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Item 7. Management’s Discussion and Analysis

2025-03-11 compared with 2024-03-05 · 134 added, 161 removed, 376 unchanged (44% of the section changed)

13 unchanged sentences

First Watch is an award-winning Daytime Dining concept serving made-to-order breakfast, brunch and lunch using fresh ingredients.

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.

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

For three consecutive years, First Watch was named a Top 100 Most Loved Workplace® by Newsweek and the Best Practice Institute, and in 2024, was named the #1 Most Loved Workplace.

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.”

The Company operates and franchises restaurants in 29 states under the “First Watch” trade name and as of December 31, 2023, the Company had 425 company-owned restaurants and 99 franchise-owned restaurants.

The Company operates and franchises restaur ants in 29 states under the “First Watch” trade name and as of December 29, 2024, the Company had 489 company-owned restaurants and 83 franchise- owned restaurants.

The Company does not operate outside of the United States.

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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 2024 and 2022 reflect the results of the 52-week fiscal year ended December 29, 2024 and December 25, 2022.

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.

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the percentage change in year-over-year restaurant sales (excluding gift card breakage) for the comparable restaurant base, which we define as the number of company-owned First Watch branded restaurants open for 18 months or longer as of the beginning of the fiscal year (“Comparable Restaurant Base”).

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

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

For the year ended 2024, this operating metric compares the 52-week period ended December 29, 2024 with the 52-week period ended December 31, 2023, versus the 53-week fiscal year ended December 31, 2023, in order to compare like-for-like periods.

For the 52-weeks ended December 29, 2024 and December 31, 2023, there were 344 restaurants and 327 restaurants in our Comparable Restaurant Base.

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

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Same-Restaurant Traffic Growth :

the percentage change in traffic counts as compared to the same period in the prior year using the Comparable Restaurant Base.

the percentage change in traffic counts for the 52-week period ended December 29, 2024 as compared to the 52-week period ended December 31, 2023 using the Comparable Restaurant Base, versus the 53-week fiscal year ended December 31, 2023 in order to compare like-for-like periods.

Measuring our same-restaurant traffic growth allows Management to evaluate the performance of our existing restaurant base.

We believe this measure is useful for investors because an increase in same-restaurant traffic provides an indicator as to the development of our brand and the effectiveness of our marketing strategy.

We believe this measure is useful for investors because same-restaurant traffic provides an indicator as to the development of our brand and the effectiveness of our marketing strategy.

Average Unit Volume (“AUV”):

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(i) Adjusted EBITDA, (ii) Adjusted EBITDA margin, (iii) Restaurant level operating profit and (iv) Restaurant level operating profit margin.

Our presentation of these non-GAAP measures includes isolating the effects of some items that are either nonrecurring in nature or vary from period to period without any correlation to our ongoing core operating performance.

Our presentation of these non-GAAP measures includes isolating the effects of some items that are either nonrecurring in nature or have no meaningful correlation to our ongoing core operating performance.

These supplemental measures of performance are not required by or presented in accordance with GAAP.

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We use Adjusted EBITDA and Adjusted EBITDA margin (i) as factors in evaluating management’s performance when determining incentive compensation, (ii) to evaluate our operating results and the effectiveness of our business strategies and (iii) internally as benchmarks to compare our performance to that of our competitors.

We use Restaurant level operating profit and Restaurant level operating profit margin (i) to evaluate the performance and profitability of each operating restaurant, individually and in the aggregate and (ii) to make decisions regarding future spending and other operational decisions.

We use Restaurant level operating profit and Restaurant level operating profit margin (i) to evaluate the performance and profitability of operating restaurants, individually, and in the aggregate, (ii) to compare the performance of our restaurants and markets and (iii) to make decisions regarding future spending and other operational decisions.

Adjusted EBITDA :

represents Net income (loss) before depreciation and amortization, interest expense, income taxes, and items that we do not consider in our evaluation of ongoing core operating performance as identified in the reconciliation of

Net income (loss), the most directly comparable measure in accordance with GAAP, to Adjusted EBITDA, included in the section Non-GAAP Financial Measure Reconciliations below .

represents Net income before depreciation and amortization, interest expense, income taxes, and items that we do not consider in our evaluation of ongoing core operating performance as identified in the reconciliation of Net income, the most directly comparable measure in accordance with GAAP, to Adjusted EBITDA, included in the section Non-GAAP Financial Measure Reconciliations below .

Adjusted EBITDA Margin :

represents Adjusted EBITDA as a percentage of total revenues.

See Non-GAAP Financial Measure Reconciliations below for a reconciliation to Net income (loss) margin, the most directly comparable GAAP measure.

See Non-GAAP Financial Measure Reconciliations below for a reconciliation to Net income margin, the most directly comparable GAAP measure.

Restaurant Level Operating Profit :

represents restaurant sales, less restaurant operating expenses, which include food and beverage costs, labor and other related expenses, other restaurant operating expenses, pre-opening expenses and occupancy expenses.

Restaurant level operating profit excludes corporate-level expenses and other items that we do not consider in the evaluation of the ongoing core operating performance of our restaurants as identified in the reconciliation of Income (Loss) from operations, the most directly comparable GAAP measure, to Restaurant level operating profit, included in the section Non-GAAP Financial Measure Reconciliations below.

Restaurant level operating profit excludes corporate-level expenses and other items that we do not consider in the evaluation of the ongoing core operating performance of our restaurants as identified in the reconciliation of Income from operations, the most directly comparable GAAP measure, to Restaurant level operating profit, included in the section Non-GAAP Financial Measure Reconciliations below.

Restaurant Level Operating Profit Margin :

represents Restaurant level operating profit as a percentage of restaurant sales.

See Non-GAAP Financial Measure Reconciliations below for a reconciliation to Income (Loss) from operations margin, the most directly comparable GAAP measure.

See Non-GAAP Financial Measure Reconciliations below for a reconciliation to Income from operations margin, the most directly comparable GAAP measure.

Financial Highlights

The financial results of 2024 reflect the continued growth of the Company.

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

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 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

The Company continued to accelerate the pace of new restaurant openings with 43 NROs in 2024 and we executed on our growth strategy as w e acquired 22 op erating restaurants from our franchisees in 2024.

Financial highlights for the 52-weeks ended December 29, 2024 as compared, unless otherwise indicated below, to the 53-weeks ended December 31, 2023, reflected the continued momentum of our strong operating performance and include the following:

• Total revenues increase d 13.9% to $1.0 billion from $891.6 million in 2023

• System-wide sales increased to $1.2 billion from $1.1 billion in 2023

• Same-restaurant sales growth of negative 0.5%*

• Same-restaurant traffic growth of negative 4.0%*

• Income from operations decreased to $38.9 million from $41.3 million in 2023

• Income from operations margin decreased to 3.9% from 4.7% in 2023

• Restaurant level operating profit** increased to $201.8 million from $175.7 million in 2023

• 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

• Opened 51 system-wide restaurants (37 company-owned and 14 franchise-owned) across 19 states resulting in a total of 524 system-wide restaurants (425 company-owned and 99 franchise-owned) across 29 states

• Restaurant level operating profit margin** increased to 20.1% f rom 20.0% in 2023

• Net income decreased t o $18.9 million from $25.4 million in 2023

• Adju sted EBITDA** increased to $113.8 million from $99.5 million in 2023

• O pened 50 system-wide restaurants (43 company-owned and 7 franchise-owned) across 19 states resulting in a total of 572 system-wide restaurants (489 company-owned and 83 franchise-owned) across 29 state s

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*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.

*Comparison to the 52-week periods ended December 29, 2024 and December 31, 2023 in order to compare like-for-like periods.

See “Key Performance Indicators” for additional information.

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

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.

During 2024, many restaurant industry sectors experienced downward sales pressure and traffic and “breakfast” was the most impacted daypart .

The Company’s same-restaurant sales growth in 2024 was negative 0.5%, and partially offset by a 3.6% increase in carried price.

Commodity inflation was 3.2% in 2024.

We expect a high-single digit percentage increase in our 2025 commodity prices as compared to the prior year.

Restaurant level labor inflation of 4.4% was offset by improvements in labor efficiencies.

At year end, we were staffed with ov er 120 ma nagers to lead and operate our future new company-owned restaurants.

We expect 2% to 4% labor inflation in 2025.

Continuing the Company’s expansion, Management intends to open 59 to 64 net new system-wide restaurants in 2025.

In addition, Management has entered into two agreements to acquire 19 restaurants from franchisees.

Development Highlights

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

During 2024, the Company had a tot al of 50 new system-wide restaurant s in 19 states.

One company-owned and one franchise-owned restaurant closed in 2024 .

We also acquired 22 operating restaurants from our franchisees in the execution of our growth strategy.

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End of period

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.

We expect to open betwe en 55 to 58 company-owned restaurants and 7 to 9 franchise-owned restaurants during 2025.

We also plan to close 3 company-owned restaurants, resulting in a total of 59 to 64 , net new sys tem-wide restaurants in 2025.

Selected Operating Data

2024 2023 2022

Operating weeks in fiscal year 53 52 52

Number of weeks in fiscal year 52 53 52

System-wide restaurants 572 524 474

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Same-restaurant sales growth (1)

(0.5) % 7.6 % 14.5 %

Same-restaurant traffic growth (1)

(4.0) % 0.2 % 7.7 %

AUV (in thousands) $ 2,204 $ 2,250 $ 2,032

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20.1 % 20.0 % 17.9 %

Net income (loss) (in thousands) $ 25,385 $ 6,907 $ (2,107)

Net income (loss) margin 2.8 % 0.9 % (0.4) %

Net income (in thousands) $ 18,925 $ 25,385 $ 6,907

Net income margin 1.9 % 2.8 % 0.9 %

Adjusted EBITDA (in thousands) (3)

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

(1) Comparing th e 52-week period ended December 29, 2024 with the 52-week period ended December 31, 2023 in order to compare like-for-like periods.

See “Key Performance Indicators” for additional information .

(2) 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.

(3) Reconciliations from Net income and Net income 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.

Results of Operations

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Total Restaurant sales $ 1,004,355 $ 877,092 $ 127,263 14.5 %

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.

The increase in total restaurant sales was primarily due to (i) opening and acquiring restaurants in 2024, (ii) recognizing a full year of sales for restaurants opened and acquired in 2023 and (iii) menu price increases .

The increase was partially offset by (i) 2024 negative same-restaurant sales growth of 0.5% and (ii) the 53rd week of sales in 2023 .

Franchise Revenues

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Total Franchise revenues $ 11,555 $ 14,459 $ (2,904) (20.1) %

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.

The decrease in franchise revenues during 2024 as compared to 2023 was primarily driven by (i) the Company’s acquisitions of franchise-owned restaurants and (ii) $0.6 million of deferred franchise revenues recognized in 2023 in connection with the acquisitions of restaurants from franchisees.

The decrease was partially offset by (i) revenues from franchise-owned NROs and (ii) $0.4 million of deferred franchise revenues recognized in 2024 in connection with the acquisitions of restaurants from our franchisees.

Food and Beverage Costs

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As a percentage of restaurant sales 22.2 % 22.5 % (0.3)%

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.

Food and beverage costs as a percent of restau rant sales decreased during 2024 as compared to 2023 primarily due to leveraging menu price increases.

The decrease was partially offset by commodity inflation of 3.2% .

Food and bevera ge costs increased during 2024 as compared to 2023 primarily as a result of (i) the 14.5% increase in restaurant sales, (ii) opening and acquiring restaurants in 2024, (iii) recognizing a full year of costs for restaurants opened and acquired in 2023 and (iv) commodity inflation.

The increase was partially affected by the additional 53rd week in 2023.

Labor and Other Related Expenses

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As a percentage of restaurant sales 33.4 % 33.5 % (0.1)%

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.

Labor and other related expenses as a percentage of restaurant sales decreased during 2024 as compared to 2023 primarily as a result of (i) menu price increases and (ii) improved hourly labor efficie ncy.

This decrease was partially offset by (i) wage increases and (ii) higher health insurance costs.

The increase in labor and other related expenses during 2024 as compared to 2023 was primarily due to (i) the increase in staffing levels to support the increase in corporate-owned restaurants (ii) wage increases and (iii) higher health insurance costs .

The increase was partially offset by (i) hourly labor efficiency and (ii) the additional 53rd week in 2023.

Other Restaurant Operating Expenses

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As a percentage of restaurant sales 15.1 % 15.3 % (0.2)%

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

Other restaurant operating expenses as a percentage of restaurant sales during 2024 decreased as compared to 2023 primarily due to (i) leveraging menu price increases, (ii) third-party delivery related revenue and expenses, including to-go supplies and third-party delivery fees, increasing at a lower rate than total restaurant sales.

This decrease was partially offset by (i) utilities expenses, (ii) restaurant advertising costs and (iii) credit card fees which increased as a percentage of restaurant sales.

The increase in other restaurant operating expenses during 2024 as compared to 2023 was primarily due to the increase in the number of restaurants driving increases in certain expenses including (i) $ 7.5 million of additional credit card, delivery, and license fees, (ii) $4.6 million increase in utilities and repair and maintenance expenses, (iii) $3.4 million related to operating supplies and (iv) $ 1.3 million related to restaurant advertising costs .

The increase was partially offset by a decrease in to-go supplies costs of $0.3 million.

Occupancy Expen ses

Occupancy expenses primarily consist of rent expense, property insurance, common area expenses and property taxes.

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As a percentage of restaurant sales 8.2 % 7.8 % 0.4%

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.

The increase in occupancy expenses as a percentage of restaurant sales during 2024 as compared to 2023 was primarily due to higher rent expense and the deleverage associated with negative same-restaurant sales grow th.

The increase in occupancy expenses during 2024 as compared to 2023 was primarily due to the increase in the number of company-owned restaurants.

Pre-opening Expenses

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Pre-opening expenses $ 10,109 $ 7,173 $ 2,936 40.9 %

Pre-opening expenses have continued to increase over the last few years, in part due to management’s decision to gain early access to facilities during the build-out phase.

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

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.

The increase in 2024 pre-opening expenses as compared to 2023 was primarily due to (i) the higher number of restaurants opened and under construction and (ii) the increase in rents.

General and Administrative Expenses

General and administrative expenses primarily consist of costs associated with our corporate and administrative functions that support restaurant development and operations including marketing and advertising costs incurred as well as legal fees, professional fees and stock-based compensation.

General and administrative expenses are impacted by changes in our employee headcount and costs related to strategic and growth initiatives.

In preparation for and after the consummation of the Company’s initial public offering (“IPO”) in October 2021, we have incurred and we expect to incur in the future significant additional legal, accounting and other expenses associated with being a public company, including costs associated with our compliance with the Sarbanes-Oxley Act.

(in thousands) 2024 2023 Change

General and administrative expenses $ 113,270 $ 103,121 $ 10,149 9.8 %

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.

The increase in general and administrative expenses during 2024 as compared to 2023 was mainly due to (i) $5.2 million increase in compensation and other related expenses such as wage increases, stock compensation and additional employee headcount to support growth, (ii) $2.7 million increase in licenses and fees related to information technology, (iii) $1.8 million related to consulting and professional services partially offset by $1.1 million related to a decrease in brand research costs and (iv) approximately $1.6 million related to travel and other miscellaneous expenses.

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 man aged by Advent in August 2017 as well as reacquired rights from our acquisitions of franchise-owned restaurants.

(in thousands) 2024 2023 Change

Depreciation and amortization $ 57,715 $ 41,223 $ 16,492 40.0 %

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.

The increase in depreciation and amortization during 2024 as compared to 2023 was primarily due to additional NRO assets and restaurants acquired, including reacquired rights from franchisees.

Impairments and Loss on Disposal of Assets

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Impairments and loss on disposal of assets $ 525 $ 1,359 $ (834) (61.4)%

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 2024, the amounts represented write-off of assets retired as a result of restaurant closures or replacements of assets.

There were no impairment losses recognized.

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.

Transaction Expenses, Net

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Transaction expenses, net $ 2,587 $ 3,147 $ (560) (17.8)%

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.

Transaction expenses, net decreased during 2024 as compared to 2023 primarily due to (i) lower costs incurred in connection with the acquisitions of restaurants from our franchisees and (ii) contingent consideration liability reduction.

This decrease was partially offset by an increase in costs incurred by us in connection with the sale of the Company’s common stock by funds managed by Advent through secondary public offerings.

Income from Operations and Income from Operations Margin

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Income from operations margin 3.9 % 4.7 % (0.8)%

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.

Income from operations margin decreased during 2024 as compared to 2023 primarily due to (i) deleveraging of certain expenses, including occupancy expenses, as a result of a decline in same-restaurant sales and (ii) higher depreciation and amortization expense driven by our restaurant growth and acquisition of certain franchise-owned restaurants partially offset by (i) labor efficiency and (ii) food and beverage costs improving as a percent of sales.

Income from operations decreased during 2024 as compared to 2023 primarily due to (i) higher operating costs and depreciation expense driven by our restaurant growth and acquisitions of restaurants from franchisees, as well as (ii) higher general and administrative expenses primarily attributable to additional employee headcount and performance-based compensation and (iii) the 53rd week in 2023.

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

Interest Expense

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Interest expense $ (12,640) $ (8,063) $ (4,577) 56.8 %

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

The increase in interest expense during 2024 as compared to 2023 was primarily due (i) an increase borrowings associated with franchise acquisitions and (ii) higher interest rates.

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.

Other income, 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) 2024 2023 Change

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

(1) Not meaningful.

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.

Other income, net $ 1,759 $ 2,871 $ (1,112) (38.7) %

Othe r income, net decreased in 2024 primarily related to insurance recoveries received in 2023 in connection with 2022 insured losses.

Income Tax Expense

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Effective income tax rate 32.5 % 29.6 % 2.9%

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.

The change in the effective income tax rates for 2024 as compared to 2023 was mainly due to (i) the change in the valuation allowance on deferred tax assets, (ii) the benefit of tax credits for FICA taxes on certain employees’ tips and (iii) impacts of executive stock-based compensation.

Net Income and Net Income Margin

(in thousands) 2024 2023 Change

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

Net income $ 18,925 $ 25,385 $ (6,460) (25.4) %

Net income margin 1.9 % 2.8 % (0.9)%

(1) Not meaningful.

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.

The decrease in net income and net income margin during 2024 as compared to 2023 was primarily due to (i) the decrease in income from operations including deleveraging of occupancy expenses, (ii) increase in depreciation and amortization attributed primarily to locations opened and acquired in 2024 and (iii) the increase in interest expense associated with increased borrowings to fund acquisitions.

Restaurant Level Operating Profit and Restaurant level Operating Profit Margin

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Restaurant level operating profit margin 20.1 % 20.0 % 0.1%

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.

Restaurant level operating profit margin during 2024 increased as compared to 2023 primarily due to (i) favorable food and beverage costs as a percent of sales, (ii) favorable labor and other related expenses as a percent of sales and (iii) acquired restaurants.

This was partially offset by the deleverage of occupancy expenses.

Restaurant level operating profit during 2024 increased as compared to 2023 primarily due to (i) menu price increases and (ii) revenue from the increase in the number of restaurants .

This was partially offset by the increase in (i) operating costs and expenses driven by our restaurant growth and (ii) deleverage of occupancy expenses.

Adjusted EBITDA and Adjusted EBITDA Margin

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Adjusted EBITDA margin 11.2 % 11.2 % —%

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.

The increase in Adjusted EBITDA and consistent Adjusted EBITDA margin during 2024 as compared to 2023 was primarily due to the increase in (i) restaurant level operating profit and (ii) 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.

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Delaware Voluntary Disclosure Agreement Program (5)

126 1,250 149

Recruiting and relocation costs (6)

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

329 (621) 115

Loss on extinguishment of debt 428 — —

COVID-19 related charges (9)

Adjusted EBITDA $ 113,836 $ 99,483 $ 69,278

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(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).

(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.

(2) Represents costs incurred in connection with the acquisition of franchise-owned restaurants, expenses related to debt, secondary offering costs, costs related to restaurant closures, gains or losses associated with lease or contract terminations and revaluations of contingent consideration liability.

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

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( 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.

(5) 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).

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

(6) Represents costs incurred for hiring qualified individuals.

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

(7) Severance costs are recorded in 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.

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

(9) Represents the non-cash portion of straight-line rent expense recorded within both Occupancy expenses and General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss).

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Costs in connection with natural disasters (3)

COVID-19 related charges (4)

Restaurant level operating profit $ 201,761 $ 175,658 $ 128,936

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_____________________________

(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.

(1) Represents costs incurred in connection with the acquisition of franchise-owned restaurants, secondary offering costs, costs related to restaurant closures, gains or losses associated with lease or contract terminations and revaluations of contingent consideration liability.

(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.

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

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

(3) Represents costs incurred in connection with hurricane damage.

The costs include inventory spoilage and labor costs, which were recorded in Food and beverage costs and Labor and other related expenses, respectively, on the Consolidated Statements of Operations and Comprehensive Income (Loss).

(4) Represents the non-cash portion of straight-line rent expense recorded within Occupancy expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss).

Liquidity and Capital Resources

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.

As of December 29, 2024, we had cash and cash equivalents of $33.3 million and outstanding borrowings under the Credit Facility of $193.8 million, excluding unamortized debt discount and deferred issuance costs.

We had availability of $123.3 million under our revolving credit facility of $125.0 million, of which $1.7 million is reserved under letters of credit, and availability of $27.5 million under our delayed draw term loan pursuant to our credit agreement, as amended (“Credit Agreement”).

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.

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.

Our working capital requirements are low due to our restaurants’ storage of minimal inventory and customers’ payment for purchases at the time of the sale, which frequently precedes our payment terms with suppliers.

We believe that our cash flow from operations combined with our availability under the Credit Facility and our cash and cash equivalents will be sufficient to meet the Company’s 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, the funds would be furnished 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, 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.

We estimate that our capital expenditures will total approximately $150.0 million to $160.0 million in 2025, not including the capital allocated to franchise acquisitions.

This capital is invested primarily in new restaurant projects and planned remodels.

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

Summary of Cash Flows

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Cash used in investing activities (206,653) (123,370)

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.

Cash provided by financing activities 74,331 28,070

Net (decrease) increase in cash and cash equivalents and restricted cash $ (16,649) $ 38

Cash provided by operations is our typical source of liquidity used (i) to fund capital expenditures for new restaurants, (ii) to maintain and remodel existing restaurants and (iii) for debt service.

Cash provided by operations increased in 2024 as compared to 2023 primarily due t o the addition of new and acquired restaurants.

Cash used in investing activities increas ed to $206.7 million during 2024 from $123.4 million du ring 2023 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 activitie s of $74.3 million during 2024 as compared to $28.1 million during 2023 was primarily due to additional borrowings to fund the acquisition of franchise-owned restaurants .

Contractual Obligations

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By their nature, these judgments are subject to an inherent degree of uncertainty.

These judgments are based on our historical experience, terms of existing contracts, our evaluation of trends in the industry, information available from other outside sources, as appropriate.

These judgments are based on our historical experience, terms of existing contracts, our evaluation of trends in the industry, and information available from other outside sources, as appropriate.

We evaluate our estimates and judgments on an on-going basis.

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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.

As such, the fair value of purchase consideration is allocated to the tangible assets acquired, liabilities assumed and intangible assets acquired based on estimated fair values at the acquisition date.

The excess of the 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.

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.

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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.

If the initial accounting for a business combination is incomplete at the end of a reporting period that falls within a 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.

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

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

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Goodwill and Indefinite-Lived Intangibles

Goodwill and indefinite-lived intangibles are tested for impairment annually, on the first day of the fourth quarter of the fiscal year, or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

Goodwill and indefinite-lived intangibles are tested for impairment annually on the first day of the fourth quarter of the fiscal year, or when events or changes in circumstances indicate that the carrying amount may not be recoverable.

Significant judgments are used to determine if an indicator of impairment has occurred.

Such indicators could include negative operating performance of our restaurants, economic and restaurant industry trends, legal factors, significant competition or changes in our business strategy.

Any adverse change in these factors could have a significant impact on the recoverability of our goodwill and indefinite-lived intangible assets and could have a material impact on our consolidated financial statements.

Adverse changes in these factors could have a significant impact on the recoverability of our goodwill and indefinite-lived intangible assets and could have a material impact on our consolidated financial statements.

We have identified one reporting unit to which we have attributed goodwill.

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During 2024 and 2023, 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.

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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 acquired by the Company.

Long-lived assets deployed at company-owned restaurants include (i) property, fixtures and equipment, (ii) operating lease right-of-use assets, net of the related operating lease liabilities and (iii) reacquired rights to the extent the restaurants have been 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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Definite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives and are reviewed for impairment when events or change in circumstances indicate that the carrying amount of such assets may not be recoverable.

Significant judgments are used to determine if an indicator of impairment has occurred.

Significant judgment is used to determine if an indicator of impairment has occurred.

Such indicators may include, among others:

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Recoverability of definite-lived intangible assets is measured by a comparison of the carrying amount of the asset group to the estimated undiscounted future cash flows expected to be generated by the asset group.

If the total future undiscounted net cash flows are less than the carrying amount, this may be an indicator of impairment.

If the total future undiscounted net cash flows are less than the carrying amount, this may be an indication of impairment.

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.

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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.

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Stock-Based Compensation and Fair Value of Common Stock

Stock-based compensation expense is measured based on the award’s grant date fair value.

Stock-based compensation expense is measured based on the award’s fair value at the date of grant.

Stock-based compensation expense related to time-based stock option awards issued under the 2017 Equity Plan is recognized on an accelerated recognition method over the requisite service period.

Prior to our IPO, we had not recognized any stock-based compensation expense for our performance-based stock option awards issued under the 2017 Equity Plan as the satisfaction of the performance conditions were not considered probable.

Upon consummation of the Company’s IPO in October 2021, certain performance-based stock option awards issued under the 2017 Equity Plan for which the performance and market conditions were satisfied as a result of the Company’s IPO, converted into time-based stock option awards with the related stock-based compensation expense to be recognized on an accelerated recognition method over the remaining service period.

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 2023 and 2022 and the Company does not intend to grant any further awards under the 2017 Equity Plan.

Upon the Company’s IPO in October 2021, certain performance-based stock option awards issued under the 2017 Equity Plan for which the performance and market conditions were satisfied as a result of the Company’s IPO, converted into time-based stock option awards with the related stock-based compensation expense to be recognized on an accelerated recognition method over the remaining service period.

No awards were granted under the 2017 Equity Plan during 2024 or 2023, 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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(i) third-party valuations of our common stock, (ii) a combination of the income approach and the market approach and (iii) general economic outlook including economic growth, inflation and interest rates.

In 2021, prior to the IPO, we determined the Company’s equity value using the probability weighted expected return method (“PWERM”), or the hybrid method.

Under the hybrid method, multiple valuation approaches are used and then combined into a single probability weighted valuation using a PWERM, which considers the probability of an initial public offering and sale scenarios.

The results of the valuation approaches were weighted based on a variety of factors, including:

the current macroeconomic environment, current industry conditions and length of time since arms-length market transaction events.

Additionally, a discount for lack of marketability was applied to account for the lack of access to an active public market.

The resulting value was then allocated to outstanding equity using an option-pricing model.

This process involved the use of estimates, judgments, and assumptions that are highly complex and subjective, such as those regarding our expected future revenue, expenses and future cash flows, discount rates, market multiples, the selection of comparable companies, and the probability of possible future events.

The assumptions underlying these valuations represented management’s best estimate, which involved inherent uncertainties and the application of management’s judgment.

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 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.

Insurance Reserves

The Company is self-insured for employee group health claims and Ohio workers’ compensation and carries retention levels and per-claim deductibles for a significant portion of expected losses associated with other workers’ compensation and general liability programs.

We record liabilities for unresolved and incurred but not reported claims at the anticipated cost below applicable retention levels or per-claim deductible amounts.

Insurance reserve liabilities are established using actuarial assumptions and judgments regarding the frequency and severity of claims.

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