including the amount, character,and timing of Holdings’ and its subsidiaries’ taxable income in the future.Our counterparties under the TRA will not reimburse us for any benefits that are subsequently disallowed, although any future payments would be adjusted tothe extent possible to reflect the result of such disallowance. As a result, in such circumstances, we could make payments under the TRA greater than ouractual cash tax savings.If we undergo a change of control as defined in the TRA, the TRA will terminate, and we will be required to make a payment equal to the present value ofexpected future payments under the TRA, which payment would be based on certain assumptions, including assumptions related to our future taxableincome. Additionally, if we or a direct or indirect subsidiary transfer any asset to a corporation with which we do not file a consolidated tax return, we will betreated as having sold that asset for its fair market value in a taxable transaction for purposes of determining the cash savings in income tax under the TRA.Any such payment resulting from a change of control or asset transfer could be substantial and could exceed our actual cash tax savings.A recent court judgment includes an injunction which could have an adverse impact on our business, financial conditions and results of operations in 2019and beyond.22Our growth strategy depends in part on opening new restaurants in existing and new markets and expanding our franchise system. A key part of thisexpansion is our ability to enter into franchise agreements for restaurants to be located in certain desirable geographic areas. In a recent lawsuit in the LosAngeles Superior Court, an existing franchisee challenged our right to open new restaurants within a certain distance from that franchisee’s existingrestaurant. A jury found in favor of the franchisee and, among other things, the trial court issued an injunction requiring us to revise our franchise agreementand franchise disclosure document in a manner that limits our rights to open new restaurants within certain proximities of existing franchised restaurants. Seeadditional information presented in "Note 13. Commitments and Contingencies—Legal Matters" in the accompanying "Notes to Consolidated FinancialStatements" in this Annual Report. We are appealing that decision, and our motion to stay the injunctive relief was denied by the trial and appellate courts.We therefore are now required to use an amended franchise agreement and franchise disclosure document that includes the terms specified in the injunction,including constraints on the locations at which we can open new restaurants. Although most of the locations protected from development by the injunctionare not in markets in which we had intended to open restaurants under our current growth strategy, nevertheless, and especially in existing markets with manyfranchised restaurants, the injunctive relief may adversely impact our growth, which may adversely affect our business, financial condition and results ofoperations.Risks Related to Ownership of Our Common StockIf the ownership of our common stock continues to be highly concentrated, it may prevent you and other minority stockholders from influencing significantcorporate decisions and may result in conflicts of interest.Trimaran Pollo Partners, L.L.C. (“LLC”), owns approximately 42.9% of our outstanding common stock. This large position means that LLC and its majorityowners—predecessors and affiliates of, and certain funds managed by, Trimaran Capital Partners and Freeman Spogli & Co. (collectively, “Trimaran” and“Freeman Spogli,” respectively)—possess significant influence when stockholders vote on matters such as election of directors, mergers, consolidations andacquisitions, the sale of all or substantially all of our assets, decisions affecting our capital structure, amendments to our certificate of incorporation or our by-laws, and our winding up and dissolution. So long as LLC maintains at least 40% ownership, (i) any member of the board of directors may be removed at anytime without cause by affirmative vote of a majority of our common stock, and (ii) stockholders representing 40% or greater ownership may cause specialstockholder meetings to be called. Currently, three of our nine directors, including our chairman, are affiliated with Trimaran or Freeman Spogli.This concentration of ownership may delay, deter, or prevent acts that would be favored by our other stockholders. While our board has determined thatdirector John Roth, a general partner of Freeman Spogli and its CEO, satisfies the criteria for an independent director under NASDAQ Global Select market(the “NASDAQ") rules, the interests of Trimaran and Freeman Spogli may not always coincide with our interests or the interests of our other stockholders.This concentration of ownership may also have the effect of delaying, deterring, or preventing a change in control of us. Also, Trimaran and Freeman Spoglimay seek to cause us to take courses of action that, in their judgments, could enhance their investments in us, but that might involve risks to our otherstockholders or adversely affect us or our other stockholders. As a result, the market price of our common stock could decline, or stockholders might notreceive a premium over the then-current market price of our common stock upon a change in control. In addition, this concentration of ownership mayadversely affect the trading price of our common stock, because investors may perceive disadvantages in owning shares of a company with significantstockholders.The interests of Trimaran and Freeman Spogli may conflict with ours or our stockholders’ in the future.Trimaran and Freeman Spogli engage in a range of investing activities, including investments in restaurants and other consumer-related companies inparticular. While our board has determined that director John Roth, a general partner of Freeman Spogli and its CEO, satisfies the criteria for an independentdirector under NASDAQ rules, in the ordinary course of their business activities, Trimaran and Freeman Spogli may engage in activities where their interestsconflict with our interests or those of our stockholders. Our amended and restated certificate of incorporation provides that none of LLC or any of its officers,directors, employees, agents, shareholders, members, partners, principals, affiliates and managers (including, inter alia, Trimaran and Freeman Spogli) has aduty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we operate. Forexample, in the third quarter of 2017, Cafe Rio, a high-growth, fast-casual Mexican restaurant company, announced that Freeman Spogli had acquired amajority interest in it. Trimaran and Freeman Spogli also may pursue acquisition opportunities that may be complementary to our business, and, as a result,those acquisition opportunities may not be available to us. In addition, Trimaran and Freeman Spogli may have an interest in pursuing acquisitions,divestitures, and other transactions that, in their judgment, could enhance their investment in us, even though those transactions might involve risks to you,such as debt-financed acquisitions.We are a holding company with no operations, and we rely on our operating subsidiaries to provide us with the funds necessary to meet our financialobligations and to pay dividends.23We are a holding company with no material direct operations. Our principal assets are the equity interests that we indirectly hold in our operating subsidiary,El Pollo Loco, Inc. (“EPL”), which owns our operating assets. As a result, we are dependent on loans, dividends, and other payments from EPL, our operatingcompany and indirect wholly owned subsidiary, and from EPL Intermediate, Inc. (“Intermediate”), our direct wholly owned subsidiary, to generate the fundsnecessary to meet our financial obligations and to pay dividends on our common stock. Our subsidiaries are legally distinct from us and may be prohibited orrestricted from paying dividends or otherwise making funds available to us under certain conditions. Although we do not expect to pay dividends on ourcommon stock for the foreseeable future, if we are unable to obtain funds from our subsidiaries, we may be unable to, or our board may exercise its discretionnot to, pay dividends.Under our secured revolving credit facility, Holdings may not make certain payments such as cash dividends, except that it may, inter alia, (i) pay up to $1.0million 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 iscontinuing, (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 12month consecutive period to redeem, repurchase or otherwise acquire equity interests of any subsidiary that is not a wholly-owned subsidiary from any holderof 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) makeup 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) alease-adjusted consolidated leverage ratio not to exceed 4.25 times and (y) the financial covenants applicable to our secured revolving credit facility.We do not anticipate paying any dividends on our common stock in the foreseeable future.We do not expect to declare or pay any cash or other dividends in the foreseeable future on our common stock, because we intend to use cash flow generatedby operations to grow our business. Our secured revolving credit facility restricts our ability to pay cash dividends on our common stock. We may also enterinto other credit agreements or other borrowing arrangements in the future that restrict or limit our ability to pay cash dividends on our common stock.As a public company, we incur significant costs to comply with the laws and regulations affecting public companies, which could harm our business andresults of operations.As a public company, we are subject to the reporting requirements of the Exchange Act and of the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”), to the listing requirements of the NASDAQ, and to other applicable securities statutes and regulations. These statutes and regulations haveincreased, and will continue to increase, our legal, accounting, and financial compliance costs, and have made, and will continue to make, some activitiesmore time-consuming and costly, particularly after we cease to be an “emerging growth company,” as defined in the JOBS Act. For example, these statutesand regulations could make it more difficult and costly for us to obtain director and officer liability insurance, and we may be required to accept reducedpolicy limits and coverage or to incur substantial costs to maintain the same or similar coverage. These statutes and regulations could also make it moredifficult for us to attract and retain qualified individuals to serve on our board of directors, on board committees, or as executive officers. Our managementand other personnel devote a substantial amount of time to compliance initiatives. As a result, management’s attention may be diverted from other businessconcerns, which could harm our business and operating results. Although we have hired additional employees to comply with these requirements, we mayneed to hire more employees in the future, which will increase our costs and expenses.Our management team and other personnel devote a substantial amount of time to new compliance initiatives, and we may not successfully or efficientlymanage our transition to being a public company. To comply with the requirements of being a public company, including the Sarbanes–Oxley Act, we mayneed to undertake various actions, such as implementing new internal controls and procedures, and hiring accounting or internal audit staff, which wouldrequire us to incur additional expenses, and could harm our results of operations.For as long as we are an emerging growth company, we will not be required to comply with certain reporting requirements, including those relating toaccounting standards and disclosure about our executive compensation, that apply to other public companies.We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the JOBS Act. As such, we are eligible to takeadvantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growthcompanies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes–OxleyAct, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements ofholding a non-binding advisory vote on executive compensation and of stockholder approval of any golden parachute payments not previously approved.We may take advantage of some of these exemptions. If we do, we do not know if some investors will find our24common stock less attractive as a result. The result may be a less-active trading market for our common stock and increased stock price volatility.In addition, Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided inSection 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delaythe adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to availourselves of this exemption and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are notemerging growth companies.We can remain an “emerging growth company” for up to five years from our IPO, or until the earliest of (a) the last day of the first fiscal year in which ourannual gross revenues exceed $1.07 billion, (b) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, whichwould occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recentlycompleted second fiscal quarter, or (c) the date on which we have issued more than $1 billion in non-convertible debt securities in the preceding three-yearperiod.We were not previously required to assess the effectiveness of our internal control over financial reporting; we have and may continue to identifydeficiencies as we do so.Section 404(a) of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of internal control over financial reporting, startingwith our second annual report. Prior to our second annual report, we were not subject to this requirement. Accordingly, as we continue to mature as a publiccompany and follow the necessary procedures and practices related to internal control over financial reporting, we may identify deficiencies.In particular, as disclosed under "Item 9A. Controls and Procedures,” in the Form 10-K for 2016, in the process of evaluating the effectiveness of our internalcontrol over financial reporting, we identified material weaknesses in our internal control over financial reporting as of December 28, 2016. These and futuredeficiencies or weaknesses, whether or not identified or remediated, or failure to achieve and maintain an effective internal control environment generally,could have a material adverse effect on our business, our finances and financial reporting, and our stock price.The market price and trading volume of our common stock have been and may be volatile, which could result in rapid and substantial losses for ourstockholders.The market price of our common stock has fluctuated and may continue to fluctuate, or may decline significantly in the future. Shares of our common stockwere sold in our IPO in July 2014 at a price of $15.00 per share, and our common stock has subsequently traded as high as $41.70 and as low as $9.05. Someof the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common stock include:•variations in our quarterly or annual operating results;•changes in our earnings estimates, if provided, or differences between our actual financial and operating results and those expected by investors andanalysts;•the contents of published research reports about us or our industry, or the failure of securities analysts to cover our common stock;•additions or departures of key management personnel;•any increased indebtedness that we may incur in the future;•announcements by us or others and developments affecting us;•actions by institutional stockholders;•litigation and governmental investigations;•legislative or regulatory changes;•judicial pronouncements interpreting laws and regulations;•changes in government programs;•changes in market valuations of similar companies;•speculation or reports by the press or investment community with respect to us or our industry in general;•announcements by us or our competitors of significant contracts, acquisitions, dispositions, strategic relationships, joint ventures, or capitalcommitments; and25•general market, political, and economic conditions, including local conditions in the markets in which we operate.These broad market and industry factors may decrease the market price of our common stock, regardless of our actual operating performance. The stockmarket in general has from time to time experienced extreme price and volume fluctuations, including recently. In addition, in the past, following periods ofvolatility in the overall market and decreases in the market price of a company’s securities, securities class action litigation has often been instituted againstthat company. We are currently defending against such litigation. See additional information presented in "Note 13. Commitments and Contingencies—Legal Matters" in the accompanying "Notes to Consolidated Financial Statements" in this Annual Report. Such litigation could result in substantial costs anda diversion of our management’s attention and resources.Future offerings of debt or equity securities by us may adversely affect the market price of our common stock.In the future, we may attempt to obtain financing, or to further increase our capital resources, by issuing additional shares of our common stock or by offeringother equity securities, or debt, including senior or subordinated notes, debt securities convertible into equity, or shares of preferred stock. Opening newcompany-operated restaurants in existing and new markets could require substantial additional capital in excess of cash from operations. We would expect tofinance the capital required for new company-operated restaurants through a combination of additional issuances of equity, corporate indebtedness, and cashfrom operations.Issuing additional shares of our common stock or other equity securities or securities convertible into equity may dilute the economic and voting rights ofour existing stockholders, reduce the market price of our common stock, or both. In a liquidation, holders of any such debt securities or preferred stock, andlenders with respect to other borrowings, could receive distributions of our available assets prior to the holders of our common stock. Debt securitiesconvertible into equity could be subject to adjustments in their conversion ratios under certain circumstances, increasing the number of equity securitiesissuable upon conversion. Preferred stock, if issued, could have a preference with respect to liquidating distributions, or a preference with respect to dividendpayments that could limit our ability to pay dividends to the holders of our common stock. Our decision to issue securities in any future offering will dependon market conditions and other factors beyond our control that may adversely affect the amount, timing, or nature of our future offerings. Thus, holders of ourcommon stock bear the risk that our future offerings may reduce the market price of our common stock and dilute their stockholdings in us.The market price of our common stock could be negatively affected by sales of substantial amounts of our common stock in the public markets.The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market or the perception thatsuch sales could occur. No lock-up agreements presently are in effect. LLC presently owns approximately 42.9% of our outstanding common stock and couldsell stock publicly either if the stock were registered or if the exemption requirements of Rule 144 were satisfied.Pursuant to our stockholders agreement, LLC and, in certain instances, Freeman Spogli, may require us to file registration statements under the Securities Actat our expense, covering resales of our common stock held by them or LLC or piggyback on a registration statement in certain circumstances. Any such sales,or the prospect of any such sales, could materially impact the market price of our common stock.The future issuance of additional common stock in connection with our incentive plan, acquisitions, or otherwise will dilute all other stockholdings.As of February 28, 2019, we had an aggregate of 156,948,363 shares of common stock authorized, unissued, and not reserved for incentive plan issuance. Wemay issue all of these shares of common stock without any action or approval by our stockholders, subject to certain exceptions. Any common stock issued inconnection with our incentive plan, the exercise of outstanding stock options, or otherwise would dilute the percentage ownership held by all otherstockholders.Delaware law, our organizational documents, and our existing and future debt agreements may impede or discourage a takeover, depriving our investorsof 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 controlof us, even if a change of control would be beneficial to our existing stockholders. In addition, provisions of our amended and restated certificate ofincorporation 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;26•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 thenumber 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 bystockholders 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, a75% supermajority vote will be required to amend or repeal provisions relating to, among other things, the classification of the board of directors, thefilling of vacancies on the board of directors, and the advance notice requirements for stockholder proposals and director nominations.In addition, our secured revolving credit facility imposes, and we anticipate that documents governing our future indebtedness may impose, limitations onour ability to enter into change of control transactions. Under our secured revolving credit facility, the occurrence of a change of control transaction canconstitute an event of default permitting acceleration of the debt, thereby impeding our ability to enter into change of control transactions.The foregoing factors, as well as significant common stock ownership by Trimaran and Freeman Spogli, could impede a merger, takeover, or other businesscombination, or discourage a potential investor from making a tender offer for our common stock, which, under certain circumstances, could reduce themarket value of our common stock.ITEM 1B.UNRESOLVED STAFF COMMENTSNone.ITEM 2.PROPERTIESAs of December 26, 2018, our restaurant system consisted of 484 restaurants, comprised of 213 company-operated restaurants and 271 franchised restaurants,located in California, Arizona, Nevada, Texas, Louisiana and Utah. In addition, we currently license our brand to one restaurant in the Philippines. We havenot included this licensed restaurant as part of our unit count as presented in this annual report. The table below sets forth the locations (by state) for allrestaurants in operation.StateCompany-Operated Franchised TotalCalifornia167 216 383Nevada22 5 27Arizona7 19 26Texas16 23 39Utah1 7 8Louisiana— 1 1Total213 271 484Our restaurants are either free-standing facilities, typically with drive-thru capability, or in-line. A typical restaurant generally ranges from 2,200 to 3,000square feet, with seating for approximately 50-70 people. For a majority of our company-operated restaurants, we lease land on which our restaurants arebuilt. Our leases generally have terms of 20 years, with two or three renewal terms of five years.Restaurant leases provide for a specified annual rent, and some leases call for additional or contingent rent based on revenue above specified levels.Generally, our leases are “net” leases that require us to pay a pro rata share of taxes, insurance, and maintenance costs. We own 15 properties, currentlyoperating 12 and licensing 3 to franchisees. In addition, we operate 201 company-operated restaurants on leased real estate, an owned operating unit withadditional parking on leased real estate, and have another 15 leased sites that are subleased or assigned to franchisees who operate El Pollo Loco restaurants.We also have six closed units and two units subleased for uses other than El Pollo Loco.We lease our headquarters, consisting of approximately 29,880 square feet in Costa Mesa, California, for a term expiring in 2023, plus one three-yearextension option. Our headquarters is located at 3535 Harbor Boulevard, Suite 100, Costa Mesa, California 92626, and our telephone number is (714) 599-5000. We believe that our current office space is suitable and adequate for its intended purposes and our near-term expansion plans.27ITEM 3.LEGAL PROCEEDINGSFor information regarding legal proceedings, see "Note 13. Commitments and Contingencies—Legal Matters" in the accompanying "Notes to ConsolidatedFinancial Statements" in this Annual Report.ITEM 4.MINE SAFETY DISCLOSURESNone.28PART IIITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIESMarket InformationOur common stock has been listed on the NASDAQ under the symbol “LOCO” since July 25, 2014.The following table sets forth, for the periods indicated, the high and low intraday sale prices for our common stock on the NASDAQ, as reported by theNASDAQ. Such quotations represent interdealer prices without retail markup, markdown, or commission, and may not necessarily represent actualtransactions. Low HighFiscal 2017: First Quarter (December 29, 2016-March 29, 2017)$10.75 $13.55Second Quarter (March 30, 2017-June 28, 2017)$11.50 $14.85Third Quarter (June 29, 2017-September 27, 2017)$11.00 $14.35Fourth Quarter (September 28, 2017-December 27, 2017)$9.55 $12.55Fiscal 2018: First Quarter (December 28, 2017-March 28, 2018)$9.05 $10.95Second Quarter (March 29, 2018-June 27, 2018)$9.20 $11.75Third Quarter (June 28, 2018-September 26, 2018)$11.00 $14.40Fourth Quarter (September 27, 2018-December 26, 2018)$12.04 $16.95As of February 28, 2019, the closing price per share of our common stock on the NASDAQ was $15.13.As of February 28, 2019, there were approximately 50 holders of record of our common stock. The number of holders of record is based upon the actualnumber of holders registered at such date and does not include holders of shares in “street name” or persons, partnerships, associates, corporations, or otherentities in security position listings maintained by depositories. As of the same date, there were approximately 25,000 registered and beneficial accounts.Dividend PolicyWe did not pay dividends in 2018 and 2017 and do not expect to pay dividends in the foreseeable future because we intend to use cash flow generated byoperations to grow our business. Any future determination otherwise will be at the discretion of our board of directors and depend upon our financialcondition, results of operations, capital requirements, and other factors. In addition, the 2018 Revolver (defined below) restricts our ability to pay dividends.See "Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Debt and OtherObligations—Current Credit Agreement," “Item 1A. Risk Factors—Risks Related to Ownership of Our Common Stock,” and "Note 1. Description ofBusiness" in the accompanying "Notes to Consolidated Financial Statements" in this Annual Report.29Issuer Purchases of Equity SecuritiesThe following table summarizes the Company's purchases of common stock under a Stock Repurchase Program (as defined below) and withholdings ofcommon stock to satisfy tax withholding obligations in connection with the vesting of restricted stock issued to employees related to awards under ourcompensation plans in the quarterly period ended December 26, 2018 (in thousands, except number of shares and per share amounts): Total Number of SharesPurchased Average Price PaidPer Share Total Number of SharesPurchased as Part ofPublicly Announced Plansor Programs Approximate Dollar Value ofShares That May BePurchased Under the Plansor ProgramsSeptember 27, 2018 to October 24, 2018 — $— — $20,000October 25, 2018 to November 21, 2018 — $— — $20,000November 22, 2018 to December 26, 2018 66,746 $14.78 66,409 $19,019Total 66,746 66,409 On August 2, 2018, the Company announced the Board of Directors had authorized a stock repurchase program (the "Stock Repurchase Program"). TheCompany entered into a stock repurchase plan pursuant to Rule 10b5-1 of the Exchange Act on August 28, 2018 (the "Stock Repurchase Plan"), which allowsthe repurchase of up to $20.0 million of the Company's common stock. The Stock Repurchase Plan commenced purchases on November 6, 2018, and, if notterminated sooner by other provisions of the Stock Repurchase Plan, will terminate on June 26, 2019. The Stock Repurchase Plan may also be suspended orterminated at any time upon prior notice.Under the Stock Repurchase Program, the Company may repurchase its common stock from time to time, in amounts and at prices that the Company deemsappropriate, subject to market conditions and other considerations. The Company's repurchases may be executed using open market purchases and/orthrough privately negotiated transactions.During the quarterly period ended December 26, 2018, the Company withheld 337 shares of common stock surrendered to the Company to satisfy taxwithholding obligations in connection with the vesting of restricted stock issued to employees related to awards under our compensation plans for totalconsideration of less than $0.1 million.Recent Sales of Unregistered SecuritiesNone.Stock Performance GraphThe following graph and table illustrate the total return from July 25, 2014, through December 26, 2018, for (i) our common stock, (ii) the NASDAQComposite Total Return Index and (iii) the Standard and Poor’s Supercomposite Restaurants Index, assuming the investment of $100 at the beginning of theperiod (at the closing price on our first day of trading of $24.03), reinvestment of dividends, and no transaction costs.The graph and table are furnished and not filed with the SEC, and are not incorporated by reference into any other filing. They are not a forecast of futureperformance.30DateLOCO NASDAQComposite S&P SupercompositeRestaurants IndexJuly 25, 2014$100.00 $100.00 $100.00September 24, 2014$148.65 $102.61 $99.36December 31, 2014$83.10 $107.02 $105.22April 1, 2015$104.91 $110.61 $112.22July 1, 2015$85.19 $113.95 $119.52September 30, 2015$44.86 $105.30 $121.36December 30, 2015$52.77 $115.81 $127.95March 30, 2016$55.97 $111.68 $133.22June 29, 2016$52.73 $109.97 $128.46September 28, 2016$54.35 $122.74 $127.33December 28, 2016$52.43 $125.90 $136.03March 29, 2017$49.94 $136.91 $141.62June 28, 2017$59.09 $145.13 $157.36September 27, 2017$49.94 $150.61 $150.68December 27, 2017$41.61 $162.38 $165.58March 28, 2018$39.53 $163.06 $161.16June 27, 2018$47.02 $175.14 $161.19September 26, 2018$51.81 $188.45 $175.09December 26, 2018$62.84 $155.02 $178.2531ITEM 6.SELECTED FINANCIAL DATAThe following tables contain selected historical consolidated financial data as of and for the last five fiscal years, derived from our audited consolidatedfinancial statements. Not all periods shown are discussed in this Annual Report. You should read these tables in conjunction with "Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” and our "Audited Consolidated Financial Statements" and accompanying "Notesto Consolidated Financial Statements" in this Annual Report (dollar and share amounts in thousands, except per share data).32 Fiscal Year 2018 (1) 2017 2016 2015 2014Statements of Operations Data: Revenue Company-operated restaurant revenue$388,835 $376,615 $355,468 $332,040 $322,516Franchise revenue25,771 25,086 24,655 23,017 22,345Franchise advertising fee revenue21,222 — — — —Total revenue435,828 401,701 380,123 355,057 344,861Cost of operations Food and paper costs111,142 109,898 107,218 105,917 102,611Labor and related expenses112,417 106,584 97,471 84,231 80,646Occupancy and other operating expenses91,385 85,631 78,263 69,977 68,538Gain on recovery of insurance proceeds, lost profits— — (502) — —Company restaurant expenses314,944 302,113 282,450 260,125 251,795General and administrative expenses50,261 38,523 34,661 28,997 29,519Legal settlements36,258 — — — —Franchise expenses24,429 3,335 3,823 3,456 3,704Depreciation and amortization17,825 18,128 16,053 13,092 11,538Loss on disposal of assets278 799 674 471 646Expenses related to fire loss— — 48 — —Gain on recovery of insurance proceeds, property, equipment and expenses— — (741) — —Recovery of securities lawsuits related legal expenses(8,356) (1,666) — — —Asset impairment and closed-store reserves9,650 33,645 8,554 92 1,033Total expenses445,289 394,877 345,522 306,233 298,235Gain on disposition of restaurants— — 28 — 2,658(Loss) income from operations(9,461) 6,824 34,629 48,824 49,284Interest expense, net3,502 3,278 3,155 3,707 18,062Early extinguishment of debt— — — — 9,718Expenses related to selling shareholders— — — 50 667Income tax receivable agreement (income) expense(761) (5,570) 352 156 41,382(Loss) income before provision (benefit) for income taxes(12,202) 9,116 31,122 44,911 (20,545)Provision (benefit) for income taxes(3,208) 497 12,783 20,857 (63,008)Net (loss) income$(8,994) $8,619 $18,339 $24,054 $42,463Per Share Data: Net (loss) income per share Basic$(0.23) $0.22 $0.48 $0.63 $1.32Diluted$(0.23) $0.22 $0.47 $0.62 $1.24Weighted average shares used in computing net (loss) incomeper share Basic38,574,553 38,453,347 38,357,805 37,949,316 32,285,484Diluted38,574,553 39,086,676 39,026,950 39,039,558 34,346,241(1)On December 28, 2017 we adopted Accounting Standards Update (“ASU") No. 2014-09, “Revenue from Contracts with Customers (Topic 606)"("ASU 2014-09"). Results for reporting periods beginning on or after December 28, 2017 are presented under Accounting Standards Codification("ASC") Topic 606 ("ASC 606"). Prior period amounts were not revised and continue to be reported in accordance with ASC Topic 605 ("ASC 605"),the accounting standard then in effect.33 Fiscal Year 2018 2017 2016 2015 2014Consolidated Statements of Cash Flows Data: Net cash provided by operating activities$45,442 $53,671 $49,299 $57,971 $26,085Net cash used in investing activities$(27,802) $(36,238) $(35,202) $(30,835) $(21,401)Net cash used in financing activities$(19,221) $(11,051) $(18,030) $(32,534) $(10,200)Consolidated Balance Sheet Data—(at period end): Cash and cash equivalents$6,969 $8,550 $2,168 $6,101 $11,499Net property (1)$104,145 $102,794 $118,470 $102,421 $82,090Total assets$450,226 $442,711 $471,305 $461,028 $455,306Total debt (2)$74,184 $93,316 $104,461 $123,638 $165,846Total stockholders’ equity$265,236 $274,950 $265,182 $244,633 $210,400(1)Net property consists of property owned, net of accumulated depreciation and amortization.(2)Total debt consists of borrowings under the 2018 Revolver and the 2014 Revolver (each, as defined below in "Item 7. Management’s Discussion andAnalysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Debt and Other Obligations”), and our capital leaseobligations.ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe following discussion should be read in conjunction with "Item 6. Selected Financial Data,” and our "Audited Consolidated Financial Statements" andaccompanying "Notes to Consolidated Financial Statements" included elsewhere in this Annual Report. In addition to historical information, thisdiscussion contains forward-looking statements that involve risks, uncertainties, and assumptions that could cause actual results to differ materially frommanagement’s expectations. See “Forward-Looking Statements” and "Item 1A. Risk Factors” included elsewhere in this Annual Report. We assume noobligation to update any of these forward-looking statements.Basis of PresentationWe use a 52- or 53-week fiscal year ending on the last Wednesday of each calendar year. Fiscal 2018, 2017, and 2016 ended on December 26, 2018,December 27, 2017 and December 28, 2016, respectively. In a 52-week fiscal year, each quarter includes 13 weeks of operations. In a 53-week fiscal year, thefirst, second and third quarters each include 13 weeks of operations, and the fourth quarter includes 14 weeks of operations. Approximately every six or sevenyears a 53-week fiscal year occurs. Fiscal 2018, 2017, and 2016 were 52-week fiscal years. 53-week years may cause revenues, expenses, and other results ofoperations to be higher due to the additional week of operations. Fiscal years are identified in this report according to the calendar years in which they ended.For example, references to fiscal 2018 refer to the fiscal year ended December 26, 2018.OverviewEl Pollo Loco is a differentiated and growing restaurant concept that specializes in fire-grilling citrus-marinated chicken and operates in the limited servicerestaurant (“LSR”) segment. We strive to offer the quality of food and dining experience typical of fast casual restaurants while providing the speed,convenience, and value typical of traditional quick-service restaurants (“QSRs”), a combination that we call “QSR+.” Our distinctive menu features oursignature product—citrus-marinated fire-grilled chicken—and a variety of Mexican-inspired entrees that we create from our chicken. We offer our customershealthier alternatives to traditional food on the go, served by our team members in a contemporary restaurant environment. We serve individual and family-sized chicken meals, a variety of Mexican-inspired entrees, and sides, and, throughout the year, on a limited-time basis, additional proteins like shrimp. Ourentrees include favorites such as our Chicken Avocado Burrito, Under 500 Calorie entrees, Double Pollo Bowl, and Stuffed Chicken Avocado Quesadilla.Our famous Creamy Cilantro dressings and salsas are prepared fresh daily, allowing our customers to create their favorite flavor profiles to enhance theirculinary34experience. Our distinctive menu with healthier alternatives appeals to consumers across a wide variety of socio-economic backgrounds and drives ourbalanced day-part mix.Growth Strategies and OutlookWe plan to continue to expand our business, drive restaurant sales growth, and enhance our competitive positioning, by executing on the followingstrategies:•expand our restaurant base;•increase our comparable restaurant sales; and•enhance operations and leverage our infrastructure.As of December 26, 2018, we had 484 locations in six states. In fiscal 2018, we opened eight new company-operated restaurants and our franchisees openednine new restaurants across Arizona, California, Utah, Louisiana and Texas. In fiscal 2017, we opened 16 new company-operated and seven new franchisedrestaurants across Arizona, California, Utah and Texas. In 2019, we intend to open three to four new company-operated and three to five new franchisedrestaurants. To increase comparable restaurant sales, we plan to increase customer frequency, attract new customers, and improve per-person spend.Highlights and TrendsComparable Restaurant SalesIn fiscal 2018, 2017, and 2016, comparable restaurant sales system-wide increased 1.2%, 1.5%, and 0.9%, respectively. Comparable restaurant sales growthreflects the change in year-over-year sales for the comparable restaurant base. A restaurant enters our comparable restaurant base the first full week after its 15-month anniversary. System-wide comparable restaurant sales include restaurant sales at all comparable company-operated restaurants and at all comparablefranchised restaurants, as reported by franchisees. Comparable restaurant sales at company-operated restaurants increased 0.4% in fiscal 2018, 1.0% in fiscal2017, and 0.6% in fiscal 2016. In fiscal 2018, the increase in company-operated comparable restaurant sales was primarily the result of an increase in averagecheck size of 1.4%, partially offset by a decrease in transactions of 1.0%. In fiscal 2017, the increase in company-operated comparable restaurant sales wasprimarily the result of an increase in average check size of 1.9% offset by a decrease in transactions of 0.9%. In fiscal 2016, the increase in company-operatedcomparable restaurant sales was driven by an increase in average check size of 0.3% and an increase in transactions of 0.3%. In fiscal 2018, 2017, and 2016,comparable restaurant sales at franchised restaurants increased 1.8%, 1.8%, and 1.1%, respectively.Restaurant DevelopmentNew restaurant development is expected to be a key driver of our long-term growth strategy. In fiscal 2018, we opened eight company-operated restaurants,and our franchisees opened nine new restaurants. From time to time, we and our franchisees close restaurants. In fiscal 2018, the Company closed sevenrestaurants and our franchisees closed three restaurant. Our restaurant counts at the beginning and end of each of the last three years were as follows:35 Fiscal Year 2018 2017 2016Company-operated restaurant activity: Beginning of period212 201 186Openings8 16 18Restaurant sale to franchisee— — (1)Closures(7) (5) (2)Restaurants at end of period213 212 201Franchised restaurant activity: Beginning of period265 259 247Openings9 7 13Restaurant sale to franchisee— — 1Closures(3) (1) (2)Restaurants at end of period271 265 259Total restaurant activity: Beginning of period477 460 433Openings17 23 31Closures(10) (6) (4)Restaurants at end of period484 477 460We and our franchisees commenced our remodeling program in 2011 and, as of December 26, 2018, together we have remodeled 134 company-operated and225 franchised restaurants, or 359 system-wide, over 85% of our restaurant system due to be remodeled. This includes 28 company-operated and 32franchised restaurants that have been remodeled using our newest Vision restaurant design. The Vision design elevates the brand image with exterior andinterior features that embrace the brand’s authentic roots with warm textures, rustic elements and a focus on the signature open kitchen layout established inprevious designs. As of December 26, 2018, including new builds and remodels, we had 99 restaurants open with the Vision design in our system.Remodeling is a use of cash and has implications for our net property and depreciation line items on our consolidated balance sheets and statements ofoperations, among others. The cost of our restaurant remodels varies depending on the scope of work required, but on average the investment is $0.3 to $0.4million per restaurant. We believe that our remodeling program will result in higher restaurant revenue and a strengthened brand.Loco RewardsDuring the second quarter of 2017, we introduced a new loyalty rewards points program in an effort to increase sales and loyalty among our customers, byoffering rewards that incentivize customers to visit our restaurants more often each month. Customers earn 1 point for each $1 spent and 100 points can beredeemed for a $10 reward to be used for a future purchase. In addition, customers can earn additional points and free entrées for a variety of engagementactivities. As points are available for redemption past the quarter earned, a portion of the revenue associated with the earned points will be deferred untilredemption. As of December 26, 2018, the amount of revenue deferred related to the earned points, net of redemptions, is $1.0 million. The Company had1,164,217 loyalty program members as of December 26, 2018.Key Financial DefinitionsRevenueOur revenue is derived from two primary sources: company-operated restaurant revenue and franchise related revenue. Beginning in fiscal 2018 with theadoption of ASU 2014-09, franchise related revenue includes franchise advertising fee revenue representing advertising contributions received fromfranchisees and franchise revenue, which is comprised primarily of franchise royalties and, to a lesser extent, franchise fees and sublease rental income.Food and Paper CostsFood and paper costs include the direct costs associated with food, beverage and packaging of our menu items. The components of food and paper costs arevariable in nature, change with sales volume, are impacted by menu mix, and are subject to increases or decreases in commodity costs.36Labor and Related ExpensesLabor 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 minimumwage and payroll tax legislation, the frequency and severity of workers’ compensation claims, health care costs, and the performance of our restaurants.Occupancy Costs and Other Operating ExpensesOccupancy costs include rent, common area maintenance, 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 ExpensesGeneral and administrative expenses are comprised of expenses associated with corporate and administrative functions that support the development andoperations of our restaurants, including compensation and benefits, travel expenses, stock compensation costs, legal and professional fees, and other relatedcorporate costs. Also included are pre-opening costs, and expenses above the restaurant level, including salaries for field management, such as area andregional managers, and franchise field operational support.Legal SettlementsLegal settlements include expenses such as judgments or settlements related to legal matters, legal claims and class action lawsuits.Franchise ExpensesFranchise expenses prior to fiscal 2018 were primarily comprised of rent expenses incurred on properties leased by us and then sublet to franchisees, andexpenses incurred in support of franchisee information technology systems. Beginning in fiscal 2018 with the adoption of ASU 2014-09, franchise expensesalso include all expenses of the advertising fund representing the franchised restaurants portion of advertising expenses.Depreciation and AmortizationDepreciation and amortization primarily consist of the depreciation of property and equipment, including leasehold improvements and equipment.Loss on Disposal of AssetsLoss on disposal of assets includes the loss on disposal of assets related to retirements and replacement or write-off of leasehold improvements or equipment.Asset Impairment and Closed-Store ReservesWe review long-lived assets such as property, equipment, and intangibles on a unit-by-unit basis for impairment when events or circumstances indicate acarrying value of the assets that may not be recoverable, and record an impairment charge when appropriate. Closure costs include non-cash restaurantcharges such as up-front expensing the net present value of unpaid rent remaining on the life of a lease offset by assumed sublease income.Interest Expense, NetInterest expense, net, consists primarily of interest on our outstanding revolving debt. Debt issuance costs are amortized on a straight-line basis over the lifeof the related debt.Provision (Benefit) for Income TaxesProvision (benefit) for income taxes consists of federal and state tax expense (recoveries) on our income (loss), and changes to our deferred tax asset anddeferred tax liability.37Results of OperationsFiscal Year 2018 Compared to Fiscal Year 2017Our operating results for the fiscal years ended December 26, 2018, and December 27, 2017, in absolute terms and expressed as a percentage 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, arecompared below: Fiscal Year 2018(52-Weeks) 2017(52-Weeks) Increase / (Decrease) ($ ,000) (%) ($ ,000) (%) ($ ,000) (%)Statements of Operations Data: Revenue Company-operated restaurant revenue$388,835 89.2 $376,615 93.8 $12,220 3.2Franchise revenue25,771 5.9 25,086 6.2 685 2.7Franchise advertising fee revenue21,222 4.9 — — 21,222 N/ATotal revenue435,828 100.0 401,701 100.0 34,127 8.5Cost of operations Food and paper costs (1)111,142 28.6 109,898 29.2 1,244 1.1Labor and related expenses (1)112,417 28.9 106,584 28.3 5,833 5.5Occupancy and other operating expenses (1)91,385 23.5 85,631 22.7 5,754 6.7Company restaurant expenses (1)314,944 81.0 302,113 80.2 12,831 4.2General and administrative expenses50,261 11.5 38,523 9.6 11,738 30.5Legal settlements36,258 8.3 — — 36,258 N/AFranchise expenses24,429 5.6 3,335 0.8 21,094 632.5Depreciation and amortization17,825 4.1 18,128 4.5 (303) (1.7)Loss on disposal of assets278 0.1 799 0.2 (521) (65.2)Recovery of securities lawsuits related legal expenses(8,356) (1.9) (1,666) (0.4) (6,690) 401.6Asset impairment and closed-store reserves9,650 2.2 33,645 8.4 (23,995) (71.3)Total expenses445,289 102.2 394,877 98.3 50,412 12.8Income from operations(9,461) (2.2) 6,824 1.7 (16,285) (238.6)Interest expense, net3,502 0.8 3,278 0.8 224 6.8Income tax receivable agreement (income) expense(761) (0.2) (5,570) (1.4) 4,809 (86.3)(Loss) income before provision for income taxes(12,202) (2.8) 9,116 2.3 (21,318) (233.9)(Benefit) provision for income taxes(3,208) (0.7) 497 0.1 (3,705) (745.5)Net (loss) income$(8,994) (2.1) $8,619 2.1 $(17,613) (204.4)(1)Percentages for line items relating to cost of operations and company restaurant expenses are calculated with company-operated restaurant revenueas the denominator. All other percentages use total revenue.Company-Operated Restaurant RevenueIn fiscal 2018, company-operated restaurant revenue increased $12.2 million, or 3.2%, due to $16.3 million of additional sales from new restaurants. Inaddition, company-operated revenue was favorably impacted by an increase in company-operated comparable restaurant sales of $1.6 million, or 0.4%. Thegrowth in company-operated comparable restaurant sales was due primarily to an increase in average check size of 1.4%, partially offset by a decline intransactions of 1.0%, compared to the prior year. The increase in company-operated restaurant revenue was partially offset by $5.3 million of net impact oflost sales from closed restaurants in fiscal 2018 and 2017, and a $0.4 million decrease in other revenue.38Franchise RevenueIn fiscal 2018, franchise revenue increased $0.7 million, or 2.7%. This increase was due primarily to an increase in franchised comparable restaurant sales of1.8%, and higher sales revenue resulting from additional franchise units. This was partially offset by a decline in franchise agreement and developmentagreement fees and lower levels of rent received from franchised restaurants related to their use of our owned or leased properties.Franchise Advertising Fee RevenueBeginning in fiscal 2018, we implemented Accounting Standard Update 2014-09, which requires us to present franchise advertising contributions receivedfrom franchisees as franchise advertising fee revenue and record all expenses of the advertising fund within franchise expenses, resulting in an increase inrevenues and expenses on our consolidated statements of operations. As such, franchise revenue increased $21.2 million, from the comparable period in theprior year, as this was the first year of implementation. Refer to the Consolidated Financial Statements, Note 15, Revenue from Contracts with Customers, forfurther details.Food and Paper CostsFood and paper costs increased $1.2 million in fiscal 2018, due to a $0.6 million increase in food costs and a $0.6 million increase in paper costs. Thisincrease was due primarily to higher restaurant revenue. Food and paper costs as a percentage of company-operated restaurant revenue were 28.6% in fiscal2018, compared to 29.2% in fiscal 2017. This percentage decrease was due primarily to higher restaurant revenues due to increases in pricing.Labor and Related ExpensesPayroll and benefit expenses increased $5.8 million in fiscal 2018. This increase was due primarily to additional labor needs arising from the opening of 8new restaurants in fiscal 2018 and 16 new restaurants in fiscal 2017 (partially offset by reduced labor for restaurant closures in fiscal 2018 and 2017),minimum wage increases in California and Los Angeles, and higher group insurance costs due to increased claims activity. Payroll and benefit expenses as apercentage of company-operated restaurant revenue were 28.9% in fiscal 2018, compared to 28.3% in fiscal 2017. This increase was primarily due to thewage increases noted above, partially offset by higher restaurant revenue from increases in pricing.Occupancy and Other Operating ExpensesOccupancy and other operating expenses increased $5.8 million in fiscal 2018. This increase for the year-to-date period was due to a $1.8 million increase inoccupancy costs, due primarily to additional rent and property tax, a $1.3 million increase in other controllable costs, resulting primarily from an increase inoperating supply costs and trash collection costs, a $1.0 million increase in advertising costs and a $0.8 million increase in other operating expenses,resulting primarily from an increase in credit card fees and customer order delivery fees. The increases in fiscal 2018 were partially due to new restaurantopenings during or after the first quarter of 2017. Occupancy and other operating expenses as a percentage of company-operated restaurant revenue was23.5% in fiscal 2018, compared to 22.7% in fiscal 2017. This increase is primarily due to the higher costs noted above.General and Administrative ExpensesGeneral and administrative expenses increased $11.7 million in fiscal 2018. The increase was due primarily to (i) a $8.7 million increase in legal expenseprimarily related to the securities class action as discussed in "Note 13. Commitments and Contingencies—Legal Matters" in the accompanying "Notes toConsolidated Financial Statements" in this Annual Report, (ii) a $1.4 million increase in payroll expense due primarily to an increase in our accrual for ourannual bonus program and an increase in severance costs related to executive terminations, (iii) a $0.9 million increase in stock compensation relatedexpenses, primarily related to the stock modification discussed in "Note 11. Stock-Based Compensation" in the accompanying "Notes to ConsolidatedFinancial Statements" in this Annual Report and (iv) a $0.5 million increase in other professional fees, primarily related to general internal audit controldevelopment and effectiveness testing as well as additional tax services during 2018. These increases were partially offset by a $1.1 million decrease in newrestaurant opening costs. General and administrative expenses as a percentage of total revenue was 11.5% in fiscal 2018, compared to 9.6% in fiscal 2017.This increase is primarily due to the higher costs noted above.Legal Settlements39Legal settlements increased $36.3 million in fiscal 2018. The increase was due to (i) an accrual of an expected settlement amount in fiscal 2018 related to anagreement in principle to settle all claims and allegations for the securities class action as discussed in "Note 13. Commitments and Contingencies—LegalMatters" in the accompanying "Notes to Consolidated Financial Statements" in this Annual Report and (ii) an accrual of an expected settlement amount infiscal 2018 related to an agreement in principle to settle all claims and allegations, as well as all wage and hour claims for multiple class action suits asdiscussed in "Note 13. Commitments and Contingencies—Legal Matters" in the accompanying "Notes to Consolidated Financial Statements" in this AnnualReport.Franchise ExpensesBeginning in fiscal 2018, we implemented ASU 2014-09, which requires us to present franchise advertising contributions received from franchisees asfranchise advertising fee revenue and record all expenses of the advertising fund within franchise expenses, resulting in an increase in revenues and expenseson our consolidated statements of income. As such, franchise expenses increased by $21.2 million, from the comparable period in the prior year, representingthe presentation of advertising fund expenses within franchise expenses as this was the first year of implementation. This increase in advertising fundexpenses was partially offset by a decrease in rent expenses incurred on properties leased by us. Refer to the Consolidated Financial Statements, Note 15,Revenue from Contracts with Customers, for further details.Asset Impairment and Closed-Store ReservesDuring fiscal 2018, we determined that the carrying value of assets at certain restaurants may not be recoverable. As a result, we recorded a $5.1 millionimpairment expense primarily related to four restaurants, in Arizona, California and Texas, including a restaurant in Texas that opened in early 2018. Duringfiscal 2017, we determined that the carrying value of the assets of 21 restaurants, in Arizona, California and Texas, may not be recoverable. As a result, werecorded a $32.6 million impairment expense. The impairment expense for fiscal 2017 included an impairment expense of $27.7 million, representing theentire remaining value of capitalized assets of all of our company-operated restaurants in Texas, net of previously recorded depreciation. Factors which led tothe impairment of our Texas restaurants included operating results, which indicated that the restaurants did not achieve the sales volumes required togenerate positive cash flows or improve profitability in the Texas market, along with the related future cash flow assumptions, including comparable salesrate growth and restaurant operating costs, over the remaining lease terms and the age of the restaurants in Texas. The restaurants in Texas began opening inlate 2014, causing a higher net book value at the time of impairment testing, and increased difficulty projecting results for newer restaurants in newermarkets.During fiscal 2018, we closed seven restaurants in Arizona, California and Texas. These closures resulted in closed-store reserve expenses of $4.5 millionduring fiscal 2018. During fiscal 2017, we closed four restaurants in Texas, one of which was fully impaired during the fourth quarter of 2016, one of whichwas fully impaired during the third quarter of 2016 and the other two were fully impaired in fiscal 2017. Additionally, we closed one restaurant in Arizona,which was fully impaired in the third quarter of 2016. These closures resulted in closed-store reserve expenses of $1.1 million during fiscal 2017.The Company continues to monitor the recoverability of the carrying value of the assets of several other restaurants.Interest Expense, NetFor fiscal 2018, interest expense, net increased by $0.2 million primarily due to an increase in the interest rate on our revolving debt during 2018.Income Tax Receivable AgreementIn fiscal 2018 we recognized income tax receivable agreement income of $0.8 million as a result of changes to future forecasted results and the timing of thedeductibility of certain temporary differences including the current year legal settlement accruals. In 2017 we incurred income tax receivable agreementincome of $5.6 million, resulting from the amortization of interest expense related to our total expected TRA payments, changes to future forecasted results,the reduction of the expected TRA liability as a result of the impact of the Tax Act on the corporate tax rate on future years, and expected realization ofvarious pre-IPO tax credits. In fiscal 2018 and 2017, we paid $7.3 million and $11.1 million, respectively, to our pre-IPO stockholders under the TRA.Provision for Income Taxes40In fiscal 2018, we recorded an income tax benefit of $3.2 million, compared to income tax expense of $0.5 million in fiscal 2017, reflecting an estimatedeffective tax rate of 26.3% and 5.5%, respectively. The lower effective tax rate in 2017 resulted primarily from the Tax Act enacted on December 22, 2017.The Tax Act had the following effects on our income tax expense for the year ended December 27, 2017:•Under Financial Accounting Standards Board ASC Topic 740, Income Taxes (“ASC 740”), we are required to revalue any deferred tax assets orliabilities in the period of enactment of change in tax rates. The Tax Act lowers the corporate income tax rate from 35% to 21%. We estimated theimpact of the revaluation of our deferred tax assets and liabilities, which resulted in a decrease to our net deferred income tax liability by $1.4million and is reflected as a decrease in our income tax expense in our results for fiscal 2017.•The reduced corporate tax rate also resulted in a TRA benefit to the provision for income tax expense for fiscal 2017 in the amount of $2.0 million.•The Tax Act is generally effective for tax years beginning after December 31, 2017. As such, the reduction in the corporate income tax rate from 35%to 21% is effective for the fiscal year ended December 26, 2018.In addition, there was a $1.0 million valuation allowance against our deferred tax assets recorded in each of fiscal 2018 and fiscal 2017. The valuationallowance against our deferred tax assets resulted from certain tax credits that may not be realizable prior to the time the credits expire.Fiscal Year 2017 Compared to Fiscal Year 2016Our operating results for the fiscal years ended December 27, 2017, and December 28, 2016, in absolute terms and expressed as a percentage of total revenue,with the exception of cost of operations and company restaurant expenses, which are expressed as a percentage of company-operated restaurant revenue, arecompared below:41 Fiscal Year 2017(52-Weeks) 2016(52-Weeks) Increase / (Decrease) ($ ,000) (%) ($ ,000) (%) ($ ,000) (%)Statements of Operations Data: Revenue Company-operated restaurant revenue$376,615 93.8 $355,468 93.5 $21,147 5.9Franchise revenue25,086 6.2 24,655 6.5 431 1.7Total revenue401,701 100.0 380,123 100.0 21,578 5.7Cost of operations Food and paper costs (1)109,898 29.2 107,218 30.2 2,680 2.5Labor and related expenses (1)106,584 28.3 97,471 27.4 9,113 9.3Occupancy and other operating expenses (1)85,631 22.7 78,263 22.0 7,368 9.4Gain on recovery of insurance proceeds, lost profits (1)— — (502) (0.1) 502 N/ACompany restaurant expenses (1)302,113 80.2 282,450 79.5 19,663 7.0General and administrative expenses38,523 9.6 34,661 9.1 3,862 11.1Franchise expenses3,335 0.8 3,823 1.0 (488) (12.8)Depreciation and amortization18,128 4.5 16,053 4.2 2,075 12.9Loss on disposal of assets799 0.2 674 0.2 125 18.5Expenses related to fire loss— — 48 — (48) N/AGain on recovery of insurance proceeds, property, equipment and expenses— — (741) (0.2) 741 N/ARecovery of securities lawsuits related legal expenses(1,666) (0.4) — — (1,666) N/AAsset impairment and closed-store reserves33,645 8.4 8,554 2.3 25,091 293.3Total expenses394,877 98.3 345,522 90.9 49,355 14.3Gain on disposition of restaurants— — 28 — (28) N/AIncome from operations6,824 1.7 34,629 9.1 (27,805) (80.3)Interest expense, net3,278 0.8 3,155 0.8 123 3.9Income tax receivable agreement (income) expense(5,570) (1.4) 352 0.1 (5,922) (1,682.4)Income before provision for income taxes9,116 2.3 31,122 8.2 (22,006) (70.7)Provision for income taxes497 0.1 12,783 3.4 (12,286) (96.1)Net income$8,619 2.1 $18,339 4.8 $(9,720) (53.0)(1)Percentages for line items relating to cost of operations and company restaurant expenses are calculated with company-operated restaurant revenueas the denominator. All other percentages use total revenue.Company-Operated Restaurant RevenueIn fiscal 2017, company-operated restaurant revenue increased $21.1 million, or 5.9%, due to $20.9 million of additional sales from new restaurants. Inaddition, company-operated restaurant revenue was favorably impacted by an increase in company-operated comparable restaurant sales of $3.4 million, or1.0%. The growth in company-operated comparable restaurant sales was due primarily to an increase in average check size of 1.9%, partially offset by adecline in transactions of 0.9%, compared to the prior year. The increase in company-operated restaurant revenue was partially offset by $2.7 million of netimpact of lost sales from closed restaurants in fiscal 2017 and 2016, and $0.5 million of other revenue.42Franchise RevenueIn fiscal 2017, franchise revenue increased $0.4 million, or 1.7%. This increase was due primarily to an increase in franchised comparable restaurant sales of1.8%, and $1.0 million in higher sales revenue, resulting from additional franchise units. This was partially offset by a decline in franchise agreement anddevelopment agreement fees and lower fees received from franchised restaurants related to their use of our point-of-sales system.Food and Paper CostsFood and paper costs increased $2.7 million in fiscal 2017, due to a $1.6 million increase in food costs and a $1.1 million increase in paper costs. Thisincrease was due primarily to higher restaurant revenue, and increased food waste, partially offset by lower commodity costs related to chicken. Food andpaper costs as a percentage of company-operated restaurant revenue were 29.2% in fiscal 2017, compared to 30.2% in fiscal 2016. This decrease inpercentage was due primarily to the lower commodity costs, noted above, and increases in prices.Labor and Related ExpensesPayroll and benefit expenses increased $9.1 million in fiscal 2017. This increase was due primarily to additional labor needs arising from the opening of 16new restaurants in fiscal 2017 and 18 new restaurants in fiscal 2016, minimum wage increases in California, and higher workers' compensation expense due toincreased claims activity. This was partially offset by lower group insurance costs due to lower claims activity. Payroll and benefit expenses as a percentageof company-operated restaurant revenue were 28.3% in fiscal 2017, compared to 27.4% in fiscal 2016. This increase was primarily due to the minimum wageincreases and incremental labor required for the new restaurant openings, noted above, partially offset by higher restaurant revenue.Occupancy and Other Operating ExpensesOccupancy and other operating expenses increased $7.4 million in fiscal 2017. This increase for the year-to-date period was due to a $3.7 million increase inoccupancy costs, due primarily to additional rent and property tax, a $1.3 million increase in utilities costs, a $0.7 million increase in advertising costs, and a$1.7 million increase in other operating expenses, resulting primarily from an increase in credit card fees, restaurant security expenses and repair andmaintenance costs. The increases in fiscal 2017 resulted primarily from the new restaurants opened during or after the first quarter of 2016. Occupancy andother operating expenses as a percentage of company-operated restaurant revenue was 22.7% in fiscal 2017, compared to 22.0% in fiscal 2016. This increaseresulted primarily from rent expense, relative to revenue volume generated, and other incremental costs related to opening new restaurants in 2016 and fiscalyear 2017.General and Administrative ExpensesGeneral and administrative expenses increased $3.9 million in fiscal 2017. The increase was due primarily to (i) a $2.6 million increase in legal expenserelated primarily to the securities class action as discussed under Item 3, "Legal Proceedings" and franchise related litigation, (ii) a $2.0 million increase inpayroll expense due primarily to an increase in our accrual for our annual bonus program and an increase in the number of corporate employees and (iii) a$0.5 million increase in other general and administrative costs, primarily related to an increase in recruiting costs. These increases were partially offset by a$0.6 million decrease in new restaurant opening costs and a $0.6 million decrease in travel related costs. General and administrative expenses as a percentageof total revenue were 9.6% in fiscal 2017, compared to 9.1% in fiscal 2016. This increase is primarily due to the higher costs noted above.Gain on Recovery of Insurance ProceedsIn November 2015, one of the Company’s restaurants incurred damage resulting from a fire. In fiscal 2016, we incurred costs directly related to the fire of lessthan $0.1 million, disposed of assets of an additional $0.1 million and recognized gains of $0.7 million, related to the reimbursement of property andequipment and expenses incurred and $0.5 million related to the reimbursement of lost profits. The reimbursement of lost profits is included in theaccompanying consolidated statements of operations as a reduction of company restaurant expenses, for fiscal 2016. The Company received from theinsurance company cash of $1.4 million, net of the insurance deductible, during fiscal 2016.43Asset Impairment and Closed-Store ReservesDuring fiscal 2017, we determined that the carrying value of the assets of 21 restaurants, in Arizona, California and Texas, may not be recoverable.Additionally, we made a strategic decision to close two additional restaurants in Texas. As a result, we recorded a $32.6 million impairment expense. Theimpairment expense for fiscal 2017 includes an impairment expense of $27.7 million, representing the entire remaining value of capitalized assets of all ofour company-operated restaurants in Texas, net of previously recorded depreciation. Factors which led to the impairment of our Texas restaurants includerecent results, which indicate that the restaurants have not achieved the sales volumes required to generate positive cash flows or improve profitability in theTexas market, along with the related future cash flow assumptions, including comparable sales rate growth and restaurant operating costs, over the remaininglease terms and the age of the restaurants in Texas. The restaurants in Texas began opening in late 2014, causing a higher net book value at the time ofimpairment testing, and increased difficulty projecting results for newer restaurants in newer markets. During fiscal 2017, we closed four restaurants in Texas,one of which was fully impaired during the fourth quarter of 2016, one of which was fully impaired during the third quarter of 2016 and the other two werefully impaired in fiscal 2017. Additionally, we closed one restaurant in Arizona, which was fully impaired in the third quarter of 2016. These closures resultedin closed-store reserve expenses of $1.1 million during fiscal 2017.During fiscal 2016, the Company determined that the carrying value of the assets of nine restaurants, in Arizona, California and Texas, may not berecoverable. As a result, the Company recorded $8.3 million of expense related to the impairment of the assets of the nine restaurants.The Company continues to monitor the recoverability of the carrying value of the assets of several other restaurants.Gain on Disposition of RestaurantsOn June 16, 2016, we completed an agreement to sell one company-operated restaurant in Tucson, Arizona to a franchisee, resulting in cash proceeds of $1.5million and a net gain of less than $0.1 million, which is recorded as a gain on disposition of restaurants in the accompanying consolidated statements ofoperations. This restaurant is now included in our franchised restaurant totals.Interest Expense, NetFor fiscal 2017, interest expense, net was comparable with the same period of the prior year.Income Tax Receivable AgreementIn fiscal 2017 we recognized income tax receivable agreement income of $5.6 million and in 2016 we incurred income tax receivable agreement expense of$0.4 million, resulting from the amortization of interest expense related to our total expected TRA payments, changes in estimates for actual tax returns filed,the reduction of the expected TRA liability as a result of the impact of the Tax Act on the corporate tax rate on future years, and expected realization ofvarious pre-IPO tax credits. In fiscal 2017 and 2016, we paid $11.1 million and $3.2 million, respectively, to our pre-IPO stockholders under the TRA.Provision for Income TaxesIn fiscal 2017, we recorded an income tax expense of $0.5 million, compared to income tax expense of $12.8 million in fiscal 2016, reflecting an estimatedeffective tax rate of 5.5% and 41.1%, respectively. The lower effective tax rate resulted primarily from the Tax Act enacted on December 22, 2017. The TaxAct had the following effects on our income tax expense for the year ended December 27, 2017:•Under ASC 740, we are required to revalue any deferred tax assets or liabilities in the period of enactment by the change in tax rates. The Tax Actlowers the corporate income tax rate from 35% to 21%. We estimated the impact of the revaluation of our deferred tax assets and liabilities, resultingin a decrease to our net deferred income tax liability by $1.4 million which is reflected as a decrease in our income tax expense in our results forfiscal 2017.•The reduced corporate tax rate, also resulted in a TRA benefit to the provision for income tax expense for fiscal 2017 in the amount of $2.0 million.•The Tax Act is generally effective for tax years beginning after December 31, 2017. As such, the reduction in the corporate income tax rate from 35%to 21% is effective for the fiscal year ended December 26, 2018.In addition, there was a $3.3 million valuation allowance against our deferred tax assets recorded in fiscal 2016, compared to an additional valuationallowance of $1.0 million recorded in fiscal 2017. The valuation allowance against our deferred tax assets resulted from certain tax credits that may not berealizable prior to the time the credits expire.44Key Performance IndicatorsTo evaluate the performance of our business, we utilize a variety of financial and performance measures. These key measures include company-operatedrestaurant revenue, system-wide sales, comparable restaurant sales, company-operated average unit volumes ("AUV"), restaurant contribution, restaurantcontribution margin, new restaurant openings, EBITDA, and Adjusted EBITDA. In fiscal 2018, our restaurants generated company-operated restaurantrevenue of $388.8 million and system-wide sales of $868.4 million, and system comparable sales increased 1.2%, consisting of company-operated restaurantcomparable sales growth of 0.4% and franchised comparable sales growth of 1.8%. The company-operated comparable sales increase consisted of a 1.4%check growth, partially offset by a 1.0% transaction decrease. In fiscal 2018, for company-operated restaurants, our annual AUV was $1.8 million, restaurantcontribution margin was 19.0%, and Adjusted EBITDA was $62.9 million.Company-Operated Restaurant RevenueCompany-operated restaurant revenue consists of sales of food and beverages in company-operated restaurants net of promotional allowances, employeemeals, and other discounts. Company-operated restaurant revenue in any period is directly influenced by the number of operating weeks in such period, thenumber 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 andfourth quarters due to reduced January and December transactions and higher in the second and third quarters. As a result of seasonality, our quarterly andannual results of operations and key performance indicators such as company-operated restaurant revenue and comparable restaurant sales may fluctuate.System-Wide SalesSystem-wide sales are neither required by, nor presented in accordance with, accounting principles generally accepted in the United States of America(“GAAP”). System-wide sales are the sum of company-operated restaurant revenue and sales from franchised restaurants. Our total revenue in our consolidatedstatements of operations is limited to company-operated restaurant revenue and franchise revenue from our franchisees. Accordingly, system-wide salesshould not be considered in isolation or as a substitute for our results as reported under GAAP. Management believes that system-wide sales are an importantfigure 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: Fiscal Year(Dollar amounts in thousands)2018 2017 2016Company-operated restaurant revenue$388,835 $376,615 $355,468Franchise revenue25,771 25,086 24,655Franchise advertising fee revenue21,222 — —Total Revenue435,828 401,701 380,123Franchise revenue(46,993) (25,086) (24,655)Sales from franchised restaurants479,574 465,149 439,973System-wide sales$868,409 $841,764 $795,441Comparable Restaurant SalesComparable restaurant sales reflect year-over-year sales changes for comparable company-operated, franchised, and system-wide restaurants. A restaurantenters our comparable restaurant base the first full week after it has operated for fifteen months. Comparable restaurant sales exclude restaurants closed duringthe applicable period. At December 26, 2018, December 27, 2017 and December 28, 2016, there were 449, 424, and 409 comparable restaurants, 195, 181,and 169 company-operated and 254, 243 and 240 franchised, respectively. Comparable restaurant sales indicate the performance of existing restaurants, sincenew restaurants are excluded. Comparable restaurant sales growth can be generated by an increase in the number of meals sold and/or by increases in theaverage check amount, resulting from a shift in menu mix and/or higher prices resulting from new products or price increases.Company-Operated Average Unit Volumes45We measure company-operated AUVs on both a weekly and an annual basis. Weekly AUVs consist of comparable restaurant sales over a seven-day periodfrom Thursday to Wednesday. Annual AUVs are calculated using the following methodology: First, we divide our total net sales for all company-operatedrestaurants for the fiscal year by the total number of restaurant operating weeks during the same period. Second, we annualize that average weekly per-restaurant sales figure by multiplying it by 52. An operating week is defined as a restaurant open for business over a seven-day period from Thursday toWednesday. This measurement allows management to assess changes in consumer spending patterns at our restaurants and the overall performance of ourrestaurant base.Restaurant Contribution and Restaurant Contribution MarginRestaurant contribution and restaurant contribution margin are neither required by, nor presented in accordance with, GAAP. Restaurant contribution isdefined as company-operated restaurant revenue less company restaurant expenses which includes food and paper cost, labor and related expenses andoccupancy and other operating expenses, where applicable. Restaurant contribution excludes certain costs, such as general and administrative expenses,depreciation and amortization, asset impairment and closed-store reserve and other costs that are considered normal operating costs and accordingly,restaurant contribution is not indicative of overall Company results and does not accrue directly to the benefit of shareholders because of the exclusion ofcertain corporate-level expenses. Restaurant contribution margin is defined as restaurant contribution as a percentage of net company-operated restaurantrevenue.Restaurant contribution and restaurant contribution margin are supplemental measures of operating performance of our restaurants, and our calculationsthereof may not be comparable to those reported by other companies. Restaurant contribution and restaurant contribution margin have limitations asanalytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. Management usesrestaurant contribution and restaurant contribution margin as key metrics to evaluate the profitability of incremental sales at our restaurants, to evaluate ourrestaurant performance across periods, and to evaluate our restaurant financial performance compared with our competitors. Management believes thatrestaurant contribution and restaurant contribution margin are important tools for investors, because they are widely-used metrics within the restaurantindustry to evaluate restaurant-level productivity, efficiency, and performance. Restaurant contribution and restaurant contribution margin may also assistinvestors in evaluating our business and performance relative to industry peers and provide greater transparency with respect to the Company's financialcondition and results of operation.A reconciliation of restaurant contribution and restaurant contribution margin to company-operated restaurant revenue is provided below:46 Fiscal Year(Dollar amounts in thousands)2018 2017 2016 Restaurant contribution: (Loss) income from operations$(9,461) $6,824 $34,629Add (less): General and administrative expenses50,261 38,523 34,661 Legal settlements36,258 — — Franchise expenses24,429 3,335 3,823 Depreciation and amortization17,825 18,128 16,053 Loss on disposal of assets278 799 674 Expenses related to fire loss— — 48 Gain on recovery of insurance proceeds, property, equipment and expenses— — (741) Franchise revenue(25,771) (25,086) (24,655) Franchise advertising fee revenue(21,222) — — Gain on disposition of restaurants— — (28) Recovery of securities lawsuits related legal expenses(8,356) (1,666) — Asset impairment and closed-store reserves9,650 33,645 8,554Restaurant contribution$73,891 $74,502 $73,018 Company-operated restaurant revenue: Total revenue$435,828 $401,701 $380,123Less: Franchise revenue(25,771) (25,086) (24,655) Franchise advertising fee revenue(21,222) — —Company-operated restaurant revenue$388,835 $376,615 $355,468 Restaurant contribution margin (%)19.0% 19.8% 20.5%New Restaurant OpeningsThe number of restaurant openings reflects the number of new restaurants opened by us and our franchisees during a particular reporting period. Before a newrestaurant opens, we and our franchisees incur pre-opening costs, as described below. New restaurants often open with an initial start-up period of higher thannormal sales volumes, which subsequently decrease to stabilized levels. New restaurants typically experience normal inefficiencies in the form of higher foodand paper, labor, and other direct operating expenses and, as a result, restaurant contribution margins are generally lower during the start-up period ofoperation. The average start-up period after which our new restaurants’ revenue and expenses normalize is approximately fourteen weeks. When we enter newmarkets, we may be exposed to start-up times and restaurant contribution margins that are longer and lower than reflected in our average historicalexperience.EBITDA and Adjusted EBITDAEBITDA represents net (loss) income before interest expense, provision for income taxes, depreciation, and amortization. Adjusted EBITDA represents net(loss) income before interest expense, provision for income taxes, depreciation, amortization, and items that we do not consider representative of our on-going operating performance, as identified in the reconciliation table below.EBITDA and Adjusted EBITDA as presented in this Annual Report are supplemental measures of our performance that are neither required by, nor presentedin accordance with, GAAP. EBITDA and Adjusted EBITDA are not measurements of our financial performance under GAAP and should not be considered asalternatives to net income, operating income, or any other performance measures derived in accordance with GAAP, or as alternatives to cash flow fromoperating activities as a measure of our liquidity. In addition, in evaluating EBITDA and Adjusted EBITDA, you should be aware that in the future we willincur expenses or charges such as those added back to calculate EBITDA and Adjusted EBITDA. Our presentation of EBITDA and Adjusted EBITDA shouldnot be construed as an inference that our future results will be unaffected by unusual or nonrecurring items.47EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation, or as substitutes for analysis of our resultsas reported under GAAP. Some of these limitations are (i) they do not reflect our cash expenditures, or future requirements for capital expenditures orcontractual commitments, (ii) they do not reflect changes in, or cash requirements for, our working capital needs, (iii) they do not reflect interest expense, orthe cash requirements necessary to service interest or principal payments, on our debt, (iv) although depreciation and amortization are non-cash charges, theassets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirementsfor 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 reflectthe 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 industrymay 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. Wefurther 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 itemsthat vary from period to period without any correlation to core operating performance or that vary widely among similar companies. These potentialdifferences may be caused by variations in capital structures (affecting interest expense), tax positions (such as the impact on periods or companies ofchanges in effective tax rates or net operating losses) 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 otherinterested parties to evaluate companies in our industry, (ii) we believe that investors will find these measures useful in assessing our ability to service orincur indebtedness, and (iii) we use EBITDA and Adjusted EBITDA internally as benchmarks to compare our performance to that of our competitors.The following table sets forth reconciliations of our net (loss) income to EBITDA and Adjusted EBITDA: Fiscal Year 2018 2017 2016Net (loss) income$(8,994) $8,619 $18,339Non-GAAP adjustments: (Benefit) provision for income taxes(3,208) 497 12,783Interest expense, net3,502 3,278 3,155Depreciation and amortization17,825 18,128 16,053EBITDA$9,125 $30,522 $50,330Stock based compensation expense (a)1,278 1,056 1,063Loss on disposal of assets (b) (c)278 799 674Expenses related to fire loss (c)— — 48Gain on recovery of insurance proceeds, property, equipment, and expenses (c)— — (741)Recovery of securities lawsuits related legal expense (d)(8,356) (1,666) —Asset impairment and closed-store reserves (e)9,650 33,645 8,554Gain on disposition of restaurants (f)— — (28)Legal settlements (g)36,258 — —Income tax receivable agreement (income) expense (h)(761) (5,570) 352Securities class action legal expense (i)13,532 4,236 2,696Pre-opening costs (j)837 1,981 2,624Executive transition costs (k)1,081 284 —Adjusted EBITDA$62,922 $65,287 $65,572(a)Includes non-cash, stock-based compensation, excluding stock-based compensation costs associated with the transition of our former CEO.(b)Loss on disposal of assets includes the loss on disposal of assets related to retirements and replacement or write-off of leasehold improvements orequipment.48(c)In November 2015, one of the Company’s restaurants incurred damage resulting from a fire. In fiscal 2016, we incurred costs directly related to thefire of less than $0.1 million, disposed of assets of an additional $0.1 million and recognized gains of $0.7 million, related to the reimbursement ofproperty and equipment and expenses incurred and $0.5 million related to the reimbursement of lost profits. The reimbursement of lost profits isincluded in the accompanying consolidated statements of operations, for fiscal 2016, as a reduction of company restaurant expenses. The Companyreceived from the insurance company cash of $1.4 million, net of the insurance deductible, during fiscal 2016. The restaurant was reopened forbusiness on March 14, 2016.(d)In fiscal 2018 and fiscal 2017, we received insurance proceeds of $8.4 million and $1.7 million, respectively, related to the reimbursement of certainlegal expenses paid in prior years for the defense of securities lawsuits. See "Note 13. Commitments and Contingencies—Legal Matters" in theaccompanying "Notes to Consolidated Financial Statements" in this Annual Report.(e)Includes costs related to impairment of long-lived assets and closing restaurants. During fiscal 2018, we determined that the carrying value of theassets of four restaurants, in Arizona, California and Texas, may not be recoverable, including a restaurant in Texas that opened in early 2018. As aresult, we recorded a $5.1 million impairment expense. Additionally, during fiscal 2018, we closed seven restaurants in Texas, California andArizona. These closures resulted in closed-store reserve expenses of $4.5 million during fiscal 2018.During fiscal 2017, we determined that the carrying value of the assets of 21 restaurants, in Arizona, California and Texas, may not be recoverable.Additionally, we made a strategic decision to close two additional restaurants in Texas. As a result, we recorded a $32.6 million impairment expense.The impairment expense for fiscal 2017 included an impairment expense of $27.7 million, representing the entire remaining value of capitalizedassets of all of our company-operated restaurants in Texas, net of previously recorded depreciation. During fiscal 2017, we closed four restaurants inTexas, one of which was fully impaired during the fourth quarter of 2016, one of which was impaired during the third quarter of 2016 and the othertwo were impaired in fiscal 2017. Additionally, we closed one restaurant in Arizona, which was fully impaired in the third quarter of 2016. Theseclosures resulted in closed-store reserve expenses of $1.1 million during fiscal 2017.During fiscal 2016, the Company determined that the carrying value of the assets of nine restaurants, in Arizona, California and Texas, may not berecoverable. As a result, the Company recorded $8.3 million of expense related to the impairment of the assets of the nine restaurants.The Company continues to monitor the recoverability of the carrying value of the assets of several other restaurants.(f)On June 16, 2016, we completed an agreement to sell one company-operated restaurant in Tucson, Arizona to a franchisee, resulting in cashproceeds of $1.5 million and a net gain of less than $0.1 million, which is recorded as a gain on disposition of restaurants in the accompanyingconsolidated statement of operations. This restaurant is now included in our franchised restaurant totals.(g)Legal settlements of $36.3 million in fiscal 2018 included (i) an accrual of an expected settlement amount in fiscal 2018 related to an agreement inprinciple to settle all claims and allegations for the securities class action and (ii) an accrual of an expected settlement amount in fiscal 2018 relatedto an agreement in principle to settle all claims and allegations, as well as all wage and hour claims for multiple class action suits. For additionalinformation on legal settlements, see "Note 13. Commitments and Contingencies—Legal Matters" in the accompanying "Notes to ConsolidatedFinancial Statements" in this Annual Report.(h)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 realizein our taxes as a result of utilizing our net operating losses and other tax attributes attributable to preceding periods. For the years endedDecember 26, 2018, December 27, 2017, and December 28, 2016, income tax receivable agreement (income) expense consisted of the amortizationof interest expense and changes to future forecasted results and the timing of deductibility of certain timing differences, including for fiscal 2018 thelegal settlement accruals, related to our total expected TRA payments. For fiscal 2017, the income tax receivable agreement income was primarilydue to the Tax Act, and the resulting changes to the Federal corporate income tax rate.(i)Consists of costs related to the defense of securities lawsuits. See "Note 13. Commitments and Contingencies—Legal Matters" in the accompanying"Notes to Consolidated Financial Statements" in this Annual Report.(j)Pre-opening costs are a component of general and administrative expenses, and consist of costs directly associated with the opening of newrestaurants and incurred prior to opening, including management labor costs, staff labor costs during training, food and supplies used duringtraining, marketing costs, and other related pre-opening costs. These are49generally incurred over the three to five months prior to opening. Pre-opening costs also include occupancy costs incurred between the date ofpossession and the opening date for a restaurant.(k)Includes costs associated with the transition of our CEO, such as executive recruiting costs and stock-based compensation costs associated with thetransition of our former CEO.Liquidity and Capital ResourcesOur primary sources of liquidity and capital resources have been cash provided from operations, cash and cash equivalents, and our secured revolving creditfacility. Our primary requirements for liquidity and capital are new restaurants, existing restaurant capital investments (remodels and maintenance), legaldefense costs, lease obligations, interest payments on our debt, working capital and general corporate needs. Our working capital requirements are notsignificant, 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 ourinventory items before we have to pay our suppliers. Our restaurants do not require significant inventories or receivables. We believe that these sources ofliquidity and capital are sufficient to finance our continued operations and expansion plans for at least the next 12 months from the issuance of theconsolidated financial statements.The following table presents summary cash flow information for the years indicated: Fiscal Year(Amounts in thousands)2018 2017 2016Net cash provided by (used in) Operating activities$45,442 $53,671 $49,299Investing activities(27,802) (36,238) (35,202)Financing activities(19,221) (11,051) (18,030)Net (decrease) increase in cash and cash equivalents$(1,581) $6,382 $(3,933)Operating ActivitiesIn fiscal 2018, net cash provided by operating activities decreased by $8.2 million compared to fiscal 2017. This was due primarily to unfavorable workingcapital fluctuations.In fiscal 2017, net cash provided by operating activities increased by $4.4 million compared to fiscal 2016. This was due primarily to favorable workingcapital fluctuations, partially offset by lower profitability and an increased payment of the TRA.Investing ActivitiesIn fiscal 2018, net cash used in investing activities decreased by $8.4 million compared to fiscal 2017. This was due to a decrease of $8.4 million in capitalexpenditure spending, due primarily to opening eight new company-operated restaurants in fiscal 2018, compared to 16 new restaurants in fiscal 2017. Infiscal 2018, we incurred capital expenditures of approximately $27.8 million, consisting of $14.6 million related to new restaurants, $6.3 million related tothe remodeling of existing restaurants, and $6.9 million related to major maintenance and other corporate capital expenditures. Capital expenditures for theseperiods exclude unpaid purchases of property and equipment.In fiscal 2017, net cash used in investing activities increased by $1.0 million compared to fiscal 2016. This was primarily due to $1.5 million in proceedsfrom the sale of a restaurant and $0.7 million in insurance proceeds relating to the property and equipment fire damage incurred at one of our restaurants inNovember 2015, received in 2016. This was partially offset by a decrease of $1.2 million in capital expenditure spending, due to opening 16 new companyrestaurants in fiscal 2017, compared to 18 new restaurants in fiscal 2016. In fiscal 2017, we incurred capital expenditures of approximately $36.2 million,consisting of $24.1 million related to new restaurants, $5.7 million related to the remodeling of existing restaurants, and $6.4 million related to majormaintenance and other corporate capital expenditures. Capital expenditures for these periods exclude unpaid purchases of property and equipment.Financing ActivitiesIn fiscal 2018, net cash used by financing activities increased by $8.2 million compared to fiscal 2017. This was due primarily to an increase in net pre-payments on our revolving debt of $8.7 million and an increase in repurchases of common stock of $1.0 million which were partially offset by an increase inproceeds received from stock option exercises of $1.7 million in fiscal 2018 compared to fiscal 2017.50In fiscal 2017, net cash used by financing activities decreased by $7.0 million compared to fiscal 2016. This was due primarily to a decrease in net pre-payments on the 2014 Revolver of $8.0 million in fiscal 2017 compared to fiscal 2016.Debt and Other ObligationsCurrent Credit AgreementOn December 11, 2014, the Company refinanced its debt, with EPL, Intermediate, and Holdings entering into a credit agreement with 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 $200.0million five-year senior secured revolving facility (the “2014 Revolver”). The 2014 Revolver included a sub limit of $15.0 million for letters of credit and asub limit of $15.0 million for swingline loans.On July 13, 2018, the Company refinanced the 2014 Revolver, pursuant to a credit agreement (the "2018 Credit Agreement") among EPL, as borrower, andthe Company and Intermediate, as guarantors, Bank of America, N.A., as administrative agent, swingline lender, and letter of credit issuer, the lenders partythereto, and the other parties thereto, which provides for a $150.0 million five-year senior secured revolving credit facility (the “2018 Revolver”). The 2018Revolver includes a sub limit of $15.0 million for letters of credit and a sub limit of $15.0 million for swingline loans. The obligations under the 2018 CreditAgreement and related loan documents are guaranteed by the Company and Intermediate. The obligations of the Company, EPL and Intermediate under the2018 Credit Agreement and related loan documents are secured by a first priority lien on substantially all of their respective assets.Borrowings under the 2018 Revolver (other than any swingline loans) bear interest, at the borrower’s option, at rates based upon either LIBOR 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 thehighest of (a) the federal funds rate plus 0.50%, (b) the published Bank of America prime rate, or (c) LIBOR plus 1.00%. For LIBOR loans, the margin is in therange of 1.25% to 2.25%, and for base rate loans the margin is in the range of 0.25% to 1.25%. For borrowings under both the 2014 Revolver and the 2018Revolver during fiscal 2018, the interest rate range was 3.3% to 4.0%. For borrowings under the 2014 Revolver during fiscal 2017, the interest rate range was2.4% to 3.3%. The interest rate under the 2018 Revolver was 4.0% at December 26, 2018 and 3.3% under the 2014 Revolver at December 27, 2017.The 2018 Credit Agreement contains certain financial covenants. The Company was in compliance with all such covenants at December 26, 2018. See theNotes to the Consolidated Financial Statements, Note 1, Description of Business for restrictions on the payment of dividends under the 2018 CreditAgreement. At December 26, 2018, $8.5 million of letters of credit and $74.0 million of the revolving line of credit were outstanding. The amount availableunder the revolving line of credit was $67.5 million at December 26, 2018.Contractual ObligationsThe following table represents our contractual commitments (which include expected interest expense, calculated based on current interest rates) to makefuture payments pursuant to our debt and other obligations disclosed above and pursuant to our restaurant operating leases outstanding as of December 26,2018: Payments Due by Period(Amounts in thousands)Total 2019 2020-2021 2022-2023 2024 andthereafterOperating leases$266,481 $25,388 $47,779 $42,972 $150,342Capital leases248 95 108 45 —Long-term debt87,270 2,935 5,853 78,482 —Income tax receivable agreement13,942 6,637 5,526 1,180 599Purchasing commitments—chicken29,850 29,850 — — —Total$397,791 $64,905 $59,266 $122,679 $150,941Off-Balance Sheet ArrangementsAt December 26, 2018, December 27, 2017, and December 28, 2016, we had $8.5 million, $8.1 million, and $7.2 million, respectively, of borrowing capacityon the 2018 Revolver or 2014 Revolver pledged as collateral to secure outstanding letters of credit.Critical Accounting Policies and Use of Estimates51The preparation of our consolidated financial statements in accordance with GAAP requires us to make estimates and judgments that affect our reportedamounts of assets, liabilities, revenue, and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experienceand on various other assumptions that we believe to be reasonable under current circumstances in making judgments about the carrying value of assets andliabilities that are not readily available from other sources. We evaluate our estimates on an on-going basis. Actual results may differ from these estimatesunder different assumptions or conditions.Accounting policies are an integral part of our financial statements. A thorough understanding of these accounting policies is essential when reviewing ourreported results of operations and our financial position. Management believes that the critical accounting policies and estimates discussed below involvethe most difficult management judgments, due to the sensitivity of the methods and assumptions used. Our significant accounting policies are described in"Note 2. Summary of Significant Accounting Policies" in the accompanying "Notes to Consolidated Financial Statements" included elsewhere in this AnnualReport.Revenue RecognitionWe record revenue from company-operated restaurants as food and beverage products are delivered to customers and payment is tendered at the time of sale.We present sales net of sales-related taxes and promotional allowances. In the case of gift card sales, we record revenue when the gift card is redeemed by thecustomer. We record royalties from franchised restaurant sales based on a percentage of restaurant revenues in the period that the related franchisedrestaurants’ revenues are earned. Prior to the adoption of ASU 2014-09, the Company's accounting policy was to recognize initial franchise fees, developmentfees, and franchise agreement renewals when all material obligations had been performed and conditions were satisfied, typically when operations of thefranchised restaurant commenced. In accordance with the terms of the new guidance in ASU 2014-09 adopted for fiscal 2018, the initial franchise services, orexclusivity of the development agreements, are not distinct from the continuing rights or services offered during the term of the franchise agreement, and willtherefore be treated as a single performance obligation. As such, initial franchise and development fees received, and subsequent renewal fees, will berecognized over the franchise, or renewal, term, which is typically 20 years. For additional information regarding the adoption of ASU 2014-09, see "Note 2.Summary of Significant Accounting Policies—Changes in Accounting Policies" and "Note 15. Revenue from Contracts with Customers" in ouraccompanying "Notes to Consolidated Financial Statements" included in "Item 8. Financial Statements and Supplementary Data" in this Annual Report.Goodwill and Indefinite-Lived Intangible Assets, NetIntangible assets consist primarily of goodwill and trademarks.We do not amortize our goodwill and indefinite-lived intangible assets. We perform an annual impairment test for goodwill during the fourth fiscal quarter ofeach year, or more frequently if impairment indicators arise. For our annual goodwill impairment assessment at December 26, 2018, we performed aqualitative assessment and concluded that the fair value of the reporting unit to which goodwill was assigned exceeded our book equity. Accordingly, we didnot identify any goodwill impairment.We perform an annual impairment test for indefinite-lived intangible assets during the fourth fiscal quarter of each year, or more frequently if impairmentindicators arise. For our impairment test for indefinite-lived intangible assets at December 26, 2018, we performed a qualitative assessment and concludedthat the fair value of the indefinite-lived intangible assets exceeded their carrying value and that there was no impairment.These assumptions used in our estimates of fair value are generally consistent with past performance and are also consistent with the projections andassumptions that we use in our forward-looking operating plans. These assumptions are subject to change as a result of changing economic and competitiveconditions. Changes in these estimates and assumptions could materially affect our determinations of fair value and impairment.Long-Lived AssetsWe state the value of our property and equipment, including primarily leasehold improvements and restaurant equipment, furniture, and fixtures, at cost,minus accumulated depreciation and amortization. We calculate depreciation using the straight-line method of accounting over the estimated useful lives ofthe related assets. We amortize our leasehold improvements using the straight-line method of accounting over the shorter of the lease term (includingreasonably assured renewal periods) or the estimated useful lives of the related assets. We expense repairs and maintenance as incurred, but capitalize majorimprovements and betterments. We make judgments and estimates related to the expected useful lives of those assets that are affected by52factors such as changes in economic conditions and changes in operating performance. If we change our assumptions in the future, we may be required torecord impairment charges for these assets.The Company reviews its long-lived assets for impairment on a restaurant-by-restaurant basis whenever events or changes in circumstances indicate that thecarrying value of certain assets may not be recoverable. The Company considers a triggering event to have occurred related to a specific restaurant if therestaurant’s cash flows for the last twelve months are less than a minimum threshold or if consistent levels of undiscounted cash flows for the remaining leaseperiod are less than the carrying value of the restaurant’s assets. If the Company concludes that the carrying value of certain assets will not be recovered basedon expected undiscounted future cash flows, an impairment write-down is recorded to reduce the assets to their estimated fair value. The fair value ismeasured on a nonrecurring basis using unobservable (Level 3) inputs. There is uncertainty in the projected undiscounted future cash flows used in ourimpairment review analysis. If actual performance does not achieve the projections, we may recognize impairment charges in future periods, and such chargescould be material.Insurance ReservesWe are responsible for workers’ compensation, general, and health insurance claims up to a specified amount. We maintain a reserve for estimated claims bothreported and incurred but not reported, based on historical claims experience and other assumptions. In estimating our insurance accruals, we utilizeindependent actuarial estimates of expected losses, which are based on statistical analyses of historical data. Our actuarial assumptions are closely monitoredand adjusted when warranted by changing circumstances. Should claims occur or medical costs increase in greater amounts than we have expected, accrualsmay not be sufficient, and we may record additional expenses.Accounting for Lease ObligationsWe lease a substantial number of our restaurant properties. At the inception of each lease, we evaluate the property and the lease to determine whether thelease is an operating lease or a capital lease. This lease accounting evaluation may require significant judgment in determining the fair value and useful lifeof the leased property and the appropriate lease term. The lease term used for the evaluation includes renewal option periods only in instances in which theexercise of the renewal option can be reasonably assured because failure to exercise such an option would result in an economic penalty. Such an economicpenalty would typically result from our having to abandon a building or fixture with remaining economic value upon vacating a property.Franchise OperationsWe sublease a number of restaurant properties to our franchisees. As such, we remain principally liable for the underlying leases. If sales trends or economicconditions worsen for our franchisees, their financial health may worsen, our collection rates may decline, and we may be required to assume theresponsibility for additional lease payments on what are presently franchised restaurants.Income TaxesWe use the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are determined based on temporary differencesbetween the financial carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which the temporarydifferences are expected to reverse. As of December 26, 2018, we had federal and state net operating loss (“NOL”) carryforwards of $29.8 million and less than$0.1 million, respectively. These Federal and State NOLs expire beginning in 2032 and 2027, respectively.A valuation allowance is required when there is significant uncertainty as to whether certain deferred tax assets can be realized. The ability to realize deferredtax assets is dependent upon our ability to generate sufficient taxable income within the carryforward periods provided for in the tax law for each taxjurisdiction. We have considered the following possible sources of taxable income when assessing the realization of our deferred tax assets:•future reversals of existing taxable temporary differences;•future taxable income or loss, exclusive of reversing temporary differences and carryforwards;•tax-planning strategies; and•taxable income in prior carryback years.53We will continue to reevaluate the continued need for either a valuation allowance. Relevant factors include:•current financial performance;•our ability to meet short-term and long-term financial and taxable income projections;•the overall market environment; and•the volatility and trends in the industry in which we operate.All of the factors that we consider in evaluating treatment of a deferred tax asset valuation allowance involve significant judgment. For example, there aremany different interpretations of “cumulative losses in recent years” that can be used. Also, significant judgment is involved in making projections of futurefinancial and taxable income, especially because our financial results are significantly dependent upon industry trends. Any change in our valuationallowance will significantly impact our financial results in the period of that change.When there are uncertainties related to potential income tax benefits, in order to qualify for recognition, the position we take has to have at least a “morelikely than not” chance of being sustained (based on the position’s technical merits) upon challenge by the responsible authorities. The term “more likelythan not” means a likelihood of more than 50%. Otherwise, we may not recognize any of the potential tax benefits associated with that position. Werecognize a benefit for a tax position that meets the “more likely than not” criterion as the largest amount of tax benefit that is greater than 50% likely to berealized upon its effective resolution. Unrecognized tax benefits involve our judgment regarding the likelihood of a benefit being sustained. The finalresolutions of uncertain tax positions could result in adjustments to recorded amounts and affect our results of operations, financial position, and cash flows.However, we anticipate that any such adjustments would not materially impact our financial statements.In fiscal 2017, President Trump signed into law the Tax Act. The Tax Act provides for significant changes in the U.S. Internal Revenue Code of 1986, asamended. The Tax Act contains provisions with separate effective dates but is generally effective for taxable years beginning after December 31, 2017.The Tax Act had the following effects on our income tax expense for the year ended December 27, 2017:•Under Financial Accounting Standards Board ASC 740, we are required to revalue any deferred tax assets or liabilities in the period of enactment ofchange in tax rates. The Tax Act lowers the corporate income tax rate from 35% to 21%. We estimated the impact of the revaluation of our deferredtax assets and liabilities, which resulted in a decrease to our net deferred income tax liability by $1.4 million and is reflected as a decrease in ourincome tax expense in our results for fiscal 2017.•The reduced corporate tax rate, also resulted in a TRA benefit to the provision for income tax expense for fiscal 2017 in the amount of $2.0 million.•The Tax Act is generally effective for tax years beginning after December 31, 2017. As such, the reduction in the corporate income tax rate from 35%to 21% is effective for the fiscal year ended December 26, 2018.On July 30, 2014, we entered into 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 asa result of utilizing our net operating losses and other tax attributes attributable to preceding periods. We are permitted to make TRA payments under the2018 Revolver. In fiscal 2018, we recognized a benefit of $0.8 million as a result of changes to future forecasted results and the timing of the deductibility ofcertain temporary differences including the current year legal settlement accruals. In fiscal 2017, we recognized a benefit of $5.6 million, related to theamortization of the present value of the TRA obligation, the impact of the Tax Act on the corporate tax rate on future years, and an adjustment to theexpected TRA liability, due to the expected realization of various pre-IPO tax credits.In addition, in fiscal 2014, we applied for various tax credits that resulted in $6.7 million of additional deferred tax assets and tax benefits. As of fiscal 2018,the deferred asset balance related to these various tax credits, net of valuation allowance was $4.4 million. The fiscal 2018 provision includes a $5.1 millionvaluation allowance against our deferred tax asset, resulting from certain tax credits that may not be realizable prior to the time the credits expire. Also, infiscal 2018, federal work opportunity tax credits (“WOTC”) of approximately $0.5 million were generated.Stock-Based CompensationWe measure and recognize compensation expense for the estimated fair value of equity instruments for employees and non-employee directors based on thegrant-date fair value of the award. For awards that are based on a service requirement, the cost is recognized on a straight-line basis over the requisite serviceperiod, usually the vesting period. In fiscal 2018, the Company54granted 311,272 stock options and 395,880 restricted stock and performance stock awards, with an exercise price equal to the fair market value of thecommon stock on the date of grant. The awards granted in fiscal 2018, 2017 and 2016 had a four-year vesting period for employees and three-year vestingperiod for directors. Included in the fiscal 2018 restricted stock award grants were 72,116 performance share units which have a five-year term. Performanceshare units are granted at fair market value on the date of grant and are subject to service-based and market-based vesting conditions. For stock options thatwere based on performance requirements, costs were recognized over the periods to which the performance criteria related. On November 15, 2016, the boardof directors modified the vesting of the remaining performance based stock options to instead vest based on service conditions. As of December 26, 2018,there were no remaining performance based stock options outstanding. In order to calculate our stock options’ fair values and the associated compensationcosts for share-based awards, we utilize the Black–Scholes option pricing model.Recent Accounting PronouncementsRecent accounting pronouncements are described in "Note 2. Summary of Significant Accounting Policies" in our accompanying "Notes to ConsolidatedFinancial Statements" included in this Annual Report.ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKInterest Rate RiskWe are exposed to market risk from changes in interest rates on our debt, which bears interest at USD LIBOR plus a margin between 1.25% and 2.25%. As ofDecember 26, 2018, we had outstanding borrowings of $74.0 million related to our 2018 Revolver and another $8.5 million of letters of credit in support ofour insurance programs. A 1.0% increase in the effective interest rate applied to our 2018 Revolver borrowings would result in a pre-tax interest expenseincrease of $0.7 million on an annualized basis.We manage our interest rate risk through normal operating and financing activities and, when determined appropriate, through the use of derivative financialinstruments.To mitigate exposure to fluctuations in interest rates, in the past, when we have determined it appropriate, we have entered into interest rate caps. At this time,due to reduced debt burden and the lowered rates of interest on our debt in recent years, we are not continuing to hedge our interest rate exposure.InflationInflation has an impact on food, paper, construction, utility, labor and benefits, general and administrative, and other costs, all of which can materially impactour operations. We have a substantial number of hourly employees who are paid wage rates at or based on the applicable federal, state, or local minimumwage, and increases in the minimum wage will increase our labor costs. On January 1, 2017, the State of California (where most of our restaurants are located)minimum wage rose to $10.50 per hour, on January 1, 2018, the State of California minimum wage rose to $11.00 per hour and on January 1, 2019 wasincreased to $12.00 per hour. We also do substantial business in locales such as the City of Los Angeles and the County of Los Angeles that may have higherminimum wages. For details, see "Item 1A. Risk Factors—Risks Related to Our Business and Industry—If we or our franchisees face labor shortages orincreased labor costs, our results of operations and growth could be adversely affected.” In general, we have been able to substantially offset cost increasesresulting from inflation by increasing menu prices, managing menu mix, improving productivity, or making other adjustments. We may not be able to offsetcost increases in the future.Commodity Price RiskWe 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 purchasingcommitments partially mitigate the risk of such fluctuations, there is no assurance that supply and demand factors such as disease or inclement weather willnot cause the prices of the commodities used in our restaurant operations to fluctuate. In periods where the prices of commodities drop, we may pay higherprices under our purchasing commitments. In rapidly-fluctuating commodities markets, it may prove difficult for us to adjust our menu prices in accordancewith input price fluctuations. Therefore, to the extent that we do not pass along cost increases to our customers, our results of operations may be adverselyaffected. At this time, we do not use financial instruments to hedge our commodity risk. See "Item 1A. “Risk Factors—Risks Related to Our Business andIndustry—Changes in food and supply costs, especially for chicken, could adversely affect our business, financial condition and results of operations,” and"Note 13.55Commitments and Contingencies—Purchase Commitments" in our accompanying "Notes to Consolidated Financial Statements" included in this AnnualReport.ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAEL POLLO LOCO HOLDINGS, INC. AND SUBSIDIARIESINDEX TO THE CONSOLIDATED FINANCIAL STATEMENTSAudited Consolidated Financial Statements Report of Independent Registered Public Accounting Firm57Consolidated Balance Sheets—December 26, 2018 and December 27, 201758Consolidated Statements of Operations—For the years ended December 26, 2018, December 27, 2017, and December 28, 201659Consolidated Statements of Changes in Stockholders’ Equity—For the years ended December 26, 2018, December 27, 2017, and December 28, 201660Consolidated Statements of Cash Flows—For the years ended December 26, 2018, December 27, 2017, and December 28, 201661Notes to Consolidated Financial Statements6256REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMShareholders and Board of DirectorsEl Pollo Loco Holdings, Inc.Costa Mesa, CaliforniaOpinion on the Consolidated Financial StatementsWe have audited the accompanying consolidated balance sheets of El Pollo Loco Holdings, Inc. (the “Company”) and subsidiaries as of December 26, 2018and December 27, 2017, the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the three years in theperiod ended December 26, 2018, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidatedfinancial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 26, 2018 and December 27,2017, and the results of their operations and their cash flows for each of the three years in the period ended December 26, 2018, in conformity withaccounting principles generally accepted in the United States of America.Change in Accounting Policy Related to Revenue RecognitionAs discussed in Note 2 to the consolidated financial statements, the Company has changed its accounting policy for revenue recognition and relateddisclosures in 2018 due to the modified retrospective adoption of Accounting Standards Codification 606, Revenue from Contracts with Customers.Basis for OpinionThese consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’sconsolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board(United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and theapplicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required tohave, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain anunderstanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internalcontrol over financial reporting. Accordingly, we express no such opinion.Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud,and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosuresin the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management,as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion./s/ BDO USA, LLPWe have served as the Company’s auditor since 2011.Costa Mesa, CaliforniaMarch 8, 201957EL POLLO LOCO HOLDINGS, INC.CONSOLIDATED BALANCE SHEETS(Amounts in thousands, except share data) December 26, 2018 December 27, 2017Assets Current assets: Cash and cash equivalents$6,969 $8,550Accounts and other receivables, net9,599 7,212Inventories2,479 2,289Prepaid expenses and other current assets2,998 2,679Total current assets22,045 20,730Property and equipment owned, net104,145 102,794Property held under capital lease, net16 40Goodwill248,674 248,674Trademarks, net61,888 61,888Other intangible assets, net280 377Deferred tax assets11,709 7,167Other assets1,469 1,041Total assets$450,226 $442,711Liabilities and Stockholders’ Equity Current liabilities: Current portion of obligations under capital leases$68 $132Accounts payable9,564 12,307Accrued salaries and vacation7,574 7,339Accrued insurance7,076 5,851Accrued income taxes payable71 35Accrued interest149 110Current portion of income tax receivable agreement payable6,637 8,281Other accrued expenses and current liabilities51,764 13,270Total current liabilities82,903 47,325Revolver loan74,000 93,000Obligations under capital leases, net of current portion116 184Other intangible liabilities, net642 786Income tax receivable agreement payable, net of current portion7,305 13,694Other noncurrent liabilities20,024 12,772Total liabilities184,990 167,761Commitments and contingencies (Note 13) Stockholders’ Equity Preferred stock, $0.01 par value—100,000,000 shares authorized; none issued or outstanding— —Common stock, $0.01 par value—200,000,000 shares authorized; 39,009,451 and 38,661,850 shares issued and outstanding390 387Additional paid-in capital375,734 372,990Accumulated deficit(110,888) (98,427)Total stockholders’ equity265,236 274,950Total liabilities and stockholders’ equity$450,226 $442,711See notes to consolidated financial statements.58EL POLLO LOCO HOLDINGS, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(Amounts in thousands, except share data)For the Years EndedDecember 26, 2018 December 27, 2017 December 28, 2016Revenue Company-operated restaurant revenue$388,835 $376,615 $355,468Franchise revenue25,771 25,086 24,655Franchise advertising fee revenue21,222 — —Total revenue435,828 401,701 380,123Cost of operations Food and paper costs111,142 109,898 107,218Labor and related expenses112,417 106,584 97,471Occupancy and other operating expenses91,385 85,631 78,263Gain on recovery of insurance proceeds, lost profits— — (502)Company restaurant expenses314,944 302,113 282,450General and administrative expenses50,261 38,523 34,661Legal settlements36,258 — —Franchise expenses24,429 3,335 3,823Depreciation and amortization17,825 18,128 16,053Loss on disposal of assets278 799 674Expenses related to fire loss— — 48Gain on recovery of insurance proceeds, property, equipment and expenses— — (741)Recovery of securities lawsuits related legal expenses(8,356) (1,666) —Asset impairment and closed-store reserves9,650 33,645 8,554Total expenses445,289 394,877 345,522Gain on disposition of restaurants— — 28(Loss) income from operations(9,461) 6,824 34,629Interest expense—net of interest income of $12, $25, and $28 for the years ended December26, 2018, December 27, 2017, and December 28, 2016, respectively3,502 3,278 3,155Income tax receivable agreement (income) expense(761) (5,570) 352(Loss) income before provision for income taxes(12,202) 9,116 31,122(Benefit) provision for income taxes(3,208) 497 12,783Net (loss) income$(8,994) $8,619 $18,339Net (loss) income per share: Basic$(0.23) $0.22 $0.48Diluted$(0.23) $0.22 $0.47Weighted average shares used in computing net (loss) income per share: Basic38,574,553 38,453,347 38,357,805Diluted38,574,553 39,086,676 39,026,950See notes to consolidated financial statements.59EL POLLO LOCO HOLDINGS, INC.CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY(Amounts in thousands, except share data) Common Stock AdditionalPaid-in Capital AccumulatedDeficit TotalStockholders’Equity Shares Amount Balance, December 31, 201538,284,435 $383 $369,635 $(125,385) $244,633Stock based compensation— — 1,063 — 1,063Issuance of common stock related to restricted shares, net41,611 — — — —Issuance of common stock upon exercise of stock options147,726 2 976 — 978Excess income tax benefit related to share-based compensation plans— — 169 — 169Net income— — — 18,339 18,339Balance, December 28, 201638,473,772 385 371,843 (107,046) 265,182Stock based compensation— — 1,056 — 1,056Issuance of common stock related to restricted shares, net170,417 2 (2) — —Issuance of common stock upon exercise of stock options17,661 — 93 — 93Net income— — — 8,619 8,619Balance, December 27, 201738,661,850 387 372,990 (98,427) 274,950Cumulative effect of accounting change (see Note 2)— — — (3,467) (3,467)Stock based compensation— — 2,005 — 2,005Issuance of common stock related to restricted shares, net155,229 1 (1) — —Issuance of common stock upon exercise of stock options269,549 3 1,834 — 1,837Shares repurchased for employee tax withholdings(10,768) — (114) — (114)Repurchase of common stock(66,409) (1) (980) — (981)Net loss— — — (8,994) (8,994)Balance, December 26, 201839,009,451 $390 $375,734 $(110,888) $265,236See notes to consolidated financial statements.60EL POLLO LOCO HOLDINGS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(Amounts in thousands)For the Years EndedDecember 26, 2018 December 27, 2017 December 28, 2016Cash flows from operating activities Net (loss) income$(8,994) $8,619 $18,339Adjustments to reconcile changes in net (loss) income to net cash provided by operating activities: Depreciation and amortization17,825 18,128 16,053Stock-based compensation expense2,005 1,056 1,063Income tax receivable agreement (income) expense(761) (5,570) 352Loss on disposal of assets278 799 674Impairment of property and equipment5,147 32,594 8,400Closed-store reserves4,503 1,051 154Amortization of deferred financing costs280 304 304Amortization of favorable and unfavorable leases, net(47) (119) (82)Excess income tax benefit related to share-based compensation plans— — (169)Deferred income taxes, net(3,428) 250 12,390Other— — (660)Changes in operating assets and liabilities: Accounts and other receivables, net(2,387) (294) (844)Inventories(190) (177) (221)Prepaid expenses and other current assets(319) 425 (448)Income taxes receivable/payable37 (85) 222Other assets122 47 107Accounts payable482 1,088 (4,579)Accrued salaries and vacation235 1,585 (939)Accrued insurance1,225 407 423Payment related to tax receivable agreement(7,272) (11,109) (3,236)Other accrued expenses and liabilities36,701 4,547 1,996Restricted cash— 125 —Net cash provided by operating activities45,442 53,671 49,299Cash flows from investing activities Proceeds from disposition of restaurant— — 1,465Proceeds from fire insurance for property and equipment— — 743Purchase of property and equipment(27,802) (36,238) (37,410)Net cash flows used in investing activities(27,802) (36,238) (35,202)Cash flows from financing activities Proceeds from borrowings on revolver and term loans13,307 8,000 —Payments on revolver loan(33,000) (19,000) (19,000)Minimum tax withholdings related to net share settlements(114) — —Proceeds from issuance of common stock upon exercise of stock options, net of expenses1,837 93 978Payment of obligations under capital leases(132) (144) (177)Deferred financing costs for revolver loan(138) — —Excess income tax benefit related to share-based compensation plans— — 169Repurchases of common stock(981) — —Net cash flows used in financing activities(19,221) (11,051) (18,030)Increase (decrease) in cash and cash equivalents(1,581) 6,382 (3,933)Cash and cash equivalents, beginning of year8,550 2,168 6,101Cash and cash equivalents, end of year$6,969 $8,550 $2,168 December 26, 2018 December 27, 2017 December 28, 2016Supplemental cash flow information Cash paid for interest, net of capitalized interest$3,393 $3,314 $3,086Cash paid during the year for income taxes, net$183 $336 $171Non-cash investing and financing activity Unpaid purchases of property and equipment$1,543 $4,741 $5,158Schedule of non-cash transactions Borrowing on revolver for financing fees$693 $— $—See notes to consolidated financial statements.61EL POLLO LOCO HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESSEl Pollo Loco Holdings, Inc. (“Holdings”) is a Delaware corporation headquartered in Costa Mesa, California. Holdings and its direct and indirectsubsidiaries are collectively known as “we,” “us” or the “Company.” The Company’s activities are conducted principally through its indirect wholly-ownedsubsidiary, El Pollo Loco, Inc. (“EPL”), which develops, franchises, licenses and operates quick-service restaurants under the name El Pollo Loco ®. Therestaurants, which are located principally in California but also in Arizona, Nevada, Texas, Utah and Louisiana, specialize in flame-grilled chicken in a widevariety of contemporary Mexican-influenced entrees, including specialty chicken burritos, chicken quesadillas, chicken tortilla soup, variations on our PolloBowl® and Pollo Salads. At December 26, 2018, the Company operated 213 (143 in the greater Los Angeles area) and franchised 271 (138 in the greater LosAngeles area) El Pollo Loco restaurants. In addition, the Company currently licenses one restaurant in the Philippines. The Company’s largest stockholder isTrimaran Pollo Partners, L.L.C. (“LLC”), which is controlled by affiliates of Trimaran Capital, L.L.C. LLC acquired Chicken Acquisition Corp. (“CAC”), apredecessor of Holdings, on November 17, 2005 (the “Acquisition”) and has a 42.9% ownership interest as of December 26, 2018. LLC’s only material assetis its investment in Holdings.On April 22, 2014, CAC, its wholly owned subsidiary, Chicken Subsidiary Corp (“CSC”) and CSC’s wholly owned subsidiary, the former El Pollo LocoHoldings, Inc. (“Old Holdings”) entered into the following reorganization transactions: (i) Old Holdings merged with and into CSC with CSC continuing asthe surviving corporation; (ii) CSC merged with and into CAC with CAC continuing as the surviving corporation and (iii) CAC renamed itself El Pollo LocoHoldings, Inc.Holdings has no material assets or operations. Holdings and Holdings’ direct subsidiary, EPL Intermediate, Inc. (“Intermediate”), guarantee EPL’s 2014Revolver (see Note 6) on a full and unconditional basis and Intermediate has no subsidiaries other than EPL. EPL is a separate and distinct legal entity, andhas no obligation to make funds available to Intermediate. EPL and Intermediate may pay dividends to Intermediate and to Holdings, respectively.On July 13, 2018, the Company refinanced its credit agreement with Bank of America, N.A., as administrative agent, swingline lender, and letter of creditissuer, the lenders party thereto, and the other parties thereto, (the "2014 Revolver"), pursuant to a credit agreement (the "2018 Credit Agreement") amongEPL, as borrower, the Company and EPL Intermediate, Inc. (“Intermediate"), as guarantors, Bank of America, N.A., as administrative agent, swingline lender,and letter of credit issuer, the lenders party thereto, and the other parties thereto, which provides for a $150.0 million five-year senior secured revolvingfacility (the “2018 Revolver”). Under the 2018 Revolver, Holdings may not make certain payments such as cash dividends, except that it may, inter alia, (i)pay up to $1.0 million per year to repurchase or redeem qualified equity interests of Holdings held by past or present officers, directors, or employees (or theirestates) of the Company upon death, disability, or termination of employment, (ii) pay under its income tax receivable agreement (the “TRA”), and, (iii) solong 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 ofstock options by directors, officers and management, provided that those equity interests represent a portion of the consideration of the exercise price of thosestock options, (b) pay up to $0.5 million in any 12 month consecutive period to redeem, repurchase or otherwise acquire equity interests of any subsidiarythat 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, subjectto 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 covenantsapplicable to the 2018 Revolver.The Company operates in one operating segment. All significant revenues relate to retail sales of food and beverages to the general public through eithercompany or franchised restaurants.On August 2, 2018, the Company announced the Board of Directors had authorized a stock repurchase program (the "Stock Repurchase Program"). TheCompany entered into a stock repurchase plan pursuant to Rule 10b5-1 of the Securities and Exchange Act of 1934, as amended on August 28, 2018 (the"Stock Repurchase Plan"), which allows the repurchase of up to $20.0 million of the Company's common stock. The Stock Repurchase Plan commencedpurchases on November 6, 2018, and, if not terminated sooner by other provisions of the Stock Repurchase Plan, will terminate on June 26, 2019. The StockRepurchase Plan may also be suspended or terminated at any time upon prior notice.Under the Stock Repurchase Program, the Company may repurchase its common stock from time to time, in amounts and at prices that the Company deemsappropriate, subject to market conditions and other considerations. The Company's repurchases may be executed using open market purchases and/orthrough privately negotiated transactions.Under the Stock Repurchase Plan for the quarterly period ended December 26, 2018, the Company repurchased 66,409 shares of common stock, executedusing open market purchases, for total consideration of approximately $1.0 million.622. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESLiquidityThe Company’s principal liquidity requirements are to service its debt and meet capital expenditure needs. At December 26, 2018, the Company’s total debt(including capital lease liabilities) was $74.2 million. The Company’s ability to make payments on its indebtedness and to fund planned capital expendituresdepends on available cash and its ability to generate adequate cash flows in the future, which, to a certain extent, is subject to general economic, financial,competitive, legislative, regulatory and other factors that are beyond the Company’s control. Based on current operations, the Company believes that its cashflows from operations, available cash of $7.0 million at December 26, 2018, and available borrowings under the 2018 Revolver (which availability was $67.5million at December 26, 2018) will be adequate to meet the Company’s liquidity needs for the next twelve months from the issuance of the consolidatedfinancial statements.Basis of PresentationThe Company uses a 52- or 53-week fiscal year ending on the last Wednesday of each calendar year. Fiscal 2018, 2017, and 2016 ended on December 26,2018, December 27, 2017 and December 28, 2016, respectively. In a 52-week fiscal year, each quarter includes 13 weeks of operations. In a 53-week fiscalyear, the first, second and third quarters each include 13 weeks of operations and the fourth quarter includes 14 weeks of operations. Approximately every sixor seven years a 53-week fiscal year occurs. Fiscal 2018, 2017 and 2016 were 52-week fiscal years. 53-week years may cause revenues, expenses, and otherresults of operations to be higher due to the additional week of operations.Principles of ConsolidationThe accompanying consolidated financial statements include the accounts of Holdings and its wholly owned subsidiaries. All intercompany balances andtransactions have been eliminated in consolidation.Use of EstimatesThe preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”)requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets andliabilities at the date of the consolidated financial statements and revenue and expenses during the period reported. Actual results could materially differ fromthose estimates. The Company’s significant estimates include estimates for impairment of goodwill, intangible assets and property and equipment, insurancereserves, lease termination liabilities, closed-store reserves, stock-based compensation, income tax receivable agreement liability, and income tax valuationallowances.Cash and Cash EquivalentsThe Company considers all highly-liquid instruments with a maturity of three months or less at the date of purchase to be cash equivalents.Restricted CashThe Company’s restricted cash represented cash collateral to one commercial bank for Company credit cards. During the fiscal year ended 2017, the cashcollateral was returned by the bank, and the Company reclassified such amounts to cash and cash equivalents.Subsequent EventsOn January 24, 2019, the parties reached an agreement in principle to settle all claims and allegations brought on behalf of putative class members inSuperior Court of the State of California, County of Orange under the caption Elliott Olvera, et al. v. El Pollo Loco, Inc., et al. (Case No. 30-2014-00707367-CU-OE-CXC), as well as all wage and hour claims brought in the class actions captioned Martha Perez v. El Pollo Loco, Inc. (Los Angeles Superior CourtCase No. BC624001), Maria Vega, et al. v. El Pollo Loco, Inc. (Los Angeles Superior Court Case No. BC649719), and Gonzalez v. El Pollo Loco, Inc. (LosAngeles Superior Court Case No. BC712867). See "Note 13. Commitments and Contingencies—Legal Matters."63EL POLLO LOCO HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)On January 23, 2019, the parties filed a Notice of Settlement and Joint Request for Order to Stay Proceedings, stating the parties have reached an agreementin principle to settle all claims and allegations brought on behalf of putative class members in United States District Court, Central District of Californiaunder the caption Turocy v. El Pollo Loco Holdings, Inc. et al., (Case No. 8:15-cv-01343-DOC-KES). See "Note 13. Commitments and Contingencies—LegalMatters."Subsequent to December 26, 2018, the Company decided to close one restaurant in Texas, which was previously impaired during the fourth quarter of 2017.The restaurant closed in January 2019.Subsequent to December 26, 2018, the Company made a $3.0 million pre-payment on the 2018 Revolver.The Company evaluated subsequent events that have occurred after December 26, 2018, and determined that there were no other events or transactionsoccurring during this reporting period that require recognition or disclosure in the consolidated financial statements.Concentration of RiskCash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally-insured limits. The Company has neverexperienced any losses related to these balances.The Company had one vendor for which amounts due at December 26, 2018 totaled 36% of the Company’s accounts payable. As of December 27, 2017, theCompany had one supplier for which amounts due totaled 14% of the Company’s accounts payable. Purchases from the Company’s largest supplier totaled29% of the Company’s purchases for fiscal 2018, 29% for fiscal 2017 and 33% for fiscal 2016 with no amounts payable at December 26, 2018 or December27, 2017. In fiscal 2018, 2017 and 2016, Company-operated and franchised restaurants in the greater Los Angeles area generated, in the aggregate,approximately 69%, 73%, and 75%, respectively, of total revenue. Two franchisees accounted for 40% of total accounts receivable as of December 26, 2018and December 27, 2017.Management believes the loss of the significant supplier or franchisee could have a material adverse effect on the Company's consolidated results ofoperations and financial condition.Accounts and Other Receivables, NetAccounts and other receivables consist primarily of royalties, advertising and sublease rent and related amounts receivable from franchisees. Such receivablesare due on a monthly basis, which may differ from the Company’s fiscal month-end dates. Accounts and other receivables also include credit/debit cardreceivables. The need for an allowance for doubtful accounts is reviewed on a specific identification basis and takes into consideration past due balances andthe financial strength of the obligor. Bad debt expense was immaterial for the years ended December 26, 2018, December 27, 2017, and December 28, 2016.InventoriesInventories consist principally of food, beverages and paper supplies and are valued at the lower of average cost or net realizable value.Property and Equipment Owned, NetProperty and equipment is stated at cost and is depreciated using the straight-line method over the estimated useful lives of the assets. Leaseholdimprovements and property held under capital leases are amortized over the shorter of their estimated useful lives or the remaining lease terms. For leases withrenewal periods at the Company’s option, the Company generally uses the original lease term, excluding the option periods, to determine estimated usefullives; if failure to exercise a renewal option imposes an economic penalty on the Company, such that management determines at the inception of the leasethat renewal is reasonably assured, the Company may include the renewal option period in the determination of appropriate estimated useful lives.The estimated useful service lives are as follows:64EL POLLO LOCO HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)Buildings20 yearsLand improvements3—30 yearsBuilding improvements3—10 yearsRestaurant equipment3—10 yearsOther equipment2—10 yearsLeasehold improvementsShorter of useful life or lease termThe Company capitalizes certain directly attributable costs in conjunction with site selection that relate to specific sites for planned future restaurants. TheCompany also capitalizes certain directly attributable costs, including interest, in conjunction with constructing new restaurants. These costs are included inproperty and amortized over the shorter of the life of the related buildings and leasehold improvements or the lease term. Costs related to abandoned sites andother site selection costs that cannot be identified with specific restaurants are charged to general and administrative expenses in the accompanyingconsolidated statements of operations, and were $0.3 million, $0.5 million and $0.5 million for the years ended December 26, 2018, December 27, 2017, andDecember 28, 2016, respectively. The Company capitalized internal costs related to site selection and construction activities of $1.3 million, $1.9 millionand $1.6 million for the years ended December 26, 2018, December 27, 2017, and December 28, 2016, respectively. Capitalized internal interest costs relatedto site selection and construction activities were $0.2 million, $0.2 million and $0.2 million for the years ended December 26, 2018, December 27, 2017, andDecember 28, 2016, respectively.Impairment of Long-Lived AssetsThe Company reviews its long-lived assets for impairment on a restaurant-by-restaurant basis whenever events or changes in circumstances indicate that thecarrying value of certain assets may not be recoverable. The Company considers a triggering event to have occurred related to a specific restaurant if therestaurant’s cash flows for the last twelve months are less than a minimum threshold or if consistent levels of undiscounted cash flows for the remaining leaseperiod are less than the carrying value of the restaurant’s assets. If the Company concludes that the carrying value of certain assets will not be recovered basedon expected undiscounted future cash flows, an impairment write-down is recorded to reduce the assets to their estimated fair value. The fair value ismeasured on a nonrecurring basis using unobservable (Level 3) inputs. There is uncertainty in the projected undiscounted future cash flows used in theCompany's impairment review analysis, which requires the use of estimates and assumptions. If actual performance does not achieve the projections, or if theassumptions used change in the future, the Company may be required to recognize impairment charges in future periods, and such charges could be material.Based on the results of this analysis, the Company recorded non-cash impairment charges of $5.1 million for the year ended December 26, 2018, primarilyrelated to the carrying value of the assets of four restaurants in Arizona, California and Texas, including a restaurant in Texas that opened in early 2018. Infiscal 2017 the company recorded a non-cash impairment charge of $32.6 million, primarily related to the carrying value of 23 restaurants in Arizona,California and Texas. The impairment expense for fiscal 2017 includes an impairment expense of $27.7 million, representing the entire value of capitalizedassets of all of the company-operated restaurants in Texas, net of previously recorded depreciation. Factors which led to the impairment of the Texasrestaurants included operating results, which indicated that the restaurants did not achieve the sales volumes required to generate positive cash flows orimprove profitability in the Texas market, along with the related future cash flow assumptions, including comparable sales rate growth and restaurantoperating costs, over the remaining lease terms and the age of the restaurants in Texas. The restaurants in Texas began opening in late 2014, causing a highernet book value at the time of impairment testing, and increased difficulty projecting results for newer restaurants in newer markets. Given the difficulty inprojecting results for newer restaurants in newer markets, we are also monitoring the recoverability of the carrying value of the assets of several otherrestaurants on an ongoing basis, including those in the Arizona and Northern California market. For these restaurants, if expected performance improvementsare not realized, an impairment charge may be recognized in future periods, and such charge could be material. In fiscal 2016 the Company recorded a non-cash impairment charge of $8.4 million, primarily related to the carrying value of the assets of nine restaurants in Arizona, California and Texas.Goodwill and Indefinite-Lived Intangible AssetsThe Company’s indefinite-lived intangible assets consist of trademarks. Goodwill represents the excess of cost over fair value of net identified assets acquiredin business combinations accounted for under the purchase method. The Company does not amortize its goodwill and indefinite-lived intangible assets.Goodwill resulted from the Acquisition and from the acquisition of certain franchise locations.65EL POLLO LOCO HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)Upon the sale of a restaurant, the Company evaluates whether there is a decrement of goodwill. The amount of goodwill included in the cost basis of the assetsold is determined based on the relative fair value of the portion of the reporting unit disposed of compared to the fair value of the reporting unit retained.The Company performs annual impairment tests for goodwill during the fourth fiscal quarter of each year, or more frequently if impairment indicators arise.The Company reviews goodwill for impairment utilizing either a qualitative assessment or by comparing the fair value of a reporting unit with its carryingamount. An impairment test consists of either a qualitative assessment or a comparison of the fair value of a reporting unit with its carrying amount. If theCompany decides that it is appropriate to perform a qualitative assessment and concludes that the fair value of a reporting unit more likely than not exceedsits carrying value, no further evaluation is necessary. If an impairment test is performed which determines the carrying amount of a reporting unit is greaterthan its fair value, an impairment charge will be recognized for the amount by which the carrying amount of a reporting unit is greater than its fair value, upto the amount of its allocated goodwill.The Company performs annual impairment tests for indefinite-lived intangible assets during the fourth fiscal quarter of each year, or more frequently ifimpairment indicators arise. An impairment test consists of either a qualitative assessment or a comparison of the fair value of an intangible asset with itscarrying amount. The excess of the carrying amount of an intangible asset over its fair value is its impairment loss.The assumptions used in the estimate of fair value are generally consistent with the past performance of the Company’s reporting segment and are alsoconsistent with the projections and assumptions that are used in current operating plans. These assumptions are subject to change as a result of changingeconomic and competitive conditions.Although the Company recognized expense related to the impairment of the assets of 4 restaurants during the year ended December 26, 2018, uponcompletion of the qualitative assessment, the Company did not identify any indicators of potential impairment for its goodwill or indefinite-lived intangibleassets. Furthermore, the Company did not identify any indicators of potential impairment during the years ended December 27, 2017 or December 28, 2016,and thus no impairment was recorded.Other Intangibles, Net—Definite LivedDefinite lived intangible assets and liabilities consist of the value allocated to the Company’s favorable and unfavorable leasehold interests that resultedfrom the Acquisition.Favorable leasehold interest represents the asset in excess of the approximate fair market value of the leases assumed as of November 17, 2005, the date of theAcquisition. The amount is being reduced over the remaining life of the leases. This amount is shown as other intangible assets, net, on the accompanyingconsolidated balance sheets.Unfavorable leasehold interest liability represents the liability in excess of the approximate fair market value of the leases assumed as of November 17, 2005,the date of the Acquisition. The amount is being reduced over the remaining life of the leases. This amount is shown as other intangible liabilities, net, on theaccompanying consolidated balance sheets.Intangible assets and liabilities with a definite life are amortized using the straight-line method over the remaining useful lives at the date of acquisition asfollows:Favorable leasehold interests1 to 18 years (remaining lease term)Unfavorable leasehold interest liability1 to 20 years (remaining lease term)Deferred Financing CostsDeferred financing costs are capitalized and amortized over the period of the loan on a straight-line basis, which approximates the effective interest method.Transaction costs of $0.8 million were incurred in connection with the July 13, 2018 refinancing and were capitalized during fiscal 2018. Included in otherassets are deferred financing costs (net of accumulated amortization), related to the revolver, of $1.1 million and $0.6 million as of December 26, 2018 andDecember 27, 2017, respectively. Amortization expense for deferred financing costs was $0.3 million, $0.3 million and $0.3 million for the years endedDecember 26, 2018, December 27, 2017, and December 28, 2016, respectively, and is reflected as a component of interest expense in the accompanyingconsolidated statements of operations.Insurance Reserves66EL POLLO LOCO HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)The Company is responsible for workers’ compensation, general and health insurance claims up to a specified aggregate stop loss amount. The Companymaintains a reserve for estimated claims both reported and incurred but not reported, based on historical claims experience and other assumptions. AtDecember 26, 2018 and December 27, 2017, the Company had accrued $7.1 million and $5.9 million, respectively, and such amounts are reflected as accruedinsurance in the accompanying consolidated balance sheets. The expense for such reserves for the years ended December 26, 2018, December 27, 2017and December 28, 2016, totaled $8.0 million, $6.8 million, and $7.2 million, respectively. These amounts are included in labor and related expenses andgeneral and administrative expenses on the accompanying consolidated statements of operations.Restaurant RevenueRevenues from the operation of company-operated restaurants are recognized as food and beverage products are delivered to customers and payment istendered at the time of sale. The Company presents sales net of sales-related taxes and promotional allowances. Promotional allowances amounted toapproximately $8.8 million, $8.9 million and $7.4 million during the years ended December 26, 2018, December 27, 2017, and December 28, 2016,respectively.The Company offers a loyalty rewards program, which awards a customer one point for every $1 spent. When 100 points are accumulated a $10 reward to beused on future purchases is earned. When a customer is part of the rewards program, the obligation to provide future discounts related to points earned isconsidered a separate performance obligation, to which a portion of the transaction price is allocated. The performance obligation related to loyalty points isdeemed to have been satisfied, and the amount deferred in the balance sheet is recognized as revenue, when the points are transferred to a $10 reward andredeemed, or the likelihood of redemption is remote. A portion of the transaction price is allocated to loyalty points, if necessary, on a pro-rata basis, based onstand-alone selling price, as determined by menu pricing and loyalty point terms. As of December 26, 2018 and December 27, 2017, the revenue allocated toloyalty points that have not been redeemed are $1.0 million and $0.4 million, respectively, which are reflected in the Company's accompanying consolidatedbalance sheets within other accrued expenses and current liabilities. The Company expects the loyalty points to be redeemed and recognized over a one yearperiod.The Company sells gift cards to its customers in the restaurants and through selected third parties. The gift cards sold to customers have no stated expirationdates and are subject to actual and/or potential escheatment rights in several of the jurisdictions in which the Company operates. Furthermore, due to theseescheatment rights, the Company does not recognize breakage related to the sale of gift cards due to the immateriality of the amount remaining afterescheatment. The Company recognizes income from gift cards when redeemed by the customer.Advertising CostsAdvertising expense is recorded as the obligation to contribute to the advertising fund is accrued, generally when the associated revenue is recognized.Advertising expense, which is a component of occupancy and other operating expenses, was $16.1 million, $15.5 million and $14.7 million for the yearsended December 26, 2018, December 27, 2017, and December 28, 2016, respectively, and is in addition to $21.2 million, $20.5 million and $19.3 million,respectively, funded by the franchisees’ advertising fees.Franchisees pay a monthly fee to the Company that ranges from 4% to 5% of their restaurants’ net sales as reimbursement for advertising, public relations andpromotional services the Company provides. Fees received in advance of provided services are included in other accrued expenses and current liabilities andwere $0.3 million and $1.0 million at December 26, 2018 and December 27, 2017, respectively. Fees received subsequent to provided service are included inaccounts receivable and current assets and were nil at December 26, 2018 and December 27, 2017. Pursuant to the Company’s Franchise DisclosureDocument, company-operated restaurants contribute to the advertising fund on the same basis as franchised restaurants. At December 26, 2018, the Companywas obligated to spend $0.3 million more in future periods to comply with this requirement.Production costs of commercials, programming and other marketing activities are charged to the advertising funds when the advertising is first used for itsintended purpose. Total contributions and other marketing expenses are included in general and administrative expenses in the accompanying consolidatedstatements of operations.Preopening CostsPreopening costs incurred in connection with the opening of new restaurants are expensed as incurred. Preopening costs, which are included in general andadministrative expenses on the accompanying consolidated statements of operations, were $0.8 million, $2.0 million and $2.6 million for the years endedDecember 26, 2018, December 27, 2017, and December 28, 2016, respectively.67EL POLLO LOCO HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)Gift CardsThe Company sells gift cards to its customers in the restaurants and through selected third parties. The gift cards sold to customers have no stated expirationdates and are subject to actual and/or potential escheatment rights in several of the jurisdictions in which the Company operates. The Company recognizesincome from gift cards when redeemed by the customer.Operating LeasesRent expense for the Company’s operating leases, which generally have escalating rents over the term of the lease, is recorded on a straight-line basis over theexpected lease term. The lease term begins when the Company has the right to control the use of the leased property, which is typically before rent paymentsare due under the terms of the lease. Rent expense is included in occupancy and other operating expenses on the consolidated statements of operations. Thedifference between rent expense and rent paid is recorded as deferred rent, which is included in current liabilities and other noncurrent liabilities in theaccompanying consolidated balance sheets. Percentage rent expenses are recorded based on estimated sales or gross margin for respective restaurants over thecontingency period.Any leasehold improvements that are funded by lessor incentives under operating leases are recorded as leasehold improvements and amortized over theexpected lease term. Such incentives are also recorded as deferred rent and amortized as reductions to rent expense over the expected lease term.Gain on Recovery of Insurance ProceedsIn November 2015, one of the Company’s restaurants incurred damage resulting from a fire. In fiscal 2016, we incurred costs directly related to the fire of lessthan $0.1 million, disposed of assets of an additional $0.1 million and recognized gains of $0.7 million, related to the reimbursement of property andequipment and expenses incurred and $0.5 million related to the reimbursement of lost profits. The reimbursement of lost profits is included in theaccompanying consolidated statements of operations, for fiscal 2016, as a reduction of company restaurant expenses. The Company received from theinsurance company cash of $1.4 million, net of the insurance deductible, during fiscal 2016. The restaurant was reopened for business on March 14, 2016.Recovery of Securities Class Action Legal ExpenseDuring fiscal 2018 and 2017, the Company received insurance proceeds of $8.4 million and $1.7 million, respectively, related to the reimbursement ofcertain legal expenses paid in prior years for the defense of securities lawsuits. See "Note 13. Commitments and Contingencies—Legal Matters."Income TaxesThe provision for income taxes, income taxes payable and deferred income taxes is determined using the asset and liability method. Deferred tax assets andliabilities are determined based on temporary differences between the financial carrying amounts and the tax basis of assets and liabilities using enacted taxrates in effect in the years in which the temporary differences are expected to reverse. On a periodic basis, the Company assesses the probability that its netdeferred tax assets, if any, will be recovered. If after evaluating all of the positive and negative evidence, a conclusion is made that it is more likely than notthat some portion or all of the net deferred tax assets will not be recovered, a valuation allowance is provided by a charge to tax expense to reserve theportion of the deferred tax assets which are not expected to be realized.The Company reviews its filing positions for all open tax years in all U.S. federal and state jurisdictions where it is required to file.When there are uncertainties related to potential income tax benefits, in order to qualify for recognition, the position the Company takes has to have at least a“more likely than not” chance of being sustained (based on the position’s technical merits) upon challenge by the respective authorities. The term “morelikely than not” means a likelihood of more than 50%. Otherwise, the Company may not recognize any of the potential tax benefit associated with theposition. The Company recognizes a benefit for a tax position that meets the “more likely than not” criterion as the largest amount of tax benefit that isgreater than 50% likely of being realized upon its effective resolution. Unrecognized tax benefits involve management’s judgment regarding the likelihoodof the benefit being sustained. The final resolution of uncertain tax positions could result in adjustments to recorded amounts and may affect our results ofoperations, financial position and cash flows.The Company’s policy is to recognize interest or penalties related to income tax matters in income tax expense. The Company had no accrual for interest orpenalties at December 26, 2018 or December 27, 2017, and did not recognize interest or penalties68EL POLLO LOCO HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)during the years ended December 26, 2018, December 27, 2017, and December 28, 2016, since there were no material unrecognized tax benefits.Management believes no material change to the amount of unrecognized tax benefits will occur within the next twelve months.On July 30, 2014, the Company entered into the TRA with the stockholders of the Company immediately prior to the initial public offering ("IPO") whichcalls for the Company to pay to its pre-IPO stockholders 85% of the savings in cash that the Company realizes in its taxes as a result of utilizing its netoperating losses and other tax attributes attributable to preceding periods. As of December 26, 2018 and December 27, 2017, the Company had accrued $13.9million and $22.0 million, respectively relating to expected TRA payments. In fiscal 2018, 2017 and 2016, we paid $7.3 million, $11.1 million and $3.2million, respectively, to our pre-IPO stockholders under the TRA.Fair Value MeasurementsFair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at themeasurement date. Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:•Level 1: Quoted prices for identical instruments in active markets.•Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; andmodel-derived valuations whose inputs or significant value drivers are observable.•Level 3: Unobservable inputs used when little or no market data is available.As of December 26, 2018 and December 27, 2017, the Company had no assets and liabilities measured at fair value on a recurring basis.Certain assets and liabilities are measured at fair value on a nonrecurring basis. In other words, the instruments are not measured at fair value on an ongoingbasis but are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment).The following non-financial instruments were measured at fair value, on a nonrecurring basis, as of and for the year ended December 26, 2018 (in thousands): Fair Value Measurements Using Total Level 1 Level 2 Level 3 Impairment LossesProperty and equipment owned, net$449 $— $— $449 $5,147The following non-financial instruments were measured at fair value, on a nonrecurring basis, as of and for the year ended December 27, 2017 (in thousands): Fair Value Measurements Using Total Level 1 Level 2 Level 3 Impairment LossesProperty and equipment owned, net$— $— $— $— $32,594The following non-financial instruments were measured at fair value, on a nonrecurring basis, as of and for the year ended December 28, 2016 (in thousands): Fair Value Measurements Using Total Level 1 Level 2 Level 3 Impairment LossesProperty and equipment owned, net$1,614 $— $— $1,614 $8,400During fiscal 2018, 2017 and 2016, the Company recorded $5.1 million, $32.6 million and $8.4 million, respectively, of expenses related to the impairmentof assets. This was primarily related to the carrying value of the assets of four restaurants, in Arizona, California and Texas during fiscal 2018, the carryingvalue of the assets of 21 restaurants in Arizona, California and Texas, as well as the strategic decision to close two restaurants in Texas, in fiscal 2017 andnine restaurants in Arizona, California and Texas in fiscal 2016. These impairment charges resulted primarily from our annual impairment testing of long-lived assets, except for the two restaurant closings in Texas in fiscal 2017 noted above. The fair value measurements used in69EL POLLO LOCO HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)these impairment evaluations were based on discounted cash flow estimates using unobservable Level 3 inputs, based on market assumptions. Fair Value of Financial InstrumentsThe carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and certain accrued expenses approximate fair value due to theirshort-term maturities. The recorded value of the TRA approximates fair value, based on borrowing rates currently available to the Company for debts withsimilar terms and remaining maturities (Level 3 measurement).Stock Based CompensationAccounting literature requires the recognition of compensation expense using a fair-value based method for costs related to all share-based paymentsincluding stock options and restricted stock issued under the Company’s employee stock plans. The guidance also requires companies to estimate the fairvalue of stock option awards on the date of grant using an option pricing model, which require the input of subjective assumptions. The Company is requiredto use judgment in estimating the amount of stock-based awards that are expected to be forfeited. If actual forfeitures differ significantly from the originalestimate, stock-based compensation expense and the results of operations could be affected. The cost is recognized on a straight-line basis over the periodduring which an employee is required to provide service, usually the vesting period. For options or restricted shares that are based on a performancerequirement, the cost is recognized on an accelerated basis over the period to which the performance criteria relate.Earnings per ShareEarnings per share (“EPS”) is calculated using the weighted average number of common shares outstanding during each period. Diluted EPS assumes theconversion, exercise or issuance of all potential common stock equivalents unless the effect is to reduce a loss or increase the income per share. For purposesof this calculation, options and restricted stock awards are considered to be common stock equivalents and are only included in the calculation of dilutedearnings per share when their effect is dilutive. The shares used to compute basic and diluted net income per share represent the weighted-average commonshares outstanding.Recently Adopted Accounting PronouncementsIn May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)," ("ASU2014-09"), which supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenueswhen promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for thosegoods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, requires more judgment and estimates within therevenue recognition process.On December 28, 2017, the Company adopted ASU 2014-09 using the modified retrospective method applied to those contracts, which were not fullysatisfied as of December 28, 2017. Results for reporting periods beginning after December 28, 2017, are presented under Topic 606, while prior periodamounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605. The Company has recognized anadjustment to retained earnings, related to the cumulative effect of adopting ASU 2014-09 at the date of adoption. The adoption of ASU 2014-09 did nothave a material impact to its consolidated statement of operations, and the cumulative catch-up adjustment recorded to accumulated deficit was $3.5 million,or 1% of total assets.In addition, the FASB issued the following Technical Corrections, Practical Expedients and Targeted Improvements to Topic 606, Revenue from Contractswith Customers: ASU No. 2017-14 in November 2017, ASU No. 2017-13 in September 2017, ASU No. 2016-20, in December 2016, ASU No. 2016-12, inMay 2016 and ASU No. 2016-10, in April 2016 (together with ASU 2014-09 referred to as "Topic 606"). All amendments are effective for financial statementsissued for annual periods beginning after December 15, 2017, including interim periods within those annual periods.For additional information and discussion of the impact of the adoption of Topic 606 on revenue recognition, see "Changes in Accounting Policies" belowand "Note 15. Revenue from Contracts with Customers".In May 2017, the FASB issued ASU 2017-09, "Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting," ("ASU 2017-09"),which provides clarity, reduces diversity in practice, and reduces cost and complexity when applying the guidance in Topic 718 Compensation—StockCompensation, regarding a change to the terms or conditions of a70EL POLLO LOCO HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)share-based payment award. Specifically, an entity is to account for the effects of a modification, unless all of the following are satisfied: (1) the fair value (orcalculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated valueor intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified; (2) the vestingconditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (3) theclassification of the modified award as an equity instrument or as a liability instrument is the same as the classification of the original award immediatelybefore the original award is modified. The Company adopted ASU 2017-09 in the first quarter of 2018. The adoption of ASU 2017-09 did not have asignificant impact on the Company’s consolidated financial position or results of operations.In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business" ("ASU 2017-01"). ASU2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should beaccounted for as acquisitions (or disposals) of assets or businesses. The Company adopted ASU 2017-01 in the first quarter of 2018. The adoption of ASU2017-01 did not have a significant impact on the Company’s consolidated financial position or results of operations.In January 2017, the FASB issued ASU No. 2017-04, "Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment," ("ASU2017-04"), simplifying the manner in which an entity is required to test for goodwill impairment by eliminating Step 2 from the goodwill impairment test.The Company adopted ASU 2017-04 in the fourth quarter of 2018. The adoption of ASU 2017-04 did not have a significant impact on the Company’sconsolidated financial position or results of operations.In November 2016, the FASB issued ASU No. 2016-18, "Restricted Cash" ("ASU 2016-18"). ASU 2016-18 addresses the diversity in practice that existsregarding the classification and the presentation of changes in restricted cash on the statements of cash flows under Topic 230, Statements of Cash Flow, andother Topics. The amendments in ASU 2016-18 require that amounts generally described as restricted cash and restricted cash equivalents should be includedwith cash and cash equivalents when reconciling the beginning-of-period and the end-of-period total amounts set forth on the statements of cash flows. TheCompany adopted ASU 2016-18 in the first quarter of 2018. The adoption of ASU 2016-18 did not have a significant impact on the Company’s consolidatedfinancial position or results of operations.In August 2016, the FASB issued ASU No. 2016-15, "Classification of Certain Cash Receipts and Cash Payments" ("ASU 2016-15"). ASU 2016-15 addresseshow certain cash receipts and cash payments are presented and classified in the statements of cash flows under Topic 230, Statements of Cash Flow, and otherTopics. The Company adopted ASU 2016-15 in the first quarter of 2018. The adoption of ASU 2016-15 did not have a significant impact on the Company’sconsolidated financial position or results of operations.In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments – Overall: Recognition and Measurement of Financial Assets and FinancialLiabilities" ("ASU 2016-01"). ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting, or those thatresult in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, requires public business entities touse the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets andfinancial liabilities by measurement category and form of financial asset, and eliminates the requirement for public business entities to disclose the method(s)and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The Companyadopted ASU 2016-01 in the first quarter of 2018. The adoption of ASU 2016-01 did not have a significant impact on the Company’s consolidated financialposition or results of operations.On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act, (the "Tax Act"). TheTax Act makes broad and complex changes to the U.S. tax code. On December 22, 2017, the Securities and Exchange Commission (“SEC") issued guidancein Staff Accounting Bulletin No. 118, ("SAB 118"), to address certain fact patterns where the accounting for changes in tax laws or tax rates under FASB ASCTopic 740, Income Taxes (“ASC 740”) is incomplete upon issuance of an entity's financial statements for the reporting period in which the Tax Act isenacted. As permitted in SAB 118, in 2017, the Company took a measurement period approach and reported certain provisional amounts, based onreasonable estimates, for certain tax effects in which the accounting under ASC 740 is incomplete. Such provisional amounts are subject to adjustment duringa limited measurement period, not to extend one year beyond the tax law enactment date, until the accounting under ASC 740 is complete. The Companycompleted the accounting required under ASC 740 in 2018; however as new guidance and interpretations of the tax law become available, any furtheradjustments related to the enacted tax laws could result in a material adverse impact on the Company's net income and our financial position in 2019.In March 2018, the FASB issued ASU No. 2018-05, "Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting BulletinNo. 118" ("ASU 2018-05"). The amendments in ASU 2018-05 amend the SEC paragraphs71EL POLLO LOCO HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)included in Topic 740 to be consistent with the guidance in SAB 118, which the Company adopted in the year ended December 27, 2017, as describedabove.Recent Accounting Pronouncements Not Yet AdoptedIn August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, “Disclosure Update and Simplification”, amending certain disclosurerequirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements onthe analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equitypresented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to theending balance of each period for which a statement of comprehensive income is required to be filed. The Company anticipates its first presentation ofchanges in shareholders' equity will be included in its Form 10-Q for the first quarter of fiscal year 2019.In June 2018, the FASB issued ASU No. 2018-07, "Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based PaymentAccounting," ("ASU 2018-07"), which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services fromnon-employees. ASU 2018-07 is effective for financial statements issued for annual periods beginning after December 15, 2018, and for the interim periodstherein. The adoption of ASU 2018-07 is not expected to have a significant impact on the Company’s consolidated financial position or results of operations.In February 2016, the FASB issued ASU No. 2016-02, “Leases" ("ASU 2016-02"). ASU 2016-02 establishes a right-of-use ("ROU") model that requires alessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as eitherfinance or operating, with classification affecting the pattern of expense recognition in the statement of operations. The new standard is effective for fiscalyears beginning after December 15, 2018, including interim periods within those fiscal years. The Company will adopt these provisions in the first quarter of2019, electing the transition method that allows us to apply the standard as of the adoption date and record a cumulative adjustment in retained earnings, ifapplicable. We have elected the package of practical expedients permitted under the transition guidance within the new guidance, which among other things,allows us to carryforward the historical lease classification. The Company has $266.5 million of operating lease obligations as of December 26, 2018, andupon adoption of this standard will record a ROU asset and lease liability equal to the present value of these leases, which will have a material impact on theconsolidated balance sheet. However, the recognition of lease expense in the consolidated statement of operations is not expected to change from the currentmethodology and no significant changes are expected to the consolidated statement of cash flows upon the adoption of ASU 2016-02.In July 2018, the FASB issued ASU No. 2018-10, "Codification Improvements to Topic 842, Leases," ("ASU 2018-10"), to clarify how to apply certainaspects of the new lease accounting standard. The amendments in this update, among other things, better articulates the requirement for a lessee'sreassessment of lease classification as of the effective date of a modification, clarifies that a change to an index or rate for variable lease payments does notconstitute a resolution of a contingency that would result in the remeasurement of lease payments, and requires entities that apply Topic 842 retrospectivelyto each reporting period and do not adopt the practical expedients to write off any prior unamortized initial direct costs that do not meet the definition underTopic 842 to equity. The amendments in this update have the same effective date and transition requirements as the new lease standard summarized above.The Company has disclosed the impact of adoption of Topic 842 on the Company’s consolidated financial position and results of operations as stated above.Also, in July 2018, the FASB issued ASU No. 2018-11, "Leases (Topic 842): Targeted Improvements," ("ASU 2018-11"), to provide an additional transitionmethod. An entity can now elect not to present comparative financial information under Topic 842 if it recognizes a cumulative-effect adjustment to retainedearnings upon adoption. The Company intends to make this election. The amendments in these update are effective for the Company for fiscal yearsbeginning after December 15, 2018, including interim periods within those years, with early adoption permitted. The Company has performed an assessmentof the impact of the adoption of the amendments in these updates on the Company's consolidated financial position and results of operations for theCompany's leases, which primarily consist of restaurant operating leases and corporate office leases. Based on that assessment, the Company has establishedthat the adoption of Topic 842 will result in the recognition of a significant increase to the balance sheet for right-of-use assets and lease liabilities as ofDecember 27, 2018 based on the present value of future minimum lease payments. Also, the impacts from the adoption of Topic 842 to the Company'saccumulated deficit as of December 27, 2018 and to consolidated results of operations for the year ending December 25, 2019 are not expected to be material.Changes in Accounting PoliciesExcept for the changes below, the Company has consistently applied the accounting policies to all periods presented in these consolidated financialstatements.72EL POLLO LOCO HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)The Company adopted Topic 606, with a date of initial application of December 28, 2017. As a result, the Company has changed its accounting policy forrevenue recognition as detailed below.The Company generates a substantial amount of its revenues from company-operated restaurants. This revenue stream was not impacted by the adoption ofTopic 606.The Company applied Topic 606 using the modified retrospective method by recognizing the cumulative effect of initially applying Topic 606 as anadjustment to the opening balance of equity at December 28, 2017. Therefore, the comparative information has not been adjusted and continues to bereported under Topic 605. The details of the significant changes and quantitative impact of the changes are set out below and in "Note 15. Revenue fromContracts with Customers."Franchise RevenueFranchise revenue consists of franchise royalties, initial franchise fees, license fees due from franchisees and IT support services. Rental income for subleasesto franchisees are outside of the scope of the revenue standard and are within the scope of lease guidance. Franchise royalties are based upon a percentage ofnet sales of the franchisee and were previously recorded as income as such sales are earned by the franchisees, which does not change with the adoption ofTopic 606.For franchise and development agreement fees, the Company's previous accounting policy was to recognize initial franchise fees, development fees, andfranchise agreement renewals when all material obligations had been performed and conditions had been satisfied, typically when operations of thefranchised restaurant had commenced. In accordance with the new guidance, the initial franchise services, or exclusivity of the development agreements, arenot distinct from the continuing rights or services offered during the term of the franchise agreement, and are therefore treated as a single performanceobligation. As such, initial franchise and development fees received, and subsequent renewal fees, are recognized over the franchise or renewal term, which istypically twenty years. As of December 26, 2018, the Company had executed development agreements that represent commitments to open 44 franchisedrestaurants at various dates through 2022.Franchise Advertising Fee RevenueThe Company's previous accounting policy was to recognize advertising funded by franchisees on a net basis in the consolidated statements of operations,and as a liability within the consolidated balance sheets. Under the new guidance, the Company presents advertising contributions received from franchiseesas franchise advertising fee revenue and records all expenses of the advertising fund within franchise expenses, resulting in an increase in revenues andexpenses on the consolidated statements of operations, with no change to the consolidated balance sheets.The adoption of this guidance did not have a material change on revenue from Company-operated restaurant revenue, gift cards or the Company's loyaltyprogram.The following tables summarize the impacts of adopting Topic 606 on the Company’s consolidated financial statements as of and for the twelve monthsended December 26, 2018:73EL POLLO LOCO HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Impact of changes in accounting policiesDecember 26, 2018 (in thousands)As Reported Adjustments Balances withoutadoption of Topic606Assets Current assets: Deferred tax assets$11,709 $1,272 $10,437Total assets$450,226 $1,272 $448,954Liabilities and Stockholders' Equity Current liabilities: Other accrued expenses and current liabilities$51,764 $369 $51,395Total current liabilities82,903 369 82,534Other noncurrent liabilities20,024 4,370 15,654Total liabilities184,990 4,739 180,251Stockholders' Equity Accumulated deficit(110,888) (3,467) (107,421)Total stockholders' equity265,236 (3,467) 268,703Total liabilities and stockholder’s equity$450,226 $1,272 $448,954 Impact of changes in accounting policiesYear Ended December 26, 2018 (in thousands) As Reported Adjustments Balances withoutadoption of Topic606Revenue Franchise revenue $25,771 $166 $25,605Franchise advertising fee revenue 21,222 21,222 —Total revenue 435,828 21,388 414,440Cost of operations Franchise expenses 24,429 21,222 3,207Total expenses 445,289 21,222 424,067Loss from operations (9,461) 166 (9,627)Loss before provision for income taxes (12,202) 166 (12,368)Net loss $(8,994) $166 $(9,160)Franchise Development Option Agreement with Related PartyOn July 11, 2014, EPL and LLC entered into a Franchise Development Option Agreement relating to development of our restaurants in the New York–Newark, NY–NJ–CT–PA Combined Statistical Area (the “Territory”). EPL granted LLC the exclusive option to develop and open 15 restaurants in theTerritory over five years (the “Initial Option”), and, provided that the Initial Option is exercised, the exclusive option to develop and open up to anadditional 100 restaurants in the Territory over ten years. The Franchise Development Option Agreement terminates (i) ten years after execution, or (ii) if theInitial Option is exercised, five years after that exercise. LLC may only exercise the Initial Option if EPL first determines to begin development of company-operated restaurants in the Territory or support the development of the Territory. We have no current intention to begin development in the Territory and asof December 26, 2018, no stores have been opened in the Territory.74EL POLLO LOCO HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)3. PROPERTY AND EQUIPMENTThe costs and related accumulated depreciation and amortization of major classes of property are as follows (in thousands): December 26, 2018 December 27, 2017Land$12,323 $12,323Buildings and improvements156,806 124,056Other property and equipment76,061 64,712Construction in progress2,989 8,225 248,179 209,316Less: accumulated depreciation and amortization(144,034) (106,522) $104,145 $102,794Depreciation expense was $17.8 million, $18.1 million and $16.1 million for the years ended December 26, 2018, December 27, 2017, and December 28,2016, respectively.Based on the Company’s review of its long-lived assets for impairment, the Company recorded non-cash impairment charges of $5.1 million, $32.6 millionand $8.4 million for the years ended December 26, 2018, December 27, 2017, and December 28, 2016, respectively.4. TRADEMARKS, OTHER INTANGIBLE ASSETS AND LIABILITIESDomestic trademarks consist of the following (in thousands): December 26, 2018 December 27, 2017Cost$120,700 $120,700Accumulated impairment charges(58,812) (58,812)Trademarks, net$61,888 $61,888Other intangible assets subject to amortization consist of the following (in thousands): December 26, 2018 December 27, 2017Favorable leasehold interest$6,038 $6,038Less: accumulated amortization(5,758) (5,661)Total favorable leasehold interest, net$280 $377Unfavorable leasehold interest liability$(9,156) $(9,156)Less: accumulated amortization8,514 8,370Unfavorable leasehold interest liability, net$(642) $(786)The estimated net amortization credits (net liability) for the Company’s favorable and unfavorable leasehold interests for each of the five succeeding fiscalyears and thereafter is as follows (in thousands):For the Years EndingFavorable LeaseholdInterest Unfavorable LeaseholdInterestDecember 25, 2019$94 $(136)December 30, 202085 (123)December 29, 202164 (120)December 28, 202237 (107)December 28, 2023— (100)Thereafter— (56)Total$280 $(642)75EL POLLO LOCO HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)The aggregate amortization expense for the years ended December 26, 2018, December 27, 2017, and December 28, 2016 was less than $0.1 million for fiscal2018 and $0.1 million, in each of fiscal 2017 and fiscal 2016. The remaining weighted average amortization periods of the favorable leasehold interest andthe unfavorable leasehold liability are two years and three years respectively.5. LEASESThe Company’s operations utilize property, facilities, equipment and vehicles owned by the Company or leased from others. Buildings and facilities leasedfrom others are primarily for restaurants and support facilities. Restaurants are operated under lease arrangements that generally provide for a fixed base rentand, in some instances, contingent rent based on a percentage of gross operating profit or net revenues in excess of a defined amount. Initial terms of land andrestaurant building leases generally have terms of 20 years, exclusive of options to renew. Leases of equipment primarily consist of restaurant equipment,computer systems and vehicles. The Company subleases facilities to certain franchisees and other non-related parties which are recorded on a straight-linebasis. Information regarding the Company’s future lease obligations at December 26, 2018 is as follows (in thousands): Capital Leases Operating LeasesFor the Years EndingMinimumLeasePayments MinimumLeasePayments MinimumSubleaseIncomeDecember 25, 2019$95 $25,388 $1,443December 30, 202054 24,437 1,108December 29, 202154 23,342 1,078December 28, 202245 22,338 1,001December 28, 2023— 20,634 989Thereafter— 150,342 2,612Total$248 $266,481 $8,231Less: imputed interest (11.0% to 11.1%)(64) Present value of capital lease obligations184 Less: current maturities(68) Noncurrent portion$116 Net rent expense is as follows (in thousands):For the Years EndedDecember 26, 2018 December 27, 2017 December 28, 2016Base rent$25,591 $24,384 $22,089Contingent rent282 259 209Less: sublease income(2,218) (2,334) (2,540)Net rent expense$23,655 $22,309 $19,758Base rent and contingent rent are included in occupancy and other operating expenses, while sublease income is included in franchise revenue in theaccompanying consolidated statements of operations. Sublease income includes contingent rental income of $0.7 million, $0.8 million, and $1.0 million forfiscal 2018, 2017, and 2016, respectively.The Company is a lessor for certain property, facilities and equipment owned by the Company and leased to others, principally franchisees, undernoncancelable leases with initial terms ranging from 3 to 20 years. The lease agreements generally provide for a fixed base rent and, in some instances,contingent rent based on a percentage of gross operating profit or net revenues. Total rental income included in franchise revenue in the accompanyingconsolidated statements of operations for leased property was $0.5 million, $0.5 million and $0.5 million for fiscal 2018, 2017, and 2016, respectively.Minimum future rental income for company-owned properties under noncancelable operating leases, which is recorded on a straight-line basis, in effect as ofDecember 26, 2018, is as follows (in thousands):76EL POLLO LOCO HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)For the Years Ending December 25, 2019$334December 30, 2020349December 29, 2021301December 28, 2022276December 28, 2023276Thereafter2,673Total future minimum rental income$4,2096. CURRENT CREDIT AGREEMENTSOn December 11, 2014, the Company refinanced its debt, with EPL, Intermediate, and Holdings entering into a credit agreement with 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 the $200.0million five-year 2014 Revolver. The 2014 Revolver included a sub limit of $15.0 million for letters of credit and a sub limit of $15.0 million for swinglineloans.On July 13, 2018, the Company refinanced the 2014 Revolver, pursuant to the 2018 Credit Agreement among EPL, as borrower, and the Company andIntermediate, as guarantors, Bank of America, N.A., as administrative agent, swingline lender, and letter of credit issuer, the lenders party thereto, and theother parties thereto, which provides for the $150.0 million five-year 2018 Revolver. The 2018 Revolver includes a sub limit of $15.0 million for letters ofcredit and a sub limit of $15.0 million for swingline loans. The obligations under the 2018 Credit Agreement and related loan documents are guaranteed bythe Company and Intermediate. The obligations of the Company, EPL and Intermediate under the 2018 Credit Agreement and related loan documents aresecured by a first priority lien on substantially all of their respective assets.Borrowings under the 2018 Revolver (other than any swingline loans) bear interest, at the borrower’s option, at rates based upon either LIBOR 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 thehighest of (a) the federal funds rate plus 0.50%, (b) the published Bank of America prime rate, or (c) LIBOR plus 1.00%. For LIBOR loans, the margin is in therange of 1.25% to 2.25%, and for base rate loans the margin is in the range of 0.25% to 1.25%. For borrowings under both the 2014 Revolver and the 2018Revolver during fiscal 2018, the interest rate range was 3.3% to 4.0%. For borrowings under the 2014 Revolver during fiscal 2017, the interest rate range was2.4% to 3.3%. The interest rate under the 2018 Revolver was 4.0% at December 26, 2018 and 3.3% under the 2014 Revolver at December 27, 2017.The 2018 Credit Agreement contains certain financial covenants. The Company was in compliance with all such covenants at December 26, 2018. See Note 1for restrictions on the payment of dividends under the 2018 Credit Agreement. At December 26, 2018, $8.5 million of letters of credit and $74.0 million ofthe revolving line of credit were outstanding. The amount available under the revolving line of credit was $67.5 million at December 26, 2018.MaturitiesOn July 13, 2018, the Company refinanced the 2014 Revolver pursuant to the 2018 Credit Agreement. The 2018 Revolver and 2018 Credit Agreement willmature on July 13, 2023. There are no required principal payments prior to maturity for the 2018 Revolver.7. OTHER ACCRUED EXPENSES AND CURRENT LIABILITIESOther accrued expenses and current liabilities consist of the following (in thousands): December 26, 2018 December 27, 2017Accrued sales and property taxes$5,016 $4,792Accrued legal settlements and professional fees38,639 1,544Gift card liability2,512 2,319Other5,597 4,615Total other accrued expenses and current liabilities$51,764 $13,270778. OTHER NONCURRENT LIABILITIESOther noncurrent liabilities consist of the following (in thousands): December 26, 2018 December 27, 2017Deferred rent$10,660 $9,403Deferred franchise and development fees5,224 —Other4,140 3,369Total noncurrent liabilities$20,024 $12,7729. INCOME TAXESThe provision for income taxes is based on the following components (in thousands):For the Years EndedDecember 26, 2018 December 27, 2017 December 28, 2016Current income taxes: Federal$— $— $—State220 250 224Total current220 250 224Deferred income taxes: Federal(3,526) 1,495 9,660State98 192 2,730Total deferred(3,428) 1,687 12,390Charge in lieu of tax (attributable to stock options)— — 169Adjustment to deferred taxes for tax rate change— (1,440) —Tax provision for income taxes$(3,208) $497 $12,783On December 22, 2017 the U.S government enacted the Tax Act. The Tax Act reduces the corporate tax rate to from 35% to 21%, effective for tax yearsbeginning January 1, 2018. The Company is subject to the provisions of ASC 740, Income Taxes, which requires that the effect on deferred tax assets andliabilities of a change in tax rates be recognized in the period the tax rate change was enacted. The enacted reduction in the corporate federal income tax rateresulted in a re-measurement of the Company’s net deferred tax assets and liabilities with a one-time, non-cash increase to income tax benefit. Consequently,we recorded a decrease related to deferred tax assets and deferred tax liabilities of $12.1 million and $13.5 million, respectively, with a net benefit to deferredincome tax expense of $1.4 million for the year ended December 27, 2017. In addition, under the new tax law, the corporate alternative minimum tax(“AMT”) is repealed effective for tax years beginning January 1, 2018. For tax years beginning in 2018, 2019 and 2020, to the extent AMT credit carryoversexceed regular tax liability, 50% of the excess of AMT credit carryovers would be refundable. Any remaining AMT credits would be fully refundable in2021.The provision for income taxes differs from the amount computed by applying the federal income tax rate of 21.0% for fiscal 2018 and 35.0% for both fiscal2017 and fiscal 2016 as follows:For the Years EndedDecember 26, 2018 December 27, 2017 December 28, 2016Statutory federal income tax rate applied to earnings before income taxes and extraordinary items21.0 % 35.0 % 35.0 %TRA expense1.3 (21.4) 0.4Revaluation of deferred taxes— (15.8) —Change in valuation allowance(6.9) 10.9 1.3WOTC Credit3.3 (2.5) (0.8)State tax benefit (net of federal benefit)5.0 0.6 5.0Stock option exercises2.1 — —Other0.5 (1.3) 0.2Total26.3 % 5.5 % 41.1 %78EL POLLO LOCO HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)Deferred income tax assets and liabilities are recorded for differences between the financial statement and tax basis of the assets and liabilities that will resultin taxable or deductible amounts in the future based on enacted laws and rates applicable to the periods in which the differences are expected to affecttaxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.The Company has evaluated the available evidence supporting the realization of its gross deferred tax assets. After evaluating all of the positive and negativeevidence, including the Company’s continued income from operations, the Company concluded that it is more likely than not that its deferred tax assets willbe realized. Beginning in fiscal 2015 and 2016, the Company recorded a valuation allowance against its deferred tax assets resulting from certain tax creditsthat may not be realizable prior to the time the credits expire. As of December 28, 2016, the Company's total valuation allowance was $3.3 million. In fiscal2017 and 2018, the Company recorded an additional $1.0 million and $0.8 million, respectively to the valuation allowance. As of December 26, 2018 thetotal valuation allowance was $5.1 million.On July 30, 2014, the Company entered into the TRA. The TRA calls for the Company to pay its pre-IPO stockholders 85% of the cash savings that theCompany realizes in its taxes as a result of utilizing its NOLs and other tax attributes attributable to preceding periods. The TRA charge (benefit) expense is apermanent add-back to the Company’s taxable income. TRA resulted in approximately $0.8 million of benefit in fiscal 2018 as a result of changes to futureforecasted results and timing of deductibility of certain temporary differences including the current year settlement accrual, $5.6 million of benefit in fiscal2017 as a result of a reduction in the federal corporate income tax rate related to tax reforms discussed further below, and $0.4 million of tax expense in fiscal2016. In fiscal 2018, we paid $7.3 million to our pre-IPO stockholders under the TRA.As of December 26, 2018 and December 27, 2017, the deferred tax assets related to California Enterprise Zone credits, net of valuation allowances are $4.4million and $5.4 million, respectively.The Company’s deferred tax assets and liabilities as of December 26, 2018 and December 27, 2017 are summarized below. The balances reflect therevaluation for the reduction in the Federal corporate rate to 21.0%. December 26, 2018 December 27, 2017Deferred assets: Capital leases$53 $90Accrued vacation456 428Accrued legal10,343 —Deferred rent3,788 3,516Accrued workers’ compensation1,660 1,450Enterprise zone and other credits13,001 12,722Net operating losses6,260 13,488Fixed assets3,374 4,176Other5,239 2,261Total deferred tax assets44,174 38,131Valuation allowance(5,149) (4,306)Net deferred tax assets39,025 33,825Deferred liabilities: Goodwill(6,229) (6,037)Trademark(17,654) (17,613)Prepaid expense(528) (380)Fixed asset— —Other(2,905) (2,628)Deferred tax liabilities(27,316) (26,658)Net deferred tax asset$11,709 $7,167The net deferred tax asset amounts above as of December 26, 2018 and December 27, 2017 have been classified in the accompanying consolidated balancesheets as noncurrent assets.As of December 26, 2018, the Company has federal and state NOL carryforwards of approximately $29.8 million and less than $0.1 million, respectively,which expire beginning in 2032 and 2027, respectively. The Company also has state enterprise zone credits of approximately $10.9 million, which expire in2023, federal Work Opportunity Credits of approximately $1.4 million,79EL POLLO LOCO HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)which will expire in 2038 and federal and state AMT credits of approximately $0.5 million, which carry forward indefinitely. The utilization of NOLcarryforwards may be subject to limitation under section 382 of the Internal Revenue Code of 1986 (the “Code”) and similar state law provisions. As of December 26, 2018, December 27, 2017, and December 28, 2016, the Company had no accrual for unrecognized tax benefits. Consequently, nointerest or penalties have been accrued by the Company. The Company believes that no significant changes to the amount of unrecognized tax benefits willoccur within the next twelve months. The Company is subject to taxation in the United States and in various state jurisdictions. The Company is no longer subject to U.S. examination for yearsbefore 2014 by the federal taxing authority, and for years before 2013 by state taxing authorities. 10. EMPLOYEE BENEFIT PLANSThe Company sponsors a defined contribution employee benefit plan that permits its employees, subject to certain eligibility requirements, to contribute upto 25% of their qualified compensation to the plan. The Company matches 100% of the employees’ contributions of the first 3% of the employees’ annualqualified compensation, and 50% of the employees’ contributions of the next 2% of the employees’ annual qualified compensation. The Company’smatching contribution immediately fully vests. The Company’s contributions to the plan for the years ended December 26, 2018, December 27, 2017, andDecember 28, 2016 were $0.8 million, $0.7 million and $0.6 million, respectively.11. STOCK-BASED COMPENSATIONStock OptionsAt December 26, 2018, options to purchase 2,102,404 shares of common stock of the Company were outstanding, including 1,722,455 vested and 379,949unvested. Unvested options vest over time, or upon our achieving annual financial goals. However, the compensation committee of the board of directors, asadministrator of the Company’s 2018 Omnibus Equity Incentive Plan, has the power to accelerate the vesting schedule of stock-based compensation, and,generally, in the event of an employee termination in connection with a change in control of the Company, any unvested portion of an award under the planshall become fully vested. At December 26, 2018, 1,381,010 premium options, options granted above the stock price at date of grant, remained outstanding.In fiscal 2018 and 2017, the Company granted 311,272 and 135,036 options, respectively, with an exercise price equal to the fair market value of thecommon stock on the date of grant. The options granted in fiscal 2018 and 2017 had a four-year vesting period. On November 15, 2016, the board ofdirectors approved the modification of the remaining performance based stock options granted in 2014 and 2013 to vest based solely on service conditions.As a result, a) 17,380 performance based stock options that did not vest in fiscal 2015 based on performance targets not being met, vested as of November 15,2016; b) 80,799 performance based stock options that would not have vested based on 2016 performance targets vested as of December 28, 2016; and c)17,378 performance based stock options that would not have vested based on the 2017 performance target vested at the end of fiscal 2017, subject tocontinued employment of the option holder and the other terms and conditions of the 2014 Stock Option Plan. The Company recorded $0.6 million ascompensation expense in fiscal 2016 as a result of this stock option modification. As of December 26, 2018, there were no remaining performance basedstock options and 2,102,404 time based stock options outstanding. Stock options generally expire 10 years from the date of grant. Changes in stock optionsfor the years ended December 26, 2018 and December 27, 2017, are as follows: Shares Weighted-AverageExercise PriceOutstanding - December 28, 20162,191,728 $7.26Grants135,036 13.73Exercised(17,661) 5.26Forfeited, cancelled or expired— —Outstanding - December 27, 20172,309,103 7.65Grants311,272 10.98Exercised(269,549) 6.81Forfeited, cancelled or expired(248,422) 12.46Outstanding - December 26, 20182,102,404 $7.68Vested and expected to vest at December 26, 20182,091,138 $7.66Exercisable at December 26, 20181,722,455 $6.8680EL POLLO LOCO HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)Stock options at December 26, 2018 are summarized as follows:Range of Exercise Prices NumberOutstanding Weighted-AverageRemainingContractual Life(in Years) Weighted-Average ExercisePrice NumberExercisable Weighted-AverageExercise Price$4.09 99,531 4.50 $4.09 99,531 $4.09$5.84 1,381,010 3.52 5.84 1,381,010 $5.84$9.65 - $13.95 482,831 8.89 11.59 102,882 $12.24$15.00 139,032 5.58 15.00 139,032 $15.00$4.09 - $15.00 2,102,404 4.93 $7.68 1,722,455 $6.86The intrinsic value of options outstanding and options exercisable, calculated as the difference between the market value as of December 26, 2018 and theexercise price, is $15.5 million and $14.2 million, respectively. The intrinsic value of options exercised, calculated as the difference between the marketvalue on the date of exercise and the exercise price, was $1.5 million, $0.2 million and $0.9 million for fiscal years 2018, 2017 and 2016, respectively.The Company measures and recognizes compensation expense for the estimated fair value of stock options for employees and non-employee directors andsimilar awards based on the grant-date fair value of the award. For options that are based on a service requirement, the cost is recognized on a straight-linebasis over the requisite service period, usually the vesting period. For options that were based on performance requirements, costs were recognized overperiods to which the performance criteria related. The Company has authorized 5,652,240 shares of common stock for issuance in connection with stockawards. As of December 26, 2018, 1,495,767 shares were available for grant. In order to calculate our stock options’ fair values and the associatedcompensation costs for share-based awards, the Company utilizes the Black–Scholes option pricing model, and has developed estimates of various inputsincluding forfeiture rate, expected term, expected volatility, and risk-free interest rate. The forfeiture rate is based on historical rates and reduces thecompensation expense recognized. The expected term for options granted is derived using the “simplified” method, in accordance with SEC guidance. TheCompany calculates the risk-free interest rate using the implied yield for a U.S. Treasury security with constant maturity and a remaining term equal to theexpected term of the Company’s employee stock options. The Company does not anticipate paying any cash dividends for the foreseeable future andtherefore uses an expected dividend yield of zero for option valuation purposes. Expected volatility is estimated using four publicly-traded companies in ourmarket category. These are selected based on similarities of market capitalization, size, and other financial and operational characteristics. Volatility iscalculated by taking the historical daily closing equity prices of our peer companies, prior to the grant date, over a period equal to the expected term.The weighted-average estimated fair value of employee stock options granted in fiscal 2018 was $3.78 per share using the Black–Scholes model with thefollowing weighted-average assumptions used to value the option grants: expected volatility of 28.4%, expected term of 6.25 years, risk-free interest rate of2.86% to 2.88%, and expected dividend yield of 0%.The weighted-average estimated fair value of employee stock options granted in fiscal 2017 was $4.29 per share using the Black–Scholes model with thefollowing weighted-average assumptions used to value the option grants: expected volatility of 28.6%, expected term of 5.75 years, risk-free interest rates of1.88% to 2.01%, and expected dividend yield of 0%.During the years ended December 26, 2018, December 27, 2017 and December 28, 2016, the Company recognized stock option compensation expense of$1.1 million, $0.6 million and $0.9 million, respectively. These expenses were included in general and administrative expenses consistent with the salaryexpense for the related optionees in the accompanying consolidated statements of operations. In connection with the retirement of our former President andChief Executive Officer ("CEO") during fiscal 2018, the Company modified previously granted equity awards to accelerate the vesting of 33,545 awards,which would have otherwise vested in May 2018, and extended the exercisability of all vested and outstanding options until the expiration of the originalterm of such awards. As a result, the Company incurred incremental stock-based compensation expense of $0.8 million for the year ended December 26, 2018.As of December 26, 2018, we had total unrecognized compensation expense of $1.3 million related to unvested stock options, which the Company expects torecognize over a weighted average period of 3.27 years.The above assumptions generally require significant judgment. If in the future we determine that another method is more reasonable, or if another method forcalculating these input assumptions is prescribed by authoritative guidance, and, therefore, should be used to estimate volatility or expected term, the fairvalue calculated for our stock options could change significantly. Higher volatility and longer expected lives result in an increase to stock-basedcompensation expense determined at the date of grant. Stock-based compensation expense affects our general and administrative expense.81EL POLLO LOCO HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)We estimate our forfeiture rate based on an analysis of our actual forfeitures and will continue to evaluate the appropriateness of the forfeiture rate based onactual forfeiture experience, analysis of employee turnover behavior, and other factors. Changes in the estimated forfeiture rate can have a significant effecton reported stock-based compensation expense, as the cumulative effect of adjusting the rate for all expense amortization is recognized in the period theforfeiture estimate is changed. If a revised forfeiture rate is higher than the previously-estimated forfeiture rate, an adjustment is made that will result in adecrease to the stock-based compensation expense recognized in the financial statements. If a revised forfeiture rate is lower than the previously-estimatedforfeiture rate, an adjustment is made that will result in an increase to the stock-based compensation expense recognized in the financial statements. Theeffect of forfeiture adjustments was insignificant in fiscal 2018, 2017 and 2016. We will continue to use significant judgment in evaluating the expectedterm, volatility, and forfeiture rate related to our stock-based compensation.Restricted SharesIn fiscal 2018 and 2017, 323,764 and 181,292 restricted share and restricted stock unit awards were granted, respectively, at the fair market value on the dateof grant. These grants vest based on continued service over three years for directors and four years for employees. Included in the fiscal 2018 restricted stockaward grants were 72,116 performance share units which vest over a minimum of one year and a maximum of five years. Performance share units are grantedat fair market value on the date of grant and are subject to service-based and market-based vesting conditions. A portion of the performance share unitssatisfied their market-based vesting conditions during the fourth quarter of fiscal 2018 and will vest upon the satisfaction of their service condition in thesecond quarter of fiscal 2019. We base the amount of unearned compensation recorded on the fair market value of the awards on the date of issuance. In fiscal2018, 2017, and 2016 the Company recognized share-based compensation expense of $1.0 million, $0.5 million, and $0.2 million, respectively. Thisexpense was included in general and administrative expenses in the accompanying consolidated statements of operations. As of December 26, 2018, therewas total unrecognized compensation expense of $4.6 million related to unvested restricted share awards, which the Company expects to recognize over aweighted-average period of 3.06 years.Changes in restricted shares for the years ended December 26, 2018 and December 27, 2017, are as follows: Shares Weighted-AverageFair ValueUnvested shares at December 28, 201636,752 $15.42Granted181,292 $13.69Released(10,527) $16.48Forfeited, cancelled, or expired(10,875) $16.72Unvested shares at December 27, 2017196,642 $13.70Granted395,880 $10.22Released(45,991) $13.86Forfeited, cancelled, or expired(55,831) $13.42Unvested shares at December 26, 2018490,700 $10.9112. EARNINGS PER SHAREBasic EPS is calculated using the weighted-average number of shares of common stock outstanding during the years ended December 26, 2018, December 27,2017, and December 28, 2016. Diluted EPS is calculated using the weighted-average number of shares of common stock outstanding and potentially dilutiveduring the period, using the treasury stock method.Below are basic and diluted EPS data for the periods indicated, which are in thousands except for per share data.82EL POLLO LOCO HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)For the Years EndedDecember 26, 2018 December 27, 2017 December 28, 2016Numerator: Net (loss) income$(8,994) $8,619 $18,339Denominator: Weighted-average shares outstanding—Basic38,574,553 38,453,347 38,357,805Weighted-average shares outstanding—Diluted38,574,553 39,086,676 39,026,950Net (loss) income per share—Basic$(0.23) $0.22 $0.48Net (loss) income per share—Diluted$(0.23) $0.22 $0.47Anti-dilutive securities not considered in diluted EPS calculation2,593,104 747,985 468,705Below is a reconciliation of basic and diluted share counts.For the Years EndedDecember 26, 2018 December 27, 2017 December 28, 2016Weighted-average shares outstanding—Basic38,574,553 38,453,347 38,357,805Dilutive effect of stock options and restricted shares— 633,329 669,145Weighted-average shares outstanding—Diluted38,574,553 39,086,676 39,026,95013. COMMITMENTS AND CONTINGENCIESLegal MattersOn or about February 24, 2014, a former employee filed a class action in the Superior Court of the State of California, County of Orange, under the captionElliott Olvera, et al v. El Pollo Loco, Inc., et al (Case No. 30-2014-00707367-CU-OE-CXC) (the "Olvera Action") on behalf of all putative class members (allhourly employees from 2010 to the present) alleging certain violations of California labor laws, including failure to pay overtime compensation, failure toprovide meal periods and rest breaks, and failure to provide itemized wage statements. The putative lead plaintiff’s requested remedies include compensatoryand punitive damages, injunctive relief, disgorgement of profits, and reasonable attorneys’ fees and costs. No specific amount of damages sought wasspecified in the complaint. The court recently certified two classes of plaintiffs - one class encompasses restaurant employees who were not provided properrest breaks because they were not allowed to leave the premises during their breaks and the other class encompasses restaurant employees who were requiredto wait at the restaurant after they finished working for the night until the manager set the alarm for safety purposes. The parties reached a settlement inprinciple on January 24, 2019 of all claims brought on behalf of the 32,000+ putative class members in the Olvera Action, as well as all claims for failure topay overtime compensation, failure to provide meal periods and rest breaks, and failure to provide itemized wage statements brought in the class actionscaptioned Martha Perez v. El Pollo Loco, Inc. (Los Angeles Superior Court Case No. BC624001), Maria Vega, et al. v. El Pollo Loco, Inc. (Los AngelesSuperior Court Case No. BC649719), and Gonzalez v. El Pollo Loco, Inc. (Los Angeles Superior Court Case No. BC712867). The settlement reached inprinciple in the Olvera, Perez, Vega, and Gonzalez actions resolves all potential claims from April 12, 2010 through April 1, 2019 El Pollo Loco restaurantemployees may have against El Pollo Loco for failure to pay for all compensation owed, failure to pay overtime compensation, failure to provide mealperiods and rest breaks, and failure to provide itemized wage statements, among other wage and hour related claims. A $16.3 million accrual of an expectedsettlement amount related to this matter was recorded as of December 26, 2018. Purported class actions alleging wage and hour violations are commonly filedagainst California employers. The Company fully expects to have to defend against similar lawsuits in the future.Daniel Turocy, et al. v. El Pollo Loco Holdings, Inc., et al. (Case No. 8:15-cv-01343) was filed in the United States District Court for the Central District ofCalifornia on August 24, 2015, and Ron Huston, et al. v. El Pollo Loco Holdings, Inc., et al. (Case No. 8:15-cv-01710) was filed in the United States DistrictCourt for the Central District of California on October 22, 2015. The two lawsuits have been consolidated, with co-lead plaintiffs and class counsel. Aconsolidated complaint was filed on January 29, 2016, on behalf of co-lead plaintiffs and others similarly situated, alleging violations of federal securitieslaws in connection with Holdings common stock purchased or otherwise acquired and the purchase of call options or the sale of put options, between May 1,2015 and August 13, 2015 (the “Class Period”). The named defendants are Holdings; Stephen J. Sather, Laurance Roberts, and Edward J. Valle (collectively,the “Individual Defendants”); and Trimaran Pollo Partners, LLC, Trimaran Capital Partners, and Freeman Spogli & Co. (collectively, the “ControllingShareholder Defendants”). Among other things, Plaintiffs allege that, in 2014 and early 2015, Holdings suffered losses due to rising labor costs in Californiaand, in an83EL POLLO LOCO HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)attempt to mitigate the effects of such rising costs, removed a $5 value option from the Company's menu, which resulted in a decrease in traffic from value-conscious consumers. Plaintiffs further allege that during the Class Period, Holdings and the Individual Defendants made a series of materially false andmisleading statements that concealed the effect that these factors were having on store sales growth, resulting in Holdings stock continuing to be traded atartificially inflated prices. As a result, Plaintiffs and other members of the putative class allegedly suffered damages in connection with their purchase ofHoldings’ stock during the Class Period. In addition, Plaintiffs allege that the Individual Defendants and Controlling Shareholder Defendants had directinvolvement in, and responsibility over, the operations of Holdings, and are presumed to have had, among other things, the power to control or influence thetransactions giving rise to the alleged securities law violations. In both cases, Plaintiffs seek an unspecified amount of damages, as well as costs and expenses(including attorneys’ fees).On July 25, 2016, the Court issued an order granting, without prejudice, Defendants’ Motion to Dismiss plaintiff’s complaint for failure to state a claim.Plaintiffs were granted leave to amend their complaint, and filed an amended complaint on August 22, 2016. Defendants moved to dismiss the amendedcomplaint, and on March 20, 2017, the Court dismissed the amended complaint and granted Plaintiffs leave to file another amended complaint. Plaintiffsfiled another amended complaint on April 17, 2017. Defendants filed a motion to dismiss the amended complaint on or about May 17, 2017. The Courtdenied Defendants' motion to dismiss the third amended complaint on August 4, 2017. On December 8, 2017, Plaintiffs filed a motion for class certification,and on July 3, 2018, the Court granted Plaintiffs’ motion and certified a class as to all of Plaintiffs’ claims. Defendants filed a petition for appellate review ofa portion of the Court's July 3, 2018 class certification order. On October 19, 2018 the Ninth Circuit Court of Appeals denied the petition.On January 23, 2019, the parties filed a Notice of Settlement and Joint Request for Order to Stay Proceedings, stating the parties have reached an agreementin principle to settle the claims and allegations in the action and are negotiating the terms of a Stipulation of Settlement. On January 24, 2019, the Courtordered that all proceedings in the action be stayed until April 3, 2019, on or before which the parties are to file a Stipulation of Settlement and a motion forpreliminary approval of the settlement. Defendants maintain that the Plaintiffs' claims are without merit, and have entered into the settlement to eliminate theuncertainties, burden and expense of further protracted litigation. A $20.0 million accrual of an expected settlement amount related to this matter wasrecorded as of December 26, 2018.On or about November 5, 2015, a purported Holdings shareholder filed a derivative complaint on behalf of Holdings in the Court of Chancery of the State ofDelaware against certain Holdings officers, directors and Trimaran Pollo Partners, L.L.C., under the caption Armen Galustyan v. Sather, et al. (Case No.11676-VCL). The derivative complaint alleges that these defendants breached their fiduciary duties to Holdings and were unjustly enriched when they soldshares of Holdings at artificially inflated prices due to alleged misrepresentations and omissions regarding EPL’s comparable store sales in the second quarterof 2015. The Holdings shareholder’s requested remedies include an award of compensatory damages to Holdings, as well as a court order to improvecorporate governance by putting forward for stockholder vote certain resolutions for amendments to Holdings’ Bylaws or Certificate of Incorporation. Theparties have stipulated to, which the court has ordered, a stay of these proceedings pending the outcome of Turocy v. El Pollo Loco Holdings, Inc., discussedabove. A second purported Holdings shareholder filed a derivative complaint on or about September 23, 2016, under the caption Diep v. Sather, CA 12760-VCL in the Delaware Court of Chancery. The Diep action is also purportedly brought on behalf of Holdings, names the same defendants and assertssubstantially the same claims on substantially the same alleged facts as does Galustyan. Defendants moved to stay or dismiss the Diep action.On March 17, 2017, the Delaware court granted in part, and denied in part, the motion to stay the Diep action. The court denied defendants' motion todismiss the complaint for failure to state a claim. On January 17, 2018, the court entered an order granting the parties’ stipulation staying all proceedings inthe Diep action for five months or until the completion of an investigation of the allegations in the action by a special litigation committee of the Holdingsboard of directors (the "SLC"). On February 13, 2019, after concluding its investigation, the SLC filed a motion to dismiss the Diep action. The SLC filed itsinvestigative report under seal as an exhibit to the motion to dismiss.Janice P. Handlers-Bryman and Michael D. Bryman v. El Pollo Loco, Inc., Los Angeles Superior Court (Case No. MC026045) (the “Lancaster Lawsuit”) wasfiled on February 9, 2016. Existing El Pollo Loco franchisees, Janice P. Handlers-Bryman and Michael D. Bryman, as individuals and in their capacities astrustees of the Handlers Bryman Trust (collectively, “Plaintiffs”), filed suit against us alleging, among other things, that we “imposed unreasonable timelimitations” on their development of additional restaurant locations in Lancaster, California, and that we thereafter developed company-operated El PolloLoco restaurants in the “market area” of Plaintiffs’ existing El Pollo Loco restaurant in Lancaster. Plaintiffs asserted claims against us for, among other things,(i) breach of the implied covenant of good faith and fair dealing, (ii) intentional interference with prospective business, and (iii) unfair business practices. Inaddition to an unspecified amount of damages and costs of the lawsuit, Plaintiffs sought reformation of the contract, declaratory relief, disgorgement ofalleged revenues and profits, injunctive relief, and a judicial mandate requiring us to either transfer the company-operated locations to Plaintiffs or to84EL POLLO LOCO HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)continuously disgorge to Plaintiffs the unjust enrichment allegedly obtained by us through the operation of the company-operated restaurants in Lancaster.We denied Plaintiffs’ allegations as the franchise agreement did not grant Plaintiffs any exclusive territorial rights and, instead, expressly reserved for us theright to open and operate - and the right to grant others the right to open and operate - El Pollo Loco restaurants “in the immediate vicinity of or adjacent to”Plaintiffs’ restaurant in Lancaster. On June 7, 2016, we filed a cross-complaint against Plaintiffs for breach of the franchise agreement due to Plaintiffs’ failureto pay to us liquidated damages provided for in the franchise agreement in connection with their solicitation and/or hiring of our general manager. Thiscounterclaim was voluntarily dismissed by us, without prejudice, on February 27, 2017 and a related action before the San Bernardino Superior Court, titledEl Pollo Loco, Inc. v. EPL 3766, Inc., was dismissed on April 6, 2017. On April 24, 2017, four days before the commencement of trial, Plaintiffs filed avoluntary dismissal, without prejudice, of the Lancaster Lawsuit without any payment or other concession by us. The corresponding dismissal was entered bythe court on April 25, 2017. On May 22, 2017, Plaintiffs filed a motion for relief from the dismissal which was granted by the court on June 29, 2017. Thetrial in the case was bifurcated between the liability and damages phases. The liability phase commenced on November 16, 2017. The only cause of actionthat the court allowed to go to the jury was the cause of action for breach of the covenant of good faith and fair dealing. The court elected not to present thecause of action for intentional interference with prospective business to the jury. (The causes of action for reformation due to mistake and unconscionability,unfair business practices under California Business & Professions Code §17200 et seq., and declaratory relief were not presented to the jury as these types ofequitable claims are to be decided by the court as a matter of law.) On December 11, 2017, the jury returned a verdict in favor of Plaintiffs finding that theCompany breached the implied covenant of good faith and fair dealing by (1) constructing the two new company-operated El Pollo Loco restaurants inLancaster, and (2) not offering the two new company-operated El Pollo Loco restaurants in Lancaster to Plaintiffs. Because the trial was bifurcated, theDecember 11, 2017 verdict did not include a determination of damages. The damages phase of the trial commenced on April 20, 2018. On May 1, 2018, the jury returned a verdict on damages in favor of Plaintiffs in the followingamounts: (1) $4,356,600 in “impact damages” arising out of our construction of the two new company-operated El Pollo Loco restaurants in Lancaster, and(2) $4,481,206 in “lost opportunity damages” arising out of our failure to offer the two new company-operated El Pollo Loco restaurants in Lancaster toPlaintiffs. On August 1, 2018, the court issued a final judgment and decision on the unfair business practices claim under California Business & ProfessionsCode § 17200 et seq. As part of the final judgment, the court found El Pollo Loco liable and issued injunctive relief requiring El Pollo Loco to revise itsfranchise disclosure document and franchise agreement. The court also awarded Plaintiffs restitution of$4,356,600 for “impact damages” arising out of our construction of the two new company-operated El Pollo Loco restaurants in Lancaster. The court,reversing its previous position, held that these damages could be awarded in addition to the "lost opportunity damages" awarded by the jury. Thus, the courtentered a total monetary judgment of $8,837,806. There has been no ruling on the causes of action for reformation due to mistake and unconscionability, anddeclaratory relief. On August 16, 2018, the Company filed a motion challenging the verdicts and a motion for new trial (both the liability phase and damages phase) and onSeptember 2, 2018, the court denied those motions. On August 27, 2018, the Company filed a notice of appeal as to the entire judgment, and on October 5,2018, the Company filed a second notice of appeal challenging the court’s denial of the post-trial motions. On September 5, 2018, we filed a motion to strikeseveral of the costs of suit requested by the Plaintiffs, and on September 28, 2018, the Plaintiffs filed a motion for an award of attorneys’ fees. The court ruledon these motions on October 30, 2018, reducing many of the costs requested by the Plaintiffs and awarding $1,391,702.50 to the Plaintiffs for attorneys’ fees.We filed a notice of appeal relating to the trial court’s order relating to our motion to strike the costs and the Plaintiff’s motion for attorneys’ fees onNovember 6, 2018. The Company also filed motions to stay the injunctive part of the judgment pending the appeal but both the trial court and the CaliforniaCourt of Appeal denied those motions. We filed a petition for review of these denials with the California Supreme Court, but the California Supreme Courtdenied our petition for review on November 14, 2018. The appeal on the merits is currently pending. Briefing on the merits has not yet occurred in theappellate court. Once the record is delivered by the trial court clerk to the court of appeal, a schedule for the briefing on appeal will be set by the appellatecourt. Based on the assessment by Management, together with our legal trial counsel, the Company believes that the loss is currently not probable under ASC450 and as of December 26, 2018 no accrual has been made with regard to the verdict.The Company is also involved in various other claims and legal actions that arise in the ordinary course of business. The Company does not believe that theultimate resolution of these other actions will have a material adverse effect on its financial position, results of operations, liquidity, or capital resources. Asignificant increase in the number of claims, or an increase in amounts owing under successful claims, could materially and adversely affect its business,consolidated financial condition, results of operations, and cash flows.Purchase Commitments85EL POLLO LOCO HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)The Company has long-term beverage supply agreements with certain major beverage vendors. Pursuant to the terms of these arrangements, marketing rebatesare provided to the Company and its franchisees from the beverage vendors based upon the dollar volume of purchases for system-wide restaurants which willvary according to their demand for beverage syrup and fluctuations in the market rates for beverage syrup. These contracts have terms extending through theend of 2024.At December 26, 2018, the Company’s total estimated commitment to purchase chicken was $29.8 million.Contingent Lease ObligationsAs a result of assigning the Company’s interest in obligations under real estate leases in connection with the sale of company-operated restaurants to some ofthe Company’s franchisees, the Company is contingently liable on five lease agreements. These leases have various terms, the latest of which expires in 2036.As of December 26, 2018, the potential amount of undiscounted payments the Company could be required to make in the event of non-payment by theprimary lessee was $2.4 million. The present value of these potential payments discounted at the Company’s estimated pre-tax cost of debt at December 26,2018 was $2.0 million. The Company’s franchisees are primarily liable on the leases. The Company has cross-default provisions with these franchisees thatwould put them in default of their franchise agreements in the event of non-payment under the leases. The Company believes that these cross-defaultprovisions reduce the risk that payments will be required to be made under these leases. Accordingly, no liability has been recorded in the Company’sconsolidated financial statements related to these contingent liabilities.Employment AgreementsAs of December 26, 2018, the Company had employment agreements with four of the officers of the Company. These agreements provide for minimum salarylevels, possible annual adjustments for cost-of-living changes, and incentive bonuses that are payable under certain business conditions.Indemnification AgreementsThe Company has entered into indemnification agreements with each of its current directors and officers. These agreements require the Company toindemnify these individuals to the fullest extent permitted under Delaware law against liabilities that may arise by reason of their service to the Company andto advance expenses incurred as a result of any proceeding against them as to which they could be indemnified. The Company also intends to enter intoindemnification agreements with future directors and officers.14. RELATED PARTY TRANSACTIONSLLC owns approximately 42.9% of the Company’s outstanding common stock. This large position means that LLC and its majority owners—predecessorsand affiliates of, and certain funds managed by, Trimaran Capital Partners and Freeman Spogli & Co. (collectively, “Trimaran” and “Freeman Spogli,”respectively)—possess significant influence when stockholders vote on matters such as election of directors, mergers, consolidations and acquisitions, thesale of all or substantially all of the Company’s assets, decisions affecting the Company’s capital structure, amendments to the Company’s certificate ofincorporation or by-laws, and the Company’s winding up and dissolution. So long as LLC maintains at least 40% ownership, (i) any member of the board ofdirectors may be removed at any time without cause by affirmative vote of a majority of the Company’s common stock, and (ii) stockholders representing40% or greater ownership may cause special stockholder meetings to be called.15. REVENUE FROM CONTRACTS WITH CUSTOMERSAdoption of Topic 606, "Revenue from Contracts with Customers"On December 28, 2017, the Company adopted Topic 606 using the modified retrospective method applied to those contracts, which were not fully satisfiedas of December 28, 2017. Results for reporting periods beginning after December 28, 2017, are presented under Topic 606, while prior period amounts are notadjusted and continue to be reported in accordance with our historic accounting under Topic 605.The cumulative catch-up adjustment recorded to accumulated deficit was approximately $3.5 million, net of taxes, related to franchise and development fees.Revenue Recognition86Nature of products and servicesThe Company has two revenue streams, company-operated restaurant revenue and franchise related revenue.Company-operated restaurant revenueRevenues from the operation of company-operated restaurants are recognized as food and beverage products are delivered to customers and payment istendered at the time of sale. The Company presents sales, net of sales-related taxes and promotional allowances.The Company offers a loyalty rewards program, which awards a customer one point for every $1 spent. When 100 points are accumulated a $10 reward to beused on future purchases is earned. When a customer is part of the rewards program, the obligation to provide future discounts related to points earned isconsidered a separate performance obligation, to which a portion of the transaction price is allocated. The performance obligation related to loyalty points isdeemed to have been satisfied, and the amount deferred in the balance sheet is recognized as revenue, when the points are transferred to a $10 reward andredeemed, or the likelihood of redemption is remote. A portion of the transaction price is allocated to loyalty points, if necessary, on a pro-rata basis, based onstand-alone selling price, as determined by menu pricing and loyalty point terms. As of December 26, 2018 and December 27, 2017, the revenue allocated toloyalty points that have not been redeemed are $1.0 million and $0.4 million, respectively, which are reflected in the Company's accompanying consolidatedbalance sheets within other accrued expenses and current liabilities. The Company expects the loyalty points to be redeemed and recognized over a one yearperiod.The Company sells gift cards to its customers in the restaurants and through selected third parties. The gift cards sold to customers have no stated expirationdates and are subject to actual and/or potential escheatment rights in several of the jurisdictions in which the Company operates. Furthermore, due to theseescheatment rights, the Company does not recognize breakage related to the sale of gift cards due to the immateriality of the amount remaining afterescheatment. The Company recognizes income from gift cards when redeemed by the customer.Franchise and franchise advertising revenueFranchise revenue consists of franchise royalties, initial franchise fees, license fees due from franchisees, IT support services, and rental income for subleasesto franchisees. Franchise advertising revenue consists of advertising contributions received from franchisees. These revenue streams are made up of thefollowing performance obligations:•Franchise License - inclusive of advertising services, development agreements, training, access to plans and help desk services;•Discounted renewal option; and•Hardware services.The Company satisfies the performance obligation related to the franchise license over the term of the franchise agreement, which is typically 20 years.Payment for the franchise license consists of three components, a fixed-fee related to the franchise/development agreement, a sales-based royalty fee and asales-based advertising fee. The fixed fee, as determined by the signed development and/or franchise agreement, is due at the time the developmentagreement is entered into, and/or when the franchise agreement is signed, and does not include a finance component.The sales-based royalty fee and sales-based advertising fee are considered variable consideration and will continue to be recognized as revenue as such salesare earned by the franchisees. Both sales-based fees qualify under the royalty constraint exception, and do not require an estimate of future transaction price.Additionally, the Company is utilizing the practical expedient regarding disclosure of the aggregate amount of the transaction price allocated to theperformance obligations that are unsatisfied for sales-based royalties.In certain franchise agreements, the Company offers a discounted renewal to incentivize future renewals after the end of the initial franchise term. As this isconsidered a separate performance obligation, the Company allocated a portion of the initial franchise fee to this discounted renewal, on a pro-rata basis,assuming a 20 year renewal. This performance obligation is satisfied over the renewal term, which is typically 10 or 20 years, while payment is fixed and dueat the time the renewal is signed.The Company purchases hardware, such as scanners, printers, cash registers and tablets, from third party vendors, which it then sells to franchisees. As theCompany is considered the principal in this relationship, payment for the hardware is considered revenue, and is received upon transfer of the goods from theCompany to the Franchisee. As of December 26, 2018, there were no performance obligations, related to hardware services that were unsatisfied or partiallysatisfied.Disaggregated revenue87The following table presents our revenues for the year ended December 26, 2018 disaggregated by revenue source and market (in thousands):Core Market(1): Company-operated restaurant revenue $340,421Franchise revenue 14,144Franchise advertising fee revenue 10,831Total core market $365,396Non-Core Market(2): Company-operated restaurant revenue 48,414Franchise revenue 11,627Franchise advertising fee revenue 10,391Total non-core market $70,432Total revenue $435,828(1) Core Market includes markets with existing company-operated restaurants at the IPO date.(2) Non-Core Market includes markets entered into subsequent to the IPO date.The following table presents our revenues disaggregated by geographic market for the year ended December 26, 2018:Greater Los Angeles area market69.2%Other markets30.8%Total100%Contract balancesThe following table provides information about the change in the franchise contract liability balances during the year ended December 26, 2018 (inthousands):December 28, 2017$5,759Revenue recognized - beginning balance(396)Additional contract liability365Revenue recognized - additional contract liability(135)December 26, 2018$5,593The Company’s franchise contract liability includes development fees, initial franchise and license fees, and franchise renewal fees and is included withinother accrued expenses and current liabilities and other noncurrent liabilities within the accompanying consolidated balance sheets. The Company receivesarea development fees from franchisees when they execute multi-unit area development agreements. Initial franchise and license fees, or franchise renewalfees, are received from franchisees upon the execution of, or renewal of, a franchise agreement. Revenue is recognized from these agreements as theunderlying performance obligation is satisfied, which is over the term of the agreement.The following table illustrates the estimated revenue to be recognized in the future related to performance obligations that are unsatisfied as of December 26,2018:88Franchise revenues (in thousands): 2019$3692020400202139220223892023379Thereafter3,664Total$5,593Contract CostsThe Company does not currently incur costs to obtain or fulfill a contract that would be considered contract assets under Topic 606.16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)The following table sets forth a summary of our unaudited quarterly operating results for each of the last eight quarters in the period ended December 26,2018. We have derived this data from our unaudited consolidated interim financial statements that, in our opinion, have been prepared on substantially thesame basis as the audited financial statements contained elsewhere in this report and include all normal recurring adjustments necessary for a fair presentationof the financial information for the periods presented. These unaudited quarterly results should be read in conjunction with our financial statements and notesthereto included elsewhere in this report. The operating results in any quarter are not necessarily indicative of the results that may be expected for any futureperiod.89EL POLLO LOCO HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)QUARTERLY FINANCIAL INFORMATION (UNAUDITED) 2018 2017(Dollar amounts in thousands, exceptshare data)Dec. Sept. June Mar Dec. Sept. June MarSelected Financial Data Total revenue ($) (5)106,261 112,178 111,633 105,756 95,202 101,155 105,573 99,771(Loss) income from operations($)(30,990)(6)9,492 7,589 4,448 (9,665) (5,612) 12,740 9,361Provision (benefit) for incometaxes ($)(8,410)(6)2,388 865 1,949 (4,757)(3)(2,457) 4,244 3,467Net (loss) income ($)(23,410) 6,835 5,052 2,529 (38) (4,039) 7,819 4,877Per Share Data (2): Net (loss) income per share: Basic(0.60) 0.18 0.13 0.07 0.00 (0.11) 0.20 0.13Diluted(0.60) 0.17 0.13 0.06 0.00 (0.11) 0.20 0.12Weighted average shares used incomputing net income pershare: Basic38,751,522 38,602,658 38,482,074 38,465,208 38,465,208 38,462,100 38,449,240 38,437,020Diluted38,751,522(4)39,205,090 39,043,434 38,987,351 38,465,208(4)38,462,100(4)39,123,961 39,079,007Selected Operating Data Number of restaurants (atperiod end) Company-operated213 212 211 212 212 208 208 204Franchised271 271 269 268 265 265 264 263System-wide484 483 480 480 477 473 472 467Average unit volume (AUV) (company-operated) (1)1,785 1,891 1,890 1,791 1,787 1,922 1,995 1,913Comparable restaurant salesgrowth (%) Company-operated3.7 2.0 (1.6) (2.0) 0.9 0.9 2.4 (0.4)Franchised5.1 3.0 (0.3) (0.4) 1.9 2.4 3.2 (0.2)System-wide4.4 2.6 (0.9) (1.1) 1.4 1.7 2.9 (0.3)(1)AUVs consist of average annualized sales of all company-operated restaurants over the fiscal quarter.(2)Due to the use of weighted average shares outstanding for each quarter of computing earnings per share, the sum of the quarterly per share amountsmay not equal the per share amount for the year.(3)The Company recorded a benefit for income taxes of $4.8 million in the fourth quarter of 2017 related to the enacted tax reform. The Tax Act had thefollowing effects on our income tax expense for the year ended December 27, 2017, all of which impacted the fourth quarter:•Under ASC Topic 740 we are required to revalue any deferred tax assets or liabilities in the period of enactment of change in tax rates. The Tax Actlowers the corporate income tax rate from 35% to 21%. We have estimated the impact of the revaluation of our deferred tax assets and liabilities,which resulted in a decrease to our net deferred income tax liability by $1.4 million and is reflected as a decrease in our income tax expense in ourresults for fiscal 2017.•The reduced corporate tax rate, also resulted in a TRA benefit to the provision for income tax expense for fiscal 2017 in the amount of $2.0 million.•The Tax Act is generally effective for tax years beginning after December 31, 2017. As such, the reduction in the corporate income tax rate from 35%to 21% is effective for the fiscal year ended December 26, 2018.(4)Due to a loss for the period, zero incremental shares are included because the effect would be antidilutive.(5)For fiscal 2017, revenue is recognized under Topic 605. Beginning in fiscal 2018, the Company adopted Topic 606, with a date of initialapplication of December 28, 2017. As a result, the Company recognized revenue under Topic 606 in fiscal 2018.(6)Loss from operations and net loss includes a $36.3 million legal settlement in the period.90ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone.ITEM 9A.CONTROLS AND PROCEDURESDisclosure Controls and ProceduresWe maintain disclosure controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit underthe Exchange Act is recorded, processed, summarized and reported, within the required time periods, and designed to ensure that such information isaccumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timelydecisions regarding required disclosure.Our disclosure controls and procedures are based on assumptions about the likelihood of future events, and even effective disclosure controls and procedurescan only provide reasonable assurance of achieving their objectives. Because of their inherent limitations, we cannot guarantee that our disclosure controlsand 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 allmisstatements.Our management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controlsand procedures, as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer haveconcluded that our disclosure controls and procedures were effective as of December 26, 2018.Management Report on Internal Control over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Exchange Act Rule 13a-15(f), internal control over financial reporting is a process designed by, or under the supervision of, our principal executive officer and principal financialofficer and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that(i) pertain to the maintenance of records that in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and thatreceipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that couldhave a material effect on the financial statements. The design of any system of control is based upon certain assumptions about the likelihood of futureevents, and there can be no assurance that any design will succeed in achieving its stated objectives under all future events, no matter how remote, or that thedegree of compliance with the policies or procedures may not deteriorate. Because of its inherent limitations, internal control over financial reporting maynot prevent or detect misstatements. Accordingly, even effective internal control over financial reporting can only provide reasonable assurance of achievingtheir control objectives. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we carried out anevaluation of the effectiveness of our internal control over financial reporting as of December 26, 2018 based on the criteria in “Internal Control — IntegratedFramework” (2013 Framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this evaluation, ourmanagement concluded that our internal control over financial reporting was effective as of December 26, 2018.Our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reportingas long as we are an “emerging growth company” pursuant to the provisions of the JOBS Act.Changes in Internal Control over Financial ReportingNo changes in our internal control over financial reporting occurred during our most recent fiscal quarter that has materially affected, or is reasonably likelyto materially affect, our internal control over financial reporting.We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system aremet, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within any company have beendetected.91ITEM 9B.OTHER INFORMATIONNone.92PART IIIITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEIncorporated by reference from our definitive proxy statement to be filed not later than 120 days after the end of our 2018 fiscal year.ITEM 11.EXECUTIVE COMPENSATIONIncorporated by reference from our definitive proxy statement to be filed not later than 120 days after the end of our 2018 fiscal year.ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERSIncorporated by reference from our definitive proxy statement to be filed not later than 120 days after the end of our 2018 fiscal year.ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEIncorporated by reference from our definitive proxy statement to be filed not later than 120 days after the end of our 2018 fiscal year.ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICESIncorporated by reference from our definitive proxy statement to be filed not later than 120 days after the end of our 2018 fiscal year.93PART IVITEM 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULESThe following documents are filed as a part of this report:(1)Financial Statements: Consolidated financial statements filed as part of this report are listed under Item 8. Financial Statements and Supplementary Data.(2)Financial Statement Schedules: None.(3)Exhibits: Incorporated by Reference Number Description FiledHerewith Form PeriodEnded Exhibit FilingDate SEC File Number3.1 Amended and Restated Certificate ofIncorporation of El Pollo Loco Holdings,Inc. 10-Q 6/25/2014 3.1 9/5/2014 001-365563.2 Amended and Restated By-Laws of El PolloLoco Holdings, Inc. 10-Q 6/25/2014 3.2 9/5/2014 001-3655610.1 Income Tax Receivable Agreement, datedJuly 30, 2014, between El Pollo LocoHoldings, Inc., and Trimaran Pollo Partners,L.L.C. 10-Q 9/24/2014 10.1 11/7/2014 001-3655610.2 Franchise Development Agreement(Exclusive), dated August 20, 2014, betweenEl Pollo Loco, Inc., as franchisor, and AnilYadav and Atour Eyvazian, collectively, asdeveloper 8-K N/A 10.1 8/22/2014 001-3655610.3 Consent to and Assignment of DevelopmentRights (Initial Change of Entity), datedAugust 20, 2014, between El Pollo Loco,Inc., as franchisor, and (i) Anil Yadav andAtour Eyvazian, collectively, as assignor,and (ii) AA Pollo, Inc., as assignee 8-K N/A 10.2 8/22/2014 001-3655610.4 Franchise Development Option Agreement,dated July 11, 2014, between El Pollo Loco,Inc., and Trimaran Pollo Partners, L.L.C. S-1/A N/A 10.14 7/14/2014 333-19700110.5 Stockholders Agreement, dated as ofNovember 18, 2005, by and among El PolloLoco Holdings, Inc. (formerly ChickenAcquisition Corp.) and the stockholderslisted therein S-1 N/A 10.3 6/24/2014 333-19700110.6 Amendment No. 1 to StockholdersAgreement, dated as of April 20, 2006, byand between El Pollo Loco Holdings, Inc.(formerly Chicken Acquisition Corp.) andTrimaran Pollo Partners, L.L.C. S-1 N/A 10.4 6/24/2014 333-19700110.7 Amendment No. 2 to StockholdersAgreement, dated as of December 26, 2007,by and between El Pollo Loco Holdings, Inc.(formerly Chicken Acquisition Corp.) andTrimaran Pollo Partners, L.L.C. S-1 N/A 10.5 6/24/2014 333-1970019410.8 Second Amended and Restated LimitedLiability Company Operating Agreement ofTrimaran Pollo Partners, L.L.C., dated as ofMarch 8, 2006 S-1 N/A 10.6 6/24/2014 333-19700110.9 Amendment No. 1 to Second Amended andRestated Limited Liability CompanyOperating Agreement of Trimaran PolloPartners, L.L.C., dated as of December 26,2007 S-1 N/A 10.7 6/24/2014 333-19700110.10 Amendment No. 2 to Second Amended andRestated Limited Liability CompanyOperating Agreement of Trimaran PolloPartners, L.L.C., dated as of January 30, 2008 S-1 N/A 10.8 6/24/2014 333-19700110.11 Amendment No. 3 to Second Amended andRestated Limited Liability CompanyOperating Agreement of Trimaran PolloPartners, L.L.C., dated as of July 14, 2011 S-1 N/A 10.9 6/24/2014 333-19700110.12 Form of Franchise Agreement S-1 N/A 10.12 6/24/2014 333-19700110.13 Form of Franchise Development Agreement S-1 N/A 10.13 6/24/2014 333-19700110.14* Employment Agreement between LauranceRoberts and El Pollo Loco, Inc. S-1 N/A 10.15 6/24/2014 333-19700110.15* 2012 Stock Option Plan S-1 N/A 10.18 6/24/2014 333-19700110.16* 2014 Omnibus Equity Incentive Plan S-1/A N/A 10.22 7/22/2014 333-19700110.17* Form of Option Award Agreement (FairMarket Value Options) under 2012 StockOption Plan S-1 N/A 10.19 6/24/2014 333-19700110.18* Form of Option Award Agreement (PremiumOptions) under 2012 Stock Option Plan S-1 N/A 10.20 6/24/2014 333-19700110.19* Form of Option Award Agreement (FairMarket Value Options) under 2014 OmnibusEquity Incentive Plan S-1/A N/A 10.25 7/22/2014 333-19700110.20* Form of Non-Officer Director RestrictedShare Agreement under 2014 OmnibusEquity Incentive Plan S-1/A N/A 10.26 7/22/2014 333-19700110.21* Form of Indemnification Agreement betweenEl Pollo Loco Holdings, Inc. and each of itsdirectors and executive officers S-1/A N/A 10.27 7/22/2014 333-19700110.22 Credit Agreement, dated as of December 11,2014, among El Pollo Loco, Inc., asborrower, El Pollo Loco Holdings, Inc., andEPL Intermediate, Inc., as guarantors, Bankof America, N.A., as administrative agent,swingline lender and letter of credit issuer,the lenders party thereto, and the otherparties thereto 8-K N/A 10.1 12/16/2014 001-365569510.23* Form of Option Award Agreement (FairMarket Value Options) under 2014 OmnibusEquity Incentive Plan (Time Vesting Only) 10-Q 6/29/2016 10.27 8/5/2016 001-3655610.24* Form of Employee Restricted ShareAgreement under 2014 Omnibus EquityIncentive Plan 10-Q 9/28/2016 10.28 11/4/2016 001-3655610.25* Employment Agreement between BernardAcoca and El Pollo Loco, Inc. 10-K 12/27/2017 10.29 3/9/2018 001-3655610.26* Retirement Agreement between Stephen J.Sather and El Pollo Loco, Inc. andExecutive’s Waiver and Release of Claimsbetween Stephen J. Sather and El PolloLoco, Inc. 10-K 12/27/2017 10.30 3/9/2018 001-3655610.27* Form of Non-Qualified Stock OptionAgreement between El Pollo Loco Holdings,Inc. and Bernard Acoca S-8 N/A 4.3 5/8/2018 333-22473010.28* Form of Restricted Share Unit AwardAgreement between El Pollo Loco Holdings,Inc. and Bernard Acoca S-8 N/A 4.4 5/8/2018 333-22473010.29* Form of Performance Share Unit AwardAgreement between El Pollo Loco Holdings,Inc. and Bernard Acoca S-8 N/A 4.5 5/8/2018 333-22473010.30* 2018 Omnibus Equity Incentive Plan S-8 N/A 4.3 8/6/2018 333-22662121.1 Subsidiaries of El Pollo Loco Holdings, Inc. S-1 N/A 21.1 6/24/2014 333-19700123.1 Consent of BDO USA, LLP X 24.1 Power of Attorney (included on signaturepage hereto) X 31.1 Certification of Principal Executive Officerunder section 302 of the Sarbanes–OxleyAct of 2002 X 31.2 Certification of Principal Financial Officerunder section 302 of the Sarbanes–OxleyAct of 2002 X 32.1 Certification of Chief Executive Officer andChief Financial Officer under 18 U.S.C.section 1350, adopted by section 906 of theSarbanes–Oxley Act of 2002 ** 101.INS XBRL Instance Document X 101.SCH XBRL Taxonomy Extension SchemaDocument X 101.CAL XBRL Taxonomy Extension CalculationLinkbase Document X 101.DEF XBRL Taxonomy Extension DefinitionLinkbase Document X 101.LAB XBRL Taxonomy Extension Label LinkbaseDocument X 101.PRE XBRL Taxonomy Extension PresentationLinkbase Document X 96*This exhibit is a management contract or a compensatory plan or arrangement.**Furnished herewith. Pursuant to Item 601(b)(32)(ii) of Regulation S-K (17 C.F.R. § 229.601(b)(32)(ii)), this certification is deemed furnished,not filed, for purposes of section 18 of the Exchange Act, nor is it otherwise subject to liability under that section. It will not be deemed to beincorporated by reference into any filing under the Securities Act or the Exchange Act, except if the registrant specifically incorporates it byreference.ITEM 16.FORM 10-K SUMMARYNone.97SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized. EL POLLO LOCO HOLDINGS, INC. By: /s/ Bernard Acoca Bernard Acoca President and Chief Executive Officer Date:March 8, 2019SIGNATURES AND POWER OF ATTORNEYWe, the undersigned, hereby severally constitute Bernard Acoca and Laurance Roberts, and each of them singly, our true and lawful attorneys with full powerto them and each of them to sign for us, and in our names in the capacities indicated below, any and all amendments to this report, and file the same, with allexhibits thereto, and other documents in connection therewith, hereby ratifying and confirming all that said attorney may lawfully do or cause to be done byvirtue hereof.Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrantand in the capacities and on the dates indicated.98Name Title Date /s/ Bernard Acoca Director, President and Chief Executive Officer (principal executive officer) March 8, 2019Bernard Acoca /s/ Laurance Roberts Chief Financial Officer (principal financial and accounting officer) March 8, 2019Laurance Roberts /s/ Michael G. Maselli Chairman and Director March 8, 2019Michael G. Maselli /s/ Dean C. Kehler Director March 8, 2019Dean C. Kehler /s/ John M. Roth Director March 8, 2019John M. Roth /s/ Douglas J. Babb Director March 8, 2019Douglas J. Babb /s/ Samuel N. Borgese Director March 8, 2019Samuel N. Borgese /s/ Mark Buller Director March 8, 2019Mark Buller /s/ William R. Floyd Director March 8, 2019William R. Floyd /s/ Carol Lynton Director March 8, 2019Carol Lynton 99Exhibit 23.1Consent of Independent Registered Public Accounting FirmEl Pollo Loco Holdings, Inc.Costa Mesa, CaliforniaWe hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-197698) of El Pollo Loco Holdings, Inc. of ourreport dated March 8, 2019, relating to the consolidated financial statements, which appears in this Form 10-K. Our report contains an explanatory paragraphregarding change in accounting policy related to revenue recognition./s/ BDO USA, LLPCosta Mesa, CaliforniaMarch 8, 2019Exhibit 31.1CERTIFICATIONSI, Bernard Acoca, certify that:1. I have reviewed this annual report on Form 10-K of El Pollo Loco Holdings, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a–15(e) and 15d–15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrantand have:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly duringthe period in which this report is being prepared;(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles;(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness ofthe disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’s internal control over financial reporting; and5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely toadversely affect the registrant’s ability to record, process, summarize and report financial information; and(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting.Date: March 8, 2019 /s/ Bernard Acoca Bernard AcocaPresident and Chief Executive Officer(Principal Executive Officer) Exhibit 31.2CERTIFICATIONSI, Laurance Roberts, certify that:1. I have reviewed this annual report on Form 10-K of El Pollo Loco Holdings, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a–15(e) and 15d–15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrantand have:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly duringthe period in which this report is being prepared;(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles;(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness ofthe disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’s internal control over financial reporting; and5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely toadversely affect the registrant’s ability to record, process, summarize and report financial information; and(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting.Date: March 8, 2019 /s/ Laurance Roberts Laurance RobertsChief Financial Officer(Principal Financial Officer) Exhibit 32.1CERTIFICATIONUnder 18 U.S.C. section 1350, adopted by section 906 of the Sarbanes-Oxley Act of 2002, in connection with the attached periodic report, the undersignedeach certify that (i) the periodic report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) theinformation contained in the periodic report fairly presents, in all material respects, the financial condition and results of operations of the issuer.Date: March 8, 2019 /s/ Bernard Acoca Bernard AcocaPresident and Chief Executive Officer /s/ Laurance Roberts Laurance RobertsChief Financial Officer

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