RED ROBIN GOURMET BURGERS INC 10-K

ITEM 8. Financial Statements and Supplementary Data RED ROBIN GOURMET BURGERS, INC. INDEX Page Report of Independent Registered Public Accounting Firm, Deloitte & Touche LLP (PCAOB ID: 34 ) 42 Report of Independent Registered Public Accounting Firm, KPMG LLP (PCAOB ID: 185 ) 44 Consolidated Balance Sheets 45 Consolidated Statements of Operations and Comprehensive Loss 46 Consolidated Statements of Stockholders' Equity 47 Consolidated Statements of Cash Flows 48 Notes to Consolidated Financial Statements 49 41 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Red Robin Gourmet Burgers, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Red Robin Gourmet Burgers, Inc. and subsidiaries (the "Company") as of December 25, 2022 and December 26, 2021, the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for the periods ended December 25, 2022 and December 26, 2021, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 25, 2022 and December 26, 2021, and the results of its operations and its cash flows for the periods ended December 25, 2022 and December 26, 2021, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 25, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2023, expressed an unqualified opinion on the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Impairment of Long-Lived Assets – Refer to Notes 1, 4 and 9 in the Financial Statements Critical Audit Matter Description As of December 25, 2022, the Company had $318.5 million in property and equipment, net, $361.4 million in operating lease assets, net, and $7.6 million in finance lease assets, net. The Company assesses long-lived assets for impairment at the individual restaurant-level whenever events and circumstances indicate the carrying amount of an asset group may not be recoverable. During 2022, the Company determined long-lived assets at 46 locations were impaired as a result of their cash flow analysis and recognized non-cash impairment charges of $38.0 million. Long-lived assets are reviewed whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Expected cash flows associated with an asset are the key factor in determining the recoverability of the asset. Identifiable cash flows are measured at the restaurant-level. The estimate of cash flows is based upon, among other things, certain assumptions about expected future operating performance, including assumptions of future revenue trends. If the sum of the undiscounted cash flows is less than the carrying value of the asset, an impairment loss is recognized and measured as the amount by which the carrying value exceeds the fair value of the asset. We identified the evaluation of long-lived asset impairment as a critical audit matter because of the significant judgments made by management to estimate the undiscounted cash flows, including assumptions about expected future operating performance, and the fair value of the lease assets. This required a high degree of auditor judgment and an increased extent of effort, when performing audit procedures to evaluate whether management appropriately identified and evaluated potential impairment 42 Table of Contents indicators, and when evaluating the reasonableness of management’s estimates and assumptions, particularly related to undiscounted cash flows and market rent. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the impairment of long-lived assets included the following, among others: • We tested the operating effectiveness of internal controls over the Company’s assessment and evaluation of potential impairment indicators for long-lived assets and over forecasted undiscounted cash flows and market rent used in their recoverability and impairment analyses. • We evaluated the reasonableness of the Company’s evaluation of impairment indicators by: ◦ Evaluating the Company’s process for identifying qualitative and quantitative impairment indicators by location and whether the Company appropriately considered such indicators ◦ Conducting a completeness assessment to determine whether additional impairment indicators were present during the period that were not identified by the Company. • We tested the mathematical accuracy of management’s calculations and the underlying source of information for a selection of restaurant sites. • We evaluated the reasonableness of the information in the Company’s forecasted undiscounted cash flows used in their recoverability and impairment analyses, by comparing the forecasts to ◦ Historical actual information ◦ Internal communications between management and the Board of Directors ◦ Forecasted information included in analyst and industry reports for the Company. • We evaluated the Company’s forecasted undiscounted and discounted cash flows for consistency with evidence obtained in other areas of the audit. • With the assistance of our fair value specialists, we evaluated the market rent by developing a range of independent estimates and comparing those to the market rent used by management. /s/ Deloitte & Touche LLP Denver, Colorado February 28, 2023 We have served as the Company's auditor since 2021. 43 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Red Robin Gourmet Burgers, Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows of Red Robin Gourmet Burgers, Inc. and subsidiaries (the Company) for the year ended December 31, 2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the results of operations of the Company and its cash flows for the year ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion. /s/ KPMG LLP We served as the Company’s auditor from 2015 to 2021 . Denver, Colorado March 3, 2021, except as to paragraph (c) of Note 1, which is as of March 10, 2022 44 Table of Contents RED ROBIN GOURMET BURGERS, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except per share amounts) December 25, 2022 December 26, 2021 Assets: Current assets: Cash and cash equivalents $ 48,826 $ 22,750 Accounts receivable, net 21,427 21,400 Inventories 26,447 25,219 Income tax receivable 562 15,824 Prepaid expenses and other current assets 12,938 16,963 Restricted cash 9,380 — Total current assets 119,580 102,156 Property and equipment, net 318,517 386,336 Operating lease assets, net 361,432 400,825 Intangible assets, net 17,727 21,292 Other assets, net 14,889 18,389 Total assets $ 832,145 $ 928,998 Liabilities and stockholders' equity: Current liabilities: Accounts payable $ 39,336 $ 32,510 Accrued payroll and payroll-related liabilities 33,666 32,584 Unearned revenue 43,358 54,214 Current portion of operating lease liabilities 47,394 48,842 Current portion of long-term debt 3,375 9,692 Accrued liabilities and other current liabilities 49,498 45,458 Total current liabilities 216,627 223,300 Long-term debt 203,155 167,263 Long-term portion of operating lease liabilities 393,157 435,136 Other non-current liabilities 13,831 26,325 Total liabilities 826,770 852,024 Stockholders' equity: Common stock; $ 0.001 par value: 45,000 shares authorized; 20,449 shares issued; 15,934 and 15,722 shares outstanding as of December 25, 2022 and December 26, 2021 20 20 Preferred stock, $ 0.001 par value: 3,000 shares authorized; no shares issued and outstanding as of December 25, 2022 and December 26, 2021 — — Treasury stock 4,515 and 4,727 shares, at cost as of December 25, 2022 and December 26, 2021 ( 182,810 ) ( 192,803 ) Paid-in capital 238,803 242,560 Accumulated other comprehensive income (loss), net of tax ( 34 ) 1 Retained (deficit) earnings ( 50,604 ) 27,196 Total stockholders' equity 5,375 76,974 Total liabilities and stockholders' equity $ 832,145 $ 928,998 See Notes to Consolidated Financial Statements. 45 Table of Contents RED ROBIN GOURMET BURGERS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (In thousands, except per share amounts) Year Ended December 25, 2022 December 26, 2021 December 27, 2020 Revenues: Restaurant revenue $ 1,230,318 $ 1,137,733 $ 854,136 Franchise revenue 19,306 17,236 8,853 Other revenue 16,993 7,109 5,726 Total revenues 1,266,617 1,162,078 868,715 Costs and expenses: Restaurant operating costs (excluding depreciation and amortization shown separately below): Cost of sales 306,509 260,896 198,487 Labor (includes $ 958 , $ 894 , and $ 157 of stock-based compensation) 440,564 409,901 332,827 Other operating 224,704 207,829 164,468 Occupancy 98,868 96,484 99,521 Depreciation and amortization 76,245 83,438 87,557 Selling, general, and administrative expenses (includes $ 8,635 , $ 5,728 , and $ 4,173 of stock-based compensation) 136,612 122,743 106,822 Pre-opening costs 568 1,410 296 Other charges (includes $( 3,299 ), $ 0 , and $ 0 of stock-based compensation) 38,961 16,074 153,883 Total costs and expenses 1,323,031 1,198,775 1,143,861 Loss from operations ( 56,414 ) ( 36,697 ) ( 275,146 ) Other expense (income): Interest expense 20,643 14,176 10,163 Interest (income) and other, net ( 4 ) ( 719 ) ( 1,757 ) Total other expenses, net 20,639 13,457 8,406 Loss before income taxes ( 77,053 ) ( 50,154 ) ( 283,552 ) Income tax expense (benefit) 747 ( 152 ) ( 7,484 ) Net loss $ ( 77,800 ) $ ( 50,002 ) $ ( 276,068 ) Loss per share: Basic $ ( 4.91 ) $ ( 3.19 ) $ ( 19.29 ) Diluted $ ( 4.91 ) $ ( 3.19 ) $ ( 19.29 ) Weighted average shares outstanding: Basic 15,840 15,660 14,314 Diluted 15,840 15,660 14,314 Other comprehensive (loss) income: Foreign currency translation adjustment $ ( 35 ) $ 5 $ ( 1,115 ) Other comprehensive (loss) income, net of tax ( 35 ) 5 ( 1,115 ) Total comprehensive loss $ ( 77,835 ) $ ( 49,997 ) $ ( 277,183 ) See Notes to Consolidated Financial Statements. 46 Table of Contents RED ROBIN GOURMET BURGERS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands) Common Stock Treasury Stock Accumulated Other Comprehensive (Loss) Income, net of tax Retained Earnings (Deficit) Paid-in Capital Shares Amount Shares Amount Total Balance, December 29, 2019 17,851 $ 18 4,928 $ ( 202,313 ) $ 213,922 $ ( 4,373 ) $ 353,266 $ 360,520 Exercise of options, issuance of restricted stock, shares exchanged for exercise and tax, and stock issued through employee stock purchase plan — — ( 99 ) 4,040 ( 3,720 ) — — 320 Acquisition of treasury stock — — 72 ( 1,635 ) — — ( 1,635 ) Non-cash stock compensation — — — — 4,489 — — 4,489 Issuance of common stock. $ 0.001 par value, net of stock issuance costs 2,598 2 — — 28,716 — — 28,718 Release of currency translation adjustment — — — — — 5,484 — 5,484 Net loss — — — — — — ( 276,068 ) ( 276,068 ) Other comprehensive loss — — — — — ( 1,115 ) — ( 1,115 ) Balance, December 27, 2020 20,449 20 4,901 ( 199,908 ) 243,407 ( 4 ) 77,198 120,713 Exercise of options, issuance of restricted stock, shares exchanged for exercise and tax, and stock issued through employee stock purchase plan — — ( 174 ) 7,105 ( 7,484 ) — — ( 379 ) Non-cash stock compensation — — — — 6,637 — — 6,637 Net income — — — — — — ( 50,002 ) ( 50,002 ) Other comprehensive income — — — — — 5 — 5 Balance, December 26, 2021 20,449 20 4,727 ( 192,803 ) 242,560 1 27,196 76,974 Exercise of options, issuance of restricted stock, shares exchanged for exercise and tax, and stock issued through employee stock purchase plan — — ( 212 ) 9,993 ( 10,080 ) — — ( 87 ) Non-cash stock compensation — — — — 6,323 — — 6,323 Net loss — — — — — — ( 77,800 ) ( 77,800 ) Other comprehensive loss — — — — — ( 35 ) — ( 35 ) Balance, December 25, 2022 20,449 $ 20 4,515 $ ( 182,810 ) $ 238,803 $ ( 34 ) $ ( 50,604 ) $ 5,375 See Notes to Consolidated Financial Statements. 47 Table of Contents RED ROBIN GOURMET BURGERS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 25, 2022 December 26, 2021 December 27, 2020 Cash Flows From Operating Activities: Net loss $ ( 77,800 ) $ ( 50,002 ) $ ( 276,068 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 76,245 83,438 87,557 Gift card breakage ( 14,761 ) ( 5,373 ) ( 4,516 ) Goodwill and asset impairments 38,534 7,052 122,354 Non-cash other charges (gains) ( 3,440 ) 346 2,837 Deferred income tax provision — — 51,502 Stock-based compensation expense 6,294 6,622 4,330 Gain on sale of property ( 9,204 ) — — Amortization of debt issuance costs 3,530 3,032 639 Other, net 287 71 413 Changes in operating assets and liabilities: Accounts receivable ( 26 ) ( 4,919 ) 5,601 Inventories ( 1,813 ) ( 1,925 ) 2,239 Income tax receivable 15,263 759 ( 11,276 ) Prepaid expenses and other current assets 2,289 ( 3,066 ) 7,443 Operating lease assets, net of liabilities ( 7,036 ) ( 9,293 ) 18,324 Trade accounts payable and accrued liabilities 11,724 19,449 ( 9,566 ) Unearned revenue 3,906 9,449 430 Other operating assets and liabilities, net ( 8,460 ) ( 8,348 ) 17,990 Net cash provided by operating activities 35,532 47,292 20,233 Cash Flows From Investing Activities: Purchases of property, equipment and intangible assets ( 38,159 ) ( 42,261 ) ( 22,132 ) Proceeds from sales of property and equipment, and other 8,591 20 739 Net cash used in investing activities ( 29,568 ) ( 42,241 ) ( 21,393 ) Cash Flows From Financing Activities: Borrowings of long-term debt 297,151 192,500 211,000 Payments of long-term debt and capital leases ( 266,519 ) ( 188,845 ) ( 247,501 ) Purchase of treasury stock — — ( 1,635 ) Debt issuance costs ( 4,869 ) ( 1,714 ) ( 2,952 ) Proceeds related to real estate sale 3,856 — — Proceeds from issuance of common stock, net of stock issuance costs — — 28,718 (Uses) proceeds from other financing activities, net ( 86 ) ( 378 ) 666 Net cash provided by (used in) financing activities 29,533 1,563 ( 11,704 ) Effect of exchange rate changes on cash ( 41 ) 20 ( 1,065 ) Net change in cash and cash equivalents, and restricted cash 35,456 6,634 ( 13,929 ) Cash and cash equivalents, beginning of period 22,750 16,116 30,045 Cash and cash equivalents, and restricted cash, end of period $ 58,206 $ 22,750 $ 16,116 Supplemental disclosure of cash flow information Income taxes refund received, net $ ( 14,642 ) $ ( 962 ) $ ( 50,629 ) Interest paid, net of amounts capitalized 16,054 10,455 9,869 Accrued purchases of property, equipment and intangible assets $ 9,688 $ 4,655 $ 2,358 See Notes to Consolidated Financial Statements. 48 Table of Contents RED ROBIN GOURMET BURGERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Description of Business and Summary of Significant Accounting Policies (a) Description of Business Red Robin Gourmet Burgers, Inc., a Delaware corporation, together with its subsidiaries ("Red Robin," "we," "us," "our", or the "Company"), primarily operates, franchises, and develops casual dining restaurants in North America. As of December 25, 2022, the Company owned and operated 414 restaurants located in 38 states. The Company also had 97 casual dining restaurants operated by franchisees in 16 states and one Canadian province. The Company operates its business as one operating and one reportable segment. (b) Basis of Presentation and Principles of Consolidation The consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States and include the accounts of Red Robin and its wholly owned subsidiaries after elimination of all intercompany accounts and transactions. The Company's fiscal year is 52 or 53 weeks ending the last Sunday of the calendar year. Year-end dates and the number of weeks in each fiscal year are shown in the table below for periods presented in the consolidated financial statements and for the upcoming fiscal year. Fiscal Year Year End Date Number of Weeks in Fiscal Year Current and Prior Fiscal Years: 2022 December 25, 2022 52 2021 December 26, 2021 52 2020 December 27, 2020 52 Upcoming Fiscal Years: 2023 December 31, 2023 53 2024 December 29, 2024 52 (c) Reclassifications Certain amounts presented have been reclassified within the December 26, 2021 and December 27, 2020 Consolidated Statements of Cash Flows to conform with the current period presentation, including prior year reclassifications from Other, net to Amortization of debt issuance costs. The reclassifications had no effect on the Company’s cash flows from operations. (d) Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The areas that require management's most significant estimates are impairment of long-lived assets, lease accounting, estimating fair value, and unearned revenue. Actual results could differ from those estimates. Change in Accounting Estimate - Gift Card Breakage As part of its annual assessment of gift card breakage and during the fifty-two weeks ended December 25, 2022, the Company re-evaluated the estimated redemption pattern related to gift cards and aligned the recognition of gift card breakage to the updated estimated redemption pattern. As a result, the Company recognized $ 5.9 million of additional gift card breakage in Other revenues, partially offset by $ 0.6 million of associated commissions costs recognized in Selling, general and administrative expenses, in the first quarter of 2022. This change in accounting estimate decreased net loss by $ 5.2 million, or $ 0.33 per basic and diluted share for the fifty-two weeks ended December 25, 2022. The Company may record adjustments related to changes in estimated redemption patterns in the future which could be material. Change in Accounting Estimate - Red Robin Loyalty Breakage In the fourth quarter of 2022, the Company re-evaluated the estimated redemption pattern related to Red Robin Royalty benefits and aligned the recognition of loyalty breakage to the updated estimated redemption pattern. As a result, the Company recognized an additional $ 2.9 million of loyalty breakage in Restaurant revenue. The Company re-evaluates the estimated redemption pattern related to Red Robin Royalty each year and may record adjustments related to changes in estimated redemption patterns in the future which could be material. 49 Table of Contents (e) Summary of Significant Accounting Policies Revenue Recognition - Revenues consist of sales from restaurant operations (including third party delivery), franchise revenue, and other revenue including gift card breakage and miscellaneous revenue. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a restaurant Guest, franchisee, or other customer. The Company recognizes revenues from restaurant operations when payment is tendered at the point of sale, as the Company's performance obligation to provide food and beverage to the customer has been satisfied. The Company sells gift cards which do not have an expiration date, and it does not deduct dormancy fees from outstanding gift card balances. We recognize revenue from gift cards as either: (i) Restaurant revenue, when the Company's performance obligation to provide food and beverage to the customer is satisfied upon redemption of the gift card, or (ii) gift card breakage, as discussed below. Gift card breakage is recognized when the likelihood of a gift card being redeemed by the customer is remote and the Company determines there is not a legal obligation to remit the unredeemed gift card balance to the relevant jurisdiction. The determination of the gift card breakage rate is based upon the Company's specific historical redemption patterns. The Company recognizes gift card breakage by applying its estimate of the rate of gift card breakage on a pro rata basis over the period of estimated redemption. Red Robin Royalty™ deferred revenue primarily relates to a program in which registered members earn an award for a free entrée for every nine entrées purchased. Registered members can also earn an award if they visit a Red Robin restaurant 5 separate times within 5 weeks of joining our Royalty™ program. We recognize the current sale of an entrée and defer a portion of the revenue to reflect partial prepayment for the future entrée the member is entitled to receive. We estimate the future value of the award based on the historical average value of redemptions. We also estimate what portion of registered members are not likely to reach the ninth purchase or fifth visit based on historical activity and recognize the revenue related to those purchases from deferred revenue. We recognize the deferred revenue in restaurant revenue on earned rewards when the Company satisfies its performance obligation at redemption, or upon expiration. We compare the estimate of the value of future awards to historical redemptions to evaluate the reasonableness of the deferred amount. Revenues we receive from our franchise arrangements include sales-based royalties, advertising fund contributions, area development fees, and franchise fees. Red Robin franchisees are required to remit 4.0 % to 5.0 % of their revenues as royalties to the Company and contribute up to 3 % of revenues to two national advertising funds. The Company recognizes these sales-based royalties and advertising fund contributions as the underlying franchisee sales occur. Contributions to these Advertising Funds from franchisees are recorded as revenue under Franchise revenue in the Consolidated Statements of Operations and Comprehensive Loss in accordance with ASC Topic 606, Revenue from Contracts with Customers . The Company also provides its franchisees with management expertise, training, pre-opening assistance, and restaurant operating assistance in exchange for area development fees and franchise fees. The Company capitalizes these fees upon collection from the franchisee, which then amortize over the contracted franchise term as the services comprising the performance obligation are satisfied. The Company typically grants franchise rights to franchisees for a term of 20 years, with the right to extend the term for an additional 10 years if various conditions are satisfied by the franchisee. Other revenue consists of gift card breakage, licensing income, and recycling income. Cash and Cash Equivalents, and Restricted Cash - The Company considers all highly liquid instruments with an original maturity of three months or less to be cash equivalents. Amounts receivable from credit card issuers are typically converted to cash within two to four days of the original sales transaction and are considered to be cash equivalents. Cash and cash equivalents are maintained with multiple financial institutions. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions with reputable credit and therefore bear minimal credit risk. The Company holds cash and cash equivalents at financial institutions in excess of amounts covered by the Federal Depository Insurance Corporation (the "FDIC") and sometimes invests excess cash in money market funds not insured by the FDIC. The Company periodically assesses the credit risk associated with these financial institutions and believes that the risk of loss is minimal. The Company is required to carry restricted cash balances that are reserved as collateral for existing letters of credit. The amounts issued under letters of credit, which are undrawn and expire in June 2023, totaled $ 9.1 million. Accounts Receivable, Net - Accounts receivable, net consists primarily of third party gift card receivables, third party delivery partner receivables, trade receivables due from franchisees for royalties and advertising fund contributions, and tenant improvement allowances. At the end of 2022, there was approximately $ 11.6 million of gift card receivables in accounts receivable related to gift cards that were sold by third party retailers compared to $ 10.9 million at the end of 2021. At the end of 50 Table of Contents 2022, there was also approximately $ 2.3 million related to third party delivery partners in accounts receivable compared to approximately $ 3.0 million at the end of 2021. Inventories - Inventories consist of food, beverages, and supplies valued at the lower of cost (first-in, first-out method) or net realizable value. At the end of 2022 and 2021, food and beverage inventories were $ 10.1 million and $ 8.7 million, respectively, and supplies inventories were $ 16.3 million and $ 16.4 million, respectively. Property and Equipment, Net - Property and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance, and repairs are expensed as incurred. Depreciation is computed on the straight-line method based on the shorter of the estimated useful lives or the terms of the underlying leases of the related assets. Interest incurred on funds used to construct Company-owned restaurants is capitalized and amortized over the estimated useful life of the related assets. The estimated useful lives for property and equipment are: Buildings 5 years to 20 years Leasehold improvements Shorter of lease term or estimated useful life, not to exceed 20 years Furniture, fixtures, and equipment 5 years to 20 years Computer equipment 2 years to 5 years The Company capitalizes certain overhead related to the development and construction of its new restaurants as well as certain information technology infrastructure upgrades. Costs incurred for the potential development of restaurants that are subsequently terminated are expensed. Leases - The Company leases land, buildings, and equipment used in its operations under operating and finance leases. Our leases generally have remaining terms of 1 - 15 years, most of which include options to extend the leases for additional 5 -year periods. Generally, the lease term is the minimum of the non-cancelable period of the lease or the lease term inclusive of reasonably certain renewal periods up to a term of 20 years. We determine if a contract contains a lease at inception. Operating lease assets and liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent our right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, we estimate incremental secured borrowing rates corresponding to the maturities of the leases. We estimate this rate based on prevailing financial market conditions, comparable company and credit analysis, and management judgment. Our leases typically contain rent escalations over the lease term. We recognize expense for these leases on a straight-line basis over the lease term. Additionally, tenant incentives used to fund leasehold improvements are recognized when earned and reduce our right-of-use asset related to the lease. These are amortized through the right-of-use asset as reductions of expense over the lease term. Some of our leases include rent escalations based on inflation indexes and fair market value adjustments. Certain leases contain contingent rental provisions that include a fixed base rent plus an additional percentage of the restaurant's sales in excess of stipulated amounts. Operating lease liabilities are calculated using the prevailing index or rate at lease commencement. Subsequent escalations in the index or rate and contingent rental payments are recognized as variable lease expenses. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We have elected the short-term lease recognition exemption for all applicable classes of underlying assets. Short-term disclosures include only those leases with a term of 12 months or less, and expense is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less, that do not include an option to purchase the underlying asset that we are reasonably certain to exercise, are not recorded on the balance sheet. We elected the practical expedient that does not require us to separate lease and non-lease components for our population of real estate assets. Intangible Assets, net - Intangible assets comprise primarily leasehold interests, acquired franchise rights, and the costs of purchased liquor licenses. Leasehold interests primarily represent the fair values of acquired lease contracts having contractual rents lower than fair market rents and are amortized on a straight-line basis over the remaining initial lease term. Acquired franchise rights, which represent the acquired value of franchise contracts, are amortized over the term of the franchise agreements. The costs of obtaining non-transferable liquor licenses from local government agencies are capitalized and generally amortized over a period of up to 20 years. The costs of purchasing transferable liquor licenses through open markets in jurisdictions with a limited number of authorized liquor licenses are capitalized as indefinite-lived intangible assets. 51 Table of Contents Liquor licenses with indefinite lives are reviewed for impairment annually or whenever events or changes in circumstances indicate the carrying amount may not be recoverable. If the carrying amount is not recoverable, we record an impairment charge for the excess of the carrying amount over the fair value. We determine fair value based on prices in the open market for license in same or similar jurisdictions. Impairment charges of $ 0.5 million were recorded related to indefinite-lived intangibles in 2022 and $ 0.5 million were recorded in 2021. No impairment charges were recorded in 2020. Impairment of Long-Lived Assets - The Company reviews its long-lived assets, including restaurant sites, leasehold improvements, other fixed assets, information technology systems, right of use assets, and amortizable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future undiscounted net cash flows expected to be generated by the assets. Identifiable cash flows are measured at the lowest level for which they are largely independent of the cash flows of other groups of assets and liabilities, generally at the restaurant-level. If the assets are determined to be impaired, the amount of impairment recognized is the amount by which the carrying amount of the assets exceeds their fair value. Fair value is generally determined using projected cash flows discounted using an estimated weighted average cost of capital. Management may also utilize other market information to determine fair value such as market rent and discount rates, to estimate the fair value of restaurant right of use lease assets. Restaurant sites and other assets to be disposed of are reported at the lower of their carrying amount or fair value, less estimated costs to sell. 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 in 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. Other Assets, net - Other assets, net consist primarily of assets related to various deposits, the employee deferred compensation plan, and unamortized debt issuance costs on the revolving Credit Facility. Debt issuance costs on the revolving Credit Facility are capitalized and amortized to interest expense on a straight-line basis which approximates the effective interest rate method over the term of the Company's long-term debt. Advertising - Under the Company's franchise agreements, both the Company and the franchisees must contribute up to 3.0 % of revenues to two national media advertising funds (the "Advertising Funds"). These Advertising Funds are used to build the Company's brand equity and awareness primarily through a national marketing strategy, including national television advertising, digital media, social media programs, email, loyalty, and public relations initiatives. Total advertising costs of $ 35.7 million, $ 34.3 million, and $ 24.9 million in 2022, 2021, and 2020 and were included in Selling, general, and administrative expenses. Advertising production costs are expensed in the period when the advertising first takes place. Other advertising costs are expensed as incurred. Self-Insurance Programs - The Company utilizes a self-insurance plan for health, general liability, and workers' compensation coverage. Predetermined loss limits have been arranged with insurance companies to limit the Company's per occurrence cash outlay. Accrued liabilities and other current liabilities and accrued payroll and payroll-related liabilities include the estimated cost to settle reported claims and incurred but unreported claims. Legal Contingencies - In the normal course of business, we are subject to various legal proceedings and claims, the outcomes of which are uncertain. We record an accrual for legal contingencies when we determine it is probable that we have incurred a liability and we can reasonably estimate the amount of the loss. In making such determinations we evaluate, among other things, the probability of an unfavorable outcome, and when we believe it probable that a liability has been incurred, our ability to make a reasonable estimate of the loss. Pre-opening Costs - Pre-opening costs are expensed as incurred. Pre-opening costs include rental expenses through the date of opening for each restaurant, travel expenses, wages, and benefits for the training and opening teams, as well as food, beverage, and other restaurant opening costs incurred prior to a restaurant opening for business. Costs related to preparing restaurants to introduce Donatos® will be expensed as incurred and included in pre-opening costs. Income Taxes - Deferred tax liabilities are recognized for the estimated effects of all taxable temporary differences, and deferred tax assets are recognized for the estimated effects of all deductible temporary differences, net operating losses, and tax credit carryforwards. Realization of net deferred tax assets is dependent upon profitable operations and future reversals of existing taxable temporary differences. However, the amount of the deferred tax assets considered realizable could be adjusted if estimates of future taxable income during the carry forward period are increased or reduced or if there are differences in the timing or amount of future reversals of existing taxable temporary differences. Pursuant to the guidance for uncertain tax positions, a taxpayer must be able to more likely than not sustain a position to recognize a tax benefit, and the measurement of the benefit is calculated as the largest amount that is more than 50 percent 52 Table of Contents likely to be realized upon resolution of the benefit. The Company has analyzed filing positions in all of the federal, state, and foreign jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The only periods subject to examination for the Company's federal and state returns are the 2018 through 2022 tax years. The Company records interest and penalties associated with audits as a component of income before taxes. Penalties are recorded in Selling, general, and administrative expenses, interest received is recorded in Interest income and other, net, and interest paid is recorded in Interest expense on the consolidated statements of operations and comprehensive loss. The Company recorded immaterial interest expense on the identified tax liabilities in 2022, 2021, and 2020. Approximately $ 1.1 million of interest income was recorded related to a federal cash tax refund received during the fourth quarter of 2020. Loss Per Share - Basic loss per share amounts are calculated by dividing net loss by the weighted average number of common shares outstanding during the year. Diluted loss per share amounts are calculated based upon the weighted average number of common and potentially dilutive common shares outstanding during the year. Potentially dilutive shares are excluded from the computation in periods in which they have an anti-dilutive effect. Diluted loss per share reflects the potential dilution that could occur if holders of options and awards exercised their holdings into common stock. As the Company was in a net loss position for the fifty-two week period ended December 25, 2022, December 26, 2021, and December 27, 2020, all potentially dilutive common shares are considered anti-dilutive. The Company uses the treasury stock method to calculate the impact of outstanding stock options and awards. Basic weighted average shares outstanding is reconciled to diluted weighted average shares outstanding for the fiscal years ended December 25, 2022, December 26, 2021, and December 27, 2020 as follows (in thousands): 2022 2021 2020 Basic weighted average shares outstanding 15,840 15,660 14,314 Dilutive effect of stock options and awards — — — Diluted weighted average shares outstanding 15,840 15,660 14,314 Awards excluded due to anti-dilutive effect on diluted earnings per share 1,481 875 489 Comprehensive Loss - Total comprehensive loss consists of the net loss and other gains and losses affecting stockholders' equity that, under U.S. GAAP, are excluded from net income. Other comprehensive (loss) income as presented in the consolidated statements of operations and comprehensive loss for 2022, 2021, and 2020 consisted of the foreign currency translation adjustment resulting from the Company's Canadian franchise operations. Stock-Based Compensation - The Company maintains several equity incentive plans under which it may grant stock options, stock appreciation rights, restricted stock, stock variable compensation, or other forms of awards granted or denominated in the Company's common stock or units of the Company's common stock, as well as cash variable compensation awards to employees, non-employees, directors, and consultants. The Company also maintains an employee stock purchase plan. The Company issues shares relating to stock-based compensation plans and the employee stock purchase plan from treasury shares. We recognize compensation expenses for only the portion of share-based awards that are expected to vest. Therefore, we apply estimated forfeiture rates that are derived from our historical forfeitures of similar awards when a Team Member leaves the Company. Deferred Compensation - The Company has assets and liabilities related to a deferred compensation plan. The assets of the deferred compensation plan are held in a rabbi trust, where they are invested in certain mutual funds that cover an investment spectrum range from equities to money market instruments. Fluctuations in the market value of the investments held in the trust result in the recognition of deferred compensation expense or income reported in Selling, general, and administrative expenses and recognition of investment gain or loss reported in Interest income and other, net, in the consolidated statements of operations and comprehensive loss. Foreign Currency Translation - The Canadian Dollar is the functional currency for our Canadian entity operations. Assets and liabilities denominated in Canadian Dollars are translated into U.S. Dollars at exchange rates in effect as of the balance sheet date. Income and expense accounts are translated using the average exchange rates prevailing throughout the period. The resulting translation adjustment is recorded as a separate component of Other comprehensive (loss) income. During the fourth quarter of 2020, the Company substantially completed the exit of Company-owned restaurants in Canada resulting in the removal of the accumulated currency translation adjustment as a component of stockholders' equity and the recognition in Other charges on the Consolidated Statements of Operations and Comprehensive Loss totaling a loss of $ 5.5 million. 53 Table of Contents 2. Recent Accounting Pronouncements Reference Rate Reform In March 2020, FASB issued Update 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This update provides temporary optional expedients to applying the reference rate reform guidance to contracts that reference the London Interbank Offer Rate ("LIBOR") or another reference rate expected to be discontinued. Under this update, contract modifications resulting in a new reference rate may be accounted for as a continuation of the existing contract. This guidance is effective upon issuance of the update and applies to contract modifications made through December 31, 2022. We adopted Topic 848 during the first quarter of fiscal year 2022 in conjunction with the refinancing of our Credit Facility and its associated transition from LIBOR to the Secured Overnight Financing Rate ("SOFR"), noting it did not have a material impact to the Company's Consolidated Statements of Operations and Comprehensive Loss upon adoption. We reviewed all other recently issued accounting pronouncements and concluded they were either not applicable or not expected to have a significant impact on the Company's consolidated financial statements. 3. Revenue Disaggregation of Revenue In the following table, revenue is disaggregated by type of good or service (in thousands): Year Ended December 25, 2022 December 26, 2021 December 27, 2020 Restaurant revenue $ 1,230,318 $ 1,137,733 $ 854,136 Franchise revenue 19,306 17,236 8,853 Gift card breakage (1) 14,762 5,373 4,516 Other revenue 2,231 1,736 1,210 Total revenues $ 1,266,617 $ 1,162,078 $ 868,715 (1) The Company re-evaluated the estimated redemption pattern related to gift cards and aligned the recognition of gift card breakage revenue to the updated estimated redemption pattern. See Note 1. Description of Business and Summary of Significant Accounting Policies. Contract Liabilities Components of Unearned revenue in the Consolidated Balance Sheets are as follows (in thousands): December 25, 2022 December 26, 2021 Unearned gift card revenue $ 32,251 $ 41,128 Deferred loyalty revenue $ 11,107 $ 13,086 Revenue recognized in the consolidated statements of operations and comprehensive loss for the redemption of gift cards that were included in the liability balance at the beginning of the fiscal year was as follows (in thousands): Year Ended December 25, 2022 December 26, 2021 December 27, 2020 Gift card revenue $ 25,749 $ 14,249 $ 16,385 4. Other Charges (Gains), net Other charges consist of the following (in thousands): 54 Table of Contents Year Ended December 25, 2022 December 26, 2021 December 27, 2020 Asset impairment $ 38,534 $ 7,052 $ 26,940 Gain on sale of restaurant property ( 9,204 ) — — Severance and executive transition, net of $( 3,299 ) and $ 0 in stock-based compensation 2,280 — 881 Other financing costs 1,462 — — Restaurant closure costs, net 828 6,276 19,846 Closed corporate office costs, net of sublease income 475 — — COVID-19 related charges 438 1,288 1,858 Litigation contingencies 4,148 1,330 6,440 Board and stockholder matter costs — 128 2,504 Goodwill Impairment — — 95,414 Other charges (gains), net $ 38,961 $ 16,074 $ 153,883 Asset Impairment During 2022, the Company determined long-lived assets at 46 locations were impaired and recognized non-cash impairment charges of $ 38.0 million related to the impairment of the long-lived assets associated with our properties, primarily due to restaurants that did not perform as expected as a result of cost pressures that reduced restaurant-level profitability. Additionally, the Company recognized $ 0.5 million of non-cash impairment charges related to the impairment of long lived intangible assets related to quota state liquor licenses at six locations. During 2021, the Company impaired long-lived assets of ten Company-owned restaurants and recognized non-cash impairment charges of $ 6.4 million. Additionally, the Company recognized $ 0.5 million of non-cash impairment charges related to the impairment of long lived intangible assets related to quota state liquor licenses at seven locations. During 2020, the Company impaired long-lived assets of 40 Company-owned restaurants and recognized non-cash impairment charges of $ 21.7 million. Additionally, the Company impaired information technology assets totaling $ 5.2 million due to the COVID-19 pandemic redirecting our implementation of certain digital platforms in order to accelerate our speed to market. Gain on Sale of Restaurant Property During the second quarter of 2022 the Company closed on an agreement to sell a restaurant property that the Company owned and leased back on a short-term basis. The Company collected initial net proceeds from the purchaser-lessor of $ 3.9 million, which represented a portion of the total consideration received from the sale. The Company did not recognize a sale in the second quarter of 2022 as certain criteria to recognize a sale in accordance with ASC Topic 842, Leases , and ASC Topic 606, Revenue from Contracts with Customers , were not met. During the third quarter of 2022, the Company received the remaining proceeds, upon which the lease terminated and the sale transaction was completed, and recognized a $ 9.2 million gain on the sale of the restaurant property. The initial net proceeds of $ 3.9 million are included within cash flows from financing activities and the final proceeds received of $ 8.5 million are included within cash flows from investing activities on the Consolidated Statements of Cash Flows for the year ended December 25, 2022. Severance and Executive Transition During 2022, the Company recorded $ 2.3 million of severance and executive transition costs primarily related to transitioning to a new Chief Executive Officer, and changes in other leadership positions as a result of our strategic pivot under the North Star plan and severance related to a reduction in force of restaurant support Team Members in the fourth quarter of 2022. These costs are net of a $ 3.3 million stock-based compensation benefit primarily related to a change in estimated stock-based compensation forfeitures as a result of changes in executive leadership. During 2020, the Company recorded $ 0.9 million of severance and executive transition costs primarily related to severance costs associated with the reduction in force of Restaurant Support Center Team Members in the first quarter of 2020. 55 Table of Contents Other Financing Costs Other financing costs of $ 1.5 million include fees related to the entry by the Company into the new Credit Agreement (as defined below) on March 4, 2022 that were not capitalized with the closing of the Credit Facility. See Note 8. Borrowings. Restaurant Closure Costs, net Restaurant closure costs include costs incurred for permanently closed restaurants and closed restaurant lease termination gains or losses, as well as the ongoing restaurant operating costs of the Company-owned restaurants that temporarily closed due to the COVID-19 pandemic. In 2022, 2021 and 2020, the Company recorded $ 0.8 million, $ 6.3 million, and $ 19.8 million of costs, respectively. Closed Corporate Office Costs, Net of Sublease Income Closed corporate office, net of sublease income includes expense and sublease income related to a corporate office facility that was vacated and subleased. COVID-19 Related Costs In 2022, 2021 and 2020, the Company recorded $ 0.4 million, $ 1.3 million, and $ 1.9 million of costs, respectively, related to purchasing personal protective equipment for restaurant Team Members and Guests and providing emergency sick pay to restaurant Team Members during the pandemic. Litigation Contingencies In 2022, 2021 and 2020, the Company recorded $ 4.1 million, $ 1.3 million, and $ 6.4 million respectively, of contingencies related to litigation matters. Litigation contingencies during 2022 include the impact of cash proceeds received by the Company related to certain legal claims. See Note 12. Commitments and Contingencies, for further discussion. Board and Stockholder Matters Costs During 2021, the Company recorded $ 0.1 million of board and stockholder matters costs. During 2020, the Company recorded $ 2.5 million of board and stockholder matters costs primarily related to the shareholder rights plan and the recruitment and appointment of a new board member in the first quarter of 2020. Goodwill Impairment The Company recognized full goodwill impairment during the first quarter of 2020 totaling $ 95.4 million resulting from the negative effects of COVID-19 on our business. 5. Property and Equipment, Net Property and equipment consist of the following at December 25, 2022 and December 26, 2021 (in thousands): December 25, 2022 December 26, 2021 Land $ 39,810 $ 41,850 Buildings 98,235 98,675 Leasehold improvements 625,429 684,235 Furniture, fixtures, and equipment 379,409 405,387 Construction in progress 12,539 8,866 Property and equipment, gross $ 1,155,422 $ 1,239,013 Accumulated depreciation and amortization ( 836,905 ) ( 852,677 ) Property and equipment, net $ 318,517 $ 386,336 Depreciation and amortization expense on property and equipment was $ 73.7 million in 2022, $ 80.5 million in 2021, and $ 83.2 million in 2020. 56 Table of Contents 6. Intangible Assets The following table presents intangible assets as of December 25, 2022 and December 26, 2021 (in thousands): December 25, 2022 December 26, 2021 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Intangible assets subject to amortization: Franchise rights $ 46,499 $ ( 38,469 ) $ 8,030 $ 49,328 $ ( 38,662 ) $ 10,666 Leasehold interests 13,001 ( 10,092 ) 2,909 13,001 ( 9,681 ) 3,320 Liquor licenses and other 9,640 ( 9,376 ) 264 9,670 ( 9,364 ) 306 $ 69,140 $ ( 57,937 ) $ 11,203 $ 71,999 $ ( 57,707 ) $ 14,292 Indefinite-lived intangible assets: Liquor licenses and other $ 6,524 $ — $ 6,524 $ 7,000 $ — $ 7,000 Intangible assets, net $ 75,664 $ ( 57,937 ) $ 17,727 $ 78,999 $ ( 57,707 ) $ 21,292 Immaterial impairment charges were recorded related to finite-lived intangibles resulting from the continuing and projected future results at Company-owned restaurants in 2022, 2021, and 2020. Impairment charges of $ 0.5 million were recorded related to indefinite-lived intangibles in 2022 and $ 0.5 million were recorded in 2021. No impairment charges were recorded related to indefinite-lived intangibles in 2020. The aggregate amortization expense related to intangible assets subject to amortization for 2022, 2021, and 2020 was $ 2.5 million, $ 2.9 million, and $ 4.4 million. The estimated aggregate future amortization expense as of December 25, 2022 is as follows (in thousands): 2023 $ 2,180 2024 2,039 2025 1,708 2026 1,410 2027 1,139 Thereafter 2,727 $ 11,203 7. Accrued Payroll and Payroll-Related Liabilities, and Accrued Liabilities and Other Current Liabilities Accrued payroll and payroll-related liabilities consist of the following at December 25, 2022 and December 26, 2021 (in thousands): December 25, 2022 December 26, 2021 Payroll and payroll-related taxes $ 15,799 $ 15,290 Workers compensation insurance 4,816 5,079 Corporate and restaurant incentive compensation 4,101 5,624 Accrued vacation 5,920 4,439 Other 3,030 2,152 Accrued payroll and payroll-related liabilities $ 33,666 $ 32,584 57 Table of Contents Accrued liabilities and other current liabilities consist of the following at December 25, 2022 and December 26, 2021 (in thousands): December 25, 2022 December 26, 2021 CARES act deferred payroll tax $ 8,780 $ 8,780 State and city sales tax payable 7,201 6,960 Real estate, personal property, state income, and other taxes payable 6,327 6,696 General liability insurance 5,815 4,984 Utilities 2,421 2,569 Legal 7,736 2,455 Accrued marketing 335 2,108 Current portion of finance lease liabilities 1,094 1,194 Accrued severance 2,505 — Other 7,284 9,712 Accrued liabilities and other current liabilities $ 49,498 $ 45,458 The CARES act deferred payroll tax amount was paid in full subsequent to our fiscal year end, and prior to the December 31, 2022 deadline for repayment. Accrued severance represents one-time termination benefits primarily related to changes in leadership positions as a result of our strategic pivot under the North Star plan and a related reduction in force of restaurant support Team Members in 2022 and is accounted for in accordance with ASC Topic 420, Exit or Disposal Cost Obligations . The Company expects to make the remaining payments related to these benefits in 2023. The Company expects to incur a total of $ 4.2 million in termination benefits related to the North Star plan. Approximately $ 3.0 million in one-time termination benefits was incurred and recorded in Other charges in the Consolidated Statements of Operations and Comprehensive Loss during the fifty-two week period ended December 25, 2022. Restructuring costs were as follows: Termination Benefits Balance as of December 26, 2021 $ — Charges 2,955 Cash Payments ( 450 ) Balance as of December 25, 2022 $ 2,505 8. Borrowings Borrowings as of December 25, 2022 and December 26, 2021 are summarized below: December 25, 2022 December 26, 2021 (Dollars in thousands) Borrowings Weighted Average Interest Rate Borrowings Weighted Average Interest Rate Revolving line of credit $ 15,000 $ 57,000 Term loan 199,000 9.10 % 119,080 7.10 % Notes payable 875 875 Total borrowings 214,875 176,955 Less: unamortized debt issuance costs and discounts (1) 8,345 — Less: current portion of long-term debt 3,375 9,692 Long-term debt $ 203,155 $ 167,263 Revolving line of credit unamortized deferred financing charges (1) : $ 988 $ 2,015 (1) Loan origination costs associated with the Company's Credit Facility are included as deferred costs in Other assets, net for financing charges allocated to the Revolving line of credit, and Long-term debt for financing charges associated with the term loan in the accompanying Consolidated Balance Sheets. 58 Table of Contents Maturities of long-term debt as of December 25, 2022 are as follows (in thousands): 2023 (1) $ 2,500 2024 2,000 2025 2,000 2026 2,000 2027 205,500 Thereafter — $ 214,000 (1) A typical fiscal year includes four principal payments of $ 0.5 million for a total of $ 2.0 million associated with the term loan; however, as fiscal year 2023, comprises 53 weeks instead of 52 weeks, there will be one additional principal payment in 2023 compared to fiscal year 2022. See Note 1. Description of Business and Summary of Significant Accounting Policies for details on our fiscal calendar. 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") by and among the Company, Red Robin International, Inc., as the borrower, the lenders from time to time party thereto, the issuing banks from time to time party thereto, Fortress Credit Corp., as Administrative Agent and as Collateral Agent and JPMorgan Chase Bank, N.A., as Sole Lead Arranger and Sole Bookrunner. The five-year $ 225.0 million Credit Agreement provides for a $ 25.0 million revolving line of credit and a $ 200.0 million term loan (collectively, the "Credit Facility"). The borrower maintains the option to increase the Credit Facility in the future, subject to lenders’ participation, by up to an additional $ 40.0 million in the aggregate on the terms and conditions set forth in the Credit Agreement. The Credit Facility will mature on March 4, 2027. No amortization is required with respect to the revolving Credit Facility. The term loans require quarterly principal payments in an aggregate annual amount equal to 1.0 % of the original principal amount of the term loan. 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. The variable interest rates were 9.81 % for the term loan and 10.44 % for the revolving line of credit as of December 25, 2022. 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. As of December 26, 2021, the Company had outstanding borrowings under the credit facility under the Prior Credit Agreement 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. Red Robin International, Inc., is the borrower under the Credit Agreement, and certain of its subsidiaries and the Company are guarantors of borrower’s obligations under the Credit Agreement. Borrowings under the Credit Agreement are secured by substantially all of the assets of the borrower and the guarantors, including the Company, and are available to: (i) refinance certain existing indebtedness of the borrower and its subsidiaries, (ii) pay any fees and expenses in connection with the Credit Agreement, and (iii) provide for the working capital and general corporate requirements of the Company, the borrower and its subsidiaries, including permitted acquisitions and capital expenditures, but excluding restricted payments. On March 4, 2022, Red Robin International, Inc., the Company, and the guarantors also entered into a Pledge and Security Agreement (the “Security Agreement”) granting to the Administrative Agent a first priority security interest in substantially all of the assets of the borrower and the guarantors to secure the obligations under the Credit Agreement. This new Security Agreement replaced the existing security agreement, dated January 10, 2020, which was entered into in connection with the Prior Credit Agreement. Red Robin International, Inc., as the borrower is obligated to pay customary fees to the agents, lenders and issuing banks under the Credit Agreement with respect to providing, maintaining, or administering, as applicable, the credit facilities. In connection with entry into the new Credit Agreement, the Company’s Prior Credit Agreement was terminated. In connection with such termination and new borrowings under the new Credit Agreement, the Company paid off all outstanding borrowings, accrued interest, and fees under the Prior Credit Agreement. The summary descriptions of the Credit Agreement and the Security Agreement do not purport to be complete and are qualified in their entirety by reference to the full text of the Credit Agreement and the Security Agreement, respectively, which were filed as exhibits to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 10, 2022. 59 Table of Contents During the first quarter of 2022, the Company expensed approximately $ 1.7 million of deferred financing charges related to the extinguishment of the Prior Credit Agreement on March 4, 2022. These charges were recorded to interest expense, net and other on the Consolidated Statements of Operations and Comprehensive Loss for the fifty-two weeks ended December 25, 2022. In association with the execution of the new Credit Agreement, the Company recognized $ 4.8 million of deferred financing charges, and $ 6.1 million of original issuance discount. 9. Fair Value Measurements Fair value measurements are made under a three-tier fair value hierarchy, which prioritizes the inputs used in the measuring of fair value: Level 1: Observable inputs that reflect unadjusted quote prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3: Inputs that are generally unobservable. These inputs may be used with internally developed methodologies that result in management's best estimate of fair value. Assets and Liabilities Measured at Fair Value on a Recurring Basis The carrying amounts of the Company's cash and cash equivalents, accounts receivable, accounts payable, and current accrued expenses and other current liabilities approximate fair value due to the short-term nature or maturity of the instruments. The Company maintains a rabbi trust to fund obligations under a deferred compensation plan. See Note 15. Employee Benefit Programs. Amounts in the rabbi trust are invested in mutual funds, which are designated as trading securities and carried at fair value and are included in Other assets, net in the accompanying consolidated balance sheets. Fair market value of mutual funds is measured using level 1 inputs (quoted prices for identical assets in active markets). The following tables present the Company's assets measured at fair value on a recurring basis as of December 25, 2022 and December 26, 2021 (in thousands): December 25, 2022 Level 1 Level 2 Level 3 Assets: Investments in rabbi trust $ 4,250 $ 4,250 $ — $ — Total assets measured at fair value $ 4,250 $ 4,250 $ — $ — December 26, 2021 Level 1 Level 2 Level 3 Assets: Investments in rabbi trust $ 6,276 $ 6,276 $ — $ — Total assets measured at fair value $ 6,276 $ 6,276 $ — $ — Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis Assets and liabilities recognized or disclosed at fair value on the consolidated financial statements on a nonrecurring basis include items such as property, plant and equipment, right of use assets, and intangible assets. These assets are measured at fair value if determined to be impaired. During 2022, 2021, and 2020, the Company measured non-financial assets for impairment using continuing and projected future cash flows, as discussed in Note 4. Other Charges (Gains), net, which were based on significant inputs not observable in the market and thus represented a level 3 fair value measurement. Based on our 2022, 2021, and 2020 impairment analyses, we impaired long-lived assets at 46 , 10 and 40 locations with carrying values of $ 80.4 million, $ 13.7 million, and $ 67.3 million. We determined the fair value of these long-lived assets in 2022, 2021, and 2020 to be $ 42.4 million, $ 7.2 million and $ 34.7 million based on level 3 fair value measurements. 60 Table of Contents Liquor licenses with indefinite lives are reviewed for impairment annually or whenever events or changes in circumstances indicate the carrying amount may not be recoverable. If the carrying amount is not recoverable, we record an impairment charge for the excess of the carrying amount over the fair value. 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 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. Impairment charges of $ 0.5 million were recorded to liquor licenses with indefinite lives in 2021 and no impairment charges were recorded in 2020. Disclosures of Fair Value of Other Assets and Liabilities The Company's liability under its Credit Facility is carried at historical cost in the accompanying consolidated balance sheets. As of December 25, 2022, the fair value of the Credit Facility was approximately $ 205.1 million and the principal amount carrying value was $ 214.0 million. The Credit Facility term loan is reported net of $ 8.3 million in unamortized discount and debt issuance costs in the consolidated balance sheet as of December 25, 2022. The carrying value approximated the fair value of the Credit Facility as of December 26, 2021, as the interest rate on the instrument approximated current market rates. The interest rate on the Credit Facility represents a level 2 fair value input. 10. Leases The Company's finance and operating lease assets and liabilities as of December 25, 2022 and December 26, 2021 as follows (in thousands): December 25, 2022 Finance (1) Operating (2) Lease assets, net $ 7,551 $ 361,432 Current portion of lease obligations 1,094 47,394 Long-term portion of lease obligations 8,958 393,157 Total $ 10,052 $ 440,551 December 26, 2021 Finance (1) Operating (2) Lease assets, net $ 9,664 $ 400,825 Current portion of lease obligations 1,194 48,842 Long-term portion of lease obligations 10,765 435,136 Total $ 11,959 $ 483,978 (1) Finance lease assets and obligations are included in Other assets, net, Accrued liabilities and other current liabilities, and Other non-current liabilities on our December 25, 2022 and December 26, 2021 Consolidated Balance Sheets. (2) Operating lease assets and obligations are included in Operating lease assets, net, Current portion of operating lease liabilities, and Long-term portion of operating lease liabilities on our December 25, 2022 and December 26, 2021 Consolidated Balance Sheets. The components of lease expense, including variable lease costs primarily consisting of common area maintenance charges and real estate taxes, are included in Occupancy on our consolidated statements of operations and comprehensive loss as follows (in thousands): Year Ended December 25, 2022 December 26, 2021 December 27, 2020 Operating lease cost $ 69,879 $ 70,000 $ 67,320 Finance lease cost: Amortization of right of use assets (1) 1,121 856 845 Interest on lease liabilities (2) 583 532 534 Total finance lease cost $ 1,704 $ 1,388 $ 1,379 Variable lease cost 18,965 19,812 24,482 Total lease costs $ 90,548 $ 91,200 $ 93,181 (1) Amortization of finance lease right of use assets is recorded to depreciation and amortization in our Consolidated Statements of Operations and Comprehensive Loss. (2) Interest on finance lease liabilities is recorded to interest expense in our Consolidated Statements of Operations and Comprehensive Loss. 61 Table of Contents Maturities of our lease liabilities as of December 25, 2022 were as follows (in thousands): Finance Leases Operating Leases 2023 $ 1,483 $ 77,380 2024 1,584 76,326 2025 1,305 72,368 2026 1,381 66,588 2027 1,329 59,890 Thereafter 5,243 264,449 Total future lease liability $ 12,325 $ 617,001 Less imputed interest 2,273 176,450 Present value of lease liability $ 10,052 $ 440,551 Supplemental cash flow information in thousands (except other information) related to leases is as follows: Year Ended December 25, 2022 December 26, 2021 December 27, 2020 Cash flows from operating activities Cash paid related to lease liabilities Operating leases $ 85,400 $ 81,520 $ 47,164 Finance leases 583 532 534 Cash flows from financing activities Cash paid related to lease liabilities Finance leases 1,292 1,733 270 Cash paid for amounts included in the measurement of lease liabilities $ 87,275 $ 83,785 $ 47,968 Right of use assets obtained in exchange for operating lease obligations $ 13,848 $ 28,738 $ 56,014 Right of use assets obtained in exchange for finance lease obligations $ 1,139 $ 1,170 $ 2,918 Other information related to operating leases as follows: Weighted average remaining lease term 9.04 9.69 10.24 Weighted average discount rate 7.25 % 7.05 % 6.90 % Other information related to financing leases as follows: Weighted average remaining lease term 10.27 10.81 11.76 Weighted average discount rate 4.88 % 4.56 % 4.56 % 11. Income Taxes Loss before income taxes includes the following components for the fiscal years ended December 25, 2022, December 26, 2021, and December 27, 2020 (in thousands): 2022 2021 2020 U.S. $ ( 76,893 ) $ ( 49,978 ) $ ( 262,728 ) Foreign ( 160 ) ( 176 ) ( 20,824 ) Loss before income taxes $ ( 77,053 ) $ ( 50,154 ) $ ( 283,552 ) 62 Table of Contents The benefit for income taxes for the fiscal years ended December 25, 2022, December 26, 2021, and December 27, 2020 consist of the following (in thousands): 2022 2021 2020 Current: Federal $ 374 $ — $ ( 60,340 ) State 373 ( 152 ) 1,354 Foreign — — — Total current income tax (benefit) $ 747 $ ( 152 ) $ ( 58,986 ) Deferred: Federal $ — $ — $ 44,353 State — — 8,086 Foreign — — ( 937 ) Total deferred income tax expense (benefit) — — 51,502 Income tax benefit $ 747 $ ( 152 ) $ ( 7,484 ) The reconciliation between the income tax benefit and the amount of income tax computed by applying the U.S. federal statutory rate to loss before income taxes as shown in the accompanying Consolidated Statements of Operations and Comprehensive Loss for fiscal years ended December 25, 2022, December 26, 2021, and December 27, 2020 is as follows: 2022 2021 2020 Tax provision at U.S. federal statutory rate 21.0 % 21.0 % 21.0 % State income taxes 4.0 3.8 3.9 Foreign taxes versus U.S statutory rate — — 0.2 Valuation allowance on deferred income tax assets ( 24.2 ) ( 25.2 ) ( 27.9 ) Impact of CARES Act and related method changes — — 5.5 Excess stock options ( 1.1 ) 1.1 ( 0.1 ) Other ( 0.7 ) ( 0.4 ) — Effective tax rate ( 1.0 ) % 0.3 % 2.6 % The increase in tax expense for the 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. The decrease in the Company's effective tax benefit in 2021 is primarily due to the 2020 favorable rate impact of net operating loss carrybacks allowed as part of the CARES Act. 63 Table of Contents The Company's federal and state deferred taxes at December 25, 2022 and December 26, 2021 are as follows (in thousands): 2022 2021 Deferred tax assets: Leasing transactions $ 115,832 $ 126,981 General business and other tax credits 40,802 40,472 Net operating loss carryover 48,341 36,069 Accrued compensation and related costs 8,651 9,738 Goodwill 7,851 8,296 Stock-based compensation 7,309 6,461 Advanced payments 1,371 3,912 Other non-current deferred tax assets 8,726 5,782 Subtotal 238,883 237,711 Valuation allowance ( 116,284 ) ( 99,093 ) Total $ 122,599 $ 138,618 Deferred tax liabilities: Leasing transactions $ ( 97,871 ) $ ( 108,067 ) Property and equipment ( 11,550 ) ( 17,600 ) Supplies inventory ( 4,047 ) ( 4,128 ) Prepaid expenses ( 1,906 ) ( 2,517 ) Other non-current deferred tax liabilities ( 7,225 ) ( 6,306 ) Total $ ( 122,599 ) $ ( 138,618 ) Net deferred tax asset $ — $ — The Company had net operating loss carryforwards for tax purposes of $ 48.3 million as of December 25, 2022. This is comprised of approximately $ 21.8 million of federal net operating loss carryovers, approximately $ 17.6 million of state net operating loss carryovers, and approximately $ 8.9 million of foreign net operating loss carryovers. The federal net operating loss has an indefinite carryforward period, the state net operating loss carryovers expire at various dates between 2025 and 2042, and the foreign net operating loss carryovers expire at various dates between 2035 and 2042. As of December 25, 2022, the Company had a deferred tax asset of $ 39.6 million related to federal tax credits, which expire at various dates between 2037 and 2041. The Company also had a deferred tax asset of $ 1.2 million related to state tax credits which expire in 2024. The Company establishes a valuation allowance to reduce the carrying amount of deferred income tax assets when it is more likely than not that it will not realize some portion or all the tax benefit of its deferred income tax assets. The realization of deferred tax assets depends on the generation of future taxable income during the periods in which the temporary differences become deductible. In making this determination, the Company considers all available positive and negative evidence including historical operating losses, the reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies. In 2020, management determined that a full valuation allowance was required and has recorded a full valuation allowance as of December 25, 2022 and at December 26, 2021. Based on the Company's evaluation of its deferred tax assets, a valuation allowance of approximately $ 116.3 million has been recorded against the deferred tax asset for federal and state tax credits, federal and state deferred tax assets, all net operating loss carry forwards and the deferred taxes of our foreign subsidiary. 64 Table of Contents The following table summarizes the Company's unrecognized tax benefits at December 25, 2022, December 26, 2021, and December 27, 2020 (in thousands): 2022 2021 2020 Beginning of year $ 32 $ 80 $ 104 Increase due to current year tax positions 177 3 — Due to decrease to a position taken in a prior year — — ( 24 ) Settlements — — — Reductions related to lapses in the statute of limitations ( 24 ) ( 51 ) — End of year $ 185 32 $ 80 The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is approximately $ 0.2 million. The Company does not anticipate significant changes in the aggregate amount of unrecognized tax benefits within the next 12 months, other than nominal tax settlements. The Company had outstanding federal and state refund claims of approximately $ 0.6 million as of December 25, 2022. Recent Tax Legislation The CHIPS and Science Act of 2022 (CHIPS) and the Inflation Reduction Act (IRA) of 2022 were signed into law by President Biden on August 9, 2022 and August 16, 2022, respectively. The legislation introduces new options for monetizing certain credits, a corporate alternative minimum tax, and a stock repurchase excise tax. The Company is currently evaluating the impact of CHIPS and IRA, but at present does not expect that any of the provisions included in these Acts would result in a material impact to our deferred tax assets, liabilities, or income taxes payable. 12. Commitments and Contingencies Because litigation is inherently unpredictable, assessing contingencies related to litigation is a complex process involving highly subjective judgment about potential outcomes of future events. When evaluating litigation contingencies, we may be unable to provide a meaningful estimate due to a number of factors, including the procedural status of the matter in question, the availability of appellate remedies, insurance coverage related to the claim or claims in question, the presence of complex or novel legal theories, and the ongoing discovery and development of information important to the matter. In addition, damage amounts claimed in litigation against us may be unsupported, exaggerated, or unrelated to possible outcomes, and as such are not meaningful indicators of our potential liability or financial exposure. Accordingly, we review the adequacy of accruals and disclosures each quarter in consultation with legal counsel, and we assess the probability and range of possible losses associated with contingencies for potential accrual in the consolidated financial statements. However, the ultimate resolution of litigated claims may differ from our current estimates. In the normal course of business, there are various claims in process, matters in litigation, administrative proceedings, and other contingencies. These include employment related claims and class action lawsuits, claims from Guests or Team Members alleging illness, injury, food quality, health, or operational concerns, and lease and other commercial disputes. To date, none of these claims, certain of which are covered by insurance policies, have had a material effect on the Company. While it is not possible to predict the outcome of these suits, legal proceedings, and claims with certainty, management is of the opinion that adequate provision for potential losses associated with these matters has been made in the financial statements and that the ultimate resolution of these matters will not have a material adverse effect on our financial position and results of operations. However, a significant increase in the number of these claims, or one or more successful claims resulting in greater liabilities than we currently anticipate, could materially and adversely affect our business, financial condition, results of operations, and cash flows. As of December 25, 2022, we had a balance of $ 7.7 million for loss contingencies on our consolidated balance sheets, of which $ 3.0 million relates to a class action settlement that is scheduled to be paid in first quarter 2023. We increased our estimate of loss contingency liabilities by approximately $ 4.1 million in the fourth quarter of 2022 related to changes during the fourth quarter in the status ongoing litigation matters. We ultimately may be subject to greater or less than the accrued amount for this and other matters. As of December 25, 2022, we had purchase commitments to certain vendors who provide food and beverages and other supplies to our restaurants, for an aggregate of $ 142.1 million. We expect to fulfill our commitments under these agreements in the normal course of business, and as such, no liability has been recorded. 65 Table of Contents 13. Stockholders' Equity On August 9, 2018, the Company's board of directors authorized an increase to the Company's share repurchase program of approximately $ 21 million to a total of $ 75 million of the Company's common stock. The increased share repurchase authorization became effective on August 9, 2018 and will terminate upon completing repurchases of $ 75 million of common stock unless otherwise terminated by the board. Purchases under the repurchase program may be made in open market or privately negotiated transactions. Purchases may be made from time to time at the Company's discretion, and the timing and amount of any share repurchases will be determined based on share price, market conditions, legal requirements, and other factors. The repurchase program does not obligate the Company to acquire any particular amount of common stock, and the Company may suspend or discontinue the repurchase program at any time. In 2022, the Company did not repurchase any shares under its share repurchase program. 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. Accordingly, as of December 25, 2022, we had $ 68.4 million of availability under the current share repurchase program. 14. Stock Incentive Plans In May 2017, the Company's stockholders approved the 2017 Performance Incentive Plan (the "2017 Stock Plan"). Following the date of approval, all grants are made under the 2017 Stock Plan and no new awards may be granted under the Second Amended and Restated 2007 Performance Plan (the "2007 Stock Plan"). The 2017 Stock Plan authorizes the issuance of stock options, stock appreciation rights (SARs), and other forms of awards granted or denominated in the Company common stock or unit of the Company's common stock, as well as cash performance awards pursuant to the plan. Persons eligible to receive awards under the 2017 Stock Plan include officers, employees, directors, consultants, and other service providers or any affiliate of the Company. The maximum number of shares of the Company's common stock that may be issued or transferred pursuant to awards under the 2017 Stock Plan was 630,182 shares. The 2017 Stock Plan was amended in May 2019, and again in May 2020 to add an additional 660,000 and 275,000 shares, respectively, bringing the total to 1,565,182 shares as of December 25, 2022. Vesting of the awards under the 2017 Stock Plan is determined at the date of grant by the plan administrator. Each award granted under the 2017 Stock Plan and 2007 Stock Plan fully vests, becomes exercisable and/or payable, as applicable, upon a change in control event. However, unless the individual award agreement provides otherwise, with respect to executive and certain other high level officers, upon the occurrence of a change in control, no award will vest unless such officers' employment with the Company is terminated by the Company without cause during the two years following such change in control event. Each award expires on such date as shall be determined at the date of grant; however, the maximum term of options, SARs, and other rights to acquire common stock under the plan is ten years after the initial date of the award, subject to provisions for further deferred payment in certain circumstances. Vesting of awards under these plans were generally time based over a period of one year to four years . As of December 25, 2022, 198,958 options and awards to acquire the Company's common stock remained outstanding under the 2007 Stock Plan; all remaining options and awards are outstanding under the 2017 Stock Plan. Stock-based compensation costs recognized in 2022, 2021, and 2020 were $ 6.3 million, $ 6.6 million, and $ 4.3 million with related income tax benefits of $ 0.6 million, $ 1.4 million, and $ 0.3 million. The 2022 costs were comprised of $ 9.6 million stock-based compensation, partially offset by a $ 3.3 million reduction due to executive team forfeitures recorded in Other charges in the Consolidated Statements of Operations and Comprehensive Loss. As of December 25, 2022, there was $ 8.7 million of unrecognized compensation cost, excluding estimated forfeitures. Unrecognized compensation costs are expected to be recognized over the weighted average remaining vesting period of approximately 0.25 years for stock options, 0.92 years for the restricted stock units ("RSU"), and 1.71 years for the performance stock units ("PSU"). Stock Options The tables below summarize the status of the Company's stock option plans (in thousands, except exercise price): Stock Options Shares Weighted Average Exercise Price Outstanding, December 26, 2021 453 $ 36.91 Granted — — Forfeited/expired ( 33 ) 27.95 Exercised ( 1 ) 12.61 Outstanding, December 25, 2022 419 $ 37.69 66 Table of Contents Shares Weighted Average Exercise Price Weighted Average Remaining Years of Contractual Life Aggregate Intrinsic Value Outstanding as of December 25, 2022 419 $ 37.69 3.67 $ — Vested and expected to vest as of December 25, 2022 (1) 416 $ 37.82 3.65 — Exercisable as of December 25, 2022 361 $ 41.68 3.10 $ — ——————————————————— (1) The expected to vest options are the result of applying the pre-vesting forfeiture rate assumption to total outstanding options. The Company applies estimated forfeiture rates that are derived from our historical forfeitures of similar awards. The estimated fair value of each option granted is calculated using the Black-Scholes multiple option-pricing model, and expense is recognized straight line over the vesting period. No options were granted during 2022 or 2021. The average assumptions used in the model for the fiscal years ended December 25, 2022, December 26, 2021 and December 27, 2020 were as follows: 2020 Risk-free interest rate 0.5 % Expected years until exercise 4.7 Expected stock volatility 61.0 % Dividend yield — % Weighted average Black-Scholes fair value per share at date of grant $ 6.28 Total intrinsic value of options exercised was $ 4 thousand, $ 89 thousand, and $ 30 thousand in 2022, 2021, and 2020, respectively. The risk-free interest rate was based on the rate for zero coupon U.S. Government issues with a remaining term similar to the expected life. The expected life of the options represents the period of time the options are expected to be outstanding and is based on historical trends and Team Member exercise patterns. The expected stock price volatility represents an average of the Company's historical volatility measured over a period approximating the expected life. The dividend yield assumption is based on the Company's history and expectations of dividend payouts. Time-Based RSUs During 2022, 2021, and 2020, the Company issued time-based restricted stock units ("RSUs") to certain employees as permitted under the 2017 Stock Plan. The Company can grant RSUs to its directors, executive officers, and other key employees. The RSUs granted to employees typically vest in equal installments over three to four years . For the Company's board of directors, RSUs vest in full on the earlier of the one -year anniversary of the grant date or the next annual stockholder meeting. Upon vesting, one share of the Company's common stock is issued for each RSU. The fair value of each RSU granted is equal to the market price of the Company's stock at the date of grant, and expense is recognized straight line over the vesting period. The table below summarizes the status of the Company's time-based RSUs under the 2017 and 2007 Stock Plans (shares in thousands): Restricted Stock Units Shares Weighted Average Grant-Date Fair Value (per share) Outstanding, December 26, 2021 419 $ 28.89 Awarded 339 14.70 Forfeited ( 113 ) 23.68 Vested ( 213 ) 29.04 Outstanding, December 25, 2022 (1) 432 $ 19.05 (1) Awards expected to vest are the result of applying the pre-vesting forfeiture rate assumption to total outstanding options. The Company applies estimated forfeiture rates that are derived from our historical forfeitures of similar awards. 67 Table of Contents Performance Stock Units During 2022, 2021, and 2020, the Company granted performance stock unit awards ("PSUs") to certain employees as permitted under the 2017 Stock Plan. Each PSU represents the right to receive one share of the Company's common stock on the payment date. Prior to 2020, each PSU was divided into three equal tranches with applicable performance periods, typically consisting of a fiscal year, subject to the achievement of the applicable performance goals at target and applicable vesting conditions. Fair value of each PSU granted was equal to the market price of the Company's stock at the grant date, and expense is recognized ratably across the total performance period based on probability of achieving applicable performance goals. PSUs remain unvested until the end of the third performance period and are forfeited in the event of termination of employment of a grantee prior to the last day of the third performance period. Beginning in 2020, the Company began granting PSU awards based on relative total stockholder return defined as increases in the Company's stock price during a performance period of three years as compared to the total stockholder return of a group of peer companies. Fair value of each PSU granted is determined by a Monte Carlo valuation model, and expense is recognized straight line over the performance period. PSUs remain unvested until the last day of the three year performance period and are generally forfeited in the event of termination of employment of a grantee prior to the last day of the three year performance period. If the relative total stockholder return target is not met, compensation cost for these PSUs is not reversed. The table below summarizes the status of the Company's performance stock units under the 2017 Stock Plan (shares in thousands): Performance Stock Units Shares Weighted Average Grant-Date Fair Value (per share) Outstanding, December 26, 2021 380 $ 28.54 Awarded 206 26.72 Forfeited ( 350 ) 23.25 Vested ( 3 ) 29.40 Outstanding, December 25, 2022 (1) 233 $ 34.82 (1) Awards expected to vest are the result of applying the pre-vesting forfeiture rate assumption to total outstanding options. The Company applies estimated forfeiture rates that are derived from our historical forfeitures of similar awards. Inducement Grants The Company granted stock-based awards to certain of the Company’s new executive officers as inducements material to their commencement of employment and entry into an employment agreement with the Company. The inducement grants were made in accordance with Nasdaq Listing Rule 5635(c)(4) and were not made under the 2017 Plan. The inducement grants, which include PSU and RSU awards, are generally subject to substantially the same terms and conditions as grants that are made under the 2017 Plan and fair value is determined in the same manner as described for each grant type above. The table below summarizes the status of the Company' inducement grants (shares in thousands): Restricted Stock Units Performance Stock Units Shares Weighted Average Grant-Date Fair Value (per share) Shares Weighted Average Grant-Date Fair Value (per share) Outstanding, December 26, 2021 — $ — — $ — Awarded 188 7.57 124 6.13 Forfeited — — — — Vested — — — — Outstanding, December 25, 2022 (1) 188 $ 7.57 124 $ 6.13 (1) Awards expected to vest are the result of applying the pre-vesting forfeiture rate assumption to total outstanding options. The Company applies estimated forfeiture rates that are derived from our historical forfeitures of similar awards. Long-Term Cash Incentive Plan Beginning in 2020, the long-term cash incentive plan is based on relative total stockholder return defined as increases in the Company's stock price during a performance period of 3 years as compared to the total stockholder return of a group of peer 68 Table of Contents companies. Compensation is recognized variably over the 3 -year performance period based on a Monte Carlo valuation model. Beginning in 2017, the long-term cash incentive plan was based on operational metrics with 3 one-year performance periods. Compensation expense for awards granted before 2020 is recognized variably over the performance period based on the plan-to-date performance achievement. All long-term cash incentive awards cliff vest after 3 years at the end of each performance cycle. In 2022, 2021, and 2020, the Company recorded $( 0.4 ) million, $ 0.5 million, and $ 0.2 million, respectively in compensation expense to Selling, general, and administrative expenses in the consolidated statements of operations and comprehensive loss related to the 2017 long-term cash incentive plan. The amounts recorded in 2022 include the reversal of the expense related to 2020 grants for which performance targets were not met. During 2022 and 2021, the long-term cash incentive plan payout totaled $ 0.0 million and $ 0.3 million, respectively. At December 25, 2022 and December 26, 2021, a $ 0.6 million and $ 1.0 million long-term cash incentive plan liability was included in Accrued payroll and payroll-related liabilities on the consolidated balance sheets. 15. Employee Benefit Programs Employee Deferred Compensation Plan The Company offers a deferred compensation plan that permits key employees and other members of management defined as highly compensated employees under the IRS code to defer portions of their compensation in a pre-tax savings vehicle that allows for retirement savings above 401(k) limits. Under this plan, eligible Team Members may elect to defer up to 75 % of their base salary and up to 100 % of variable compensation and commissions each plan year. The assets of the deferred compensation plan are held in a rabbi trust, where they are invested in certain mutual funds that cover an investment spectrum ranging from equities to money market instruments and are available to satisfy the claims of the Company's creditors in the event of bankruptcy or insolvency. These mutual funds have published market prices and are reported at fair value. See Note 9. Fair Value Measurements. Changes in the market value of the investments held in the trust result in the recognition of a corresponding gain or loss reported in Interest income and other, net in the Consolidated Statements of Operations and Comprehensive Loss. A corresponding change in the liability associated with the deferred compensation plan results in an offsetting deferred compensation expense, or reduction of expense, reported in Selling, general, and administrative expenses in the Consolidated Statements of Operations and Comprehensive Loss. The Company recognized a $ 0.8 million decrease in deferred compensation expense in 2022, and an increase in deferred compensation expenses of $ 0.7 million in 2021 and $ 0.6 million in 2020. As of December 25, 2022 and December 26, 2021, $ 4.3 million and $ 6.3 million of deferred compensation assets are included in Other assets, net and $ 4.3 million and $ 6.3 million of deferred compensation plan liabilities are included in Other non-current liabilities in the accompanying Consolidated Balance Sheets. Employee Stock Purchase Plan In July 2017, the Company adopted the Amended and Restated Employee Stock Purchase Plan (the "ESPP Plan"). The ESPP Plan authorized 100,000 shares of the Company's common stock for issuance. In May 2020, our board of directors authorized the issuance of an additional 150,000 shares of the Company's common stock under the ESPP Plan. In December 2022, our board of directors authorized the issuance of an additional 350,000 shares of the Company's common stock under the ESPP Plan, subject to approval by stockholders in 2023, increasing the shares authorized to be granted under the ESPP Plan to a total of 600,000 shares. Under the ESPP Plan, eligible Team Members may voluntarily contribute up to 15 % of their salary, subject to limitations, to purchase common stock at a price equal to 85 % of the fair market value of a share of the Company's common stock on the first day of each offering period or 85 % of the fair market value of a share of the Company's common stock on the last day of each offering period, whichever amount is less. In general, all of the Company's officers and Team Members who have been employed by the Company for at least one year and who are regularly scheduled to work more than 20 hours per week are eligible to participate in this plan, which operates in the successive six months commencing on January 1 and July 1 of each fiscal year. During 2022, the Company issued a total of 63,841 shares under the ESPP Plan with 55,585 shares available for future issuance. During 2021, the Company issued a total of 42,563 shares under the ESPP Plan. For 2022, in accordance with the guidance for accounting for stock compensation, the Company estimated the fair value of the awards granted pursuant to the stock purchase plan using the Black-Scholes multiple-option pricing model. The assumptions used in the model included risk-free interest rates from 1.84 % to 4.05 %, 0.5 year expected life, expected volatilities from 54.13 % to 55.00 %, and 0 % dividend yield. The weighted average fair value per share at grant date was $ 0.99 . For 2021, the assumptions used in the model included 0.31 % risk-free interest rate, 0.5 year expected life, expected volatility of 53.94 %, and 0 % dividend yield. The weighted average fair value per share at grant date was $ 4.36 . For 2020, the assumptions used in the model included 0.10 % risk-free interest rate, 0.5 year expected life, expected volatility of 50.40 %, and 0 % dividend yield. The weighted average fair value per share at grant date was $ 2.16 . The Company recognized $ 0.1 million of compensation expense related to this plan in 2022, $ 0.2 million in 2021, and $ 0.1 million in 2020. 69 Table of Contents Employee Defined Contribution Plan The Company maintains a 401(k) Savings Plan ("401k Plan") which covers eligible Team Members who have satisfied the service requirements and reached 21 years of age. The 401k Plan, which qualifies under Section 401(k) of the Internal Revenue Code, allows Team Members to defer specified percentages of their compensation on a pre-tax basis. The Company may make matching contributions in an amount determined by the board of directors. In addition, the Company may contribute each period, at its discretion, an additional amount from profits. Employer matching contributions equal to 100 % of the first 3 % of compensation and 50 % on the next 2 % of compensation. The Company matches contributions when the employee contribution is made, and the employer matching contributions are not subject to a vesting schedule. The Company recognized matching contribution expense of $ 2.9 million in 2022, $ 2.8 million in 2021, and $ 2.5 million in 2020. 70 Table of Contents ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.