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Item 7. Management’s Discussion and Analysis

2024-02-28 compared with 2023-02-28 · 171 added, 160 removed, 256 unchanged (56% of the section changed)

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Management's Discussion and Analysis of Financial Condition and Results of Operations provides a narrative of our financial performance and condition that should be read in conjunction with the accompanying consolidated financial statements.

All comparisons under this heading between 2022 and 2021 refer to the fifty-two weeks ended December 25, 2022 and December 26, 2021, unless otherwise indicated.

The Company's fiscal year ends on the last Sunday of each calendar year.

Most of our fiscal years have 52 weeks;

however, we experience a 53rd week once every five to six years.

Our discussion for fiscal year 2023, which ended on December 31, 2023, refers to a 53-week period with the fifty-third week occurring in the fourth quarter.

Our discussion for fiscal years 2022 and 2021, which ended December 25, 2022 and December 26, 2021, refers to a 52-week period in each year.

The following discussion comparing our results in 2023 and 2022 refers to the fifty-three weeks ended and fifty-two weeks ended, December 31, 2023 and December 25, 2022, respectively.

For a discussion comparing our results from 2022 to 2021,

refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 25, 2022, filed with the SEC on February 28, 2023.

Description of Business

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We also earn revenue from royalties and fees from franchised restaurants.

The Company's fiscal year ends on the last Sunday of each calendar year.

Most of our fiscal years have 52 weeks;

however, we experience a 53rd week once every five to six years.

Both 2022 and 2021 refer to 52 week fiscal years.

Fiscal Year 2022 Accomplishments

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

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

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

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

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

• Achieved a comparable restaurant revenue increase of 9.2%.

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

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

• Continued investments in sales building and infrastructure initiatives:

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

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

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

◦ Upgraded infrastructure technology in restaurant and support center locations.

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

Inflationary Cost and COVID-19 Impact

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

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

Our ability to attract and retain Team

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

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

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

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

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

Financial and Operational Highlights

The following summarizes the financial and operational highlights during the fifty-two weeks ended December 25, 2022:

Highlights for Fiscal 2023 Compared to Fiscal 2022

• Total revenues are $1.3 billion, an increase of $37.5 million.

◦ Comparable restaurant revenue (1) increased 1.6%.

◦ Comparable restaurant dine-in sales (2) increased 6.9%.

◦ The fifty-third week in 2023 contributed $24.5 million or 1.9% in restaurant revenue.

• Net loss is $21.2 million, a decrease of $57.7 million from a net loss of $78.9 million during 2022.

• Adjusted EBITDA (3) is $68.9 million, a $17.2 million increase.

• Completed two Sale-Leaseback transactions, generating net proceeds of $58.8 million and a gain, net of expenses of $29.4 million.

• Repaid $24.9 million of debt and repurchased $10.0 million of stock.

(1) Comparable restaurant revenue represents revenue from Company-owned restaurants that have operated five full quarters as of the 52 weeks ending December 24, 2023.

The comparable restaurant base includes 406 restaurants out of the total 415 Company-owned restaurants.

(2) Comparable restaurant dine-in sales are calculated based on the Company’s point-of-sale sales data, which does not include adjustments for loyalty breakage.

(3) See below for a reconciliation of adjusted EBITDA, a non-GAAP measure, to Net loss.

Key Performance Indicators and Non-GAAP Financial Measures

Restaurant revenue, compared to the same period in the prior year, is presented in the table below:

Restaurant revenue for the fifty-two weeks ended December 25, 2022

Increase in restaurant revenue from the fifty-third week 24.5

Increase in comparable (1) restaurant revenue

Decrease in non-comparable restaurant revenue (8.0)

Increase in non-comparable restaurant revenue 0.7

Total increase 44.1

Restaurant revenue for the fifty-two weeks ended December 25, 2022

(1) Comparable restaurant revenue represents revenue from Company-owned restaurants that have operated five full quarters as of the end of the period presented.

Restaurant revenues and operating costs as a percentage of restaurant revenue for the period are detailed in the table below:

Fifty-two weeks ended 2022 compared to 2021

Restaurant revenue for the fifty-three weeks ended December 31, 2023

(1) Comparable restaurant revenue represents revenue from Company-owned restaurants that have operated five full quarters as of the 52 weeks ending December 24, 2023.

Restaurant revenue and operating costs, and restaurant level operating profit for the period are detailed in the table below:

Fifty-Three Weeks Ended Fifty-Two Weeks Ended 2023 compared to 2022

(Dollars in millions) December 31, 2023 December 25, 2022 Increase/(Decrease)

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Restaurant operating costs:

Cost of sales 309.0 306.5 0.8 %

Labor 473.5 440.6 7.5 %

Other operating 225.0 224.7 0.1 %

Occupancy 102.8 98.9 3.9 %

Total Restaurant Operating Costs $ 1,110.3 $ 1,070.6 12.4 %

Restaurant Level Operating Profit (1)

$ 164.0 $ 159.5 2.8 %

(1) Restaurant Level Operating Profit is a non-GAAP measure.

See below for a reconciliation of Restaurant Level Operating Profit to Income from Operations and Income from Operations as a percentage of total revenues.

Fifty-Three Weeks Ended Fifty-Two Weeks Ended 2023 compared to 2022

(Dollars in millions) December 31, 2023 December 25, 2022 Increase/(Decrease)

Restaurant revenue $ 1,274.3 $ 1,230.2 3.6 %

Restaurant operating costs:

(Percentage of Restaurant Revenue) (Basis Points)

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Occupancy 8.1 8.0 10

Total 87.0 % 85.7 % 130

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

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

Fifty-two Weeks Ended

Total Restaurant Operating Costs 87.2 % 87.0 % 20

Restaurant Level Operating Profit 12.9 % 13.0 % (10)

Certain percentage and basis point amounts in the table above do not total due to rounding as well as restaurant operating costs being expressed as a percentage of restaurant revenue and not total revenues.

The following table summarizes net loss and loss per diluted share, and adjusted loss per diluted share for the fifty-three weeks ended December 31, 2023 and fifty-two weeks ended December 25, 2022:

Fifty-Three Weeks Ended Fifty-Two Weeks Ended

(Dollars and shares in thousands, except per share amounts) December 31, 2023 December 25, 2022

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Net loss as reported $ (1.34) $ (4.98)

Change in estimate, gift card breakage (0.33) —

Gift card breakage (1)

Write-off of unamortized debt issuance costs (2)

Other charges, net:

Other charges (gains), net:

Asset impairment 0.58 2.43

Gain on sale of restaurant property (0.58) —

Gain on sale of restaurant property, net of expenses (1.87) (0.58)

Severance and executive transition, net of $128 and $(3,299) in stock-based compensation

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Closed corporate office costs, net of sublease income 0.03 0.03

COVID-19 related charges 0.03 0.08

Litigation contingencies 0.58 0.26

Board and stockholder matter costs — 0.01

Asset disposal and other 0.11 0.03

Income tax effect 0.04 (0.58)

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Basic 15,835 15,840

Diluted 15,840 15,660

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

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

gain on sale of restaurant property;

severance and executive transition costs;

other financing costs;

restaurant closure costs;

closed corporate office costs, net of sublease income;

COVID-19 related costs;

litigation contingencies;

board and stockholder matters costs;

goodwill impairment;

change in estimate - gift card breakage;

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

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

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

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

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

GAAP as a measure of performance.

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

Fifty-Two Weeks Ended

15,835 15,840

(1) During 2022, the Company re-evaluated the estimated redemption pattern related to gift cards.

The impact of this change in estimate comprised $5.9 million included in Other revenue, partially offset by $0.6 million in gift card commission costs included in Selling, general, and administrative expenses on the Consolidated Statements of Operations.

(2) During 2022, the Company completed the refinancing of our Credit Facility and reported a non-cash charge associated with the write-off of unamortized debt issuance costs related to the remaining unamortized debt issuance costs.

(3) Other financing costs includes legal and other charges related to the refinancing of our Credit Facility in 2022.

(4) The impact of dilutive shares is excluded due to the reported net loss for all periods presented.

The following table summarizes net loss, and EBITDA and adjusted EBITDA for the fifty-three weeks ended December 31, 2023 and fifty-two weeks ended December 25, 2022:

Fifty-Three Weeks Ended Fifty-Two Weeks Ended

December 31, 2023 December 25, 2022

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EBITDA 71,068 17,991

Change in accounting estimate, gift card breakage (1)

Gift card breakage (1)

Other charges, net:

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Other financing costs (2)

COVID-19 related costs 438 1,288

Restaurant closure costs 3,062 828

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Litigation contingencies 9,140 4,148

Board and stockholder matter costs — 128

Asset disposal and other 1,713 438

Adjusted EBITDA $ 68,885 $ 51,706

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

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

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

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

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

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

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

(1) During 2022, the Company re-evaluated the estimated redemption pattern related to gift cards.

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

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

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

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

Adjusted EBITDA and Adjusted loss per share-diluted are supplemental measures of our performance that are not required by or presented in accordance with GAAP.

We believe these non-GAAP measures give the reader additional insight into the ongoing operational results of the Company, and are intended to supplement the presentation of the Company's financial results in accordance with GAAP.

Adjusted EBITDA and adjusted loss per share-diluted exclude the impact of non-operating or nonrecurring items including changes in estimate, asset impairments, litigation contingencies, gains (losses) on debt extinguishment, restaurant and office closure costs, gains on sale leaseback transactions, severance and executive transition costs and other non-recurring, non-cash or discrete items;

net of income tax impacts.

Other companies may define these non-GAAP measures differently, and as a result may not be directly comparable to those of other companies.

Adjusted loss per share-diluted and Adjusted EBITDA should be considered in addition to, and not as a substitute for, net loss as reported in accordance with U.S.

GAAP as a measure of performance.

The following table summarizes Income from Operations, and Restaurant Level Operating Profit for the fifty-three weeks ended December 31, 2023 and fifty-two weeks ended December 25, 2022:

Fifty-Three Weeks Ended Fifty-Two Weeks Ended

December 31, 2023 December 25, 2022

Income (loss) from operations $ 4,542 0.3% $ (57,497) (4.5)%

Franchise royalties, fees and other revenue 28,752 2.2% 35,345 2.8%

Other charges (gains), net (2,663) (0.2) 38,961 3.1

Pre-opening costs 587 — 568 —

Selling 34,770 2.7 51,700 4.1

General and administrative expenses 89,360 6.9 84,912 6.7

Depreciation and amortization 66,190 5.1 76,245 6.0

Restaurant level operating profit $ 164,034 $ 159,544

Income (loss) from operations as a percentage of total revenues 0.3% (4.5)%

Restaurant level operating profit margin (as a percentage of restaurant revenue) 12.9% 13.0%

The Company believes restaurant level operating profit is an important measure for management and investors because it is widely regarded in the restaurant industry as a useful metric by which to evaluate restaurant level operating efficiency and performance.

The Company defines restaurant level operating profit to be income from operations less franchise royalties, fees and other revenue, plus other charges (gains), net, pre-opening costs, selling costs, general and administrative expenses, and depreciation and amortization.

The measure includes restaurant level occupancy costs that include fixed rents, percentage rents, common area maintenance charges, real estate and personal property taxes, general liability insurance, and other property costs, but excludes depreciation and amortization expense, substantially all of which is related to restaurant level assets, because such expenses represent historical sunk costs which do not reflect current cash outlay for the restaurants.

The measure also excludes costs associated with selling, general, and administrative functions, pre-opening costs, as well as, other charges (gains), net because these costs are non-operating or nonrecurring and therefore not related to the ongoing operations of its restaurants.

Restaurant level operating profit is not a measurement determined in accordance with GAAP and should not be considered in isolation, or as an alternative, to income (loss) from operations as an indicator of financial performance.

Restaurant level operating profit as presented may not be comparable to other similarly titled measures of other companies in the Company's industry.

Restaurant Data

The following table details restaurant unit data for our Company-owned and franchised locations for the periods indicated:

Fifty-two Weeks Ended

Fifty-Three Weeks Ended Fifty-Two Weeks Ended

December 31, 2023 December 25, 2022

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Opened during the period 1 —

Acquired from franchisees 5 —

Closed during the period (5) (16)

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Opened during the period — 1

Sold to Company during the period (5) —

Closed during the period (1) (5)

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Certain percentage amounts in the table below do not total due to rounding as well as restaurant operating costs being expressed as a percentage of restaurant revenue and not total revenues.

December 31, 2023 December 25, 2022

Restaurant revenue 97.8 % 97.2 %

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Costs and expenses:

Restaurant operating costs (1) (exclusive of depreciation and amortization shown separately below):

Restaurant operating costs (1) (excluding depreciation and amortization shown separately below):

Cost of sales 24.2 % 24.9 %

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Selling, general, and administrative expenses 9.5 10.8

Pre-opening and acquisition costs — 0.1

Other charges 3.1 1.4

Loss from operations (4.5) % (3.2) %

Pre-opening costs — —

Other charges (gains), net (0.2) 3.1

Income (loss) from operations 0.3 % (4.5) %

Other expense (income):

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Interest (income) and other, net (0.1) —

Total other expenses 1.6 1.2

Total other expenses, net 2.0 1.6

Loss before income taxes (1.6) (6.2)

Income tax benefit 0.1 —

Income tax expense (benefit) 0.0 0.1

Net loss (1.6) % (6.2) %

———————————————————

(1) Expressed as a percentage of restaurant revenue.

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Total revenues $ 1,303,046 $ 1,265,534 3.0 %

Average weekly net sales per Company-owned restaurants $ 55,852 $ 51,116

Average weekly net sales volumes in Company-owned restaurants $ 59,454 $ 55,852 6.4 %

Total operating weeks 21,643 22,028 (1.7) %

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

Restaurant revenue, which comprises primarily food and beverage sales, increased $44.1 million in 2023, or 3.6%, as compared to 2022.

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

The fifty-third week in 2023 contributed approximately $24.5 million in restaurant revenue.

Of the remaining $19.6 million increase, $18.8 million, or 1.6%, was due to an increase in comparable restaurant revenue and the remaining $0.7 million increase was due to non-comparable restaurants, primarily attributed to the Company's purchase of five restaurants from a Franchisee in the second quarter of fiscal year 2023.

The comparable restaurant revenue increase was driven by a 6.8% increase in average Guest check with a 5.2% decrease in Guest count.

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

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

The increase in average Guest check resulted from a 7.5% increase in menu pricing and 0.9% decrease in discounts, partially offset by a 1.6% decrease in menu mix.

The decrease in menu mix was primarily driven by Guests shifting visits from third party delivery platforms with elevated menu prices, to dine in visits at standard menu prices, and the removal of low Guest preference, but higher priced burger options.

Dine-in sales comprised 75.0% of total food and beverage sales in 2023, as compared to 71.3% in 2022.

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Comparable restaurant revenues include those restaurants that are in the comparable base based on operating five full fiscal quarters as of the end of each period presented.

Temporarily closed Company-owned restaurants due to the COVID-19 pandemic were not included in the comparable base for the fiscal years ended December 25, 2022 and December 26, 2021.

Fluctuations in average weekly net sales volumes for Company-owned restaurants reflect the effect of comparable restaurant revenue changes as well as the performance of new and acquired restaurants during the period, the average square footage of our restaurants, as well as the impact of changing capacity limitations in response to COVID-19 levels in a given locality.

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

Closed Company-owned restaurants were not included in the comparable base for the fiscal years ended December 31, 2023 and December 25, 2022.

Fluctuations in average weekly net sales volumes for Company-owned restaurants reflect the effect of comparable restaurant revenue changes as well as the performance of new restaurants during the period.

Franchise revenue primarily includes royalty income and advertising fund contributions.

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

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

Franchise revenue decreased $3.4 million, or 17.8%, in 2023 compared to 2022.

Franchise revenue declined primarily due to a reduction in the percentage of sales each franchisee is required to contribute to support selling activities.

This reduction results from an increased focus on local restaurant marketing and reduced national and/or mass media channels pursuant to our North Star strategy.

The percentage of sales each franchisee is required to contribute could change in the future, as we expect to align contributions with spending levels, subject to compliance with the respective franchise agreement.

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

During 2023 and 2022, we recognized $9.9 million and $13.8 million of gift card breakage.

Refer to Note 1.

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

Cost of Sales

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As a percent of restaurant revenue 24.2 % 24.9 % (0.7) %

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

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

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

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

Cost of sales as a percentage of restaurant revenue decreased 70 basis points in 2023 as compared to 2022.

The decrease was primarily driven by menu price increases and implementation of various cost savings initiatives, partially offset by commodity inflation and investments to enhance food quality.

(In thousands, except percentages) 2023 2022 Percent Change

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Labor costs include restaurant-level hourly wages and management salaries as well as related taxes and benefits.

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

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

Labor as a percentage of restaurant revenue increased 140 basis points in 2023 as compared to 2022.

The increase was primarily driven by investments in hourly labor, management labor, and related payroll taxes.

Additionally, incentive compensation expense increased due to increased achievement of incentive targets, partially offset by lower group insurance expense.

In 2023, we made investments in management and hourly labor to support an enhanced Guest experience, with an objective to drive increases in Guest traffic count over time, resulting in an increase in restaurant profitability.

Other Operating

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As a percent of restaurant revenue 17.7 % 18.3 % (0.6) %

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

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

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

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

Other operating costs as a percentage of restaurant revenue decreased 60 basis points compared to the same period in 2022.

The decrease was primarily driven by reduced third party commission expenses associated with lower off-premises mix and lower commission rates, and reduced restaurant supply costs primarily due to various cost saving initiatives, partially offset by higher repairs and maintenance costs.

(In thousands, except percentages) 2023 2022 Percent Change

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

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

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

In 2023, occupancy costs increased $3.9 million or 10 basis points as a percentage of revenue compared to 2022.

This increase is primarily driven by an increase in fixed rents related to the sale-leaseback of 18 locations and the acquisition of five restaurants from a franchisee, mostly offset by reduced expenses related to net Company-owned restaurant closures.

Depreciation and Amortization

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In 2023, depreciation and amortization expense as a percentage of revenue decreased 90 basis points as compared to 2022.

The decreases are primarily due to net closed Company-owned restaurants, and sales leverage.

The decrease is primarily due to asset impairments and disposals reducing the depreciable asset base.

Selling, General, and Administrative expenses

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and Board of Directors' expenses.

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

Selling, general, and administrative expense decreased $12.5 million, or 9.1% in 2023 as compared to 2022.

General and administrative expenses increased $4.4 million or 5.2% in 2023 as compared to 2022.

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

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

The increase was primarily driven by increased digital marketing.

The increase in 2023 was primarily driven by higher incentive compensation, increased travel, and lower capitalized costs due to fewer eligible capital projects, partially offset by a decrease in wages and stock compensation due to a reduction in force in the fourth quarter of fiscal 2022 and executive transitions in fiscal years 2022 and 2023.

Selling expenses decreased $16.9 million or 32.7% in 2023 as compared to 2022.

The decrease resulted from a strategic shift as part of the North Star Plan to reallocate dollars from selling expenses to support investments in the Guest experience.

The reductions in selling expenses were primarily in internet and local media.

Pre-opening Costs

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

Our pre-opening costs fluctuate from period to period, depending upon, but not limited to, the number of restaurant openings, the size of the restaurants being opened, and the location of the restaurants.

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

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

Our pre-opening costs fluctuate from period to period, depending upon, but not limited to, the number of restaurants where Donatos ® has been introduced, the number of restaurant openings, the size of the restaurants being opened, and the location of the restaurants.

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

Pre-opening costs increased due to one new restaurant opening in 2023 as compared to none in 2022 mostly offset by a decrease due to 26 Donatos ® installations in 2023 as compared to 52 Donatos ® installations in 2022.

Other Charges (Gains), net

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Asset impairment $ 9,130 $ 38,534 (76.3) %

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

Gain on sale of restaurant property, net of expenses (29,543) (9,204) *

Severance and executive transition, net of $128 and $3,299 in stock-based compensation

3,419 2,280 50.0 %

Other financing costs — 1,462 (100.0) %

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Closed corporate office costs, net of sublease income 416 475 (12.4) %

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

Litigation contingencies 9,140 4,148 *

Board and stockholder matter costs — 128 (100.0) %

Asset disposal and other 1,713 438 *

Other charges (gains), net $ (2,663) $ 38,961

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

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

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

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

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Interest expense in 2023 and 2022 was $26.6 million and $20.6 million, respectively.

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

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

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

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

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

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

The $5.9 million increase was due to higher weighted average interest rates.

Our weighted average interest rate in 2023 and 2022 was 12.7% and 9.1%, respectively.

Average outstanding debt in 2023 and 2022 was $205.6 million and $200.8 million, respectively.

Interest income and other increased by $1.1 million in 2023 due to investment changes related to a deferred compensation plan for which assets are held in a rabbi trust, along with higher interest income on bank account balances in the 53-week period.

Income tax provision was $0.3 million in 2023, compared to an income tax provision of $0.7 million in 2022.

Our effective tax rate was a 1.5% provision in 2023 and a 1.0% provision in 2022, reflecting minimum state income taxes and state franchise taxes despite a pretax net loss position.

Liquidity and Capital Resources

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

Cash and cash equivalents, and restricted cash decreased $26.6 million to $31.6 million at December 31, 2023, from $58.2 million at the beginning of the fiscal year.

Approximately $17.2 million of the decline is due to the timing of our payroll cycle which occurred in the 53rd fiscal week and, as a result, was recorded as a cash outflow in the 2023 fiscal year.

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

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

As of December 31, 2023, the Company had approximately $48.6 million in liquidity, including cash and cash equivalents and $25.0 million available borrowing capacity under its Credit Facility.

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

Net cash provided by operating activities $ 35,532 $ 47,292

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

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

Net cash provided by (used in) operating activities $ (1,157) $ 35,532

Net cash provided by (used in) investing activities 8,226 (29,568)

Net cash provided by (used in) financing activities (33,712) 29,533

Effect of exchange rate changes on cash 2 (41)

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Net cash flows provided by operating activities decreased $36.7 million to $1.2 million in 2023 as compared to 2022.

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

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

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

The change in net cash provided by operating activities is primarily attributable to the timing of payroll as a result of the 53rd week discussed above, the receipt of an income tax refund of $14.6 million in 2022, and severance payments and higher interest payments in 2023.

Investing Cash Flows

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

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

Net cash flows provided by investing activities increased $37.8 million to $8.2 million in 2023 as compared to 2022.

The increase in cash flows provided by investing activities is primarily due to proceeds from sale-leaseback transactions and a sale of real estate, partially offset by increased capital expenditures and the acquisition of five franchised restaurants.

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

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Total capital expenditures $ 49,440 $ 38,159

Expenditures for Donatos® expansion include expenditures for kitchen equipment, other equipment and other capital costs associated with adding Donatos® to our restaurants, Restaurant improvement capital and other consists of capital equipment for our restaurants, Investment in technology, infrastructure and other consists of capital costs related to restaurant technology assets, capital overhead, and other items.

Restaurant improvement capital and other consists of capital equipment for our restaurants.

Investment in technology, infrastructure and other consists of capital costs related to restaurant technology assets, capital overhead, and other centrally developed assets.

Expenditures for Donatos ® expansion include expenditures for kitchen equipment, other equipment and other capital costs associated with adding Donatos ® to our restaurants.

Financing Cash Flows

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

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

Net cash flows used in financing activities increased $63.2 million to $33.7 million in 2023 as compared to 2022.

In 2022, financing activities were a source of cash, due to net draws made on long-term debt as a result of the Company's refinancing of debt on March 4, 2022.

In 2023, the use of cash resulted primarily from the Company’s repayment of outstanding debt with proceeds from the sale-leaseback transaction, $10.0 million of share repurchases, and standard principal payments due under the terms of the Company’s Credit Agreement.

Credit Facility

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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.

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

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

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

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

As of December 31, 2023, the Company had outstanding borrowings under the Credit Facility of $182.6 million net of $6.5 million of unamortized deferred financing charges and discounts, none of which was classified as current.

As of December 31, 2023, the Company had $25.0 million of available borrowing capacity under its Credit Facility, and $7.7 million letters of credit issued against cash collateral.

The Company's cash collateral is recorded in Restricted cash on our Consolidated Balance Sheets.

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

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

As of December 31, 2023, we were in compliance with all debt covenants.

Debt Outstanding

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

Total debt outstanding decreased $25.7 million to $189.1 million at December 31, 2023, from $214.9 million at December 25, 2022, primarily driven by payments of long-term debt using proceeds from the sale-leaseback transactions during the fifty-three weeks ended December 31, 2023.

Share Repurchase

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From the date of the current program approval through December 31, 2023, we have repurchased a total of 1,088,588 shares at an average price of $15.18 per share for an aggregate amount of $16.5 million.

There were no share repurchases in 2022 and 2021.

The Company completed $10.0 million of share repurchases in 2023 and no share repurchases during 2022.

Accordingly, as of December 31, 2023, we had $58.4 million of availability under the current share repurchase program.

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

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

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

Contractual Obligations

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(3) Operating lease obligations exclude variable lease costs, such as sales based contingent rent, and include interest of $192.6 million.

(4) Purchase obligations includes the Company's share of expected system-wide fixed price commitments for food, beverage, and restaurant supply items.

These amounts are estimates based on anticipated inventory needed for the Company's restaurants, and could vary due to the timing of volumes.

(4) Purchase obligations primarily include the Company's share of expected system-wide fixed price commitments for food, beverage, and restaurant supply items.

The timing of amounts presented is estimated based on anticipated inventory needed for the Company’s restaurants and could vary due to changes in anticipated traffic counts, consumer preferences, or other factors.

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

Refer to Note 15.

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

Financial Condition and Future Liquidity

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

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

The Company is working to complete a third sale-leaseback transaction related to its owned properties and if completed, anticipates proceeds will be used to repay debt.

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

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

Critical Accounting Policies and Estimates

Critical accounting policies and estimates are those we believe are both significant and that require us to make difficult, subjective, or complex judgments, often because we need to estimate the effect of inherently uncertain matters.

Critical Accounting Estimates

Critical accounting estimates are those we believe are both significant and that require us to make difficult, subjective, or complex judgments, often because we need to estimate the effect of inherently uncertain matters.

We base our estimates and judgments on historical experiences and various other factors we believe to be appropriate under the circumstances.

Actual results may differ from these estimates, including our estimates of future restaurant-level cash flows, which are subject to the current economic environment, and we might obtain different results if we use different assumptions or conditions.

We have identified the following as the Company's most critical accounting policies and estimates, which are most important to the portrayal of the Company's financial condition and results and require management's most subjective and complex judgment.

We have identified the following as the Company's most critical accounting estimates, which are most important to the portrayal of the Company's financial condition and results and require management's most subjective and complex judgment.

Information regarding the Company's other significant accounting policies is disclosed in Note 1, Description of Business and Summary of Significant Accounting Policies , of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

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

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

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

During 2023, the Company recognized non-cash impairment charges of $9.1 million, primarily related to the impairment of the long-lived assets at 19 underperforming locations and quota state liquor licenses at three locations.

During 2022, the Company recognized non-cash impairment charges of $38.5 million, primarily related to impairments of long-lived assets at 46 underperforming locations and quota state liquor licenses at six locations.

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

During 2020, 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.

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.

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

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

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

Recently Issued Accounting Standards

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

What changed 10-K

Item 7. Management’s Discussion and Analysis