Wingstop Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of the financial condition and results of operations of Wingstop Inc. (collectively with its direct and indirect subsidiaries on a consolidated basis, “Wingstop,” the “Company,” “we,” “our,” or “us”) should be read in conjunction with the accompanying unaudited consolidated financial statements and related notes in Part I, Item 1 of this Quarterly Report on Form 10-Q (this “Quarterly Report”) and with the audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December 30, 2023 (our “Annual Report”). The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources, and other non-historical statements are forward-looking statements. These forward-looking statements are subject to risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Special Note Regarding Forward-Looking Statements,” below and “Risk Factors” beginning on page 11 of our Annual Report. Our actual results may differ materially from those contained in or implied by any forward-looking statements. We operate on a 52- or 53-week fiscal year ending on the last Saturday of each calendar year. Our fiscal quarters are comprised of 13 weeks, with the exception of the fourth quarter of a 53-week year, which contains 14 weeks. Fiscal years 2024 and 2023 each contain 52 weeks. Overview Wingstop is the largest fast casual chicken wings-focused restaurant chain in the world, with over 2,250 locations worldwide. We are dedicated to serving the world flavor through an unparalleled guest experience and offering of classic wings, boneless wings, tenders, and chicken sandwiches, always cooked to order and hand-sauced-and-tossed in 11 bold, distinctive flavors. The Company is primarily a franchisor, with approximately 98% of Wingstop’s restaurants currently owned and operated by independent franchisees. We believe our asset-light, highly-franchised business model generates strong operating margins and requires low capital expenditures, creating stockholder value through strong and consistent free cash flow and capital-efficient growth. First Quarter of 2024 Highlights • System-wide sales increased 36.8% over the prior fiscal first quarter to $1.1 billion; • 65 net new openings in the fiscal first quarter 2024 for a total of 2,279 worldwide locations; • Domestic same store sales increased 21.6% over the prior fiscal first quarter; • Company-owned restaurant same store sales increased 6.2% over the prior fiscal first quarter; • Digital sales increased to 68.3% of system-wide sales; • Domestic AUV increased to $1.9 million; • Total revenue increased 34.1% over the prior fiscal first quarter to $145.8 million; • Net income increased 83.5% to $28.7 million, or $0.98 per diluted share, compared to net income of $15.7 million, or $0.52 per diluted share in the prior fiscal first quarter; • Adjusted net income and adjusted earnings per diluted share, both non-GAAP measures, increased 61.8% to $28.7 million, or $0.98 per diluted share, compared to $17.8 million, or $0.59 per diluted share in the prior fiscal first quarter; and • Adjusted EBITDA, a non-GAAP measure, increased 45.3% to $50.3 million, compared to adjusted EBITDA of $34.6 million in the prior fiscal first quarter. 13 Key Performance Indicators Key measures that we use in evaluating our restaurants and assessing our business include the following: Number of restaurants. Management reviews the number of new restaurants, the number of closed restaurants, and the number of acquisitions and divestitures of restaurants to assess net new restaurant growth. Thirteen Weeks Ended March 30, 2024 April 1, 2023 Domestic Franchised Activity: Beginning of period 1,877 1,678 Openings 47 32 Closures — — Restaurants end of period 1,924 1,710 Domestic Company-Owned Activity: Beginning of period 49 43 Openings 1 — Closures — — Restaurants end of period 50 43 Total Domestic Restaurants 1,974 1,753 International Franchised Activity (1) : Beginning of period 288 238 Openings 17 8 Closures — (3) Restaurants end of period 305 243 Total System-wide Restaurants 2,279 1,996 (1) Including U.S. territories System-wide sales. System-wide sales represents net sales for all of our company-owned and franchised restaurants, as reported by franchisees. This measure allows management to better assess changes in our royalty revenue, our overall store performance, the health of our brand, and the strength of our market position relative to competitors. Our system-wide sales growth is driven by new restaurant openings as well as increases in same store sales. Domestic average unit volume (“AUV”). Domestic AUV consists of the average annual sales of all restaurants that have been open for a trailing 52-week period or longer. This measure is calculated by dividing sales during the applicable period for all restaurants being measured by the number of restaurants being measured. Domestic AUV includes revenue from both company-owned and franchised restaurants. Domestic AUV allows management to assess our domestic company-owned and franchised restaurant economics. Changes in domestic AUV growth are primarily driven by increases in same store sales and are also influenced by opening new restaurants. Domestic same store sales. Domestic same store sales reflects the change in year-over-year sales for the same store restaurant base. We define the same store restaurant base to include those restaurants open for at least 52 full weeks. This measure highlights the performance of existing restaurants, while excluding the impact of new restaurant openings and permanent closures. We review same store sales for domestic company-owned restaurants as well as system-wide domestic restaurants. Domestic same store sales growth is driven by increases in transactions and average transaction size. Transaction size increases are driven by price increases or favorable mix shift from either an increase in items purchased or shifts into higher priced items. EBITDA and Adjusted EBITDA. We define EBITDA as net income before interest expense, net, income tax expense (benefit), and depreciation and amortization. We define Adjusted EBITDA as net income before interest expense, net, income tax 14 expense (benefit), and depreciation and amortization, with further adjustments for losses on debt extinguishment and financing transactions, transaction costs, costs and fees associated with investments in our strategic initiatives, and stock-based compensation expense. Adjusted EBITDA may not be comparable to other similarly titled captions of other companies due to differences in methods of calculation. For a reconciliation of net income to EBITDA and Adjusted EBITDA and for further discussion of EBITDA and Adjusted EBITDA as non-GAAP measures and how we utilize them, see footnote 2 below. Adjusted Net Income and Adjusted Earnings Per Diluted Share. We define Adjusted net income as net income adjusted for losses on debt extinguishment and financing transactions, transaction costs, costs and fees associated with investments in our strategic initiatives, and related tax adjustments that management believes are not indicative of the Company’s core operating results or business outlook over the long term. We define Adjusted earnings per diluted share as Adjusted net income divided by weighted average diluted share count. For a reconciliation of net income to Adjusted net income and for further discussion of Adjusted net income and Adjusted earnings per diluted share as non-GAAP measures and how we utilize them, see footnote 3 below. The following table sets forth our key performance indicators for the thirteen weeks ended March 30, 2024 and April 1, 2023 (in thousands, except unit data): Thirteen Weeks Ended March 30, 2024 April 1, 2023 Number of system-wide restaurants open at end of period 2,279 1,996 System-wide sales (1) $ 1,123,607 $ 821,632 Domestic restaurant AUV $ 1,918 $ 1,662 Domestic same store sales growth 21.6 % 20.1 % Company-owned domestic same store sales growth 6.2 % 10.3 % Total revenue $ 145,789 $ 108,721 Net income $ 28,747 $ 15,669 Adjusted EBITDA (2) $ 50,263 $ 34,584 Adjusted net income (3) $ 28,747 $ 17,771 (1) The percentage of system-wide sales attributable to company-owned restaurants was 2.5% and 2.8% for the thirteen weeks ended March 30, 2024 and April 1, 2023, respectively. The remainder was generated by franchised restaurants, as reported by our franchisees. (2) EBITDA and Adjusted EBITDA are supplemental measures of our performance that are not required by, or presented in accordance with, GAAP. EBITDA and Adjusted EBITDA should not be considered as an alternative to net income or any other performance measure derived in accordance with GAAP, or as an alternative to cash flow from operating activities as a measure of our liquidity. We caution investors that amounts presented in accordance with our definitions of EBITDA and Adjusted EBITDA may not be comparable to similar measures disclosed by our competitors, because not all companies and analysts calculate EBITDA and Adjusted EBITDA in the same manner. We present EBITDA and Adjusted EBITDA because we consider them to be important supplemental measures of our performance and believe they are frequently used by securities analysts, investors, and other interested parties in the evaluation of companies in our industry. Management believes that investors’ understanding of our performance is enhanced by including these non-GAAP financial measures as a reasonable basis for comparing our ongoing results of operations. Many investors are interested in understanding the performance of our business by comparing our results from ongoing operations on a period-over-period basis and would ordinarily add back non-cash expenses such as depreciation and amortization, as well as items that are not part of normal day-to-day operations of our business. Management uses EBITDA and Adjusted EBITDA: • as a measurement of operating performance because we believe they assist us in comparing the operating performance of our restaurants on a consistent basis, as they remove the impact of items not directly resulting from our core operations; • for planning purposes, including the preparation of our internal annual operating budget and financial projections; 15 • to evaluate the performance and effectiveness of our operational strategies; • to evaluate our capacity to fund capital expenditures and expand our business; and • to calculate incentive compensation payments for our employees, including assessing performance under our annual incentive compensation plan. By providing these non-GAAP financial measures, together with a reconciliation to the most comparable GAAP measure, we believe we are enhancing investors’ understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing our strategic initiatives. EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered in isolation, or as an alternative to, or a substitute for net income or other financial statement data presented in our consolidated financial statements as indicators of financial performance. Some of the limitations are: • such measures do not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; • such measures do not reflect changes in, or cash requirements for, our working capital needs; • such measures do not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our debt; • such measures do not reflect our tax expense or the cash requirements to pay our taxes; • although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and such measures do not reflect any cash requirements for such replacements; and • other companies in our industry may calculate such measures differently than we do, limiting their usefulness as comparative measures. Due to these limitations, EBITDA and Adjusted EBITDA should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using these non-GAAP measures only as performance measures and supplementally. As noted in the table below, Adjusted EBITDA includes adjustments for losses on debt extinguishment and financing transactions, transaction costs, costs and fees associated with investments in our strategic initiatives, and stock-based compensation expense. We believe these adjustments are appropriate because the amounts recognized can vary significantly from period to period, do not directly relate to the ongoing operations of our restaurants, and complicate comparisons of our internal operating results and operating results of other restaurant companies over time. Each of the normal recurring adjustments and other adjustments described in this paragraph and in the reconciliation table below help management measure our core operating performance over time by removing items that are not related to day-to-day operations. The following table reconciles net income to EBITDA and Adjusted EBITDA for the thirteen weeks ended March 30, 2024 and April 1, 2023 (in thousands): Thirteen Weeks Ended March 30, 2024 April 1, 2023 Net income $ 28,747 $ 15,669 Interest expense, net 4,544 4,573 Income tax expense 9,750 5,242 Depreciation and amortization 3,410 2,989 EBITDA $ 46,451 $ 28,473 Additional adjustments: Consulting fees (a) — 2,766 Stock-based compensation expense (b) 3,812 3,345 Adjusted EBITDA $ 50,263 $ 34,584 (a) Represents non-recurring consulting fees that are not part of our ongoing operations and are incurred to execute discrete, project-based strategic initiatives, which are included in Selling, general and administrative on the Consolidated Statements of Comprehensive Income. The costs incurred in the thirteen weeks ended April 1, 2023 include consulting fees relating to a comprehensive review of our long-term growth strategy for our domestic business to explore potential future initiatives, which review was completed in fiscal year 2023. Given the magnitude and scope of this strategic review 16 initiative that is not expected to recur in the foreseeable future, the Company considers the incremental consulting fees incurred with respect to the initiative not reflective of the ongoing costs to operate its business. (b) Includes non-cash, stock-based compensation, net of forfeitures. (3) Adjusted net income and adjusted earnings per diluted share are supplemental measures of operating performance that do not represent and should not be considered alternatives to net income and earnings per share, as determined by GAAP. These measures have not been prepared in accordance with Article 11 of Regulation S-X promulgated under the Securities Act of 1933, as amended (the “Securities Act”). Management believes adjusted net income and adjusted earnings per diluted share supplement GAAP measures and enable management to more effectively evaluate the Company’s performance period-over-period and relative to competitors. The following table reconciles net income to Adjusted net income and calculates adjusted earnings per diluted share for the thirteen weeks ended March 30, 2024 and April 1, 2023 (in thousands): Thirteen Weeks Ended March 30, 2024 April 1, 2023 Numerator: Net income $ 28,747 $ 15,669 Adjustments: Consulting fees (a) — 2,766 Tax effect of adjustments (b) — (664) Adjusted net income $ 28,747 $ 17,771 Denominator: Weighted-average shares outstanding - diluted 29,478 30,031 Adjusted earnings per diluted share $ 0.98 $ 0.59 (a) Represents non-recurring consulting fees that are not part of our ongoing operations and are incurred to execute discrete, project-based strategic initiatives, which are included in Selling, general and administrative on the Consolidated Statements of Comprehensive Income. The costs incurred in the thirteen weeks ended April 1, 2023 include consulting fees relating to a comprehensive review of our long-term growth strategy for our domestic business to explore potential future initiatives, which review was completed in fiscal year 2023. Given the magnitude and scope of this strategic review initiative that is not expected to recur in the foreseeable future, the Company considers the incremental consulting fees incurred with respect to the initiative not reflective of the ongoing costs to operate its business. (b) Represents the tax effect of the aforementioned adjustments to reflect corporate income taxes at an assumed effective tax rate of 24% for the thirteen weeks ended April 1, 2023, which includes provisions for U.S. federal income taxes, and assumes the respective statutory rates for applicable state and local jurisdictions. 17 Results of Operations Thirteen Weeks Ended March 30, 2024 compared to Thirteen Weeks Ended April 1, 2023 The following table sets forth our results of operations for the thirteen weeks ended March 30, 2024 and April 1, 2023 (dollars in thousands): Thirteen Weeks Ended Increase / (Decrease) March 30, 2024 April 1, 2023 $ % Revenue: Royalty revenue, franchise fees and other $ 67,097 $ 48,188 $ 18,909 39.2 % Advertising fees 50,149 37,463 12,686 33.9 % Company-owned restaurant sales 28,543 23,070 5,473 23.7 % Total revenue 145,789 108,721 37,068 34.1 % Costs and expenses: Cost of sales (1) 21,271 16,695 4,576 27.4 % Advertising expenses 53,192 39,643 13,549 34.2 % Selling, general and administrative 25,178 23,645 1,533 6.5 % Depreciation and amortization 3,410 2,989 421 14.1 % Loss on disposal of assets — 77 (77) (100.0) % Total costs and expenses 103,051 83,049 20,002 24.1 % Operating income 42,738 25,672 17,066 66.5 % Interest expense, net 4,544 4,573 (29) (0.6) % Other (income) expense (303) 188 (491) (261.2) % Income before income tax expense 38,497 20,911 17,586 84.1 % Income tax expense 9,750 5,242 4,508 86.0 % Net income $ 28,747 $ 15,669 $ 13,078 83.5 % (1) Cost of sales includes all operating expenses of company-owned restaurants, including advertising expenses, but excludes depreciation and amortization, which are presented separately. Revenue During the thirteen weeks ended March 30, 2024, total revenue was $145.8 million, an increase of $37.1 million, or 34.1%, compared to $108.7 million in the comparable period in 2023. Royalty revenue, franchise fees and other increased $18.9 million, of which $9.4 million was due to domestic same store sales growth of 21.6%, and $7.2 million was due to net new franchise restaurant development. Other revenue increased by $1.1 million primarily due to an increase in vendor rebates. Advertising fees increased $12.7 million due to a 36.8% increase in system-wide sales during the fiscal first quarter 2024. Company-owned restaurant sales increased $5.5 million, due to an increase of $3.3 million related to the addition of seven net new company-owned restaurants since the prior fiscal first quarter. The remainder of the increase was due to company-owned same store sales growth of 6.2%, which was driven primarily by an increase in transactions. 18 Cost of sales The table below presents the major components of cost of sales (dollars in thousands): Thirteen Weeks Ended March 30, 2024 April 1, 2023 In dollars As a % of company-owned restaurant sales In dollars As a % of company-owned restaurant sales Food, beverage and packaging costs $ 9,903 34.7 % $ 7,486 32.4 % Labor costs 6,675 23.4 % 5,517 23.9 % Other restaurant operating expenses 5,410 19.0 % 4,226 18.3 % Vendor rebates (717) (2.5) % (534) (2.3) % Total cost of sales $ 21,271 74.5 % $ 16,695 72.4 % Food, beverage and packaging costs as a percentage of company-owned restaurant sales were 34.7% in the thirteen weeks ended March 30, 2024, compared to 32.4% in the comparable period in 2023. This increase was primarily due to a 34.8% increase in the cost of bone-in chicken wings as compared to the prior year period. Our purchases in the prior fiscal first quarter were tied primarily to the spot market, which benefited from significant deflation in the cost of bone-in chicken wings. Labor costs as a percentage of company-owned restaurant sales were 23.4% for the thirteen weeks ended March 30, 2024, compared to 23.9% in the comparable period in 2023. The decrease as a percentage of company-owned restaurant sales was primarily due to sales leverage as a result of company-owned domestic same store sales growth of 6.2%. Other restaurant operating expenses as a percentage of company-owned restaurant sales were 19.0% for the thirteen weeks ended March 30, 2024 compared to 18.3% for the thirteen weeks ended April 1, 2023. The increase as a percentage of company-owned restaurant sales was primarily due to increases in restaurant level operating expenses. Advertising expenses During the thirteen weeks ended March 30, 2024, advertising expenses were $53.2 million, an increase of $13.5 million compared to $39.6 million in the comparable period in 2023. Advertising expenses are recognized at the same time the related revenue is recognized, which does not necessarily correlate to the actual timing of the related advertising spend. Selling, general and administrative (“SG&A”) During the thirteen weeks ended March 30, 2024, SG&A expense was $25.2 million, an increase of $1.5 million compared to $23.6 million in the comparable period in 2023. The increase in SG&A expense was driven by an increase in headcount related expenses of $2.1 million to support the growth in our business, professional fees of $1.4 million associated with the Company’s strategic initiatives, and an increase in performance-based stock compensation expense of $0.5 million primarily related to the Company’s prior year performance. These increases were partially offset by $2.8 million in non-recurring consulting fees incurred in the prior fiscal first quarter. Depreciation and amortization During the thirteen weeks ended March 30, 2024, depreciation expense was $3.4 million, an increase of $0.4 million compared to $3.0 million in the comparable period in 2023. The increase in depreciation and amortization was primarily due to capital expenditures related to our technology investments. Interest expense, net During the thirteen weeks ended March 30, 2024, interest expense, net was $4.5 million, which was comparable to the prior year period. Income tax expense During the thirteen weeks ended March 30, 2024, we recognized income tax expense of $9.8 million yielding an effective tax rate of 25.3%, comparable to an effective tax rate of 25.1% in the prior year period. 19 Liquidity and Capital Resources General. Our primary sources of liquidity and capital resources are cash provided from operating activities, cash and cash equivalents on hand, and borrowings available under our securitized financing facility. Our primary requirements for liquidity and capital are working capital, general corporate needs, capital expenditures, income tax payments, debt service requirements, dividend payments, and repurchasing shares of our common stock (if any). Historically, we have operated with minimal positive working capital or with negative working capital. We generally utilize available cash flows from operations to invest in our business, service our debt obligations, pay dividends, and repurchase shares of our common stock (if any). Our primary sources of short-term and long-term liquidity are expected to be cash flows from operations and available borrowings under our 2022 Variable Funding Notes (as defined below). As of March 30, 2024, the Company had $108.3 million of cash and cash equivalents on its balance sheet. Based upon current levels of operations and anticipated growth, we expect that cash flows from operations, combined with our securitized financing facility including our 2022 Variable Funding Notes, will be sufficient to meet our capital expenditure, working capital and debt service requirements for at least the next twelve months and the foreseeable future. The following table shows summary cash flows information for the thirteen weeks ended March 30, 2024 and April 1, 2023 (in thousands): Thirteen Weeks Ended March 30, 2024 April 1, 2023 Net cash provided by (used in): Operating activities $ 44,659 $ 35,698 Investing activities (11,658) (4,319) Financing activities (9,615) (10,087) Net change in cash and cash equivalents $ 23,386 $ 21,292 Operating activities . Our cash flows from operating activities are principally driven by sales at both franchise restaurants and company-owned restaurants, as well as franchise and development fees. We collect franchise royalties from our franchise owners on a weekly basis. Restaurant-level operating costs at our company-owned restaurants, unearned franchise and development fees, and corporate overhead costs also impact our cash flow from operating activities. Net cash provided by operating activities was $44.7 million in the thirteen weeks ended March 30, 2024, an increase of $9.0 million from cash provided by operating activities of $35.7 million in the thirteen weeks ended April 1, 2023. The increase is primarily due to an increase in operating income, partially offset by the timing of changes in working capital and changes in Ad Fund cash and cash equivalents, which are directly related to the timing of payments for expenses incurred for national advertising. Investing activities . Our net cash used in investing activities was $11.7 million in the thirteen weeks ended March 30, 2024, an increase of $7.3 million from cash used in investing activities of $4.3 million in the thirteen weeks ended April 1, 2023. The increase in cash used in investing activities was primarily due to an increase in capital expenditures related to our technology investments as compared to the prior fiscal year period. Financing activities . Our net cash used in financing activities was $9.6 million in the thirteen weeks ended March 30, 2024, a decrease of $0.5 million from cash used in financing activities of $10.1 million in the thirteen weeks ended April 1, 2023. The decrease in cash used in financing activities was primarily due to a principal payment made in the prior fiscal year period, partially offset by an increase in taxes paid on stock vesting during the period. 20 Securitized financing facility . On March 9, 2022, the Company completed a securitized financing transaction, pursuant to which Wingstop Funding LLC (the “Issuer”), a limited purpose, bankruptcy-remote, indirect wholly-owned subsidiary of the Company, issued $250 million of its Series 2022-1 3.734% Fixed Rate Senior Secured Notes, Class A-2 (the "2022 Class A-2 Notes"). The Issuer also entered into a revolving financing facility of Series 2022-1 Variable Funding Senior Notes, Class A-1 (the “2022 Variable Funding Notes,” and together with the 2022 Class A-2 Notes, the “2022 Notes”), which permits borrowings of up to a maximum principal amount of $200 million, subject to certain borrowing conditions, a portion of which may be used to issue letters of credit. The proceeds from the securitized financing transaction were used to pay related transaction fees and expenses, strengthen the Company's liquidity position and for general corporate purposes, which included a return of capital to the Company’s stockholders. In addition to the 2022 Notes, the Company’s outstanding debt consists of its existing Series 2020-1 2.84% Fixed Rate Senior Secured Notes, Class A-2 (the “2020 Class A-2 Notes”). No borrowings were outstanding under the 2022 Variable Funding Notes as of March 30, 2024. During the fiscal first quarter of 2024, the Company continued to have a leverage ratio under the 2020 Class A-2 Notes and the 2022 Class A-2 Notes of less than 5.0x. Per the terms of the Company’s debt agreements, principal payments are not due until the repayment date as long as the Company maintains a leverage ratio of less than 5.0x. Accordingly, the entire outstanding balance of the 2020 Class A-2 Notes and the 2022 Class A-2 Notes has been classified as long-term debt due after fiscal year 2026. Dividends. We paid a quarterly cash dividend of $0.22 per share of common stock, aggregating $6.5 million in the fiscal first quarter of 2024. On April 30, 2024, the Company’s Board of Directors approved a dividend of $0.22 per share, to be paid on June 7, 2024 to stockholders of record as of May 17, 2024, totaling $6.5 million. We do not currently expect the restrictions in our debt instruments to impact our ability to make regular quarterly dividends pursuant to our quarterly dividend program. However, any future declarations of dividends, as well as the amount and timing of such dividends, are subject to capital availability and the discretion of our Board of Directors, which must evaluate, among other things, whether cash dividends are in the best interest of the Company and our stockholders. Share Repurchase Program. On August 17, 2023, the Company announced a share repurchase program with authorization to purchase up to $250.0 million of its outstanding shares of common stock (the “Share Repurchase Program”). As of March 30, 2024, $125.0 million remained available for repurchase under the Share Repurchase Program. Critical Accounting Policies and Estimates Our consolidated financial statements and accompanying notes are prepared in accordance with GAAP. Preparing consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by the application of our accounting policies. Critical accounting estimates are those that require application of management’s most difficult, subjective, or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. While we apply our judgment based on assumptions believed to be reasonable under the circumstances, actual results could vary from these assumptions. It is possible that materially different amounts would be reported using different assumptions. Our critical accounting policies and estimates are identified and described in our annual consolidated financial statements and the related notes included in our Annual Report, and there have been no material changes since the filing of our Annual Report. Recent Accounting Pronouncements Refer to Note 1, Basis of Presentation , of the notes to the consolidated financial statements. 21 Special Note Regarding Forward-Looking Statements This report includes statements of our expectations, intentions, plans and beliefs that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and are intended to come within the safe harbor protection provided by those sections. These statements, which involve risks and uncertainties, relate to the discussion of our business strategies and our expectations concerning future operations, margins, profitability, trends, liquidity and capital resources and to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable. These forward-looking statements can generally be identified by the use of forward-looking terminology, including the terms “may,” “will,” “should,” “expect,” “intend,” “plan,” “outlook,” “anticipate,” “believe,” “think,” “estimate,” “seek,” “predict,” “can,” “could,” “project,” “potential” or, in each case, their negative or other variations or comparable terminology, although not all forward-looking statements are accompanied by such terms. These forward-looking statements are made based on expectations and beliefs concerning future events affecting us and are subject to uncertainties, risks, and factors relating to our operations and business environments, all of which are difficult to predict and many of which are beyond our control, that could cause our actual results to differ materially from those matters expressed or implied by these forward-looking statements. Such risks and other factors include those listed below and elsewhere in this report and our Annual Report, that could cause actual results or outcomes to differ from the results expressed or implied by forward-looking statements: • our ability to effectively implement our growth strategy; • our relationships with, and the performance of, our franchisees, as well as actions by franchisees that could harm our business; • our ability to identify, recruit and contract with a sufficient number of qualified franchisees; • risks associated with food safety, food-borne illness and other health concerns; • our ability to successfully expand into new markets; • our ability to effectively compete within our industry; • risks associated with changes in food and supply costs; • risks associated with interruptions in our supply chain, including availability of food products; • risks associated with data privacy, cybersecurity and the use and implementation of information technology including heightened risks that may arise upon increased adoption of artificial intelligence technologies; • risks associated with our increasing dependence on digital commerce platforms and third-party delivery service providers; • uncertainty in the law with respect to the assignment or allocation of liabilities in the franchise business model; • risks associated with litigation against us or our franchisees; • risks associated with the availability and cost of labor; • our ability to successfully advertise and market our business; • risks associated with changes in customer preferences, perceptions and eating habits; • risks associated with our future performance and operating results falling below the expectations of securities analysts and investors; • risks associated with the geographic concentration of our business; • the impact on our business from unexpected events such as international conflict or war and related sanctions, acts of terrorism, civil unrest, epidemics and pandemics and severe weather; • our ability to comply with laws and government regulations, including those relating to food products, employment and franchising, or increased costs associated with new or changing regulations; • our ability to maintain adequate insurance coverage for our business; • risks associated with damage to our reputation or lack of acceptance of our brand in existing or new markets; • risks associated with our expansion into international markets and foreign government restrictions on operations; • our ability to attract and retain our executive officers and other key employees; 22 • our ability to protect our intellectual property, including trademarks and trade secrets; • the impact on our business from environmental, social and corporate governance matters; and • our ability to comply with the terms of our securitized debt financing and generate sufficient cash flows to satisfy our significant debt service obligations thereunder. The above list of factors is not exhaustive. Some of these and other factors are discussed in more detail under “Risk Factors” in our Annual Report. When considering forward-looking statements in this report or that we make in other reports or statements, you should keep in mind the cautionary statements in this report and future reports we file with the SEC. Any forward-looking statements made in this report speak only as of the date of the report, unless specified otherwise. New risks and uncertainties arise from time to time, and we cannot predict when they may arise or how they may affect us. Except as required by law, we assume no obligation to update or revise any forward-looking statements for any reason, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future. 23