What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-28 compared with 2022-03-10 · 172 added, 128 removed, 244 unchanged (55% of the section changed)

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Fiscal Year 2022 Accomplishments

Despite the continued challenges of the COVID-19 pandemic, and associated staffing and supply chain headwinds, we made significant progress on executing our strategic business model during fiscal year 2021.

Our accomplishments in 2021 include the following:

• Sustained off-premises sales of more than double pre-pandemic levels, with off-premises sales mix of 31.4% for the fourth quarter of 2021, compared to approximately 14.0% in the fourth quarter of 2019.

Off-premises sales comprised $84.7 million, $85.1 million and $36.7 million of comparable restaurant revenue for the fourth quarters of 2021, 2020 and 2019, respectively;

• Continued Donatos® roll-out to 120 Company-owned restaurants, bringing the total number of restaurants with Donatos® to 198 restaurants as of December 26, 2021.

Restaurants that have been serving Donatos® pizza prior to 2021 are continuing to benefit from growing incremental sales beyond their first year as operations mature and brand affinity grows, with comparable restaurant revenue up 6.5% compared to 2019 in restaurants without supply chain issues;

• At the end of 2021, we were 93% staffed at the salaried manager positions, and 96% staffed in the General Manager role;

• Launched integrated and seamless digital ecosystem for our Guests, including mobile applications on both iOS and Android platforms, an improved and more relevant digital Guest experience consisting of a new and improved website, and the integration of a new loyalty program;

• Completed our lease renegotiation and restructuring initiative that we began in 2020 as a result of the COVID-19 pandemic, resulting in 3% to 4% occupancy savings over remaining lease terms on restructured leases.

COVID-19 Impact

The COVID-19 pandemic continues to create unprecedented challenges for our industry including government mandated restrictions, changing consumer behavior, labor and supply chain challenges, and wide spread inflationary costs.

Even as government restrictions were lifted, and dining rooms returned to full capacity, the surge in the Delta and Omicron variants continued to highlight the critical importance of providing a safe environment for our Team Members and Guests.

In response to these COVID-19 challenges, the Company limited dining hours and seating capacity in order to preserve the consistent quality experience our Guests expect from us.

Our disciplined Guest focus is delivered through our TGX hospitality model, off-premises enhancements, and our management labor model.

Our ability to attract and retain Team Members has become more challenging in the current competitive job market.

Staffing is our number one priority;

we have supported our staffing efforts through technology enhancements to the application and hiring process, improving our wage policies, holding national hiring days, and deploying internal and external resources to augment recruiting, hiring, and training efforts.

The challenges in hiring and retention and global supply chain disruptions have affected many of our vendor partners, resulting in intermittent product and distribution shortages.

Fiscal 2022 was a year of progress and transition for our business.

The COVID-19 pandemic continued to impact us particularly in the first half of fiscal 2022 directly through government mandated restrictions, and indirectly through supply chain disruptions and labor shortages.

We and the broader United States economy experienced inflation levels not seen in decades.

Despite these headwinds, our accomplishments in 2022 include the following:

• Revenue increased by approximately $104.5 million, from approximately $1.2 billion in fiscal 2021, to approximately $1.3 billion in fiscal 2022.

• Achieved a comparable restaurant revenue increase of 9.2%.

Comparable restaurant revenue has increased for eight (8) consecutive quarters.

• Comparable restaurant revenue and comparable restaurant traffic exceeded the industry average as measured by the Black Box Casual Dining index.

• Continued investments in sales building and infrastructure initiatives:

◦ Installed Donatos® in 52 Company-owned restaurants, bringing the total number of restaurants with Donatos® to 245 as of December 25, 2022.

Comparable restaurant revenue growth in fiscal 2022 compared to fiscal 2021 at restaurants with Donatos® outperformed restaurants without Donatos ® by 470 basis points.

◦ Invested in Guest facing facility upgrades and renovations in more than 200 restaurants.

◦ Upgraded infrastructure technology in restaurant and support center locations.

• Facilitated a successful transition to a new Chief Executive Officer and other executive leadership positions.

Inflationary Cost and COVID-19 Impact

The COVID-19 pandemic and the related aftermath continues to create unprecedented challenges for our industry including changing consumer behavior, labor and supply chain challenges, and wide spread inflationary costs.

Cost of sales as a percentage of sales increased 200 basis points in 2022 compared to 2021, driven primarily by commodity cost inflation.

Our ability to attract and retain Team

Members became more challenging in the competitive job market in 2022.

At the start of fiscal 2022, staffing was our number one priority.

We made significant progress in improving the staffing levels in our restaurants throughout the year.

The challenges in hiring and retention and global supply chain disruptions also affected many of our vendor partners, resulting in intermittent product and distribution shortages.

We remain focused on proactively addressing these industry challenges, while delivering a great Guest experience and continuing to prioritize the satisfaction and retention of our Team Members.

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Increase in comparable (1) restaurant revenue

Increase in non-comparable restaurant revenue 7.0

Decrease in non-comparable restaurant revenue (8.0)

Total increase 92.6

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Total 87.0 % 85.7 % 130

The following table summarizes Net loss, loss per diluted share, and adjusted loss per diluted share (a non-GAAP measure) for the fifty-two weeks ended December 26, 2021 and December 27, 2020;

The following table summarizes Net loss, loss per diluted share, and adjusted loss per diluted share (a non-GAAP

measure) for the fifty-two weeks ended December 25, 2022 and December 26, 2021:

Fifty-two Weeks Ended

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Net loss as reported $ (4.91) $ (3.19)

Restaurant closure costs 0.40 1.39

Change in estimate, gift card breakage (0.33) —

Write-off of unamortized debt issuance costs 0.11 —

Other charges, net:

Asset impairment 2.43 0.45

Gain on sale of restaurant property (0.58) —

Severance and executive transition, net of $(3,299) and $0 in stock-based compensation

Other financing costs 0.09 —

Restaurant closure costs, net 0.05 0.40

Closed corporate office costs, net of sublease income 0.03 —

COVID-19 related charges 0.03 0.08

Litigation contingencies 0.26 0.08

COVID-19 related costs 0.08 0.13

Board and stockholder matter costs — 0.01

Goodwill impairment — 6.67

Severance costs — 0.06

Income tax effect (0.58) (0.26)

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We believe the non-GAAP measure of adjusted loss per diluted share gives the reader additional insight into the ongoing operational results of the Company, and it is intended to supplement the presentation of the Company's financial results in accordance with GAAP.

Adjusted loss per diluted share excludes the effects of goodwill impairment, asset impairment, litigation contingencies, board and stockholder matters costs, restaurant closure costs, severance and executive transition costs, executive retention costs, COVID-19 related costs, and related income tax effects.

Adjusted loss per diluted share excludes the effects of asset impairment;

gain on sale of restaurant property;

severance and executive transition costs;

other financing costs;

restaurant closure costs;

closed corporate office costs, net of sublease income;

COVID-19 related costs;

litigation contingencies;

board and stockholder matters costs;

goodwill impairment;

change in estimate - gift card breakage;

write-off of unamortized debt issuance costs, and related income tax effects.

We have revised our definition of adjusted loss per diluted share to exclude other financing costs, closed corporate office, net of sublease income, change in estimate - gift card breakage, and write-off of unamortized debt issuance costs.

We did not revise prior years’ adjusted loss per diluted share amounts because there were no other charges similar in nature to these costs.

Other companies may define adjusted net loss per share differently, and as a result our measure of adjusted loss per share may not be directly comparable to those of other companies.

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GAAP as a measure of performance.

The following table summarizes Net Loss (a GAAP measure), and EBITDA and Adjusted EBITDA (non-GAAP measures) for the fifty-two weeks ended December 25, 2022 and December 26, 2021:

Fifty-Two Weeks Ended

December 25, 2022 December 26, 2021

Net loss as reported $ (77,800) $ (50,002)

Interest expense, net 19,882 14,168

Income tax provision (benefit) 747 (152)

Depreciation and amortization 76,245 83,438

EBITDA 19,074 47,452

Change in accounting estimate, gift card breakage (1)

Other charges, net:

Asset impairment 38,534 7,052

Gain on sale of restaurant property (9,204) —

Severance and executive transition 2,280 —

Other financing costs (2)

COVID-19 related costs 438 1,288

Restaurant closure costs 828 6,276

Closed corporate office costs, net of sublease income 475 —

Litigation contingencies 4,148 1,330

Board and stockholder matter costs — 128

Adjusted EBITDA $ 52,789 $ 63,526

(1) Change in estimate, gift card gift card breakage revenue, net of commission relates to the Company's re-evaluation of its estimated redemption pattern.

The impact during the fifty-two weeks ended December 25, 2022 comprises $5.9 million included in Franchise royalties, fees, and other revenue partially offset by $0.6 million in gift card commission costs included in Selling, general and administrative expenses on the Consolidated Statements of Operations.

(2) Other financing costs includes legal and other charges related to the refinancing of our Credit Facility in the first quarter of fiscal year 2022.

We believe the non-GAAP measure of adjusted EBITDA gives the reader additional insight into the ongoing operational results of the Company, and it is intended to supplement the presentation of the Company's financial results in accordance with GAAP.

Adjusted EBITDA excludes the effects of change in estimate - gift card breakage, asset impairment, litigation contingencies, board and stockholder matters costs, restaurant closure costs, other financing costs, COVID-19 related costs and severance and executive transition costs, gain on sale of restaurant property and closed corporate office, net of sublease income.

We have revised our definition of adjusted EBITDA to exclude gain on sale of restaurant property, change in accounting estimate - gift card breakage, other financing costs and closed corporate office, net of sublease income.

We did not revise prior years’ adjusted EBITDA because there were no other charges similar in nature to these costs.

We define EBITDA as net loss before interest expense, income taxes, and depreciation and amortization.

Other companies may define EBITDA and adjusted EBITDA differently, and as a result our measure of EBITDA and adjusted EBITDA may not be directly comparable to those of other companies.

EBITDA and adjusted EBITDA should be considered in addition to, and not as a substitute for, net loss as reported in accordance with U.S.

GAAP as a measure of performance.

Restaurant Data

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Total number of restaurants 511 531

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The following table presents total Company-owned and franchised restaurants by state or province as of December 25, 2022:

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California 57

Colorado 22 —

Connecticut 3

Illinois 22 —

Louisiana 2 —

Massachusetts 3 2

Maryland 13 —

Michigan — 20

Minnesota 4 —

North Carolina 17

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New Jersey 11 1

New Mexico 3 —

New York 14 —

Pennsylvania 11 20

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South Dakota 1

Tennessee 11 —

Virginia 20 —

Washington 37

Wisconsin 11 —

British Columbia 12

Total 430 101

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Results of Operations

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Total operating weeks 22,028 22,258 (1.0) %

Net sales per square foot $ 425 $ 320 32.8 %

Net sales per square foot (excludes closed restaurants) $ 468 $ 425 10.1 %

Restaurant revenue, which comprises primarily food and beverage sales, increased $92.6 million in 2022, or 8.1%, as compared to 2021.

The increase was due to a $276.6 million, or 33.5%, increase in comparable restaurant revenue due to the COVID-19 pandemic and a $7.0 million increase primarily from reopened restaurants that were temporarily closed during 2020.

The comparable restaurant revenue increase was driven by a 22.3% increase in Guest count and an 11.2% increase in average Guest check.

The increase in average Guest check comprised a 6.7% increase in menu mix, and a 3.7% increase in pricing and a 0.8% increase from lower discounting.

The increase in menu mix was primarily driven by higher sales of beverages, appetizers, and limited time menu offerings with higher dine-in sales volumes.

The increase was due to a $100.6 million, or 9.2%, increase in comparable restaurant revenue, partially offset by a $8.0 million decrease at non-comparable restaurants, including the impact of restaurant closures.

The comparable restaurant revenue increase was driven by a 10.1% increase in average Guest check with a 0.9% decrease in Guest count.

The increase in average Guest check resulted from a 6.4% increase in pricing and a 3.8% increase in menu mix, and was partially offset by a 0.1% decrease from higher discounts.

The increase in menu mix was primarily driven by our limited time menu offerings and higher dine-in sales volumes.

Dine-in sales comprised 71.3% of total food and beverage sales in 2022, as compared to 65.5% in 2021.

Average weekly net sales volumes represent the total restaurant revenue for all Company-owned Red Robin restaurants for each time period presented, divided by the number of operating weeks in the period.

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Net sales per square foot represents the total of restaurant revenue for Company-owned restaurants included in the comparable base divided by the total adjusted square feet of Company-owned restaurants included in the comparable base.

Franchise revenue primarily comprises royalty income and advertising fund contributions.

Franchise revenue increased $8.4 million, or 94.7%, in 2021 compared to 2020 primarily due to improved comparable franchise sales performance, and charging and collecting royalty payments and advertising contributions from our franchisees during 2021.

During 2020, the Company had temporarily abated franchisee royalty and advertising contribution payments in mid-March, and resumed collection during the latter half of the second fiscal quarter of 2020.

Other revenue is primarily comprised of gift card breakage, which represents the value associated with the portion of gift cards sold that are unlikely to be redeemed, and licensing royalties.

Franchise revenue primarily includes royalty income and advertising fund contributions.

Franchise revenue increased $2.1 million, or 12.0%, in 2022 compared to 2021 primarily due to increased comparable franchise sales.

The dollar amount of both royalty income and advertising fund contributions increased as each is calculated primarily as a fixed percentage of franchise sales.

Other revenue primarily comprises gift card breakage, which represents the value associated with the portion of gift cards sold that are unlikely to be redeemed, licensing income, and recycling income.

During 2022 and 2021, we recognized $14.8 million and $5.4 million of gift card breakage.

Refer to Note 1.

Description of Business and Summary of Significant Accounting Policies, Change in Accounting Estimate - Gift Card Breakage .

Cost of Sales

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As a percent of restaurant revenue 24.9 % 22.9 % 2 %

Cost of sales, which comprises food and beverage costs, is variable and generally fluctuates with sales channel mix and volume.

Cost of sales as a percentage of restaurant revenue decreased 30 basis points in 2021 as compared to 2020.

The decrease was primarily driven by pricing and favorable mix shifts, partially offset by commodity inflation.

Cost of sales, which comprises food and beverage costs, is variable and generally fluctuates with commodity costs and sales channel mix and volume.

Cost of sales as a percentage of restaurant revenue increased 200 basis points in 2022 as compared to 2021.

The increase was primarily driven by approximately 15.3% commodity basket inflation, partially offset by menu price increases.

(In thousands, except percentages) 2022 2021 Percent Change

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Labor as a percentage of restaurant revenue decreased 20 basis points in 2022 as compared to 2021.

The decrease was primarily driven by staffing shortages, and sales leverage, partially offset by higher wage rates, staffing costs and increased restaurant management compensation costs in 2021.

The decrease was primarily driven by sales leverage, and lower management incentive compensation costs, partially offset by wage rate inflation in 2022.

Other Operating

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As a percent of restaurant revenue 18.3 % 18.3 % — %

Other operating costs include costs such as equipment repairs and maintenance costs, restaurant supplies, utilities, restaurant technology, and other miscellaneous costs including royalties paid to Donatos®.

Other operating costs as a percentage of restaurant revenue decreased 100 basis points in 2021 as compared to 2020.

The decrease was primarily driven by sales leverage and lower utilities and supplies, partially offset by increased third party commissions and hiring advertisement costs.

Other operating costs include costs such as equipment repairs and maintenance costs, restaurant supplies, utilities, restaurant technology, third party delivery fees, and other miscellaneous costs.

Other operating costs as a percentage of restaurant revenue remained the same in 2022 and 2021.

Lower off-premises supply costs and the impact of sales leverage were offset by an increase in utilities and other costs.

(In thousands, except percentages) 2022 2021 Percent Change

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Occupancy costs include fixed rents, property taxes, common area maintenance charges, general liability insurance, contingent rents, and other property costs.

In 2021, occupancy costs as a percentage of restaurant revenue decreased 320 basis points as compared to 2020 primarily driven by sales leverage, savings from permanently closed restaurants and restructured leases.

Our fixed rents in 2021 and 2020 were $68.8 million and $66.1 million, an increase of $2.7 million due to the recognition of occupancy costs in Other charges for temporarily closed Company-owned restaurants during periods of closure due to the COVID-19 pandemic in 2020, partially offset by decreases from 14 restaurants permanently closed during 2021 and 11 restaurants permanently closed during 2020.

In 2022, occupancy costs as a percentage of restaurant revenue decreased 50 basis points as compared to 2021 primarily driven by sales leverage and the impact of permanently closed restaurants and lease amendments, partially offset by higher general liability costs.

Our fixed rents in 2022 and 2021 were $69.3 million and $68.8 million, an increase of $0.5 million due to the recognition of occupancy costs in Other charges for temporarily closed Company-owned restaurants during periods of closure due to the COVID-19 pandemic and the impact of lease amendments including a lease modification that resulted in a financing lease becoming an operating lease, partially offset by decreases from 16 restaurants permanently closed during 2022 and 14 restaurants permanently closed during 2021.

Depreciation and Amortization

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As a percent of total revenues 6.0 % 7.2 % (1.2) %

Depreciation and amortization includes depreciation on capital expenditures for restaurants and corporate assets as well as amortization of acquired franchise rights, leasehold interests, and certain liquor licenses.

Depreciation and amortization includes depreciation on capital expenditures for restaurants and corporate assets as well as amortization of reacquired franchise rights, leasehold interests, and certain liquor licenses.

In 2022, depreciation and amortization expense as a percentage of revenue decreased 120 basis points as compared to 2021.

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Selling, general, and administrative expense increased $13.9 million, or 11.3% in 2022 as compared to 2021.

The increase in selling, general, and administrative expenses in 2021 was primarily driven by the return of marketing spend closer to a more normalized level in 2021, merit increases and lapping temporary salary reductions in 2020, increased travel costs, and higher professional services spend.

General and administrative expenses increased $9.5 million or 12.6% in 2022 as compared to 2021.

The increase in 2022 was primarily driven by increased conference and travel costs following the ease of COVID-19 restrictions, higher share-based incentive compensation costs, and higher staffing costs.

Selling expenses increased $4.4 million or 9.3% in 2022 as compared to 2021.

The increase was primarily driven by increased digital marketing.

Pre-opening Costs

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As a percent of total revenues — % 0.1 % (0.1) %

* Percentage increases and decreases over 100 percent were not considered meaningful.

Pre-opening costs, which are expensed as incurred, comprise the costs related to preparing restaurants to introduce Donatos® and other initiatives, as well as direct costs, including labor, occupancy, training, and marketing, incurred related to opening new restaurants and hiring the initial work force.

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Pre-opening costs for any given quarter will typically include expenses associated with restaurants opened during the quarter as well as expenses related to restaurants opening in subsequent quarters.

We incurred pre-opening costs during 2021 related to the rollout of Donatos® and the costs associated with opening one new restaurant.

We incurred pre-opening costs during 2020 related to the rollout of Donatos®.

The Company completed the rollout of 120 restaurants during the year ended December 26, 2021, and expects to continue its roll out of Donatos® to approximately 50 restaurants in 2022 with full completion by 2024.

Rollout of Donatos® requires pre-opening expense of approximately $12 thousand per restaurant.

Other Charges

We incurred pre-opening costs related to the installation of 52 Donatos® in fiscal 2022.

Other Charges (Gains), net

(In thousands, except percentages) 2022 2021 Percent Change

Restaurant closures and refranchising costs $ 6,276 $ 19,846 (68.4) %

Asset impairment $ 38,534 $ 7,052 *

Gain on sale of restaurant property (9,204) — *

Severance and executive transition, net of $(3,299) and $0 in stock-based compensation

Other financing costs 1,462 — *

Restaurant closure costs, net 828 6,276 (86.8) %

Closed corporate office costs, net of sublease income 475 — *

COVID-19 related charges 438 1,288 (66.0) %

Litigation contingencies 4,148 1,330 *

COVID-19 related costs 1,288 1,858 (30.7) %

Board and shareholder matter costs 128 2,504 (94.9) %

Goodwill impairment — 95,414 *

Severance and executive transition — 881 *

Other charges $ 16,074 $ 153,883

Board and stockholder matter costs — 128 (100.0) %

Other charges (gains), net $ 38,961 $ 16,074

* Percentage increases and decreases over 100 percent were not considered meaningful.

For further information on Other charges line items, refer to Footnote 4, Other Charges , of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

For further information on Other charges line items, refer to Note 4.

Other Charges (Gains), net, of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

Interest Expense and Interest Income

Interest expense in 2022 and 2021 was $20.6 million and $14.2 million, respectively.

The $6.5 million increase was primarily due to the increase in average total debt and higher interest rates.

Our weighted average interest rate in 2022 and 2021 was 9.1% and 7.1%.

During the fourth quarter of 2020, we received a $49.4 million federal cash tax refund that included approximately $1.1 million of interest, recorded in the Interest income and other, net line on the consolidated statements of operation and comprehensive loss.

Income tax benefit was $0.2 million in 2021, compared to an income tax benefit of $7.5 million in 2020.

Our effective tax rate was a 0.3% benefit in 2021 and a 2.6% benefit in 2020.

The decrease in tax benefit for the year ended December 26, 2021 is primarily due to the 2020 favorable rate impact of net operating loss ("NOL") carrybacks allowed as part of the CARES Act.

The Company had outstanding federal and state refund claims of approximately $15.8 million as of December 26, 2021.

In January 2022, the Company received $2.4 million of those refund claims and expects to receive the remaining $13.4 million over the next 12-18 months due to processing delays at the IRS.

Interest income and other decreased by $0.7 million to $0.0 million in 2022 from $0.7 million in 2021 due to interest income, primarily related to an income tax refund, that was offset by investment losses, related to a deferred compensation plan for which assets are held in a rabbi trust, in 2022 compared to investment gains related to the deferred compensation plan in 2021.

Income tax provision was $0.7 million in 2022, compared to an income tax benefit of $0.2 million in 2021.

Our effective tax rate was a 1.0% provision in 2022 and a 0.3% benefit in 2021.

The increase in tax expense for th e year ended December 25, 2022, is primarily due to the 2022 impact of state taxes including minimum state income taxes and state franchise taxes as well as an adjustment to federal taxes .

Liquidity and Capital Resources

Cash and cash equivalents increased $6.7 million to $22.8 million at December 26, 2021, from $16.1 million at the beginning of the fiscal year.

As the Company continues to recover from the COVID-19 pandemic and generates operating cash flow, the Company is using available cash flow from operations to pay down debt, maintain existing restaurants and infrastructure, and execute on its long-term strategic initiatives.

As of December 26, 2021, the Company had approximately $57.7 million in liquidity, including cash on hand and available borrowing capacity under its credit facility.

Cash and cash equivalents, and restricted cash increased $35.4 million to $48.8 million at December 25, 2022, from $22.8 million at the beginning of the fiscal year.

The Company is using available cash flow from operations to maintain existing restaurants and infrastructure, and execute on its long-term strategic initiatives.

As of December 25, 2022, the Company had approximately $58.8 million in liquidity, including cash and cash equivalents and available borrowing capacity under its Credit Facility.

The table below summarizes our cash flows from operating, investing, and financing activities for each fiscal year presented (in thousands):

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Net cash used in investing activities (29,568) (42,241)

Net cash provided by (used) in financing activities 1,563 (11,704)

Effect of currency translation on cash 20 (1,065)

Net increase (decrease) in cash and cash equivalents $ 6,634 $ (13,929)

Net cash provided by financing activities 29,533 1,563

Effect of exchange rate changes on cash (41) 20

Net change in cash and cash equivalents, and restricted cash $ 35,456 $ 6,634

Operating Cash Flows

Net cash flows provided by operating activities increased $27.1 million to $47.3 million in 2021 as compared to 2020.

The changes in net cash provided by operating activities are primarily attributable to a $163.4 million increase in profit from operations (defined as the change in operating margins from comparable and non-comparable restaurants), lower accounts receivable and higher accounts payable balances due to the timing of operational receipts and payments, as well as other changes in working capital as presented in the Consolidated Statements of Cash Flows.

Net cash flows provided by operating activities decreased $11.8 million to $35.5 million in 2022 as compared to 2021.

The change in net cash provided by operating activities is primarily attributable to repayment of CARES Act deferred payroll tax of $8.8 million;

$5.6 million higher interest payments due to the increased average total debt and higher interest rates;

and decreased cash from earnings after non-cash items, as presented in the Consolidated Statements of Cash Flows, partially offset by changes in working capital, including the tax refunds received in 2022.

Investing Cash Flows

Net cash flows used in investing activities increased $20.8 million to $42.2 million in 2021 as compared to 2020.

The increase is primarily due to adding Donatos® to 120 restaurants during 2021, as well as increased spending on restaurant improvements, and investments in technology.

Net cash flows used in investing activities decreased $12.7 million to $29.6 million in 2022 as compared to 2021.

The decrease is primarily due to proceeds from the sale of a restaurant property and decreased spending on the Donatos® expansion, partially offset by increased spending on restaurant improvements, and investments in technology and other projects.

The following table lists the components of our capital expenditures for each fiscal year presented (in thousands):

Donatos® expansion $ 17,113 $ 2,620

Restaurant improvement capital and other $ 15,882 $ 12,798

Investment in technology, infrastructure, and other 12,303 10,812

Donatos® expansion 6,054 17,113

New restaurants and restaurant refreshes 3,920 1,538

Total capital expenditures $ 38,159 $ 42,261

Expenditures for Donatos® expansion include expenditures for kitchen equipment, other equipment and other capital costs associated with adding Donatos® to our restaurants, Restaurant improvement capital and other consists of capital equipment for our restaurants, Investment in technology, infrastructure and other consists of capital costs related to restaurant technology assets, capital overhead, and other items, and new restaurants and restaurant refreshes primarily relates to costs associated with the re-establishment of our new restaurant development program.

Financing Cash Flows

Net cash flows provided by (used in) financing activities increased $13.3 million to $1.6 million in 2021 as compared to 2020.

The increase primarily resulted from a $40.2 million increase in net draws of long-term debt, a decrease of $1.6 million for cash used to repurchase the Company's common stock due to the Company's financial covenants restricting the repurchase of common stock in 2021, and a $1.2 million decrease in cash paid for debt issuance costs in 2021 compared to 2020, partially offset by a $28.7 million decrease from net cash proceeds received from the issuance of common stock in 2020.

Prior Credit Facility

On November 9, 2021, the Company entered into the Third Amendment to the Company’s amended and restated credit facility (the "prior credit facility") to obtain additional flexibility to continue to implement our business strategy.

The Third Amendment, which waived compliance with the Leverage Ratio Covenant for the third fiscal quarter of 2021, and provided for adjustments during fourth fiscal quarter of 2021, also included certain amendments to the prior credit facility to address LIBOR transition matters.

As of December 26, 2021, the Company had outstanding borrowings under the prior credit facility of $176.1 million, of which $9.7 million was classified as current, in addition to amounts issued under letters of credit of $7.9 million.

Amounts issued under letters of credit reduce the amount available under the credit facility but are not recorded as debt.

As of December 26, 2021, the Company was in compliance with all covenants applicable to our credit facility, as amended.

For additional details regarding our prior credit facility, see Footnote 8, Borrowings included within the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

New Credit Facility

On March 4, 2022 the Company entered into a new Senior Secured Term Loan and Revolving Credit Facility (the "new credit facility").

The new facility references the Secured Overnight Financing Rate ("SOFR"), a new index calculated by short-term repurchase agreements and backed by U.S.

Net cash flows provided by financing activities increased $28.0 million to $29.5 million in 2022 as compared to 2021.

The increase is primarily due to $30.6 million in net borrowings in 2022 compared to a net borrowings of $3.7 million in 2021 as a result of the Company's refinancing of debt on March 4, 2022 and $3.9 million in initial deposit proceeds received related to the sale of a restaurant property in the second quarter of 2022, partially offset by an increase in cash used for debt issuance costs.

Credit Facility

On March 4, 2022, the Company replaced its prior amended and restated Credit Agreement (the "Prior Credit Agreement") with a new Credit Agreement (the "Credit Agreement"), which provides for a new Senior Secured Term Loan and Revolving Credit Facility (the “Credit Facility”).

The Credit Agreement's interest rate references the Secured Overnight Financing Rate ("SOFR"), a new index calculated by short-term repurchase agreements and backed by U.S.

Treasury securities, or the Alternate Base Rate ("ABR"), which represents the highest of (a) the Prime Rate, (b) the Federal Funds Rate plus 0.5% per annum, or (c) one-month term SOFR plus 1.0% per annum.

We are subject to a number of customary covenants under our new credit facility, including limitations on additional borrowings, acquisitions, stock repurchases, sales of assets, and dividend payments, as well as a Total Net Leverage ratio covenant.

For additional details regarding our new credit facility, see Footnote 8, Borrowings included within the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

As of December 25, 2022, the Company had outstanding borrowings under the Credit Facility of $205.7 million net of $8.3 million of unamortized deferred financing charges and discounts, of which $3.4 million was classified as current, in addition to amounts issued under letters of credit of $9.1 million.

The amounts issued under letters of credit reduce the amount available under the Credit Facility but are not recorded as debt.

We are subject to a number of customary covenants under our Credit Facility, including limitations on additional borrowings, acquisitions, stock repurchases, sales of assets, and dividend payments, as well as a Total Net Leverage ratio covenant.

As of December 25, 2022, the Company was in compliance with all covenants applicable to our Credit Facility.

For additional information regarding our Credit Facility, see Note 8.

Borrowings included within the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

Debt Outstanding

Total debt outstanding increased $6.3 million to $177.0 million at December 26, 2021, from $170.6 million at December 27, 2020, due to net borrowings of $6.3 million on the credit facility during 2021.

As of December 26, 2021, the Company had $35 million of available borrowing capacity under its credit facility.

Net borrowings during 2021 totaled $6.3 million.

Total debt outstanding increased $37.9 million to $214.9 million at December 25, 2022, from $177.0 million at December 26, 2021, primarily driven by net proceeds from the execution of the Credit Facility during the fifty-two weeks ended December 25, 2022.

Share Repurchase

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From the date of the current program approval through December 25, 2022, we have repurchased a total of 226,500 shares at an average price of $29.14 per share for an aggregate amount of $6.6 million.

There were no share repurchases in 2022 and 2021.

Accordingly, as of December 25, 2022, we had $68.4 million of availability under the current share repurchase program.

Effective March 14, 2020, the Company temporarily suspended its share repurchase program to provide additional liquidity during the COVID-19 pandemic.

As of December 26.

2021, our ability to repurchase shares was limited to conditions set forth by our lenders in the Second Amendment to our credit facility prohibiting us from repurchasing additional shares until the first fiscal quarter of 2022 at the earliest and not until we deliver a covenant compliance certificate demonstrating a lease adjusted leverage ratio less than or equal to 5.00:1.00.

The new credit facility limits our ability to repurchase shares to certain conditions set forth by our lenders in the new credit facility.

Effective March 14, 2020, the Company suspended its share repurchase program to provide additional liquidity during the COVID-19 pandemic.

The new Credit Agreement limits our ability to repurchase shares to certain conditions set forth by our lenders in the new Credit Facility.

Contractual Obligations

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(5) Other non-current liabilities primarily represent the employee deferred compensation plan liability.

Refer to Note 15, Employee Benefit Programs , of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information.

Refer to Note 15.

Employee Benefit Programs, of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information.

Financial Condition and Future Liquidity

We require capital principally to maintain, improve, and refurbish existing restaurants, support infrastructure needs, and for general operating purposes, as well as to grow the business through new restaurant construction and expansion of our restaurant base which serves Donatos®.

In addition, we have and may continue to use capital to pay principal on our borrowings and repurchase our common stock as allowed by our credit agreement.

We require capital principally to maintain, improve, and refurbish existing restaurants;

build new restaurants;

support infrastructure needs;

fund operational changes;

and for general operating purposes.

We are required to make interest and principal payments under the terms of our Credit Agreement, and may use capital to pay additional principal on our borrowings or repurchase our common stock as allowed by our Credit Agreement.

Our primary short-term and long-term sources of liquidity are expected to be cash flows from operations and our Credit Facility.

Based upon current levels of operations and anticipated growth, and the diminishing impacts of the COVID-19 pandemic, we expect cash flows from operations and available borrowing capacity under the credit facility will be sufficient to meet debt service, capital expenditures, and working capital requirements for at least the next twelve months.

We expect cash flows from operations and available borrowing capacity under the Credit Facility will be sufficient to meet debt service, capital expenditures, and working capital requirements for at least the next twelve months.

In January 2023, the Company announced it is evaluating a sale-leaseback transaction related to its owned properties and anticipates proceeds will be used to repay debt, fund capital investments, and repurchase shares of Company stock subject to the terms of the Credit Agreement and approval by the Board of Directors.

We and the restaurant industry in general maintain relatively low levels of accounts receivable and inventories, and vendors generally grant short-term trade credit for purchases, such as food and supplies.

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When necessary, we utilize our Credit Facility to satisfy short-term liquidity requirements.

We believe our future cash flows generated from restaurant operations combined with our remaining borrowing capacity under the credit facility will be sufficient to satisfy any working capital deficits and our planned capital expenditures.

We believe our future cash flows generated from restaurant operations combined with our remaining borrowing capacity under the Credit Facility and sale-leaseback transactions will be sufficient to satisfy any working capital deficits and our planned capital expenditures.

Critical Accounting Policies and Estimates

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The amount of the impairment loss is measured as the amount by which the carrying value exceeds the fair value of the asset, which is determined using discounted cash flows.

Judgments made by management related to our ability to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as the ongoing maintenance and improvements of the assets, changes in economic conditions, and changes in operating performance.

Judgments made by management related to our ability to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as changes in economic conditions, changes in operating performance, and the ongoing maintenance and improvements of the assets.

As the ongoing expected cash flows and carrying amounts of long-lived assets are assessed, these factors could cause us to realize a material impairment charge.

Each restaurant's past and present operating performance were reviewed in combination with projected future results, primarily through projected undiscounted cash flows, which indicated possible impairment.

We compared the carrying amount of each restaurant to its fair value as estimated by management.

The fair value of the long-lived assets is typically determined using a discounted cash flow projection model.

The discount factor is determined using external information regarding the risk-free rate of return, industry beta factors, and premium adjustments.

These factors are combined with internal information such as the Company's average cost of debt and effective tax rate to determine a weighted average cost of capital which is applied to the undiscounted cash flows.

In certain cases, management uses other market information such as market rent, when available, to estimate the fair value of a restaurant.

The impairment charges represent the excess of each restaurant's carrying amount over its estimated fair value.

During 2021, the Company determined long-lived assets at ten excess properties were impaired as a result of our cash flow analysis, and recognized non-cash impairment charges of $6.4 million primarily related to the impairment of the long-lived assets associated with excess properties.

During 2020, we impaired 40 Company-owned restaurants as a result of our cash flow analysis resulting in non-cash impairment charges of $21.7 million.

For those restaurants for which undiscounted cash flows did not exceed their carrying value, we compared the carrying amount of each restaurant to its fair value as estimated by management.

Determining the fair value of the long-lived assets requires the use of estimates and assumptions and is typically determined using a discounted cash flow projection model.

The weighted average cost of capital discount factor is determined using external information such as the risk-free rate of return, industry beta factors, and premium adjustments.

Management uses other market information such as market rent and discount rates, which are subject to judgment, to estimate the fair value of restaurant right of use lease assets.

During 2022, the Company determined long-lived assets at 46 locations were impaired as a result of our cash flow analysis, and recognized non-cash impairment charges of $38.0 million.

During 2021, we impaired ten Company-owned restaurants as a result of our cash flow analysis resulting in non-cash impairment charges of $6.4 million.

Information technology systems, such as internal-use computer software, are reviewed and tested for recoverability if the internal-use computer software is not expected to provide substantive service potential, a significant change occurs to the extent or manner in which the software is used or is expected to be used, a significant change is made or will be made to the software program, or costs of developing or modifying internal-use software significantly exceed the amount originally expected to develop or modify the software.

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We determine fair value based on quoted prices in the active market for the license in the same or similar jurisdictions, representing a level 1 fair value measurement.

During the fourth quarter of 2021, the Company performed its annual review of its indefinite lived liquor licenses that had a carrying value of $7.2 million, and recorded impairment charges of $0.5 million to indefinite-lived intangibles in 2021.

No impairment charges were recorded to liquor licenses with indefinite lives in 2020, or 2019.

At the end of 2022, the Company performed its annual review of its indefinite lived liquor licenses that had a carrying value of $6.7 million, and recorded impairment charges of $0.5 million to indefinite-lived intangibles in 2022.

In 2021, $0.5 million of impairment charges were recorded and, in 2020, no impairment charges were recorded to liquor licenses with indefinite lives.

Recently Issued Accounting Standards

See Footnote 2, Recent Accounting Pronouncements , of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for our discussion of recently issued accounting standards.

Recent Accounting Pronouncements, of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for our discussion of recently issued accounting standards.

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