First Watch Restaurant Group, Inc.: Form 10-Q for the period ended Jun 30, 2024

Cautionary Statement

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited interim consolidated financial statements and notes thereto included in Part I, Item 1 of this Form 10-Q and our audited consolidated financial statements and notes included in our 2023 Form 10-K. As discussed in “Cautionary Note Regarding Forward-Looking Statements,” the following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may materially differ from those discussed in such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified in our 2023 Form 10-K, including under “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in “Part II, Item 1A. Risk Factors” of our Form 10-Q for the quarter ended March 31, 2024.

Overview

First Watch is an award-winning Daytime Dining concept serving made-to-order breakfast, brunch and lunch using fresh ingredients. A recipient of hundreds of local “Best Breakfast” and “Best Brunch” accolades, First Watch’s award-winning chef-driven menu includes elevated executions of classic favorites for breakfast, brunch and lunch. In 2023, First Watch was named a Top 100 Most Loved Workplace® in Newsweek by the Best Practice Institute for the second consecutive year. On October 1, 2021, the Company’s common stock began trading on Nasdaq under the ticker symbol “FWRG.”

The Company operates and franchises restaurants in 29 states under the “First Watch” trade name and as of June 30, 2024, the Company had 459 company-owned restaurants and 79 franchise-owned restaurants.

Recent Developments

Financial highlights for the thirteen weeks ended June 30, 2024 (“second quarter of 2024”) as compared, unless otherwise indicated below, to the thirteen weeks ended June 25, 2023 (“second quarter of 2023”), reflected the continued momentum of our strong operating performance and include the following:

• Total revenues increased 19.5% to $258.6 million in the second quarter of 2024 from $216.3 million in the second quarter of 2023
• System-wide sales increased 10.1% to $299.0 million in the second quarter of 2024 from $271.5 million in the second quarter of 2023
• Same-restaurant sales growth of negative 0.3%*
• Same-restaurant traffic growth of negative of 4.0%*
• Income from operations margin increased to 6.4% during the second quarter of 2024 from 5.3% in the second quarter of 2023
• Restaurant level operating profit margin** increased to 21.9% in the second quarter of 2024 from 20.9% in the second quarter of 2023
• Net income increased to $8.9 million, or $0.14 per diluted share, in the second quarter of 2024 from $8.0 million, or $0.13 per diluted share in the second quarter of 2023
• Adjusted EBITDA** increased to $35.3 million in the second quarter of 2024 from $25.8 million in the second quarter of 2023
• Opened 7 system-wide restaurants in 6 states and acquired 21 franchise-owned restaurants resulting in a total of 538 system-wide restaurants (459 company-owned and 79 franchise-owned) across 29 states

*Comparing the thirteen-week periods ended June 30, 2024 and July 2, 2023 in order to compare like-for-like periods. See “Key Performance Indicators” for additional information.

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

Business Trends

Our same restaurant sales growth was negative 0.3% for the quarter due principally to continuing pressure on traffic. Our same restaurant traffic growth was negative 4.0% in the second quarter which was up from negative 4.5% reported in the first quarter.

Commodity inflation of 4.2% in the second quarter was due principally to increases in our cost of avocados and bacon and partially offset by a decline in the cost of coffee, shell eggs and bread. Management estimates 2024 commodity inflation will range between 2.0% to 4.0%.

During the second quarter, restaurant-level wage inflation was approximately 5.0%. For the full year, management expects restaurant-level wage inflation in the range of 5.0% to 7.0%.

Key Performance Indicators

Throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we commonly discuss the following key operating metrics which we believe will drive our financial results and long-term growth model. We believe these metrics are useful to investors because management uses these metrics to evaluate performance and assess the growth of our business as well as the effectiveness of our marketing and operational strategies.

***New Restaurant Openings (“***NROs”): the number of new company-owned First Watch restaurants commencing operations during the period. Management reviews the number of new restaurants to assess new restaurant growth and company-owned restaurant sales.

***Franchise-owned New Restaurant Openings (“***Franchise-owned NROs”): the number of new franchise-owned First Watch restaurants commencing operations during the period.

Same-Restaurant Sales Growth: the percentage change in year-over-year restaurant sales (excluding gift card breakage) for the comparable restaurant base, which we define as the number of company-owned First Watch branded restaurants open for 18 months or longer as of the beginning of the fiscal year (“Comparable Restaurant Base”). For the second quarter of 2024, this operating metric compares the thirteen and twenty-six-week periods ended June 30, 2024 with the thirteen and twenty-six-week periods ended July 2, 2023, versus the thirteen and twenty-six-week periods ended June 25, 2023, in order to compare like-for-like periods. For the thirteen and twenty-six weeks ended June 30, 2024 and July 2, 2023, there were 344 restaurants and 327 restaurants, respectively, in our Comparable Restaurant Base. Measuring our same-restaurant sales growth allows management to evaluate the performance of our existing restaurant base. We believe this measure is useful for investors to provide a consistent comparison of restaurant sales results and trends across periods within our core, established restaurant base, unaffected by results of store openings, closings, and other transitional changes.

Same-Restaurant Traffic Growth: the percentage change in traffic counts for the thirteen and twenty-six week periods ended June 30, 2024 as compared to the thirteen and twenty-six-week periods ended July 2, 2023 using the Comparable Restaurant Base, in order to compare like-for-like periods. Measuring our same-restaurant traffic growth allows management to evaluate the performance of our existing restaurant base. We believe this measure is useful for investors because an increase in same-restaurant traffic provides an indicator as to the development of our brand and the effectiveness of our marketing strategy.

System-wide restaurants: the total number of restaurants, including all company-owned and franchise-owned restaurants.

System-wide sales: consists of restaurant sales from our company-owned restaurants and franchise-owned restaurants. We do not recognize the restaurant sales from our franchise-owned restaurants as revenue.

Non-GAAP Financial Measures

To supplement the consolidated financial statements, which are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), we use the following non-GAAP measures, which present operating results on an adjusted basis: (i) Adjusted EBITDA, (ii) Adjusted EBITDA margin, (iii) Restaurant level operating profit and (iv) Restaurant level operating profit margin. Our presentation of these non-GAAP measures includes isolating the effects of some items that are either nonrecurring in nature or vary from period to period without any correlation to our ongoing core operating performance. These supplemental measures of performance are not required by or presented in accordance with GAAP. Management believes these non-GAAP measures provide investors with additional visibility into our operations, facilitate analysis and comparisons of our ongoing business operations because they exclude items that may not be indicative of our ongoing operating performance, help to identify operational trends and allow for greater transparency with respect to key metrics used by management in our financial and operational decision making. Our non-GAAP measures may not be comparable to similarly titled measures used by other companies and have important limitations as analytical tools. These non-GAAP measures should not be considered in isolation or as substitutes for analysis of our results as reported under GAAP as they may not provide a complete understanding of our performance. These non-GAAP measures should be reviewed in conjunction with our consolidated financial statements prepared in accordance with GAAP.

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

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

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

Adjusted EBITDA Margin: represents Adjusted EBITDA as a percentage of total revenues. See Non-GAAP Financial Measure Reconciliations below for a reconciliation to Net income margin, the most directly comparable GAAP measure.

Restaurant Level Operating Profit: represents restaurant sales, less restaurant operating expenses, which include food and beverage costs, labor and other related expenses, other restaurant operating expenses, pre-opening expenses and occupancy expenses. Restaurant level operating profit excludes corporate-level expenses and other items that we do not consider in the evaluation of the ongoing core operating performance of our restaurants as identified in the reconciliation of Income from operations, the most directly comparable GAAP measure, to Restaurant level operating profit, included in the section Non-GAAP Financial Measure Reconciliations below.

Restaurant Level Operating Profit Margin: represents Restaurant level operating profit as a percentage of restaurant sales. See Non-GAAP Financial Measure Reconciliations below for a reconciliation to Income from operations margin, the most directly comparable GAAP measure.

Selected Operating Data

(1) Comparing the thirteen and twenty-six-week periods ended June 30, 2024 with the thirteen and twenty-six-week periods ended July 2, 2023 in order to compare like-for-like periods. See “Key Performance Indicators” for additional information.

(2) Reconciliations from Income from operations and Income from operations margin, the most comparable GAAP measures, to Restaurant level operating profit and Restaurant level operating profit margin, are set forth in the schedules within the Non-GAAP Financial Measures Reconciliations section below.

(3) Reconciliations from Net income and Net income margin, the most comparable GAAP measures, to Adjusted EBITDA and Adjusted EBITDA margin, are set forth in the schedules within the Non-GAAP Financial Measures Reconciliations section below.

Results of Operations

The following table summarizes our results of operations and the percentages of certain items in relation to Total revenues or, where indicated, Restaurant sales for the thirteen and twenty-six weeks ended June 30, 2024 and June 25, 2023:

(in thousands)

(1) As a percentage of restaurant sales.

Restaurant Sales

Restaurant sales represent the aggregate sales of food and beverages, net of discounts, at company-owned restaurants. Restaurant sales in any period are directly influenced by the number of operating weeks in the period, the number of open restaurants, customer traffic and average check. Average check growth is driven by our menu price increases and changes to our menu mix.

(in thousands)

The increase in total restaurant sales as compared to the same periods in the prior year was due principally to restaurant sales of (i) $20.9 million and $36.8 million for the thirteen and twenty-six weeks ended June 30, 2024, respectively, from 40 NROs opened between June 25, 2023 and June 30, 2024, (ii) $19.3 million and $28.4 million for the thirteen and twenty-six weeks ended June 30, 2024, respectively, from 39 restaurants acquired from franchisees between June 25, 2023 and June 30, 2024 and (iii) menu price increases.

Franchise Revenues

Franchise revenues are comprised of sales-based royalty fees, system fund contributions and the amortization of upfront initial franchise fees, which are recognized as revenue on a straight-line basis over the term of the franchise agreement. Franchise revenues in any period are directly influenced by the number of open franchise-owned restaurants.

(in thousands)

The decrease in franchise revenues during the thirteen and twenty-six weeks ended June 30, 2024 as compared to the same periods in the prior year was primarily driven by the acquisition of 39 franchise-owned restaurants, partially offset by franchise revenues from the 8 franchise-owned NROs between June 25, 2023 and June 30, 2024.

Food and Beverage Costs

The components of food and beverage costs at company-owned restaurants are variable by nature, change with sales volume, are impacted by product mix and are subject to increases or decreases in commodity costs.

(in thousands)

Food and beverage costs as a percent of restaurant sales decreased during the thirteen and twenty-six weeks ended June 30, 2024 as compared to the same periods in the prior year primarily due to the leverage of menu price increases partially offset by commodity inflation.

Food and beverage costs increased during the thirteen and twenty-six weeks ended June 30, 2024 as compared to the same periods in the prior year primarily as a result of the 40 NROs and 39 restaurants acquired from franchisees between June 25, 2023 and June 30, 2024.

Labor and Other Related Expenses

Labor and other related expenses are variable by nature and include hourly and management wages, bonuses, payroll taxes, workers’ compensation expense and employee benefits. Factors that influence labor costs include minimum wage and payroll tax legislation, health care costs, the number and performance of our company-owned restaurants and increased competition for qualified staff.

(in thousands)

Labor and other related expenses as a percentage of restaurant sales decreased during the thirteen weeks ended June 30, 2024 as compared to the same period in the prior year primarily as a result of (i) the leverage of menu price increases, and (ii) hourly labor efficiency. These increases were partially offset by wage increases.

The increase in labor and other related expenses during the thirteen and twenty-six weeks ended June 30, 2024 as compared to the same periods in the prior year was primarily due to (i) the increase in the number of restaurants (ii) wage increases and (iii) carrying more managers to staff new restaurants.

Other Restaurant Operating Expenses

Other restaurant operating expenses consist of marketing and advertising expenses, utilities, insurance and other operating variable expenses incidental to operating company-owned restaurants, such as operating supplies (including paper products, menus and to-go supplies), credit card fees, repairs and maintenance, and third-party delivery services fees.

(in thousands)

For the thirteen and twenty-six weeks ended June 30, 2024, other restaurant operating expenses as a percentage of restaurant sales was lower than the same periods in the prior year primarily due to (i) decrease in smallwares expense, (ii) deflation in to-go supplies costs, and (iii) decrease in general liability insurance premiums, partially offset by increases in credit card fees attributable to our pay-at-table program rolled out in the first quarter of 2024.

The increase in other restaurant operating expenses during the thirteen and twenty-six weeks ended June 30, 2024 as compared to the same periods in the prior year was mainly due to the increase in the number of restaurants.

Occupancy Expenses

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

(in thousands)

As a percentage of restaurant sales, the increase in occupancy expenses for the thirteen and twenty-six weeks ended June 30, 2024 as compared to the same periods in the prior year was primarily due to higher rent expense and the deleverage associated with negative same restaurant sales growth.

The increase in occupancy expenses during the thirteen weeks and twenty-six weeks ended June 30, 2024 as compared to the same periods in the prior year was primarily due to the increase in the number of company-owned restaurants.

Pre-opening Expenses

Pre-opening expenses are costs incurred to open new company-owned restaurants. Pre-opening expenses include pre-opening rent expense, which is recognized during the period between the date of possession of the restaurant facility and the restaurant opening date. In addition, pre-opening expenses include manager salaries, recruiting expenses, employee payroll and training costs, which are recognized in the period in which the expense was incurred. Pre-opening expenses can fluctuate from period to period, based on the number and timing of new company-owned restaurant openings.

(in thousands)

The increase in pre-opening expenses during the thirteen and twenty-six weeks ended June 30, 2024 as compared to the same periods in the prior year was primarily from increases in (i) rent, (ii) travel expenses and (iii) the number of restaurants opened and under construction.

General and Administrative Expenses

General and administrative expenses primarily consist of costs associated with our corporate and administrative functions that support restaurant development and operations including marketing and advertising costs incurred as well as legal fees, professional fees, stock-based compensation and expenses associated with being a public company, including costs associated with our compliance with the Sarbanes-Oxley Act. General and administrative expenses are impacted by changes in our employee headcount and costs related to strategic and growth initiatives.

(in thousands)

The increase in general and administrative expenses during the thirteen weeks ended June 30, 2024 as compared to the same period in the prior year was mainly due to (i) $1.2 million in compensation expense from wage increases and additional employee headcount to support growth and (ii) $0.7 million increase in consulting and professional services, information technology, licenses, travel and other miscellaneous expenses.

The increase in general and administrative expenses during the twenty-six weeks ended June 30, 2024 as compared to the same period in the prior year was mainly due to (i) $4.3 million in compensation expense from wage increases and additional employee headcount to support growth and (ii) $2.6 million increase in consulting and professional services, information technology, licenses, travel and other miscellaneous expenses.

Depreciation and Amortization

Depreciation and amortization consists of the depreciation of fixed assets, including leasehold improvements, fixtures and equipment and the amortization of definite-lived intangible assets, which are primarily comprised of franchise rights. Franchise rights includes rights which arose from the purchase price allocation in connection with the merger agreement through which the Company was acquired by funds affiliated with or managed by Advent International, L.P. (“Advent”) in August 2017, as well as reacquired rights from our acquisitions of franchise-owned restaurants.

(in thousands)

The increase in depreciation and amortization during the thirteen and twenty-six weeks ended June 30, 2024 as compared to the same periods in the prior year was due to (i) additional NRO assets and restaurants acquired from franchisees and (ii) reacquired rights.

Transaction Expenses, Net

Transaction expenses, net include (i) revaluations of contingent consideration payable to previous stockholders for tax savings generated through the use of federal and state loss carryforwards and general business credits that had been accumulated from operations prior to our acquisition by Advent in August 2017, (ii) gains or losses associated with lease or contract terminations, (iii) costs incurred in connection with the acquisition of franchise-owned restaurants, (iv) costs related to restaurant closures and (v) costs related to certain equity offerings.

(in thousands)

The decrease in Transaction expenses, net during the thirteen-week period ended June 30, 2024 as compared to the same period in the prior year was primarily due to (i) $0.7 million decrease in costs incurred by us in connection with the secondary public offerings of the Company’s common stock by entities affiliated with Advent and (ii) $0.3 million decrease in costs incurred in connection with the acquisition of certain franchise-owned restaurants.

The decrease in Transaction expenses, net during the twenty-six weeks ended June 30, 2024 as compared to the same period in the prior year was primarily due to a contingent consideration liability reduction recognized as a reduction in transaction expenses in the first quarter of 2024.

Income from Operations

(in thousands)

Income from operations margin increased during the thirteen weeks ended June 30, 2024 as compared to the same period in the prior year primarily due to (i) leveraging increase in sales from menu price increases and (ii) improved labor efficiency. This was partially offset by increases in occupancy expense and depreciation and amortization increasing as a percent of sales.

Income from operations margin decreased during the twenty-six weeks ended June 30, 2024 as compared to the same period in the prior year primarily due to (i) the increase in occupancy expenses and (ii) higher depreciation and amortization expense driven by our restaurant growth and acquisition of certain franchise-owned restaurants, partially offset by the increase in restaurant sales.

Interest Expense

Interest expense primarily consists of interest and fees on our outstanding debt and the amortization expense for debt discount and deferred issuance costs.

(in thousands)

The increase in interest expense during the thirteen and twenty-six weeks ended June 30, 2024 as compared to the same periods in the prior year was due to (i) increased borrowings associated with franchise acquisitions and (ii) higher interest rates.

Other Income, Net

Other income, net includes items deemed to be non-operating based on management’s assessment of the nature of the item in relation to our core operations.

(in thousands)

The twenty-six week period ended June 30, 2024 includes $0.4 million of debt refinancing charges. Differences in Other income for the comparative periods presented are related to expected fluctuations in insurance recoveries and interest income.

Income Tax Expense

Income tax expense primarily consists of various federal and state taxes.

(in thousands)

The change in the effective income tax rates for the thirteen and twenty-six weeks ended June 30, 2024 as compared to the same periods in the prior year was primarily due to (i) the change in the valuation allowance on deferred tax assets, (ii) the benefit of tax credits for FICA taxes on certain employees’ tips and (iii) the impacts of executive stock-based compensation.

Net Income

(in thousands)

The increase in net income during the thirteen weeks ended June 30, 2024 as compared to the same period in the prior year was primarily due to the increase in income from operations. This was partially offset by (i) the increase in interest expense and (ii) the increase in income tax expense. Net income margin during the thirteen weeks ended June 30, 2024 decreased compared to the same period in the prior year primarily due to the increase in interest expense and income tax expense, partially offset by the increase in income from operations.

Net income and net income margin during the twenty-six weeks ended June 30, 2024 decreased as compared to the same period in the prior year primarily due to the (i) increase in interest expense, (ii) the increase in income tax expense and (iii) the decrease in income from operations margin.

Restaurant Level Operating Profit and Restaurant level Operating Profit Margin

(in thousands)

Restaurant level operating profit margin during the thirteen weeks ended June 30, 2024 increased as compared to the same period in the prior year primarily due to (i) additional restaurant sales contributed by NROs and restaurants acquired between June 25, 2023 and June 30, 2024, (ii) favorable food and beverage costs as a percent of sales and (iii) labor efficiencies. This was partially offset by the increase in (i) wages and (ii) the deleverage of occupancy expenses.

Restaurant level operating profit for the twenty-six weeks ended June 30, 2024 increased as compared to the same period in the prior year primarily due to (i) sales growth driven by the increase in menu prices, as well as (ii) restaurant sales contributed by 40 NROs and 39 restaurants acquired from franchisees between June 25, 2023 and June 30, 2024. This was partially offset by an increase in (i) wages and (ii) deleverage of occupancy expenses.

Adjusted EBITDA and Adjusted EBITDA Margin

(in thousands)

Adjusted EBITDA increased during the thirteen and twenty-six week periods ended June 30, 2024 as compared to the same periods in the prior year primarily due to the increase in restaurant level operating profit. This was partially offset by general and administrative expenses mainly due to wage increases and additional employee headcount to support growth..

Adjusted EBITDA margin increased during the thirteen and twenty-six week periods ended June 30, 2024 compared to the same periods in the prior year primarily due to an increase in (i) restaurant level operating profit margin and (ii) general and administrative expenses growing at a slower rate than total revenue.

Non-GAAP Financial Measures Reconciliations

Adjusted EBITDA and Adjusted EBITDA margin - The following table reconciles Net income and Net income margin, the most directly comparable GAAP measures to Adjusted EBITDA and Adjusted EBITDA margin for the periods indicated:

(in thousands)

(1) Represents costs related to process improvements and strategic initiatives. These costs are recorded within General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income.

(2) Represents non-cash, stock-based compensation expense which is recorded within General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income.

(3) Represents professional service costs incurred in connection with the Delaware Voluntary Disclosure Agreement Program related to unclaimed or abandoned property. These costs are recorded in General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income.

(4) Represents costs incurred in connection with the acquisition of franchise-owned restaurants, expenses related to debt, secondary offering costs and, in 2024, an offsetting gain on release of contingent consideration liability.

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

(6) Represents costs related to the disposal of assets due to retirements, replacements or certain restaurant closures. There were no impairments recognized during the periods presented.

(7) Represents costs incurred for hiring qualified individuals. These costs are recorded within General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income.

(8) Severance costs are recorded in General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income.

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

Restaurant level operating profit and Restaurant level operating profit margin - The following table reconciles Income from operations and Income from operations margin, the most comparable GAAP measures to Restaurant level operating profit and Restaurant level operating profit margin for the periods indicated:

(in thousands)

(1) Represents costs incurred in connection with the acquisition of franchise-owned restaurants, expenses related to debt, secondary offering costs and, in 2024, an offsetting gain on release of contingent consideration liability.

(2) Represents costs related to the disposal of assets due to retirements, replacements or certain restaurant closures. There were no impairments recognized during the periods presented.

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

Liquidity and Capital Resources

As of June 30, 2024, we had cash and cash equivalents of $45.1 million and outstanding borrowings under the Credit Facility of $196.3 million, excluding unamortized debt discount and deferred issuance costs. We had availability of $123.3 million under our revolving credit facility of $125.0 million, of which $1.7 million is reserved under letters of credit, and availability of $27.5 million under our delayed draw term loan pursuant to our credit agreement, as amended (“Credit Agreement”). Our principal uses of cash include capital expenditures for the development, acquisition or remodeling of restaurants, lease obligations, debt service payments and strategic infrastructure investments. Our working capital requirements are low due to our restaurants storing minimal inventory and customers pay for their purchases at the time of the sale, which frequently precedes our payment terms with suppliers.

We believe that our cash flow from operations, availability under our Credit Facility and available cash and cash equivalents will be sufficient to meet our liquidity needs for at least the next 12 months. We anticipate that to the extent that we require additional liquidity, or should we decide to pursue one or more significant acquisitions, it will be funded first through additional indebtedness and thereafter through the issuance of equity. Although we believe that our current level of total available liquidity is sufficient to meet our short-term and long-term liquidity requirements, we regularly evaluate opportunities to improve our liquidity position in order to enhance financial flexibility.

We estimate that our capital expenditures will total approximately $125.0 million to $135.0 million in 2024, not including the capital allocated to franchise acquisitions, which will be invested primarily in new restaurant projects and planned remodels. We plan to fund the capital expenditures primarily with cash generated from our operating activities as well as with borrowings pursuant to our Credit Agreement.

Summary of Cash Flows

The following table presents a summary of our cash provided by (used in) operating, investing and financing activities for the twenty-six weeks ended June 30, 2024 and June 25, 2023:

(in thousands)

Cash provided by operations is our typical source of liquidity used (i) to fund capital expenditures for new restaurants, (ii) to maintain and remodel existing restaurants and (iii) for debt service. Cash provided by operations increased during the twenty-six week period ended June 30, 2024 as compared to the twenty-six week period ended June 25, 2023 is primarily due to the increase in the number of restaurants.

Cash used in investing activities increased during the twenty-six weeks ended June 30, 2024 from the twenty-six weeks ended June 25, 2023 due principally to (i) increases in the number of new restaurants and capital projects into which the Company is investing and (ii) the acquisitions of 22 franchise-operated restaurants versus 6 in the same period last year.

Cash from financing activities reflects borrowings from the Company’s Credit Facility to fund strategic acquisitions of franchise-operated restaurants.

Critical Accounting Estimates

Our discussion and analysis of our financial condition and results of operations is based upon the accompanying unaudited interim consolidated financial statements and notes thereto, which have been prepared in accordance with GAAP. The preparation of these unaudited interim consolidated financial statements and related notes requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, terms of existing contracts, our evaluation of trends in the industry and information available from other outside sources, as appropriate. We evaluate our estimates and judgments on an on-going basis. Our actual results may differ from these estimates. Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions. There have been no significant changes to our critical accounting policies as disclosed in “Critical Accounting Estimates” in the 2023 Form 10-K.

Recently Issued Accounting Pronouncements

For a discussion of recently issued accounting pronouncements, see Note 2, Summary of Significant Accounting Policies, in the accompanying notes to the unaudited interim consolidated financial statements.

We are exposed to interest rate risk through fluctuations in interest rates on our debt obligations. On June 23, 2023, we entered into a variable-to-fixed interest rate swap agreement with two financial institutions to hedge $90.0 million of the outstanding variable rate debt. Under the terms of the interest rate swap agreement, the Company will pay a weighted average fixed rate of 4.16% on the notional amount and will receive payments from the counterparties based on the three-month secured overnight financing rate. On May 17, 2024, we entered into a variable-to-fixed interest rate swap agreement with two financial institutions to hedge an additional $60.0 million of the $196.3 million variable rate debt outstanding. Under the terms of the interest rate swap agreement, the Company will pay a weighted average fixed rate of 4.42% on the notional amount and will receive payments from the counterparties based on the three-month secured overnight financing rate. Refer to Note 8, Interest Rate Swaps, in the accompanying notes to the unaudited interim consolidated financial statements.

Except as described above, there have been no material changes to our exposure to market risks as disclosed in the 2023 Form 10-K.

Evaluation of Disclosure Controls and Procedures

We are responsible for establishing and maintaining disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act, such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Disclosure controls and procedures also include, without limitation, controls and procedures that are designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Due to the material weaknesses in our internal control over financial reporting discussed below, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2024, our disclosure controls and procedures were not effective. In light of this fact, our management has performed additional analyses, reconciliations, and other post-closing procedures and has concluded that, notwithstanding the material weaknesses in our internal control over financial reporting, the consolidated financial statements for the periods covered by and included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP.

Previously Identified Material Weaknesses

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of annual or interim financial statements would not be prevented or detected on a timely basis.

Refer to the management report on internal control over financial reporting in Part II - Item 9A of the 2023 Form 10-K filed with SEC on March 5, 2024 for a discussion of the material weaknesses that continue to exist as of June 30, 2024.

Remediation Efforts

We continue to implement measures designed to improve the Company’s internal control over financial reporting to address and remediate the previously identified material weaknesses. To date, such measures include the following:

• Hired new and reassigned existing financial reporting, accounting, and information technology leadership with public company experience to enhance public company financial reporting, technical accounting, and information technology services and solutions.
• Augmented financial reporting capabilities by staffing professionals with knowledge and experience in income tax, internal audit, information technology, and legal.
• Established various policies, including a formal delegation of authority policy defining the protocols for reviewing and authorizing commitments, contracts, invoices, and transactions as well as a comprehensive set of information technology policies to govern the Company’s information technology practices.
• Formalized certain roles and reviewed responsibilities, including ensuring appropriate segregation of duties.
• Designed and implemented period-end financial reporting controls, such as controls over the preparation and review of account reconciliations, financial statement disclosures, and the consolidated financial statements, including controls around classification of cash flows and disclosure of noncash items, as well as establishing a formal management Disclosure Committee to review the draft financial statements and disclosures prior to release, including a sub-certification process from various functional groups.
• Enhanced access restrictions for certain users over general ledger journal entries and designed new processes to further segregate journal entry creation from journal entry approval authority.
• Designed and implemented controls over the accounting for income taxes to ensure the appropriate recording of deferred income taxes, income taxes and related disclosures.

While the material weaknesses previously disclosed have not yet been remediated as of June 30, 2024, management is devoting substantial resources to the ongoing remediation efforts. As we continue to evaluate and work to improve our internal control over financial reporting, we may take additional measures to address control deficiencies, or we may modify certain of the remediation measures described above. The material weaknesses will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are designed and operating effectively.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during the fiscal quarter ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

In addition to the other information discussed in this report, please consider the factors described in Part I, Item 1A., “Risk Factors” in our 2023 Form 10-K, updated as set forth below, which update was first included in Part II, Item 1A., “Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2024 to reflect that, due to Advent’s sales of our common stock on March 12, 2024, we are no longer considered a “controlled company” under Nasdaq listing rules. These are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may adversely affect our business, financial condition or results of operations.

The following risk factor has been updated:

If the ownership of our common stock continues to be highly concentrated, it may prevent you and other minority stockholders from influencing significant corporate decisions and may result in conflicts of interest. Although we are no longer a “controlled company” within the meaning of the rules of the Nasdaq, Advent will continue to exert substantial influence over us.

Advent indirectly beneficially owns approximately 45% of our outstanding common stock. Although we are no longer a “controlled company” within the meaning of the Nasdaq listing rules, Advent indirectly beneficially owns shares sufficient to significantly influence all matters requiring stockholder votes, including: the election of directors; mergers, consolidations and acquisitions; the sale of all or substantially all of our assets and other decisions affecting our capital structure; amendments to our certificate of incorporation or our bylaws; and our winding up and dissolution.

This concentration of ownership may delay, deter or prevent acts that would be favored by our other stockholders. The interests of Advent may not always coincide with our interests or the interests of our other stockholders. This concentration of ownership may also have the effect of delaying, preventing or deterring a change in control of us. Also, Advent may seek to cause us to take courses of action that, in its judgment, could enhance its investment in us, but which might involve risks to our other stockholders or adversely affect us or our other stockholders. As a result, the market price of our common stock could decline or stockholders might not receive a premium over the then-current market price of our common stock upon a change in control. In addition, this concentration of share ownership may adversely affect the trading price of our common stock because investors may perceive disadvantages in owning shares in a company with significant stockholders.