What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-03-05 compared with 2023-03-07 · 165 added, 137 removed, 372 unchanged (45% of the section changed)

14 unchanged sentences

A recipient of hundreds of local “Best Breakfast” and “Best Brunch” accolades, First Watch’s award-winning chef-driven menu includes elevated executions of classic favorites for breakfast, brunch and lunch.

In 2022, First Watch was recognized with ADP’s coveted Culture at Work Award and named a Top 100 Most Loved Workplace® by Newsweek and the Best Practice Institute.

The Company is majority owned by Advent International Corporation, one of the world’s largest private-equity firms.

In 2023, First Watch was named the top restaurant brand in Yelp’s inaugural list of the top 50 most-loved brands in the United States.

In 2023 and 2022, First Watch was named a Top 100 Most Loved Workplace® by Newsweek and the Best Practice Institute.

In 2022, First Watch was recognized with ADP’s coveted Culture at Work Award.

The Company is majority owned by Advent International L.P., one of the world’s largest private-equity firms.

The Company’s common stock trades on Nasdaq under the ticker symbol “FWRG.”

3 unchanged sentences

Its fiscal quarters are comprised of 13 weeks each and end on the 13th Sunday of each quarter, save for 53-week years during which the fourth quarter ends on the 14th Sunday of the fourth quarter.

All references to 2022, 2021 and 2020 reflect the results of the 52-week fiscal years ended December 25, 2022, December 26, 2021 and December 27, 2020, respectively.

All references to 2023 reflect the results of the 53-week fiscal year ended December 31, 2023.

All references to 2022 and 2021 reflect the 52-week fiscal years ended December 25, 2022 and December 26, 2021, respectively.

We report financial and operating information in one segment.

10 unchanged sentences

There were 327 restaurants and 301 restaurants in our Comparable Restaurant Base in 2023 and in 2022, respectively.

There were 207 restaurants in the three-year Comparable Restaurant Base.

There were 205 restaurants in the four-year Comparable Restaurant Base.

Measuring our same-restaurant sales growth allows management to evaluate the performance of our existing restaurant base.

36 unchanged sentences

Financial Highlights

In 2022, the Company continued to capture strong consumer demand and same-restaurant traffic growth as the dining rooms in the Comparable Restaurant Base returned to more than 90% of 2019 usage levels, while the off-premises channel proved to be a growth vehicle with sales increasing 6.3% from 2021.

The financial results of 2023 reflect the continued growth of the Company.

Our AUV increased 10.7% to $2.3 million in 2023 from $2.0 million in 2022.

Despite the inflationary environment, customer demand allowed management to offset much of the inflationary pressure with modest menu price increases while continuing to drive same-restaurant traffic growth.

Additionally, the Company’s development team continued to accelerate new restaurant openings and populate the pipeline of prospective restaurant projects.

The 29 NROs opened with warm customer response and generated an annualized average unit volume of $2.2 million, which exceeded our AUV.

Financial highlights for 2022 include the following:

The Company continued to accelerate the pace of new restaurant openings with 37 NROs in 2023 and we executed on our growth strategy as we acquired 23 operating restaurants from our franchisees in 2023.

Financial highlights 2023, which was a 53-week fiscal year, include the following:

• Total revenues increased 22.1% to $891.6 million from $730.2 million in 2022

• System-wide sales increased 21.9% to $914.8 million from $750.7 million in 2021

• Same-restaurant sales growth of 14.5% (29.6% relative to 2019*)

• Same-restaurant traffic growth of 7.7% (6.5% relative to 2019*)

• Income from operations of $16.9 million and Income from operations margin of 2.4% compared to Income from operations of $22.2 million and Income from operations margin of 3.8% in 2021

• Restaurant level operating profit ** of $128.9 million and Restaurant level operating profit margin ** of 17.9% compared to Restaurant level operating profit ** of $115.4 million and Restaurant level operating profit margin ** of 19.5% in 2021

• Net income of $6.9 million compared to Net loss of $(2.1) million in 2021

• System-wide sales increased 20.6% to $1.1 billion from $914.8 million in 2022

• Same-restaurant sales growth of 7.6%* (up 38.9% relative to 2019**)

• Same-restaurant traffic growth of 0.2%* (up 7.5% relative to 2019**)

• Income from operations increased to $41.3 million from $16.9 million in 2022

• Income from operations margin increased to 4.7% from 2.4% in 2022

• Restaurant level operating profit*** increased to $175.7 million from $128.9 million in 2022

• Restaurant level operating profit margin*** increased to 20.0% from 17.9% in 2022

• Net income increased to $25.4 million from $6.9 million in 2022

• Adjusted EBITDA*** increased to $99.5 million from $69.3 million in 2022

1 unchanged sentence

___________________

* Comparison to the fiscal year ended December 29, 2019 (“2019”) is presented for enhanced comparability due to the economic impact of COVID-19.

*Comparison to the 53 weeks ended January 1, 2023, is provided for enhanced comparability.

**Comparison to the 53 weeks ended January 5, 2020, is provided for enhanced comparability.

*** See Non-GAAP Financial Measure Reconciliations section below.

Business Trends, Customer and Supply Chain

Despite surging inflation impacting consumers in 2022, we saw a return of in-restaurant dining levels similar to 2019 levels while our off-premises sales remained strong, indicating continued customer demand.

The unusually high commodity inflation impacted costs throughout 2022 with some deceleration in the third and fourth quarters as the Company began to lap prior year inflation-impacted periods.

The Company’s market basket experienced cost inflation of approximately 13.0% in 2022.

Notably, egg prices and the supply of cage-free shell eggs used in our recipes were under pressure most of the year due to multiple occurrences of Avian Influenza in the United States.

Management solved for shortages by expanding sourcing but at higher than planned prices.

In 2023, we expect continued cost inflation for our entire market basket in the range of 4.0% 6.0%.

During 2022, there was an increase in the volume of job applications and an overall easing of staffing constraints and labor shortages that developed in 2020 and 2021.

Restaurant staffing in both hourly and manager level positions enabled us to serve our increased in-restaurant dining and off-premises demand and sets us up to execute on our strategic development plan and open new restaurants.

We experienced restaurant-level hourly labor inflation of approximately 11.0% in 2022, which combined with the increase in staffing levels, contributed to increased labor and other related expenses at the restaurant level.

In 2023, we expect restaurant-level hourly labor inflation of 9.0% to 11.0% and we intend to focus on optimizing our staffing as our restaurants have returned to a more normal seasonality.

Costs and timing of new restaurant construction were similarly challenged in 2022 due to the elevated inflation, uneven equipment delivery and supply chain interruptions.

As a result, our development team often negotiated with landlords for early entry into new restaurant facilities so we could better control the pace of interior build out and installation of equipment, dining room packages and First Watch trade dress.

We have largely mitigated the inflationary impacts through pricing actions and we will continue to price to offset inflation while remaining focused on maximizing traffic in our restaurants.

In late January 2023, we increased in-restaurant menu prices 4.1% to continue to offset the negative effects of inflationary costs.

Business Trends

Throughout 2023 and as compared to the prior year, First Watch continued to see dining room traffic grow.

The off-premises occasions, including higher-cost third-party delivery occasions declined for the Company.

The Company’s same-restaurant sales grew 7.6% during the year on the strength of modest 7% menu price increases and overall traffic growth.

We continued to experience a decline in the average cost across our consolidated market basket relative to the prior year.

Though still high, full-year average costs were 50 basis points lower than 2022.

We expect inflation to trend upward during the fiscal year ending December 29, 2024 (“2024”) in the range of 2% to 4%.

In 2023, our manager and hourly team member turnover improved sequentially throughout each quarter.

At year end, we were staffed with over 120 managers to lead and operate our future new company-owned restaurants.

We experienced overall restaurant-level labor cost inflation of 8% and we expect 5% to 7% labor inflation in 2024.

With respect to our new restaurant openings, we have experienced more frequent delays in developers’ delivery of new commercial space as well as increased availability of second-generation sites.

Furthermore, our capital invested in new restaurants has increased significantly due in part to inflation, as well as to our strategy of leasing larger dining and kitchen space to serve unmet demand in selected trade areas.

In late January 2024, we increased in-restaurant menu prices approximately 2% to offset the negative effects of inflationary costs.

Development Highlights

During 2022, the Company had a total of 43 new system-wide restaurants in 16 states and we closed 4 company-owned restaurants.

During 2023, the Company had a total of 51 new system-wide restaurants in 19 states and we closed one company-owned restaurant.

We also acquired 23 operating restaurants from our franchisees in the execution of our growth strategy.

See Note 3, Business Acquisitions , in the accompanying notes to the consolidated financial statements for additional information.

At December 31, 2023, the Company had a total of 524 system-wide restaurants.

Restaurant closures generally result from lease expirations where management is optimizing the Company’s overall market development strategy.

FISCAL YEAR 2023

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New restaurants

Closures/Disenfranchised

Acquisitions of franchise-owned restaurants 23 (23) —

End of period

We expect to open 38 to 42 company-owned restaurants and 10 to 12 franchise-owned restaurants during the fiscal year ending December 31, 2023 (“2023”).

We also plan on closing 3 company-owned restaurants, resulting in a total of 45-51, net new system-wide restaurants in 2023.

We expect to open between 43 to 47 company-owned restaurants and 9 to 11 franchise-owned restaurants during 2024.

We also plan on closing 1 company-owned restaurant, resulting in a total of 51 to 57, net new system-wide restaurants in 2024.

Selected Operating Data

2023 2022 2021

System-wide sales (in thousands) $ 914,816 $ 750,674 $ 426,303

Operating weeks in fiscal year 53 52 52

System-wide restaurants 524 474 435

1 unchanged sentence

Franchise-owned 99 108 94

System-wide sales (in thousands) $ 1,103,089 $ 914,816 $ 750,674

Same-restaurant sales growth 7.6 % * 14.5 % 63.0 %

1 unchanged sentence

AUV (in thousands) $ 2,250 $ 2,032 $ 1,786

Income (Loss) from operations (in thousands) $ 16,913 $ 22,243 $ (47,222)

Income (Loss) from operations margin 2.4 % 3.8 % (14.0) %

Income from operations (in thousands) $ 41,267 $ 16,913 $ 22,243

Income from operations margin 4.7 % 2.4 % 3.8 %

Restaurant level operating profit (in thousands) (1)

9 unchanged sentences

________________

(1) Reconciliations from Income (Loss) from operations and Income (Loss) from operations margin, the most comparable GAAP measures to Restaurant level operating profit and Restaurant level operating profit margin, are set forth in the schedules within the Non-GAAP Financial Measure Reconciliations section below.

* Comparison to the 53 weeks ended January 1, 2023, is provided for enhanced comparability.

(1) Reconciliations from Income from operations and Income from operations margin, the most comparable GAAP measures to Restaurant level operating profit and Restaurant level operating profit margin, are set forth in the schedules within the Non-GAAP Financial Measure Reconciliations section below.

(2) Reconciliations from Net income (loss) and Net income (loss) margin, the most comparable GAAP measures to Adjusted EBITDA and Adjusted EBITDA margin, are set forth in the schedules within the Non-GAAP Financial Measure Reconciliations section below.

16 unchanged sentences

Impairments and loss on disposal of assets 1,359 0.2 % 920 0.1 %

Transaction expenses (income), net 2,513 0.3 % (1,156) (0.2) %

Transaction expenses, net 3,147 0.4 % 2,513 0.3 %

Total operating costs and expenses 850,284 95.4 % 713,249 97.7 %

2 unchanged sentences

Interest expense (8,063) (0.9) % (5,232) (0.7) %

Other income (expense), net 910 0.1 % (1,774) (0.3) %

Other income, net 2,871 0.3 % 910 0.1 %

Income before income taxes 36,075 4.0 % 12,591 1.7 %

Income tax expense (10,690) (1.2) % (5,684) (0.8) %

Net income (loss) and total comprehensive income (loss) $ 6,907 0.9 % $ (2,107) (0.4) %

Net income $ 25,385 2.8 % $ 6,907 0.9 %

(1) Percentages are calculated as a percentage of restaurant sales.

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Total Restaurant sales $ 877,092 $ 719,181 $ 157,911 22.0 %

The increase in total restaurant sales during 2022 as compared to 2021 was primarily due to (i) same-restaurant sales growth of 14.5%, driven by same-restaurant traffic growth of 7.7%, the increase in average check per person and the increase in third-party delivery sales, in addition to (ii) $26.8 million from 29 NROs.

The increase in total restaurant sales during 2023 as compared to 2022 was primarily due to (i) $53.5 million from same-restaurant sales growth of 7.6%, mainly driven by menu price increases, (ii) $85.1 million from restaurants not in the

Comparable Restaurant Base, which included $25.5 million from our 37 NROs and $18.4 million from the 23 restaurants we had acquired from our franchisees and (iii) $19.2 million of restaurant sales during the 53rd week of 2023.

Franchise Revenues

5 unchanged sentences

Initial fees 388 298 90 30.2 %

Business combinations - revenues recognized 607 — 607 — %

Total Franchise revenues $ 14,459 $ 10,981 $ 3,478 31.7 %

The increase in franchise revenues during 2022 as compared to 2021 was primarily driven by (i) the increase in sales from franchise-owned restaurants and (ii) $0.4 million from 14 franchise-owned NROs.

The increase in franchise revenues during 2023 as compared to 2022 was primarily driven by (i) the increase in sales from franchise-owned restaurants, (ii) $0.6 million from 14 franchise-owned NROs and (iii) $0.6 million of deferred franchise revenues recognized in connection with the acquisitions of restaurants from our franchisees.

The increase was partially offset by $0.6 million lower franchise fees as a result of the acquisitions of restaurants from our franchisees during 2023.

Food and Beverage Costs

3 unchanged sentences

As a percentage of restaurant sales 22.5 % 24.0 % (1.5)%

Food and beverage costs as a percent of restaurant sales increased during 2022 as compared to 2021 primarily due to inflation across the market basket, partially offset by menu price increases.

Food and beverage costs increased during 2022 as compared to 2021 primarily as a result of (i) the increase in restaurant sales, (ii) inflation across the market basket and (iii) $6.8 million from 29 NROs.

Food and beverage costs as a percent of restaurant sales decreased during 2023 as compared to 2022 primarily due to (i) lower commodity costs across the market basket, driven mostly by decreases in pork and avocado prices, and (ii) leveraging menu price increases.

Food and beverage costs increased during 2023 as compared to 2022 primarily as a result of (i) the increase in restaurant sales, (ii) 37 NROs and (iii) 23 restaurants we had acquired from our franchisees.

The increase was partially offset by lower commodity costs across the market basket, driven mostly by decreases in pork and avocado prices.

Labor and Other Related Expenses

4 unchanged sentences

As a percentage of restaurant sales 33.5 % 33.1 % 0.4%

Labor and other related expenses as a percentage of restaurant sales increased during 2022 as compared to 2021 primarily as a result of the increase in wages and staffing levels.

This increase was partially offset by (i) retention bonuses recognized in 2021 and (ii) a decrease in health insurance costs, which includes rebates from our group health plan.

The increase in labor and other related expenses during 2022 as compared to 2021 was primarily due to (i) the increase in wages and staffing levels and (ii) $11.0 million from 29 NROs.

This increase was partially offset by (i) retention bonuses recognized during 2021 and (ii) a decrease in health insurance costs, which includes rebates from our group health plan.

Labor and other related expenses as a percentage of restaurant sales increased during 2023 as compared to 2022 primarily as a result of the increase in wages and staffing to serve growing dining room traffic and strategic growth.

This increase was partially offset by lower health insurance costs.

The increase in labor and other related expenses during 2023 as compared to 2022 was primarily due to (i) the increase in wages and staffing levels, (ii) 37 NROs and (iii) 23 restaurants we had acquired from our franchisees.

This increase was partially offset by lower health insurance costs.

Other Restaurant Operating Expenses

3 unchanged sentences

As a percentage of restaurant sales 15.3 % 15.9 % (0.6)%

Other restaurant operating expenses as a percentage of restaurant sales during 2022 was slightly lower as compared to 2021 primarily due to leveraging in-restaurant dining sales, which was partially offset by the increase in the cost of to-go supplies and repairs and maintenance costs.

The increase in other restaurant operating expenses during 2022 as compared to 2021 was mainly due to (i) $9.6 million related to credit card fees, utilities, repairs and maintenance and insurance primarily driven by the increase in restaurant sales and restaurant growth, (ii) $7.2 million in operating supplies expense primarily driven by inflation and the increase in restaurant sales and restaurant growth, as well as (iii) $1.2 million in third-party delivery services fees.

Other restaurant operating expenses as a percentage of restaurant sales during 2023 decreased as compared to 2022 primarily due to (i) leveraging restaurant sales, (ii) lower costs of to-go supplies, (iii) lower insurance costs and (iv) lower third-party delivery fees mainly driven from leveraging in-restaurant dining sales.

This decrease was partially offset by higher repairs and maintenance expense.

The increase in other restaurant operating expenses during 2023 as compared to 2022 was driven by the increase in restaurant sales, restaurant growth and restaurant acquisitions from our franchisees resulting in an increase of (i) $11.8 million related to credit card fees, utilities and repairs and maintenance, (ii) $3.9 million related to operating supplies and (iii) $2.2 million related to third-party delivery services fees.

The increase was partially offset by lower insurance costs of $0.4 million.

Occupancy Expenses

3 unchanged sentences

As a percentage of restaurant sales 7.8 % 8.3 % (0.5)%

The decrease in occupancy expenses as a percentage of restaurant sales during 2022 as compared to 2021 was primarily due to sales leverage driven by increased restaurant sales.

The increase in occupancy expenses during 2022 as compared to 2021 was primarily due to the increase in the number of company-owned restaurants.

The decrease in occupancy expenses as a percentage of restaurant sales during 2023 as compared to 2022 was primarily due to leveraging restaurant sales.

The increase in occupancy expenses during 2023 as compared to 2022 was primarily due to our NROs and the acquired restaurants from our franchisees.

Pre-opening Expenses

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Early access improves the Company’s influence over the pace and timing of completion of new restaurants.

The increase in pre-opening expenses during 2022 as compared to 2021 was primarily due to (i) the higher number of restaurants opened, in addition to (ii) the higher number of restaurants expected to open and the related increase in pre-opening rent.

The increase in pre-opening expenses during 2023 as compared to 2022 was primarily due to (i) the higher number of restaurants opened and the increase in staffing and wages, as well as (ii) pre-opening rent expense mainly related to the increase in the number of new restaurant openings and restaurants that are expected to open, in addition to the investment in larger, stand-alone company-owned restaurants.

General and Administrative Expenses

4 unchanged sentences

General and administrative expenses $ 103,121 $ 84,959 $ 18,162 21.4 %

The increase in general and administrative expenses during 2022 as compared to 2021 was mainly due to (i) $7.3 million of stock-based compensation expense primarily from certain stock option awards that converted into time-based stock option awards upon the Company’s IPO, in addition to stock option awards and restricted stock units granted under the 2021 Equity Plan, (ii) $2.8 million related to health insurance costs and insurance expense associated with being a public company, (iii) $2.5 million related to legal, accounting and consulting services associated with being a public company, (iv) $1.7 million of expenses associated with investments in technology initiatives and the redesign of our systems and processes, as well as (v) $1.3 million in marketing expenses.

This increase was partially offset by the one-time expense of $5.6 million that was recognized in 2021 in connection with the modifications of certain stock option awards.

The increase in general and administrative expenses during 2023 as compared to 2022 was mainly due to (i) $15.2 million in compensation expense from performance-based compensation and additional employee headcount to support growth, (ii) $1.4 million of fees associated with investments in technology initiatives, (iii) $1.0 million in marketing expense, (iv) $0.8 million of estimated probable losses recorded in connection with the Delaware Secretary of State’s Abandoned or Unclaimed Property Voluntary Disclosure Agreement Program (“VDA Program”) (see Note 18, Commitments and Contingencies , in the accompanying notes to the consolidated financial statements for additional information), and (v) approximately $0.4 million of costs incurred in connection with the VDA Program.

This increase was partially offset by $2.8 million lower stock-based compensation expense mainly due to the accelerated recognition method for certain stock option grants as well as forfeitures of stock option grants, net of the stock-based compensation expense recognized for stock-based awards issued during 2023.

Depreciation and Amortization

Depreciation and amortization consists of the depreciation of fixed assets, including leasehold improvements, fixtures and equipment and the amortization of definite-lived intangible assets, which are primarily comprised of franchise rights.

Franchise rights includes rights which arose from the purchase price allocation in connection with the merger agreement through which the Company was acquired by funds affiliated with or managed by Advent International Corporation in August 2017 as well as reacquired rights from our acquisitions of franchise-owned restaurants.

Franchise rights includes rights which arose from the purchase price allocation in connection with the merger agreement through which the Company was acquired by funds affiliated with or man aged by Advent in August 2017 as well as reacquired rights from our acquisitions of franchise-owned restaurants.

(in thousands) 2023 2022 Change

Depreciation and amortization $ 41,223 $ 34,230 $ 6,993 20.4 %

The increase in depreciation and amortization during 2022 as compared to 2021 was primarily due to incremental depreciation of capital expenditures associated with NROs.

The increase in depreciation and amortization during 2023 as compared to 2022 was primarily due to incremental depreciation of capital expenditures associated with NROs and the acquired restaurants from our franchisees.

Impairments and Loss on Disposal of Assets

1 unchanged sentence

(in thousands) 2023 2022 Change

Impairments and loss on disposal of assets $ 920 $ 381 $ 539 n/m (1)

(1) Not meaningful.

In 2022 and 2021, the amounts represent write-off of assets retired as a result of restaurant closures or replacements of assets.

Transaction Expenses (Income), Net

Transaction expenses (income), net include (i) revaluations of contingent consideration payable to previous stockholders for tax savings generated through the use of federal and state loss carryforwards and general business credits that had been accumulated from operations prior to August 2017, (ii) gains or losses associated with lease or contract terminations, (iii) costs incurred in connection with the acquisition of franchise-owned restaurants, (iv) costs related to restaurant closures and (v) costs related to certain equity offerings.

Impairments and loss on disposal of assets $ 1,359 $ 920 $ 439 47.7%

In 2023, we recorded total impairment charges of $0.5 million, which primarily related to the long-lived assets of two company-owned restaurants for which management agreed to accelerate the expected closure dates.

In 2022, the amounts represented write-off of assets retired as a result of restaurant closures or replacements of assets.

Transaction Expenses, Net

Transaction expenses, net include (i) costs incurred in connection with the acquisition of franchise-owned restaurants, (ii) costs related to certain equity offerings, (iii) costs related to restaurant closures, (iv) gains or losses associated with lease or contract terminations and (v) revaluations of contingent consideration payable to previous stockholders for tax savings generated through the use of federal and state loss carryforwards and general business credits that had been accumulated from operations prior to August 2017.

(in thousands) 2023 2022 Change

Transaction expenses (income), net $ 2,513 $ (1,156) $ 3,669 n/m (1)

(1) Not meaningful.

Transaction expenses, net during 2022 was primarily due to $2.0 million of costs incurred in connection with the secondary public offering of the Company’s common stock by entities affiliated with our majority owner, Advent International Corporation (the “Secondary Offering”) and the Registration Statement on Form S-3.

Transaction income, net in 2021 was primarily due to recognizing a gain of $2.0 million related to a lease termination for the redevelopment of a restaurant facility by a landlord, partially offset by the $0.8 million loss recognized related to the revaluation of the contingent consideration payable to previous stockholders for tax savings generated through use of loss carryforwards and general business credits arising from Company operations prior to August 2017.

Transaction expenses, net $ 3,147 $ 2,513 $ 634 25.2%

Transaction expenses, net increased during 2023 as compared to 2022 primarily due to costs incurred in connection with the acquisitions of restaurants from our franchisees.

This increase was partially offset by (i) lower costs incurred by us in connection with the sale of the Company’s common stock by funds managed by Advent through secondary public offerings and (ii) costs incurred related to restaurant closures in 2022.

Income from Operations and Income from Operations Margin

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Income from operations margin 4.7 % 2.4 % 2.3%

Income from operations margin decreased during 2022 as compared to 2021 primar ily due to (i) inflation across commodities and supplies, (ii) the increase in restaurant-level wages and staffing, (iii) higher general and administrative expenses mainly due to stock-based compensation expense, public company costs and costs for strategic initiatives, as well as (iv) the increase in transaction costs.

This decrease was partially offset by menu price increases.

Income from operations decreased during 2022 as compared to 2021 primarily due to (i) inflation across commodities and supplies, (ii) the increase in restaurant-level wages and staffing, (iii) higher operating costs and expenses driven by the increase in restaurant sales and restaurant growth, (iv) higher general and administrative expenses mainly due to stock-based compensation expense, public company costs and costs for strategic initiatives, as well as (v) the increase in transaction costs.

This decrease was partially offset by the increase in restaurant sales and franchise revenues.

Income from operations margin increased during 2023 as compared to 2022 primarily due to (i) leveraging restaurant sales and (ii) lower costs for pork, avocados and to-go supplies.

This was partially offset by the increase in restaurant-level staffing and wages.

Income from operations increased during 2023 as compared to 2022 primarily due to (i) the increase in restaurant sales and franchise revenues and (ii) lower costs for commodities and to-go supplies.

This increase was partially offset by (i) higher restaurant-level wages and staffing, (ii) higher operating costs and depreciation expense driven by our restaurant growth and acquisitions of franchise-owned restaurants, as well as (iii) higher general and administrative expenses mainly attributable to additional employee headcount and performance-based compensation.

Interest Expense

2 unchanged sentences

Interest expense $ (8,063) $ (5,232) $ (2,831) 54.1 %

The decrease in interest expense during 2022 as compared to 2021 was primarily due to the full repayment of our borrowings under our previous senior credit facilities in October 2021, which were replaced by lower outstanding debt and reduced interest rates from the Term Facility pursuant to our Credit Agreement.

Other Income (Expense), Net

The increase in interest expense during 2023 as compared to 2022 was primarily due to higher interest rates and the increase in outstanding debt.

Other Income, Net

Other income (expense), net includes items deemed to be non-operating based on management’s assessment of the nature of the item in relation to our core operations.

(in thousands) 2023 2022 Change

Other income (expense), net $ 910 $ (1,774) $ 2,684 n/m (1)

Other income, net $ 2,871 $ 910 $ 1,961 n/m (1)

(1) Not meaningful.

The change in Other income (expense), net in 2022 as compared to 2021 primarily related to (i) the loss on extinguishment of debt recognized in connection with the full repayment of our borrowings under our previous senior credit facilities in 2021 and (ii) approximately $0.4 million of insurance recoveries recognized in connection with Hurricane Ian.

The increase in Other income, net in 2023 as compared to 2022 primarily related to the increase in (i) interest income and (ii) insurance recoveries, net of costs incurred, in connection with Hurricane Ian.

Income Tax Expense

1 unchanged sentence

(in thousands) 2023 2022 Change

Income tax expense $ (5,684) $ (2,477) $ (3,207) n/m (1)

Effective income tax rate 45.1 % 669.5 % n/m (1)

(1) Not meaningful.

The change in the effective income tax rates for 2022 as compared to 2021 was mainly due to (i) the Company’s increased profitability, (ii) the benefit of tax credits for FICA taxes on certain employees’ tip wages, (iii) non-deductible costs associated with the Secondary Offering and the Registration Statement on Form S-3 and (iv) impacts of executive stock-based compensation.

Net Income (Loss) and Net Income (Loss) Margin

Income tax expense $ (10,690) $ (5,684) $ (5,006) 88.1%

Effective income tax rate 29.6 % 45.1 % (15.5)%

The change in the effective income tax rates for 2023 as compared to 2022 was mainly due to (i) the change in the valuation allowance, (ii) the benefit of tax credits for FICA taxes on certain employees’ tips, (iii) impacts of executive stock-based compensation and (iv) non-deductible costs associated with underwritten secondary public offerings of the Company’s common stock by entities affiliated with our majority owner, Advent International L.P., and the Registration Statement on Form S-3 filed in 2022.

Net Income and Net Income Margin

(in thousands) 2023 2022 Change

Net income (loss) $ 6,907 $ (2,107) n/m (1)

Net income (loss) margin 0.9 % (0.4) % n/m (1)

Net income $ 25,385 $ 6,907 $ 18,478 n/m (1)

Net income margin 2.8 % 0.9 % 1.9%

(1) Not meaningful.

Net income and Net income margin during 2022 as compared to Net loss and Net loss margin during 2021 was primarily due to (i) lower interest expense and (ii) the loss on extinguishment of debt recognized in 2021.

This was partially offset by (i) the decrease in income from operations, (ii) costs associated with the Secondary Offering and the Registration Statement on Form S-3, as well as (iii) the increase in income tax expense.

The increase in net income and net income margin during 2023 as compared to 2022 was primarily due to the increase in income from operations, which was partially offset by higher (i) interest expense and (ii) income tax expense.

Restaurant Level Operating Profit and Restaurant level Operating Profit Margin

2 unchanged sentences

Restaurant level operating profit margin 20.0 % 17.9 % 2.1%

Restaurant level operating profit margin during 2022 decreased as compared to 2021 primarily due to (i) inflation across commodities and supplies and (ii) the increase in restaurant-level wages and staffing.

This decrease was partially offset by (i) leveraging the increase in restaurant sales and (ii) menu price increases.

Restaurant level operating profit during 2022 increased as compared to 2021 primarily due to same-restaurant sales growth, driven by same-restaurant traffic growth, the increase in average check per person and the increase in third-party delivery sales.

This increase was partially offset by (i) inflation across commodities and supplies, (ii) the increase in restaurant-level wages and staffing and (iii) the increase in operating costs and expenses driven by higher restaurant sales and our restaurant growth.

Restaurant level operating profit margin during 2023 increased as compared to 2022 primarily due to (i) leveraging restaurant sales and (ii) lower commodity costs across the market basket, driven mostly by decreases in pork and avocado prices and lower costs of to-go supplies.

This was partially offset by the increase in restaurant-level staffing and wages.

Restaurant level operating profit during 2023 increased as compared to 2022 primarily due to (i) same-restaurant sales growth, primarily driven by menu price increases, (ii) 37 NROs, (iii) 23 restaurants acquired from our franchisees and (iv) lower costs for commodities, driven mostly by decreases in pork and avocado prices, and lower costs of to-go supplies.

This was partially offset by the increase in (i) operating costs and expenses driven by our restaurant growth and (ii) restaurant-level staffing and wages.

Adjusted EBITDA and Adjusted EBITDA Margin

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Adjusted EBITDA margin 11.2 % 9.5 % 1.7%

The decrease in Adjusted EBITDA margin during 2022 as compared to 2021 was primarily due to (i) the decrease in restaurant level operating profit margin and (ii) the increase in general and administrative expenses mainly due to legal, accounting, consulting and insurance costs associated with being a public company, costs for strategic initiatives, as well as the increase in marketing expenses.

The increase in Adjusted EBITDA during 2022 as compared to 2021 was primarily due to the increase in restaurant level operating profit.

This increase was partially offset by higher general and administrative expenses mainly due to legal, accounting, consulting and insurance costs associated with being a public company, costs for strategic initiatives, as well as the increase in marketing expenses.

The increase in Adjusted EBITDA and Adjusted EBITDA margin during 2023 as compared to 2022 was primarily due to the increase in restaurant level operating profit and restaurant level operating profit margin.

This was partially offset by the increase in general and administrative expenses, mainly due to the increase in compensation expense.

Non-GAAP Financial Measure Reconciliations

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EBITDA 85,361 52,053 52,848

IPO-readiness and strategic transition costs (1)

2,318 2,402 4,247

Stock-based compensation (1)

7,604 10,374 8,596

Loss on extinguishment of debt — 2,403 —

Transaction expenses (income), net (2)

3,147 2,513 (1,156)

Strategic transition costs (3)

892 2,318 2,402

Impairments and loss on disposal of assets (4)

1,359 920 381

Delaware Voluntary Disclosure Agreement Program (5)

Recruiting and relocation costs (6)

Severance costs (7)

Delaware Voluntary Disclosure Agreement Program (7)

Costs in connection with natural disasters, net of insurance recoveries (8)

Insurance proceeds in connection with natural disasters, net (8)

Loss on extinguishment of debt — — 2,403

COVID-19 related charges (9)

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_____________________________

(1) Represents costs related to the assessment and redesign of our systems and processes.

In 2021 and 2020, the costs also include information technology support and external professional service costs incurred in connection with IPO-readiness efforts.

These costs are recorded within General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss).

(1) Represents non-cash, stock-based compensation expense which is recorded within General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss).

(3) Represents (i) revaluations of contingent consideration payable to previous stockholders for tax savings generated through the use of federal and state loss carryforwards and general business credits that had been accumulated from operations prior to August 2017, (ii) gains or losses associated with lease or contract terminations, (iii) costs incurred in connection with the acquisition of franchise-owned restaurants, (iv) costs related to restaurant closures and (v) costs related to secondary offerings of the Company’s common stock.

(4) Represents costs related to the disposal of assets due to retirements, replacements, restaurant closures and natural disasters.

There were no impairments recognized during the periods presented.

(2) Represents (i) costs incurred in connection with the acquisition of franchise-owned restaurants, (ii) costs related to certain equity offerings, (iii) costs related to restaurant closures, (iv) gains or losses associated with lease or contract terminations and (v) revaluations of contingent consideration payable to previous stockholders for tax savings generated through the use of federal and state loss carryforwards and general business credits that had been accumulated from operations prior to August 2017.

(3) Represents costs related to process improvements and strategic initiatives.

These costs are recorded within General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss).

(4) Represents impairment charges and costs related to the disposal of assets due to retirements, replacements, restaurant closures and natural disasters.

(5) Represents estimated probable loss and professional service costs incurred in connection with the Delaware Voluntary Disclosure Agreement Program related to unclaimed or abandoned property.

These costs are recorded in General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss).

(6) Represents costs incurred for hiring qualified individuals as we assessed the redesign of our systems and processes.

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(7) Severance costs are recorded in General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss).

(7) Represents professional service costs incurred in connection with the Delaware Voluntary Disclosure Agreement Program related to unclaimed or abandoned property.

These costs are recorded in General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss).

(8) Represents costs incurred, net of insurance recoveries, in connection with Hurricane Ian.

The costs include inventory obsolescence and spoilage, compensation for employees and support for hurricane relief, which were recorded in Food and beverage costs, Labor and other expenses and General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss).

(8) Represents insurance recoveries, net of costs incurred, in connection with Hurricane Ian, which were recorded in Other income, net on the Consolidated Statements of Operations and Comprehensive Income (Loss).

(9) Represents costs incurred in connection with the economic impact of the COVID-19 pandemic.

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Impairments and loss on disposal of assets (2)

1,359 920 381

Costs in connection with natural disasters (3)

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(1) Represents (i) revaluations of contingent consideration payable to previous stockholders for tax savings generated through the use of federal and state loss carryforwards and general business credits that had been accumulated from operations prior to August 2017, (ii) gains or losses associated with lease or contract terminations, (iii) costs incurred in connection with the acquisition of franchise-owned restaurants, (iv) costs related to restaurant closures and (v) costs related to secondary offerings of the Company’s common stock.

(2) Represents costs related to the disposal of assets due to retirements, replacements, certain restaurant closures and natural disasters.

There were no impairments recognized during the periods presented.

(1) Represents (i) costs incurred in connection with the acquisition of franchise-owned restaurants, (ii) costs related to certain equity offerings, (iii) costs related to restaurant closures, (iv) gains or losses associated with lease or contract terminations and (v) revaluations of contingent consideration payable to previous stockholders for tax savings generated through the use of federal and state loss carryforwards and general business credits that had been accumulated from operations prior to August 2017.

(2) Represents impairment charges and costs related to the disposal of assets due to retirements, replacements, restaurant closures and natural disasters.

(3) Represents costs incurred in connection with Hurricane Ian.

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Liquidity and Capital Resources

As of December 25, 2022, the Company had cash and cash equivalents of $49.7 million and outstanding borrowings under the Term Facility of $98.1 million, excluding unamortized debt issuance costs and deferred issuance costs .

In addition, availability under our Revolving Credit Facility was $75.0 million.

As of December 31, 2023, the Company had cash and cash equivalents of $49.6 million.

The Company had $92.5 million of principal amount outstanding of its existing $100.0 million term loan A facility (the “Term Facility”), excluding unamortized debt discount and deferred issuance costs, and the Company had drawn $30.0 million on its existing $75.0 million revolving credit facility (the “Revolving Credit Facility”) as of December 31, 2023.

Our principal uses of cash include capital expenditures for the development, acquisition or remodeling of restaurants, lease obligations, debt service payments and strategic infrastructure investments.

Our working capital requirements are low because our restaurants store very little inventory and our customers pay for their purchases at the time of the sale which frequently precedes our payment terms with suppliers.

We believe that our cash flow from operations, availability under our Credit Agreement and available cash and cash equivalents will be sufficient to meet our liquidity needs for at least the next 12 months.

We anticipate that to the extent that we require additional liquidity, or should we decide to pursue one or more significant acquisitions, it will be funded first through additional indebtedness and thereafter through the issuance of equity.

On January 5, 2024, (the “Closing Date”), FWR Holding Corporation, a Delaware corporation (“FWR”), an indirect subsidiary of the Company, entered into that certain Amendment No.

2 to Credit Agreement (the “Amendment”), by and among FWR, as borrower, AI Fresh Parent, Inc., a Delaware corporation and indirect subsidiary of the Company (“Holdings”), the subsidiaries of FWR party thereto as guarantors, the lenders party thereto and Bank of America, N.A., as administrative agent and collateral agent (in such capacities, the “Administrative Agent”), which amended its credit agreement dated as of October 6, 2021 ((as previously amended, and as amended by the Amendment, the “Credit Agreement”) by and among FWR, Holdings, the lenders from time to time party thereto and the Administrative Agent.

Pursuant to the terms of the Amendment, (i) the Term Facility was replaced with a new $100.0 million term loan A facility, (the “New Term Facility”), on terms substantially identical to the Term Facility, (ii) the Revolving Credit Facility was replaced with a new $75.0 million revolving credit facility (the “New Revolving Credit Facility”) on terms substantially identical to the Revolving Credit Facility, (iii) a new $125.0 million incremental delayed draw term loan facility, (the “New Delayed Draw Term Facility”), was established that will be available to FWR in one or more draws of at least $5.0 million each for a period of 18 months following the Closing Date, and (iv) the New Revolving Credit Facility was increased by $50.0 million in new revolving credit commitments bringing the aggregate committed amount under the New Revolving Credit Facility to $125.0 million.

Commitments in respect of the New Delayed Draw Term Facility may be reduced, in whole or in part, at any time prior to 18 months following the Closing Date in the sole discretion of FWR.

Loans under the New Term Facility and, once funded, the New Delayed Draw Term Facility will constitute the same class of term loans for all purposes under the amendment to the Credit Agreement.

We believe that our cash flows from operations, availability under our Credit Agreement and available cash and cash equivalents will be sufficient to meet our liquidity needs for at least the next 12 months.

We anticipate that to the extent that we require additional liquidity, it will be funded first through additional indebtedness and thereafter through the issuance of equity.

Although we believe that our current level of total available liquidity is sufficient to meet our short-term and long-term liquidity requirements, we regularly evaluate opportunities to improve our liquidity position in order to enhance financial flexibility.

On November 7, 2022, we filed a Registration Statement on Form S-3 that allows the Company to sell up to 5,000,000 shares of common stock from time to time in one or more offerings.

We estimate that our capital expenditures will total approximately $100.0 million to $110.0 million in 2023, which will be invested primarily in new restaurant projects and planned remodels.

We plan to fund the capital expenditures primarily with cash generated from our operating activities as well as with borrowings from our facilities pursuant to our Credit Agreement.

We estimate that our capital expenditures, not including capital allocated to acquisitions of franchise-owned restaurants, will total approximately $125.0 million to $135.0 million in 2024, which will be invested primarily in new restaurant projects and planned remodels.

We plan to fund the capital expenditures and our significant acquisitions primarily with cash generated from our operating activities as well as with borrowings from our facilities pursuant to our Credit Agreement.

Summary of Cash Flows

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Cash used in investing activities (123,370) (63,111)

Cash used in financing activities (2,018) (14,271)

Net (decrease) increase in cash and cash equivalents and restricted cash $ (2,192) $ 13,018

Cash provided by operating activities during 2022 was $62.9 million as compared to $63.0 million during 2021 primarily due to (i) the increase in net income of $9.0 million and (ii) the impact of non-cash charges of $7.4 million, which were offset by (iii) a net change in operating assets and liabilities of $16.4 million.

The increase in the non-cash charges was primarily driven by (i) additional stock-based compensation expense resulting from certain stock option awards that converted into time-based stock option awards upon closing of the IPO as well as new stock option awards and restricted stock units issued under the 2021 Equity Plan, (ii) the increase in non-cash operating lease costs and depreciation expense mainly due to our restaurant growth.

The net change in operating assets and liabilities of $16.4 million was primarily a result of (i) the timing of employee compensation payments, (ii) the payment of payroll taxes deferred in 2020 as a result of the Coronavirus, Aid, Relief and Economic Security Act and (iii) the timing of operational payments.

Cash used in investing activities increased to $63.1 million during 2022 from $35.7 million during 2021 primarily as a result of the increase in capital expenditures to support our restaurant growth and new restaurant technology.

Cash used in financing activities decreased to $2.0 million during 2022 from $14.3 million during 2021 primarily as a result of the repayment of our outstanding borrowings under our previous senior credit facilities, which was partially offset by proceeds from our IPO and proceeds from our borrowings under our Credit Agreement in 2021.

Cash provided by (used in) financing activities 28,070 (2,018)

Net increase (decrease) in cash and cash equivalents and restricted cash $ 38 $ (2,192)

Cash provided by operating activities during 2023 was $95.3 million as compared to $62.9 million during 2022 primarily due to (i) the increase in net income of $18.5 million, (ii) the impact of non-cash charges of $10.8 million and (iii) a net change in operating assets and liabilities of $3.2 million.

The increase in the non-cash charges was primarily driven by increases in (i) deferred income taxes, (ii) depreciation and amortization and (iii) non-cash operating lease costs.

This increase was partially offset by lower stock-based compensation expense.

The net change in operating assets and liabilities was primarily due to (i) higher accrued compensation and (ii) the timing of operational payments.

Cash used in investing activities increased to $123.4 million during 2023 from $63.1 million during 2022 primarily as a result of the increase in capital expenditures to support our restaurant growth and the acquisitions of restaurants from our franchisees.

Cash provided by financing activities of $28.1 million during 2023 compared to cash used in financing activities of $2.0 million during 2022 was primarily due to proceeds from borrowings on our revolving credit facility, partially offset by the increase in principal repayments on the Term Facility.

Contractual Obligations

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The timing and nature of these commitments are expected to have an impact on our liquidity and capital requirements in future periods.

Refer to Note 8, Debt, in the accompanying consolidated financial statements for additional information relating to our long-term debt and Note 9, Leases , in the accompanying consolidated financial statements for additional information related to our operating and financing leases.

Refer to Note 10, Debt, in the accompanying consolidated financial statements for additional information relating to our long-term debt and Note 12, Leases , in the accompanying consolidated financial statements included in Item 8 of Part II of this Annual Report on Form 10-K for additional information related to our operating and financing leases.

Purchase obligations include agreements related to the construction or remodeling of restaurant facilities, the purchase of food, beverages, paper goods and other supplies, equipment purchases, marketing-related contracts, software license commitments, technology and other service contracts in the normal course of business.

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These commitments are cancellable and there are no material financial penalties associated with these commitments in the event of early termination.

Purchase obligations also include firm minimum commitments in excess of 12 months for certain supply contracts.

Refer to Note 15, Commitments and Contingencies, in the accompanying consolidated financial statements for additional information.

Purchase obligations also include firm minimum commitments in excess of 12 months for certain contracts.

Refer to Note 18, Commitments and Contingencies, in the accompanying consolidated financial statements included in Item 8 of Part II of this Annual Report on Form 10-K for additional information.

Critical Accounting Policies and Estimates

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The accounting policies and estimates that we believe to be the most critical to an understanding of our financial condition and results of operations and that require the most complex and subjective management judgments are discussed below.

Business Combinations

We account for acquisitions using the purchase method of accounting.

We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values at the acquisition date.

The excess of the fair value of purchase consideration over the fair values of identifiable assets and liabilities is recorded as goodwill.

The fair values assigned, defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants, are based on estimates and assumptions determined by management.

We determine the fair values of tangible and intangible assets acquired generally

in consultation with a third-party valuation advisor.

Critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows and discount rates.

In addition, we have estimated the value and economic lives of certain tangible assets based on historical information, industry estimates and averages, which are used to calculate depreciation and amortization expense.

If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, we could experience impairment charges.

If our estimates of the economic lives change, depreciation or amortization expense could be accelerated or extended.

Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.

If the initial accounting for a business combination is incomplete by the end of a reporting period that falls within the measurement period (not to exceed a year from the date of acquisition), we report provisional amounts in our consolidated financial statements.

During the measurement period, we adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date.

We record these adjustments to the provisional amounts with a corresponding offset to goodwill.

Any adjustments identified after the measurement period are recorded in the Consolidated Statements of Operations and Comprehensive Income (Loss).

The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date and costs that we incur to complete the business combination, such as legal and other professional fees, are expensed as they are incurred.

Goodwill and Indefinite-Lived Intangibles

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During 2023 and 2022, we elected to perform a qualitative assessment for our annual impairment review of goodwill and indefinite-lived intangibles.

In considering the qualitative approach related to goodwill, we considered factors including, but not limited to, macro-economic conditions, market and industry conditions, the competitive environment, results of prior impairment tests, operational stability, the overall financial performance of the reporting unit and the impacts of the discount rates.

In considering the qualitative approach related to goodwill, we considered factors including,

but not limited to, macro-economic conditions, market and industry conditions, the competitive environment, results of prior impairment tests, operational stability, the overall financial performance of the reporting unit and the impacts of the discount rates.

Management also considered the specific future outlook for the reporting unit.

As it relates to our trade names and trademarks, we evaluate similar factors as the goodwill assessment, in addition to impacts of potential changes to the assumed royalty rate.

Based on the results of the qualitative assessment, Management concluded that impairment of

goodwill and its indefinite-lived intangibles was not likely and as a result, management was not required to perform a quantitative assessment.

Based on the results of the qualitative assessment, Management concluded that impairment of goodwill and its indefinite-lived intangibles was not likely and as a result, management was not required to perform a quantitative assessment.

Long-Lived Assets and Definite-Lived Intangible Assets

Long-lived assets deployed at company-owned restaurants include (i) property, fixtures and equipment, (ii) operating lease right-of-use asset, net of the related operating lease liability and (iii) reacquired rights to the extent the restaurant had been previously acquired by the Company.

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable.

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An impairment loss is recognized when the asset’s carrying value exceeds its estimated fair value, which is generally estimated using discounted future cash flows expected from future use of the asset group.

Management did not identify any triggering events in 2022 and 2021 and no impairment charges were recorded in 2022 and 2021.

We lease our restaurant facilities and corporate offices, as well as certain restaurant equipment under various non-cancelable agreements.

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We use the asset and liability method of accounting for income taxes.

Under this method, deferred tax assets or liabilities are recognized for the estimated future tax effects attributable to temporary differences between the carrying value and the tax basis of assets and liabilities as well as tax credit carryforwards.

Under this method, deferred tax assets or liabilities are recognized for the estimated future tax effects attributable to temporary differences between the carrying value and the

tax basis of assets and liabilities as well as tax credit carryforwards.

The estimates we make under this method include, among other items, depreciation and amortization expense allowable for tax purposes, credits for items such as taxes paid on reported employee tip wages, effective rates for state and local income taxes and the deductibility of certain items.

addition, our annual effective income tax rate is adjusted as additional information becomes available during the reporting period.

In addition, our annual effective income tax rate is adjusted as additional information becomes available during the reporting period.

We recognize deferred tax assets for all deductible temporary differences to the extent that it is probable that taxable income will be available against which the deductible temporary differences can be utilized.

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The performance-based stock option awards that did not convert into time-based stock option awards were canceled and unrecognized compensation expense for those canceled performance-based stock option awards was recognized on the date of the Company’s IPO.

No awards were granted under the 2017 Equity Plan during 2022 and the Company does not intend to grant any further awards under the 2017 Equity Plan.

No awards were granted under the 2017 Equity Plan during 2023 and 2022 and the Company does not intend to grant any further awards under the 2017 Equity Plan.

Stock-based compensation expense related to time-based stock option awards issued under the 2021 Equity Plan is recognized on a straight-line basis over the requisite service period.

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We estimate the fair value of stock option awards using the Black-Scholes valuation model, which involves several assumptions and judgments including the expected term of the stock option, expected volatility, the risk-free interest rate and the expected dividend yield.

The Company does not have sufficient historical stock option exercise activity and therefore we estimated the expected term of stock options granted under the 2021 Plan using the simplified method, which represents the mid-point between the vesting period and the contractual term for each grant.

The Company does not have sufficient historical stock option exercise activity and therefore we estimated the expected term of stock options granted under the 2021 Equity Plan using the simplified method, which represents the mid-point between the vesting period and the contractual term for each grant.

Prior to the IPO, the expected term of stock option awards was determined based on data from publicly traded companies.

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As a result, if we had used significantly different assumptions or estimates, the fair value of our common stock and our stock-based compensation expense could have been materially different.

See Note 14, Stock-Based Compensation , in the accompanying notes to the consolidated financial statements for additional information.

See Note 17, Stock-Based Compensation , in the accompanying notes to the consolidated financial statements included in Item 8 of Part II of this Annual Report on Form 10-K for additional information.

Recently Issued Accounting Pronouncements

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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-K

Item 7. Management’s Discussion and Analysis