What changed in this filing

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Item 1. Financial Statements

2023-06-06 compared with 2023-02-28 · 108 added, 533 removed, 373 unchanged (63% of the section changed)

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shares of $ 0.01 par value authorized;

22,150,800 shares issued and outstanding at January 27, 2023 , and 22,281,443 shares issued and outstanding at July 29, 2022

22,152,432 shares issued and outstanding at April 28, 2023 , and 22,281,443 shares issued and outstanding at July 29, 2022

Additional paid-in capital

Retained earnings

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Quarter Ended

Six Months Ended

Nine Months Ended

Total revenue

3 unchanged sentences

General and administrative expenses

Impairment and store closing costs

Operating income

1 unchanged sentence

Income before income taxes

Provision for income taxes

Provision for income taxes (income tax benefit)

Net income per share:

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CRACKER BARREL OLD COUNTRY STORE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN

SHAREHOLDERS’ EQUITY

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’

(Unaudited and in thousands, except share data)

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Balances at January 27, 2023

Comprehensive Income:

Total comprehensive income

Cash dividends declared - $ 1.30

Share-based compensation

Issuance of share-based compensation awards, net of shares withheld for employee taxes

Balances at April 28 ,

See Notes to unaudited Condensed Consolidated Financial Statements.

CRACKER BARREL OLD COUNTRY STORE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited and in thousands, except share data)

Shareholders’

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Share-based compensation

Cumulative-effect of change in accounting

principle, net of taxes (see N ote 1)

Cumulative-effect of change in accounting principle, net of taxes

Issuance of share-based compensation awards, net of shares withheld for employee taxes

7 unchanged sentences

Balances at January 28, 2022

Comprehensive Income:

Total comprehensive income

Cash dividends declared - $ 1.30

Share-based compensation

Purchases and retirement of common stock

Balances at April 29 ,

See Notes to unaudited Condensed Consolidated Financial Statements.

1 unchanged sentence

CONDENSED CONSOLIDATED STATEMENTS OF

Six Months Ended

Nine Months Ended

Cash flows from operating activities:

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Taxes withheld and accrued

Deferred revenues

Other current liabilities

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Net cash used in financing activities

Net increase (decrease) in cash and cash equivalents

Net decrease in cash and cash equivalents

Cash and cash equivalents, beginning of period

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Condensed Consolidated Financial Statements

Cracker Barrel Old Country Store, Inc.

and its affiliates (collectively, in

these Notes to Condensed Consolidated Financial Statements, the “Company”) are principally engaged in the operation and development in the United States of the Cracker Barrel Old Country Store® (“Cracker Barrel”) concept.

Cracker Barrel Old Country Store, Inc., and its affiliates (collectively,

in these Notes to Condensed Consolidated Financial Statements, the “Company”) are principally engaged in the operation and development in the United States of the Cracker Barrel Old Country Store® (“Cracker Barrel”) concept.

The accompanying condensed consolidated financial statements have been

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Fair Value Measurements

The Company’s assets measured at fair value on a recurring basis at January 27, 2023 were as follows:

The Company’s assets measured at fair value on a recurring basis at April 28, 2023 were as follows:

Cash equivalents*

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Consists of money market fund investments.

** Represents plan assets invested in mutual funds

established under a rabbi trust for the Company’s non-qualified savings plan and is included in the Condensed Consolidated Balance Sheets as other assets.

Represents plan assets invested in mutual funds established

under a rabbi trust for the Company’s non-qualified savings plan and is included in the Condensed Consolidated Balance Sheets as other assets.

The Company did no t have any

liabilities measured at fair value on a recurring basis at January 27, 2023 and July 29, 2022.

liabilities measured at fair value on a recurring basis at April 28, 2023 and July 29, 2022.

The Company’s money market fund investments are measured at fair value using quoted market prices.

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The fair value

of the Company’s variable rate debt, based on quoted market prices, which are considered Level 1 inputs, approximates its carrying amount at January 27, 2023 and July 29, 2022.

of the Company’s variable rate debt, based on quoted market prices, which are considered Level 1 inputs, approximates its carrying amount at April 28, 2023 and July 29, 2022.

The Company’s financial instruments that are not remeasured at fair value include the 0.625 % convertible Senior Notes (see Note 4).

The Company estimates the fair value of the Notes through consideration of quoted market prices of similar instruments, classified as Level 2.

estimated fair value of the Notes was $ 269,625 and $ 255,894 , respectively, as of January 27, 2023 and July 29, 2022 .

estimated fair value of the Notes was $ 264,606 and $ 255,894 , respectively, as of April 28, 2023 and July 29, 2022 .

Assets Measured at Fair Value on a Nonrecurring Basis

During the third quarter of 2023, six Cracker Barrel locations were determined to be impaired because of declining operational performance.

Fair value of these locations was determined by sales prices of

comparable assets or estimates of discounted future cash flows considering their highest and best use.

Assumptions used in the cash flow model included projected annual revenue growth rates and projected cash flows, which can be affected by

economic conditions and management’s expectations.

Additionally, changes in the local and national economies and markets for real estate and other assets can impact the sales prices of the assets.

The Company has determined that the majority of

the inputs used to value its long-lived assets held and used are unobservable inputs, and thus, are considered Level 3 inputs.

Based on its analysis, the Company recorded an impairment charge of $ 11,692 , which is included in the impairment and store closing costs line on the Condensed Consolidated Statement of Income.

Inventories were comprised of the following at:

January 27, 2023

April 28, 2023

July 29, 2022

On June 17, 2022, the Company entered into a five-year $ 700,000 revolving credit facility (the “2022 Revolving Credit

Facility”) with substantially the same terms and financial covenants as our previous amended $ 800,000 revolving credit facility, which it

The 2022 Revolving Credit Facility also contains an option to increase the revolving credit facility by $ 200,000 .

Company’s outstanding borrowings under the 2022 Revolving Credit Facility were $ 160,000 and $ 130,000 on January 27, 2023 and July 29, 2022, respectively.

At January 27, 2023, the Company had $ 31,896 of standby letters of credit, which reduce the Company’s borrowing availability under the 2022 Revolving Credit Facility (see Note 10 for more information on the Company’s standby

letters of credit).

At January 27, 2023, the Company had $ 508,104 in borrowing availability under the 2022 Revolving Credit Facility.

On June 17, 2022, the Company entered into a five-year $ 700,000 revolving credit facility (the “2022 Revolving Credit Facility”) with substantially

the same terms and financial covenants as our previous amended $ 800,000 revolving credit facility, which it replaced.

The 2022 Revolving

Credit Facility also contains an option to increase the revolving credit facility by $ 200,000 .

The Company’s outstanding borrowings

under the 2022 Revolving Credit Facility were $ 150,000 and $ 130,000 on April 28, 2023 and July 29, 2022, respectively.

As of April 28, 2023, the Company had $ 31,896 of standby letters of credit, which reduce the Company’s borrowing availability under the 2022 Revolving Credit Facility (see Note 10 for more information on the Company’s standby letters of credit).

April 28, 2023, the Company had $ 518,104 in borrowing availability under the 2022 Revolving Credit Facility.

In accordance with the 2022 Revolving Credit Facility, outstanding borrowings bear interest, at the Company’s election, either

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margin based on certain specified financial ratios.

At January 27, 2023, the weighted average interest rate on the Company’s outstanding borrowings was 5.96 %.

At April 28, 2023, the weighted average interest rate on the Company’s outstanding borrowings was 6.49 %.

The 2022 Revolving Credit Facility contains customary financial covenants, which include maintenance of a maximum consolidated

total senior secured leverage ratio and a minimum consolidated interest coverage ratio.

At January 27, 2023, the Company was in compliance with all financial covenants under the 2022 Revolving Credit Facility.

At April 28, 2023, the Company was in compliance with all financial covenants under the 2022 Revolving Credit Facility.

The 2022 Revolving Credit Facility also imposes restrictions on the amount of dividends the Company is permitted to pay and the

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repurchase is made;

notwithstanding (1) and (2), so long as immediately after giving effect to the payment of any such dividends, Cash Availability is at least $ 100,000 , the Company may declare and pay cash dividends on shares of its common stock in an aggregate amount not to exceed in any fiscal year the product of the aggregate amount of dividends

declared in the fourth quarter of the immediately preceding fiscal year multiplied by four .

quarter of the immediately preceding fiscal year multiplied by four .

Convertible Senior Notes

On June 18, 2021, the Company completed a $ 300,000 principal aggregate amount private offering of 0.625 % convertible

Senior Notes due in 2026 (the “Notes”).

On June 18, 2021, the Company completed a $ 300,000 principal aggregate amount private offering of 0.625 % convertible Senior Notes due in 2026

(the “Notes”).

The Notes are governed by the terms of an indenture between the Company and U.S.

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The Notes will mature on June 15, 2026 , unless earlier converted, repurchased or redeemed.

The Notes bear cash interest at an annual rate of 0.625 %, payable semi-annually in arrears on June 15 and December 15 of each

The Notes bear cash interest at an annual rate of 0.625 %,

payable semi-annually in arrears on June 15 and December 15 of each year.

The Notes are unsecured obligations and do not contain any financial or operating covenants or restrictions on the payments of

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annum, and thereafter at a rate of 0.50 % per annum, on the principal amount of the Notes.

The initial conversion rate applicable to the Notes was 5.3153 shares of the Company’s common stock per $ 1,000 principal amount of

Notes, which represented an initial conversion price of approximately $ 188.14 per share of the Company’s common stock, a premium of 25.0 % over the last reported sale price of $ 150.51

per share on June 15, 2021, the date on which the Notes were priced.

The conversion rate is subject to customary adjustments upon the occurrence of certain events, including the payment of dividends to holders of the Company’s common stock.

January 27, 2023, the conversion rate, as adjusted, was 5.7469 shares of the Company’s common stock per $ 1,000 principal amount of Notes.

In addition, if certain corporate events that constitute a “Make-Whole Fundamental Change” occur, then the conversion

rate will, in certain circumstances, be increased for a specified period of time.

The initial conversion rate applicable to the Notes was 5.3153 shares of the Company’s common stock per $ 1,000 principal

amount of Notes, which represented an initial conversion price of approximately $ 188.14 per share of the Company’s common stock, a

premium of 25.0 % over the last reported sale price of $ 150.51 per share on June 15, 2021, the date on which the Notes were priced.

The conversion rate is subject to customary adjustments upon the occurrence of certain events, including the payment of dividends to

holders of the Company’s common stock.

As of April 28, 2023, the conversion rate, as adjusted, was 5.8108 shares of the Company’s common

stock per $ 1,000 principal amount of Notes.

In addition, if certain corporate events that constitute a “Make-Whole Fundamental Change”

occur, then the conversion rate will, in certain circumstances, be increased for a specified period of time.

Net proceeds from the Notes offering were $ 291,125 , after deducting the initial purchasers’ discounts and commissions and the Company’s offering fees and expenses.

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issuance costs.

The following table includes the outstanding principal amount and carrying value of the Notes as of the periods indicated:

January 27, 2023

The following table includes the outstanding principal amount and carrying value of the Notes as of the dates indicated:

April 28, 2023

July 29, 2022

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Net carrying amount

Debt issuance costs are amortized to interest expense using the effective

interest method over the expected life of the Notes.

Debt issuance costs are amortized to interest expense

using the effective interest method over the expected life of the Notes.

The effective rate of the Notes over their expected life is 1.23 %.

1 unchanged sentence

Quarter Ended

Six Months Ended

Nine Months Ended

Coupon interest

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During any calendar quarter commencing after September 30, 2021, in which the closing price of the Company’s common stock

exceeds 130 % of the applicable conversion price of the Notes on at least 20 of the last 30 consecutive trading days of the quarter, holders may in the

quarter immediately following, convert all or a portion of their Notes.

exceeds 130 % of the applicable conversion price of the Notes on at least 20 of the last 30 consecutive trading days of the quarter,

holders may in the quarter immediately following, convert all or a portion of their Notes.

The holders of the Notes were not eligible to convert their Notes during 2023, 2022 or 2021.

When a conversion notice is received, the Company has the option to pay or deliver

the conversion amount entirely in cash or a combination of cash and shares of the Company’s common stock.

Accordingly, as of January 27, 2023, the Company could not be required to settle the Notes and, therefore, the Notes are classified as

long-term debt.

When a conversion notice is received, the Company has the option

to pay or deliver the conversion amount entirely in cash or a combination of cash and shares of the Company’s common stock.

Accordingly, as of April 28, 2023, the Company could not be required to settle the Notes and, therefore, the Notes are

classified as long-term debt.

Convertible Note Hedge and Warrant Transactions

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The strike price was initially $ 263.39 per share and is subject to certain adjustments under the terms of the Warrant Transactions.

As of January 27, 2023, the strike price, as

adjusted, of the Warrant Transactions was $ 243.61 per share as a result of dividends declared since the Notes were issued.

As of April 28, 2023, the strike price, as adjusted,

of the Warrant Transactions was $ 240.93 per share as a result of dividends declared since the Notes were issued.

The portion of the net proceeds to the Company from the offering of the Notes that was used to pay the premium on the

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Cracker Barrel stores represent a single, integrated operation with two related and substantially integrated product lines.

The operating expenses of the restaurant and retail product lines of a Cracker Barrel store are shared and are indistinguishable in many respects.

The operating expenses of the restaurant and retail product lines of a Cracker Barrel store are shared and are indistinguishable in

many respects.

Accordingly, the Company currently manages its business on the basis of one reportable operating segment.

All of the Company’s operations

are located within the United States.

Company’s operations are located within the United States.

Revenue Recognition

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Quarter Ended

Six Months Ended

Nine Months Ended

Total revenue

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breakage by applying its estimate of the rate of gift card breakage over the period of estimated redemption.

For the quarter and six months ended January 27, 2023, gift card breakage was $ 2,183 and $ 3,488 , respectively.

For the quarter and six months ended January 28,

2022, gift card breakage was $ 2,164 and $ 3,269 ,

respectively.

Deferred revenue related to the Company’s gift cards was $ 114,478 and $ 93,569 , respectively, at January 27, 2023 and July 29,

Revenue recognized in the Condensed Consolidated Statements of Income for the six months ended January 27, 2023 and January 28, 2022, respectively, for the redemption of gift cards which were included in the deferred revenue balance at the beginning of the fiscal year was $ 27,507 and $ 28,809 .

For the quarter and nine months ended April 28, 2023, gift card breakage was $ 1,595 and $ 5,083 , respectively.

For the quarter and nine months

ended April 29, 2022, gift card breakage was $ 1,514 and $ 4,783 , respectively.

Deferred revenue related to the Company’s gift cards was $ 97,777 and $ 93,569 , respectively, at April 28, 2023 and

July 29, 2022.

Revenue recognized in the Condensed Consolidated Statements of Income for the nine months ended April 28, 2023 and April 29, 2022, respectively, for the redemption of gift cards which were included in the deferred revenue balance at the beginning of the fiscal year

was $ 34,689 and $ 36,420 .

The Company has ground leases for its leased stores and office space leases that are recorded as operating leases under various non-cancellable

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Assumptions used in determining the Company’s incremental borrowing rate include the Company’s implied credit rating and an estimate of secured borrowing rates based on comparable

The following table summarizes the components of lease cost for operating leases for the quarters and six months ended January 27, 2023 and January 28, 2022:

The following table summarizes the components of lease cost for operating leases for the quarters and nine months ended April 28, 2023 and April 29, 2022:

Quarter Ended

Six Months Ended

Nine Months Ended

Operating lease cost

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The following table summarizes supplemental cash flow information and non-cash activity related to the Company’s operating leases for the quarters

and six months ended January 27, 2023 as compared to the same periods in the prior year:

and nine months ended April 28, 2023 as compared to the same periods in the prior year:

Quarter Ended

Six Months Ended

Nine Months Ended

Operating cash flow information:

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Lease modifications removing right-of-use assets

The following table summarizes the weighted-average remaining lease term and the weighted-average discount rate for operating leases as of January 27, 2023 and January 28, 2022:

January 27 , 2023

January 28 , 2022

The following table summarizes the weighted-average remaining lease term and the weighted-average discount rate for operating leases as of April 28, 2023 and April 29, 2022:

April 28 , 2023

April 29 , 2022

Weighted-average remaining lease term

Weighted-average discount rate

The following table summarizes the maturities of undiscounted cash flows reconciled to the total operating lease liability as of January 27, 2023:

The following table summarizes the maturities of undiscounted cash flows reconciled to the total operating lease liability as of April 28, 2023:

Remainder of 2023

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excess conversion value settled in cash or shares of common stock, the convertible senior notes have been excluded from the computation of diluted earnings per share because the average market price of the Company’s common stock during the

reporting period did not exceed the conversion price of $ 176.18 as of January 27, 2023.

reporting period did not exceed the conversion price of $ 172.09 as of April 28, 2023.

Warrants were excluded from the computation of

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Quarter Ended

Six Months Ended

Nine Months Ended

Net income per share numerator

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Related to its insurance coverage, the Company is contingently liable pursuant to standby letters of credit as credit guarantees to certain insurers.

As of January 27, 2023, the Company had $ 31,896 of standby letters of credit related to securing reserved claims under workers’

compensation insurance and the July 29, 2020 and August 4, 2020 sale and leaseback transactions .

All standby letters of credit are renewable annually and reduce the Company’s

borrowing availability under its 2022 Revolving Credit Facility (see Note 4).

As of April 28, 2023, the Company had $ 31,896 of standby letters of credit related to securing reserved claims under workers’ compensation

insurance and the July 29, 2020 and August 4, 2020 sale and leaseback transactions .

All standby letters of credit are renewable annually and reduce the Company’s borrowing

availability under its 2022 Revolving Credit Facility (see Note 4).

The Company enters into certain indemnification agreements in favor of third parties in the ordinary course of business.

The Company believes that

the probability of incurring an actual liability under such indemnification agreements is sufficiently remote that no such liability has been recorded in the Condensed Consolidated Balance Sheet as of January 27, 2023.

Management's Discussion and Analysis of Financial Condition and Results of Operations

Cracker Barrel Old Country Store, Inc.

and its subsidiaries (collectively, the “Company,” “our” or “we”) are principally engaged in the operation and development in the United States of the

Cracker Barrel Old Country Store® (“Cracker Barrel”) concept.

At January 27, 2023, we operated 665 Cracker Barrel stores in 45 states and 56 Maple Street Biscuit Company (“MSBC”) locations in ten states.

All dollar amounts reported or discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) are shown in thousands, except per share

amounts and certain statistical information (e.g., number of stores).

References to years in MD&A are to our fiscal year unless otherwise noted.

MD&A provides information which management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition.

MD&A should be read

in conjunction with the (i) condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q and (ii) audited consolidated financial statements and the notes thereto included in the Company’s Annual

Report on Form 10-K for the fiscal year ended July 29, 2022 (the “2022 Form 10-K”).

Except for specific historical information, many of the matters discussed in this report may express or imply projections of items such as revenues or

expenditures, estimated capital expenditures, compliance with debt covenants, plans and objectives for future operations, inventory shrinkage, growth or initiatives, expected future economic performance or the expected outcome or impact of

pending or threatened litigation.

These and similar statements regarding events or results which we expect will or may occur in the future are forward-looking statements that, by their nature, involve risks, uncertainties and other factors which

may cause our actual results and performance to differ materially from those expressed or implied by such statements.

All forward-looking information is provided pursuant to the safe harbor established under the Private Securities Litigation

Reform Act of 1995 and should be evaluated in the context of these risks, uncertainties and other factors.

Forward-looking statements generally can be identified by the use of forward-looking terminology such as “trends,” “assumptions,” “target,”

“guidance,” “outlook,” “opportunity,” “future,” “plans,” “goals,” “objectives,” “expectations,” “near-term,” “long-term,” “projection,” “may,” “will,” “would,” “could,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “potential,”

“should,” “projects,” “forecasts” or “continue” (or the negative or other derivatives of each of these terms) or similar terminology.

We believe the assumptions underlying any forward-looking statements are reasonable;

however, any of the

assumptions could be inaccurate, and therefore, actual results may differ materially from those projected in or implied by the forward-looking statements.

In addition to the risks of ordinary business operations, and those discussed or described

in this report or in information incorporated by reference into this report, factors and risks that may result in actual results differing from this forward-looking information include, but are not limited to risks and uncertainties associated

with general or regional economic weakness, business and societal conditions, and the weather impact on sales and customer travel;

discretionary income or personal expenditure activity of our customers;

information technology-related incidents,

including data privacy and information security breaches, whether as a result of infrastructure failures, employee or vendor errors, or actions of third parties;

our ability to identify, acquire and sell successful new lines of retail merchandise

and new menu items at our restaurants;

our ability to sustain or the effects of plans intended to improve operational or marketing execution and performance;

the COVID-19 pandemic, including the duration of the COVID-19 pandemic and its ultimate

impact on our business, levels of consumer confidence in the safety of dine-in restaurants, restrictions (including occupancy restrictions) imposed by governmental authorities, disruptions to our operations as a result of the spread of COVID-19

in our workforce;

uncertain performance of acquired businesses, strategic investments and other initiatives that we may pursue from time to time;

changes in or implementation of additional governmental or regulatory rules, regulations and

interpretations affecting tax, wage and hour matters, health and safety, insurance or other undeterminable areas;

the effects of plans intended to promote or protect our brands and products;

commodity price increases;

the ability of and cost to

us to recruit, train, and retain qualified hourly and management employees;

the effects of increased competition at our locations on sales and on labor recruiting, cost, and retention;

workers’ compensation, group health and utility price

consumer behavior based on negative publicity or changes in consumer health or dietary trends or safety aspects of our food or products or those of the restaurant industry in general, including concerns about outbreaks of infectious

disease as well as the possible effects of such events on the price or availability of ingredients used in our restaurants;

the effects of our indebtedness and associated restrictions on our financial and operating flexibility and ability to

execute or pursue our operating plans and objectives;

changes in interest rates, increases in borrowed capital or capital market conditions affecting our financing costs and ability to refinance all or portions of our indebtedness;

the effects of

business trends on the outlook for individual restaurant locations and the effect on the carrying value of those locations;

our ability to retain key personnel;

the availability and cost of suitable sites for restaurant development and our

ability to identify those sites;

our ability to enter successfully into new geographic markets that may be less familiar to us;

changes in land, building materials and construction costs;

the actual results of pending, future or threatened

litigation or governmental investigations and the costs and effects of negative publicity or our ability to manage the impact of social media associated with these activities;

economic or psychological effects of natural disasters or other

unforeseen events such as terrorist acts, social unrest or war and the military or government responses to such events;

disruptions to our restaurant or retail supply chain, including as a result of COVID-19;

changes in foreign exchange rates

affecting our future retail inventory purchases;

the impact of activist shareholders;

our reliance on limited distribution facilities and certain significant vendors;

implementation of new or changes in interpretation of existing accounting

principles generally accepted in the United States of America (“GAAP”) and those factors contained in Part I, Item 1A of the 2022 Form 10-K, as well as the factors described under “Critical Accounting Estimates” on pages 24-26 of this report or,

from time to time, in our filings with the Securities and Exchange Commission (“SEC”), press releases and other communications.

Readers are cautioned not to place undue reliance on forward-looking statements made in this report because the statements speak only as of the report’s date.

Except as may be required by law,

we have no obligation or intention to update or revise any of these forward-looking statements to reflect events or circumstances occurring after the date of this report or to reflect the occurrence of unanticipated events.

Readers are advised,

however, to consult any future public disclosures that we may make on related subjects in reports that we file with or furnish to the SEC or in our other public disclosures.

Management believes that Cracker Barrel’s brand remains one of the strongest and most differentiated brands in the restaurant industry, and we plan to continue to leverage and build on that

strength as a core competitive component of our business strategy.

Our long-term strategy remains centered on driving sustainable sales growth, continued business model improvements, building profitable Cracker Barrel and MSBC stores, and

driving shareholder returns.

During the second quarter of 2023, we made progress in key areas of the business, including maintaining a strong value proposition, growing our off-premise business, delivering continued strong retail sales,

marketing, and culinary innovation to grow average check through introduction of add-on menu items such as sides and beverages and other menu enhancements, thoughtful expansion of MSBC, and store-level operational excellence.

We believe there is

significant uncertainty in macroeconomic factors that may affect our business in the remainder of 2023, but we remain focused on delivering long-term growth and returns for shareholders.

Key Performance Indicators

Management uses a number of key performance measures to evaluate our operational and financial performance, including the following:

Comparable store restaurant sales increase/(decrease) :

To calculate comparable store restaurant sales increase/(decrease), we determine total restaurant sales of stores open at least six full quarters before the beginning of the

applicable period, measured on comparable calendar weeks.

We then subtract total comparable store restaurant sales for the current year period from total comparable store restaurant sales for the applicable historical period to calculate

the absolute dollar change.

To calculate comparable store restaurant sales increase/(decrease), which we express as a percentage, we divide the absolute dollar change by the comparable store restaurant sales for the historical period.

Comparable store average restaurant sales :

To calculate comparable store average restaurant sales, we determine total restaurant sales of stores open at least six full quarters before the beginning of the applicable period,

measured on comparable calendar weeks, and divide by the number of comparable stores for the applicable period.

Comparable store retail sales increase/(decrease) :

To calculate comparable store retail sales increase/(decrease), we determine total retail sales of stores open at least six full quarters before the beginning of the applicable

period, measured on comparable calendar weeks.

We then subtract total comparable store retail sales for the current year period from total comparable store retail sales for the applicable historical period to calculate the absolute

dollar change.

To calculate comparable store retail sales increase/(decrease), which we express as a percentage, we divide the absolute dollar change by the comparable store retail sales for the historical period.

Comparable store retail average weekly sales :

To calculate comparable store average retail sales, we determine total retail sales of stores open at least six full quarters before the beginning of the applicable period, measured

on comparable calendar weeks, and divide by the number of comparable stores for the applicable period.

Comparable restaurant guest traffic increase/(decrease) :

To calculate comparable restaurant guest traffic increase/(decrease), we determine the number of entrees sold in our dine-in and off-premise business from stores open at

least six full quarters at the beginning of the applicable period, measured on comparable calendar weeks.

We then subtract total entrees sold for the current year period from total entrees sold for the applicable historical period to

calculate the absolute numerical change.

To calculate comparable restaurant guest traffic increase/(decrease), which we express as a percentage, we divide the absolute numerical change by the total entrees sold for the historical period.

Average check increase per guest :

To calculate average check per guest, we determine comparable store restaurant sales, as described above, and divide by comparable guest traffic (as described above).

We then subtract average

check per guest for the current year period from average check per guest for the applicable historical period to calculate the absolute dollar change.

The absolute dollar change is divided by the prior year average check number to

calculate average check increase per guest, which we express as a percentage.

These performance indicators exclude the impact of new store openings and sales related to MSBC.

We use comparable store sales metrics as indicators of sales growth to evaluate how our established stores have performed over time.

We use comparable restaurant guest traffic

increase/(decrease) to evaluate how established stores have performed over time, excluding growth achieved through menu price and sales mix change.

Finally, we use average check per guest to identify trends in guest preferences, as well as the

effectiveness of menu changes.

We believe these performance indicators are useful for investors by providing a consistent comparison of sales results and trends across comparable periods within our core, established store base, unaffected by

results of store openings, closings, and other transitional changes.

Results of Operations

The following table highlights our operating results by percentage relationships to total revenue for the quarter ended and first six months ended January 27, 2023 as compared to the same

periods in the prior year:

Quarter Ended

Six Months Ended

Total revenue

Cost of goods sold (exclusive of depreciation and rent)

Labor and other related expenses

Other store operating expenses

General and administrative expenses

Operating income

Interest expense, net

Income before income taxes

Provision for income taxes

The following table sets forth the change in the number of Company-owned units in operation during the quarters and first six months ended January 27, 2023 and January 28, 2022 as well as the

number of Company-owned units at the end of the quarters and first six months ended January 27, 2023 and January 28, 2022:

Quarter Ended

Six Months Ended

Net change in units:

Company-owned – Cracker Barrel

Company-owned – MSBC

Units in operation at end of the period:

Company-owned – Cracker Barrel

Company-owned – MSBC

Total Company-owned units at end of the period

Franchise – MSBC

MSBC previously had seven franchised units, all of which were purchased from the franchisees by the Company in the fourth quarter of 2022.

Total Revenue

Total revenue for the second quarter and first six months of 2023 increased 8.3% and 7.7%, respectively, as compared to the same periods in the prior year.

The following table highlights the

key components of revenue for the quarter and six months ended January 27, 2023 as compared to the same periods in the prior year:

Quarter Ended

Six Months Ended

Revenue in dollars:

Total revenue

Total revenue by percentage relationships:

Average unit volumes (1):

Total revenue

Comparable store sales increase (2) :

Restaurant and retail

Average check increase

Comparable restaurant guest traffic increase (decrease) (2) :

(1) Average unit volumes include sales of all stores except for MSBC.

(2) Comparable store sales and traffic consist of sales of stores open at least six full quarters at the beginning of the period and

are measured on comparable calendar weeks.

Comparable store sales and traffic exclude MSBC.

For the second quarter of 2023, our comparable store restaurant sales increased as a result of a 10.1% average check increase (including an 8.9% average menu price increase) partially offset by a

1.7% guest traffic decrease as compared to the prior year period.

For the first six months of 2023, our comparable store restaurant sales increased as a result of a 9.5% average check increase (including an 8.4% average menu price increase)

partially offset by a 1.8% guest traffic decrease as compared to the prior year period.

While all of our dining rooms are currently operating without COVID-19-related restrictions, it is possible that renewed outbreaks or increases in cases

and/or new variants of the disease, either as part of a national trend or on a more localized basis, could result in COVID-19-related restrictions including capacity restrictions, otherwise limit our dine-in services, or negatively affect

consumer demand.

Our retail sales are made substantially to our restaurant guests.

For the second quarter and the first six months of 2023, our comparable store retail sales increases resulted primarily from the

strong performance in the apparel and accessories merchandise categories.

Cost of Goods Sold (Exclusive of Depreciation and Rent)

The following table highlights the components of cost of goods sold (exclusive of depreciation and rent) in dollar amounts and as percentages of revenues for the second quarter and first six

months of 2023 as compared to the same periods in the prior year:

Quarter Ended

Six Months Ended

Cost of Goods Sold in dollars:

Total Cost of Goods Sold

Cost of Goods Sold by percentage of revenue:

The increases in restaurant cost of goods sold as a percentage of restaurant revenue in the second quarter and first six months of 2023 as compared to the same periods in the prior year were

primarily the result of commodity inflation, higher freight costs and a shift to higher cost menu items partially offset by the menu price increase referenced above.

Commodity inflation was 12.5% and 14.5%, respectively, for the second quarter

and first six months of 2023.

Higher freight costs accounted for an increase of 0.1% as a percentage of restaurant revenue for both the second quarter and first six months of 2023 as compared to the same periods in the prior year.

menu items accounted for increases of 0.6% and 0.5%, respectively, as a percentage of restaurant revenue for the first six months of 2023 as compared to the same periods in the prior year.

We continue to partially offset inflationary pressures through menu price increases and operational improvements, and we presently expect the rate of commodity inflation to be approximately 8.5%

to 9.0% for the full year 2023, which assumes commodity inflation in the mid-single digits in the third quarter of 2023 and in the low-single digits in the fourth quarter of 2023.

The increase in retail cost of goods sold as a percentage of retail revenue in the second quarter of 2023 as compared to the same period in the prior year resulted from higher markdowns.

The increase in retail cost of goods sold as a percentage of retail revenue in the first six months of 2023 as compared to the same period in the prior year resulted from higher markdowns and the

change in the provision for obsolete inventory.

First Six Months

Increase as a Percentage

of Total Revenue

Provision for obsolete inventory

Labor and Related Expenses

Labor and related expenses include all direct and indirect labor and related costs incurred in store operations.

The following table highlights labor and related expenses as a percentage of

total revenue for the second quarter and first six months of 2023 as compared to the same periods in the prior year:

Quarter Ended

Six Months Ended

Labor and related expenses

This percentage change for the second quarter of 2023 as compared to the same period in the prior year resulted from the following:

Second Quarter

Decrease as a Percentage

of Total Revenue

Employee health care expense

Store management compensation

Store hourly labor

This percentage change for the first six months of 2023 as compared to the same period in the prior year resulted from the following:

First Six Months

Decrease as a Percentage

of Total Revenue

Employee health care expense

Store management compensation

The decreases in employee health care expenses as a percentage of total revenue for the second quarter and first six months of 2023 as compared to the same periods in the prior year resulted

primarily from lower enrollment.

The decreases in store management compensation as a percentage of total revenue for the second quarter and first six months of 2023 as compared to the same periods in the prior year were

primarily driven by the increases in total revenue in 2023 partially offset by wage inflation.

The decrease in store hourly labor expense as a percentage of total revenue for the second quarter of 2023 as compared to the same period in the prior year resulted primarily from the increase in

total revenue partially offset by wage inflation.

In addition to menu price increases, we continue to partially offset inflationary pressures through labor productivity initiatives, and we presently expect the rate of wage inflation to be

approximately 6.5% in 2023.

Other Store Operating Expenses

Other store operating expenses include all store-level operating costs, the major components of which are operating supplies, repairs and maintenance, utilities, depreciation and amortization,

advertising, rent, third-party delivery fees, credit and gift card fees, real and personal property taxes and general insurance.

The following table highlights other store operating expenses as a percentage of total revenue for the second quarter and first six months of 2022 as compared to the same periods in the prior

Quarter Ended

Six Months Ended

Other store operating expenses

These percentage changes resulted primarily from the following:

Second Quarter

Increase (Decrease) as a

Percentage of Total Revenue

First Six Months

Increase (Decrease) as a

Percentage of Total Revenue

Maintenance expense

Utilities expense

Supplies expense

Advertising expense

Depreciation expense

During the second quarter and the first six months of 2023 as compared to the same periods in the prior year, higher costs for maintenance expense, utilities expense and supplies expenses

resulted from broad inflationary pressures.

During the second quarter and first six months of 2023 as compared to the same periods in the prior year, certain expenses as a percentage of total revenue materially decreased due to the

significant increases in total revenue.

In particular, the decreases in depreciation expense and advertising expense as a percentage of total revenue were primarily driven by the increases in total revenue in 2023.

General and Administrative Expenses

The following table highlights general and administrative expenses as a percentage of total revenue for the second quarter and first six months of 2023 as compared to the same periods in the

Quarter Ended

Six Months Ended

General and administrative expenses

The decrease in general administrative expenses as a percentage of total revenue in the second quarter of 2023 as compared to the same period in the prior year resulted primarily from the

significant increase in total revenue.

The increase in general and administrative expenses as a percentage of total revenue in the first six months of 2023 as compared to the same period in the prior year resulted primarily from proxy

contest and settlement expenses in connection with the Company’s calendar year 2022 annual shareholders meeting held on November 17, 2022.

Interest Expense

The following table highlights interest expense, net in dollars for the second quarter and first six months of 2023 as compared to the same periods in the prior year:

Quarter Ended

Six Months Ended

Interest expense, net

The increase in interest expense for the second quarter and first six months of 2023 as compared to the same periods in the prior year resulted primarily from higher debt levels under our

revolving credit facility and higher average weighted interest rates.

Provision for Income Taxes

The following table highlights the provision for income taxes as a percentage of income before income taxes (“effective tax rate”) for the second quarter and first six months of 2023 as

compared to the same periods in the prior year:

Quarter Ended

Six Months Ended

Effective tax rate

The decreases in the effective tax rate in the second quarter and the first six months of 2023 as compared to the same periods in the prior year are primarily due to an increase in tax credits

resulting from lower earnings in the current year periods.

We presently expect our effective tax rate for 2023 to be approximately 10% to 12%.

Liquidity and Capital Resources

Our primary sources of liquidity are cash generated from our operations and our borrowing capacity under our 2022 Revolving Credit Facility.

Our internally generated cash, along with cash on

hand at July 29, 2022 and borrowings under our revolving credit facility, were sufficient to finance all of our growth, dividend payments, share repurchases, working capital needs, interest payments under our revolving credit facility and other

cash payment obligations in the first six months of 2023.

We believe that cash on hand at January 27, 2023, along with cash expected to be generated from our operating activities and the borrowing capacity under our revolving credit facility,

will be sufficient to finance our continuing operations, our continuing expansion plans, share repurchases and working capital needs over the next twelve months.

We believe that cash expected to be generated from our operating activities and the

borrowing capacity under our revolving credit facility will be sufficient to finance our continuing operations, dividend payments, capital expenditures, interest expense on long-term debt obligations, operating lease obligations, continuing

expansion plans, share repurchases and working capital needs beyond the next twelve months.

Our ability to draw on our revolving credit facility is subject to the satisfaction of provisions of the credit facility, as amended, and we believe we

will be able to refinance our revolving credit facility and other debt instruments prior to their maturity.

Cash Generated From Operations

Our operating activities provided net cash of $100,822 for the first six months of 2023, representing a decrease from the $107,793 net cash provided during the first six months of 2022.

decrease resulted primarily from the timing of payments for accounts payable and certain taxes partially offset by the change in retail inventory.

Borrowing Capacity, Debt Covenants and Notes

On June 17, 2022, we entered into a five-year $700,000 revolving credit facility (the “2022 Revolving Credit Facility”) with substantially the same terms and financial covenants as our previous

amended $800,000 revolving credit facility.

The 2022 Revolving Credit Facility also contains an option for the Company to increase the revolving credit facility by $200,000.

At January 27, 2023, we had $160,000 of outstanding borrowings under the 2022 Revolving Credit Facility and $31,896 of standby letters of credit related to securing reserved claims under our

workers’ compensation insurance and our July 29, 2020 and August 4, 2020 sale and leaseback transactions, which reduce our borrowing availability under the 2022 Revolving Credit Facility.

At January 27, 2023, we had $508,104 in borrowing

availability under our 2022 Revolving Credit Facility.

During the first six months of 2023, we borrowed $90,000 and repaid $60,000 under the 2022 Revolving Credit Facility.

See Note 4 to our Condensed Consolidated Financial Statements for

further information on our long-term debt.

Our 2022 Revolving Credit Facility contains customary financial covenants, which include maintenance of a maximum consolidated total senior secured leverage ratio and a minimum consolidated

interest coverage ratio.

We were in compliance with the 2022 Revolving Credit Facility’s financial covenants at July 29, 2022, and we expect to be in compliance with the 2022 Revolving Credit Facility’s financial covenants for the remaining term

of the facility.

On June 18, 2021, the Company entered into an issuance and sale of $300,000 aggregate principal amount of 0.625% Convertible Senior Notes due 2026.

The Notes are senior, unsecured obligations of

the Company and bear cash interest at a rate of 0.625% per annum, payable semi-annually in arrears on June 15 and December 15 of each year, which initiated on December 15, 2021.

The Notes mature on June 15, 2026, unless earlier converted,

repurchased or redeemed.

Capital Expenditures and Proceeds from Sale of Property and Equipment

Capital expenditures (purchase of property and equipment) net of proceeds from insurance recoveries were $48,369 for the first six months of 2023 as compared to $29,763 for the same period in the

Our capital expenditures consisted primarily of capital investments for existing stores, new store locations and capital expenditures for strategic initiatives.

The increase in capital expenditures in the first six months of 2023

from the first six months of 2022 resulted primarily from increased capital expenditures for existing stores and an increase in the number of new store locations as compared to the prior year.

We estimate that our capital expenditures during

2023 will be approximately $110,000 to $120,000.

This estimate includes the acquisition of sites and construction costs of new MSBC locations that have opened or that we expect to open during 2023, as well as for acquisition and construction

costs for new Cracker Barrel and MSBC locations that we plan to be opened in 2024.

We intend to fund our capital expenditures with cash generated by operations and borrowings under our 2022 Revolving Credit Facility, as necessary.

Dividends, Share Repurchases and Share-Based Compensation Awards

Our 2022 Revolving Credit Facility imposes restrictions on the amount of dividends we are permitted to pay and the amount of shares we are permitted to repurchase.

Under the 2022 Revolving

Credit Facility, provided there is no default existing and the total of our availability under the 2022 Revolving Credit Facility plus our cash and cash equivalents on hand is at least $100,000 (the “Cash Availability”), we may declare and pay

cash dividends on shares of our common stock and repurchase shares of our common stock (1) in an unlimited amount if at the time the dividend or the repurchase is made our consolidated total senior secured leverage ratio is 2.75 to 1.00 or less

and (2) in an aggregate amount not to exceed $100,000 in any fiscal year if our consolidated total leverage ratio is greater than 2.75 to 1.00 at the time the dividend or repurchase is made;

notwithstanding (1) and (2), so long as immediately

after giving effect to the payment of any such dividends, Cash Availability is at least $100,000, we may declare and pay cash dividends on shares of our common stock in an aggregate amount not to exceed in any fiscal year the product of the

aggregate amount of dividends declared in the fourth quarter of the immediately preceding fiscal year multiplied by four.

During the first six months of 2023, we paid a regular dividend of $2.60 per share and declared a dividend of $1.30 per share that was subsequently paid on January 31, 2023, to shareholders of

record on January 12, 2023.

In the fourth quarter of 2022, we were authorized by our Board of Directors to repurchase shares of the Company’s outstanding common stock at management’s discretion up to a total value of

During the first six months of 2023, we repurchased 171,792 shares of our common stock in the open market at an aggregate cost of $17,449 pursuant to this authorization.

During the first six months of 2023, we issued 41,149 shares of our common stock resulting from the vesting of share-based compensation awards.

Related tax withholding payments on these

share-based compensation awards resulted in a net use of cash of $2,400.

Working Capital

In the restaurant industry, virtually all sales are either for third-party credit or debit card or cash.

Restaurant inventories purchased through our principal food distributor are on terms of

net zero days, while restaurant inventories purchased locally are generally financed from normal trade credit.

Because of our retail gift shops, which have a lower product turnover than the restaurant business, we carry larger inventories than

many other companies in the restaurant industry.

Retail inventories purchased domestically are generally financed from normal trade credit, while imported retail inventories are generally purchased through wire transfers.

These various trade

terms are aided by the rapid turnover of the restaurant inventory.

Employees generally are paid on weekly or semi-monthly schedules in arrears for hours worked except for bonuses that are paid either quarterly or annually in arrears.

operating expenses have normal trade terms and certain expenses, such as certain taxes and some benefits, are deferred for longer periods of time.

We had negative working capital of $162,108 at January 27, 2023 versus negative working capital of $185,048 at July 29, 2022.

The change in working capital from July 29, 2022 to January 27, 2023

primarily resulted from the timing of payments for accounts payable and certain taxes partially offset by the decrease in retail inventory levels.

Off-Balance Sheet Arrangements

We have no material off-balance sheet arrangements.

Material Commitments

There have been no material changes in our material commitments other than in the ordinary course of business since the end of 2022.

Refer to the sub-section entitled “Material Commitments”

under the section entitled “Liquidity and Capital Resources” presented in the MD&A of our 2022 Form 10-K for additional information regarding our material commitments.

Critical Accounting Estimates

We prepare our Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America.

The preparation of these financial statements

requires us to make estimates and assumptions about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures.

We base our estimates and judgments on historical

experience, current trends, outside advice from parties believed to be experts in such matters, and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments

about the carrying value of assets and liabilities that are not readily apparent from other sources.

However, because future events and their effects cannot be determined with certainty, actual results could differ from those assumptions and

estimates, and such differences could be material.

Our significant accounting policies are discussed in Note 2 to the Consolidated Financial Statements contained in the 2022 Form 10-K.

Judgments and uncertainties affecting the application of

those policies may result in materially different amounts being reported under different conditions or using different assumptions.

Critical accounting estimates are those that:

management believes are most important to the accurate portrayal of both our financial condition and operating results, and

require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

We consider the following accounting estimates to be most critical in understanding the judgments that are involved in preparing our Consolidated Financial Statements:

Impairment of Long-Lived Assets

Insurance Reserves

Retail Inventory Valuation

Lease Accounting

Management has reviewed these critical accounting estimates and related disclosures with the Audit Committee of our Board of Directors.

Impairment of Long-Lived Assets

We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.

Recoverability of assets is

measured by comparing the carrying value of the asset to the undiscounted future cash flows expected to be generated by the asset.

If the total expected future cash flows are less than the carrying amount of the asset, the carrying value is

written down, for an asset to be held and used, to the estimated fair value or, for an asset to be disposed of, to the fair value, net of estimated costs of disposal.

Any loss resulting from impairment is recognized by a charge to income.

Judgments and estimates that we make related to the expected useful lives of long-lived assets and future cash flows are affected by factors such as changes in economic conditions and changes in operating performance.

The accuracy of such

provisions can vary materially from original estimates and management regularly monitors the adequacy of the provisions until final disposition occurs.

We have not made any material changes in our methodology for assessing impairments during the first six months of 2023, and we do not believe that there is a reasonable likelihood that there will

be a material change in the estimates or assumptions used by us in the future to assess impairment of long-lived assets.

However, if actual results are not consistent with our estimates and assumptions used in estimating future cash flows and

fair values of long-lived assets, we may be exposed to losses that could be material.

It is possible that we may recognize impairment as a result of the unknown impacts of the COVID-19 pandemic and our response.

Insurance Reserves

We self-insure a significant portion of our expected workers’ compensation and general liability insurance programs.

We purchase insurance for individual workers’ compensation claims that exceed

$250, $750 or $1,000 depending on the state in which the claim originated.

We purchase insurance for individual general liability claims that exceed $500.

We record a reserve for workers’ compensation and general liability for all unresolved

claims and for an estimate of incurred but not reported (“IBNR”) claims.

These reserves and estimates of IBNR claims are based upon a full scope actuarial study which is performed annually at the end of our first quarter and is adjusted by the

actuarially determined losses and actual claims payments for the fourth quarter.

Additionally, we perform limited scope actuarial studies on a quarterly basis to verify and/or modify our reserves.

The reserves and losses in the actuarial study

represent a range of possible outcomes within which no given estimate is more likely than any other estimate.

As such, we record the losses in the lower half of that range and discount them to present value using a risk-free interest rate based

on projected timing of payments.

We also monitor actual claims development, including incurrence or settlement of individual large claims during the interim periods between actuarial studies as another means of estimating the adequacy of our

Our group health plans combine the use of self-insured and fully-insured programs.

Benefits for any individual (employee or dependents) in the self-insured group health program are limited.

record a liability for the self-insured portion of our group health program for all unpaid claims based upon a loss development analysis derived from actual group health claims payment experience.

Additionally, we record a liability for unpaid

prescription drug claims based on historical experience.

Our accounting policies regarding insurance reserves include certain actuarial assumptions and management judgments regarding economic conditions, the frequency and severity of claims and claim

development history and settlement practices.

We have not made any material changes in the methodology used to establish our insurance reserves during the first six months of 2023 and do not believe there is a reasonable likelihood that there

will be a material change in the estimates or assumptions used to calculate the insurance reserves.

However, changes in these actuarial assumptions, management judgments or claims experience in the future may produce materially different amounts

of expense that would be reported under these insurance programs.

Retail Inventory Valuation

Cost of goods sold includes the cost of retail merchandise sold at our stores utilizing the retail inventory method (“RIM”).

Under RIM, the valuation of our retail inventories is determined by

applying a cost-to-retail ratio to the retail value of our inventories.

Inherent in the RIM calculation are certain inputs, including initial markons, markups, markdowns and shrinkage, which may significantly impact the gross margin calculation

as well as the ending inventory valuation.

Inventory valuation provisions are included for retail inventory obsolescence and retail inventory shrinkage.

Retail inventory is reviewed on a quarterly basis for obsolescence and adjusted as

appropriate based on assumptions made by management and judgment regarding inventory aging and future promotional activities.

Retail inventory also includes an estimate of shrinkage that is adjusted upon physical inventory counts.

physical inventory counts are conducted based upon a cyclical inventory schedule.

An estimate of shrinkage is recorded for the time period between physical inventory counts by using a two-year average of the physical inventories’ results on a

store-by-store basis.

We have not made any material changes in the methodologies, estimates or assumptions related to our merchandise inventories during the first six months of 2023 and do not believe there is a

reasonable likelihood that there will be a material change in the estimates or assumptions in the future.

However, actual obsolescence or shrinkage recorded may produce materially different amounts than we have estimated.

Lease Accounting

We have ground leases for our leased stores and office space leases that are recorded as operating leases under various non-cancellable operating leases.

Additionally, we lease our retail distribution center, advertising billboards, vehicle fleets, and certain equipment under various non-cancellable operating lea ses.

We evaluate our leases at contract inception to determine whether we have the right to control use of the identified asset for a period of time in exchange for consideration.

If we determine

that we have the right to obtain substantially all of the economic benefit from use of the identified asset and the right to direct the use of the identified asset, we recognize a right-of-use asset and lease liability.

Also, at contract

inception, we evaluate our leases to estimate their expected term which includes renewal options that we are reasonably assured that we will exercise, and the classification of the lease as either an operating lease or a finance lease.

Additionally, as our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the time of commencement or modification date in determining the present value of

lease payments.

Assumptions used in determining our incremental borrowing rate include our implied credit rating and an estimate of secured borrowing rates based on comparable market data.

We assess the impairment of the right-of-use

asset whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable.

Changes in these assumptions and management judgments may produce materially different amounts in the recognition of the right-of-use assets and lease liabilities.

Additionally, any loss

resulting from an impairment of the right-of-use assets is recognized by a charge to income, which could be material.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements