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What changed in NOODLES & Co's 10-K — 2023 vs 2024

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Paragraph-level year-over-year comparison of NOODLES & Co's 2023 and 2024 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2024 report.

+260 added−274 removedSource: 10-K (2024-03-08) vs 10-K (2023-03-09)

Top changes in NOODLES & Co's 2024 10-K

260 paragraphs added · 274 removed · 192 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

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Biggest changeAdditionally, we provide incentive compensation through annual bonus plans for all eligible team members. Furthermore, we offer comprehensive, targeted and innovative benefits to all eligible team members. This includes comprehensive health, dental and vision insurance coverage, a 401(k) program and paid time off. In 2022, we announced the expansion of our already comprehensive team member benefits program called LifeAtNoodles.
Biggest changeThis includes health, dental and vision insurance coverage, a 401(k) program and paid time off. We continue to offer a comprehensive team member benefits program called LifeAtNoodles. The benefits include financial planning resources, GM equity partner program and Noodles Resource Groups. Our GM equity partner program is designed to reward and motivate our top performers.
To lead our restaurant management teams, we have area managers (each of whom is responsible for between five and 10 restaurants), as well as regional directors (each of whom is responsible for between approximately 50 and 60 restaurants). Training and Career Development.
To lead our restaurant management teams, we have area managers (each of whom is responsible for approximately five to 10 restaurants), as well as regional directors (each of whom is responsible for approximately 50 to 60 restaurants). Training and Career Development.
Digital menu boards allow us to showcase key menu features, target guest communication, enhance our pricing capabilities and increase flexibility for culinary testing. Human Capital Management We believe the strength of our workforce is one of the significant contributors to our success as a brand.
Digital me nu boards allow us to showcase key menu features, target guest communication, enhance our pricing capabilities and increase flexibility for culinary testing. Human Capital Management We believe the strength of our workforce is one of the significant contributors to our success as a brand.
We have designed our food safety and quality assurance programs to maintain high standards for our food and food preparation procedures. Our director of quality assurance oversees comprehensive restaurant and supplier audits based upon the potential food safety risk of each food. We also consider food safety and quality assurance when selecting our distributors and suppliers.
We have designed our food safety and quality assurance programs to maintain high standards for our food and food preparation procedures. Our director of quality assurance oversees robust restaurant and supplier audits based upon the potential food safety risk of each food. We also consider food safety and quality assurance when selecting our distributors and suppliers.
You may access our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, amendments to those reports and other reports relating to us that are filed with or furnished to the SEC, free of charge in the investor relations section of our website as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC.
You may access our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, amendments to those reports and 6 Table of Contents other reports relating to us that are filed with or furnished to the SEC, free of charge in the investor relations section of our website as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC.
We train our employees to pay detailed attention to food quality at every stage of the food preparation cycle, and we have developed a daily checklist that our employees use to assess the freshness and quality of food supplies.
We train our employees to pay detailed attention to food quality at every stage of the food preparation cycle, and we have developed a daily checklist that our employees are required to use to assess the freshness and quality of food supplies.
We use this data to generate daily sales information and weekly consolidated reports regarding sales and other key measures. 8 Table of Contents Franchisees use similar point of sale systems and are required to report sales on a daily basis through an online reporting network and submit their restaurant-level financial statements on a quarterly and annual basis.
We use this data to generate daily sales information and weekly consolidated reports regarding sales and other key measures. Franchisees use similar point of sale systems and are required to report sales on a daily basis through an online reporting network and submit their restaurant-level financial statements on a quarterly and annual basis.
The contents of the websites mentioned herein are not incorporated into and should not be considered a part of this report. The references to the URLs for these websites are intended to be inactive textual references only. 9 Table of Contents
The contents of the websites mentioned herein are not incorporated into and should not be considered a part of this report. The references to the URLs for these websites are intended to be inactive textual references only. 7 Table of Contents
Our quarterly results are also affected by other factors such as the amount and timing of non-cash stock-based compensation expense and related tax rate impacts, impairment charges and non-operating costs, timing of marketing or promotional expenses, the number and timing of new restaurants opened in a quarter, and closure of restaurants.
Our quarterly results are also affected by other factors such as the amount and timing of incentive-based compensation expense and related tax rate impacts, impairment charges and non-operating costs, timing of marketing or promotional expenses, the number and timing of new restaurants opened in a quarter, and closure of restaurants.
Once a location has been approved by our executive-level selection committee, we begin a design process to match the characteristics and feel of the location to the trade area. 3 Table of Contents Restaurant Management and Operations Friendly Team Members. We believe our genuine, friendly team members separate us from our competitors.
Once a location has been approved by our executive-level selection committee, we begin a design process to match the characteristics and feel of the location to the trade area. Restaurant Management and Operations Friendly Team Members. We believe our genuine, friendly team members separate us from our competitors.
Our suppliers are inspected by federal, state and local regulators or other reputable, qualified inspection services, which helps ensure their compliance with all federal food safety and quality guidelines. We regularly inspect our suppliers to ensure that the ingredients we buy conform to our quality standards and that the prices we pay are competitive.
Our suppliers are inspected by federal, state and local regulators or other reputable, qualified inspection services, which promotes compliance with all federal food safety and quality guidelines. We regularly inspect our suppliers to confirm that the ingredients we buy conform to our quality standards and that the prices we pay are competitive.
Our customers experience the Noodles brand through our company-owned and franchise operated locations, through our website www.noodles.com and through our mobile app. In 2022, approximately 54% of our sales were deri ved from digital ordering, where guests have the opportunity to select in restaurant quick pick-up or delivery to their home or office.
Our customers experience the Noodles brand through our company-owned and franchise operated locations, and digitally through our mobile app, website www.noodles.com and third-party delivery services. In 2023, approximately 54% of our sales were deri ved from digital ordering, where guests have the opportunity to select in restaurant quick pick-up or delivery to their home or office.
We closed five company-owned restaurants in 2022, most of which were at or approaching the expiration of their leases or in trade areas that are not as well positioned for current consumer trends.
We closed six company-owned restaurants in 2023, most of which were at or approaching the expiration of their leases or in trade areas that are not as well positioned for current consumer trends.
Our failure to fully comply with these laws could subject us to potential litigation and liability. We are also subject to various laws and regulations relating to our current and any future franchise operations.
Our failure to fully comply with these laws could subject us to potential 5 Table of Contents litigation and liability. We are also subject to various laws and regulations relating to our current and any future franchise operations.
Noodles & Company and its subsidiaries are sometimes referred to as “we,” “us,” “our,” and the “Company” in this report. We refer to our Class A Common Stock, par value $0.01 per share, as our “common stock.” Our Concept and Business Strengths Convenience .
Noodles & Company and its subsidiaries are sometimes referred to as “Noodles,” “we,” “us,” “our,” and the “Company” in this report. We refer to our Class A Common Stock, par value $0.01 per share, as our “common stock.” Our Concept and Business Strategy We believe Noodles is a broadly appealing concept in the national fast-casual dining space.
In making site selection decisions, we use several analytical tools designed to uncover the key site, demographic, business, retail, competitive and traffic characteristics that drive successful locations.
In making site selection decisions, we use several analytical tools designed to uncover the key site, demographic, business, retail, competitive and traffic characteristics that drive successful locations. We utilize third-party resources to assist with evaluating potential new sites.
We focus on attributes that set us apart including the breadth and customization of our menu and our best-in-class convenience offerings, and ultimately use a data-driven approach to guide our strategy. • Our Menu Offering. At the heart of our marketing is our ongoing mission to always nourish and inspire every team member, guest and community we serve.
We focus on attributes that set us apart including the breadth and customization of our menu and our best-in-class convenience offerings, and ultimately use a data-driven approach to guide our strategy. • Our Contemporary Menu Offerings. At the heart of our marketing is our food.
Although we have not experienced, and do not anticipate, any significant difficulties, delays or failures in obtaining required licenses, permits or approvals, any such problem could delay or prevent the opening of, or adversely impact the viability of, a particular restaurant or group of restaurants. 7 Table of Contents In addition, in order to develop and construct restaurants, we need to comply with applicable zoning, land use and environmental regulations.
Although we have not experienced, and do not anticipate, any significant difficulties, delays or failures in obtaining required licenses, permits or approvals, any such problem could delay or prevent the opening of, or adversely impact the viability of, a particular restaurant or group of restaurants.
Noodles has been recognized by Forbes as one of America's Best Employers for Diversity in 2021 and 2022 and one of America's Best Employers for Women in 2021.
Noodles has been recognized by Forbes as one of America's Best Employers for Diversity in 2021, 2022 and 2023 and one of America's Best Employers for Women in 2021. Additionally, in 2022 and 2023, QSR named Noodles one of the Best Brands to Wo rk For.
Our Compensation Committee, with input from members of our management and a third-party compensation consultant who provides benchmarked data, has responsibility for administering and approving annually certain elements of compensation, including our incentive compensation plans and equity-based plans.
Our Compensation Committee, with input from members of our management and a third-party compensation consultant who provides benchmarked data, has responsibility for approving annually certain elements of compensation, including our incentive compensation plans and equity-based plans. Management provides input into the design of our incentive compensation programs to confirm that these programs support the Company’s business objectives and strategic priorities.
During 2022, we launched a new brand platform called Uncommon Goodness, under the tagline “we infuse Uncommon Goodness in everything we do.” The focus of the platform is to strengthen our brand awareness, introduce the Noodles brand to new guests and remind existing guests what makes Noodles unique. • Loyalty Program.
In 2022, we launched a new brand platform called Uncommon Goodness, under the tagline “we infuse Uncommon Goodness into everything we do.” This platform serves to enhance our brand awareness, introduce the Noodles to new guests and remind existing guests what sets Noodles apart.
Restaurant Portfolio and Franchising Restaurant Portfolio. As of January 3, 2023, we had 368 company-owned restaurants and 93 franchise restaurants in 31 states. Our restaurants are typically betwee n 2,000 and 2,600 square feet and are located in end-cap, in-line or free-standing locations across a variety of suburban, collegiate and urban markets.
As of January 2, 2024, we had 380 company-owned restaurants and 90 franchise restaurants in 31 states. Our restaurants are typ ically between 2,000 and 2,600 square feet and are located in end-cap, in-line or free-standing locations across a variety of suburban, collegiate and urban markets . We are currently researching a smaller square footage restaurant prototype design.
In some cases, we have made efforts to increase the number of suppliers for our ingredients, which we believe can help mitigate pricing volatility. We monitor industry news, trade issues, weather, crises and other world events that may affect supply prices. Seasonality/Quarterly Financial Information Seasonal factors and the timing of holidays cause our revenue to fluctuate from quarter to quarter.
We work closely with our suppliers and use a mix of forward, fixed and formula pricing protocols. In some cases, we have made efforts to increase the number of suppliers for our ingredients, which we believe can help mitigate pricing volatility. We monitor industry news, trade issues, weather, crises and other world events that may affect supply prices.
Our culinary team strives to develop new dishes and limited time offerings to further reinforce our brand positioning and regularly provide our customers with additional options.
All of our dishes are cooked-to-order with fresh, high quality ingredients sourced from our carefully selected suppliers. Our culinary team strives to develop new dishes and limited time offerings to further reinforce our brand positioning and regularly provide our customers with additional options.
Choice and customization have always been a great strength of the brand, and we continue to innovate in ways that allow guests to enjoy the world flavors they know and love, as well as discover new ones with all of the benefits of healthier option s.
Choice and customization have always been a great strength of the brand, and we continue to innovate in ways that allow guests to enjoy the world flavors they know and love, as well as discover new ones . This focus on culinary innovation allows us to prepare and serve high quality food and meet changing consumer trends .
We are continually focused on how we can offer the best workplace in our industry and we are proud of these benefits that honor our commitment to inclusion and diversity. We were named one of America's Favorite Restaurants by Newsweek, and one of the Top 500 Franchises by Franchise Times.
We continue to focus on how we can offer the best workplace in our industry and we are proud of these benefits that honor our commitment to inclusion and diversity.
As of January 3, 2023, we had 93 franchise units in 18 states operated by 11 franchisees. In 2022, our franchisees opened three restaurants and closed one restaurant. We have a total of eight area developers who have signed development agreements providing for the opening of 97 additional restaurants in their respective territories.
As of January 2, 2024, we had 90 franchise uni ts in 18 states operated by 10 franchisees. In 2023, our franchisees did not open any restaurants and closed three restaurants. We have 10 area developers who have signed development agreements providing for the opening of 121 restaurants in their respective territories.
Today, our globally-inspired menu includes a wide variety of high quality, cooked-to-order dishes, including noodles and pasta, salads, soups and appetizers. We believe that we offer our customers value, with per person spend of $12.50. As of January 3, 2023, we operated 461 restaurants in 31 states, which included 368 company locations and 93 franchise locations.
Today, our globally-inspired menu includes a wide variety of high quality, cooked-to-order dishes, including noodles and pasta, salads, soups and appetizers. As of January 2, 2024, we operated 470 restaurants in 31 states, which included 380 company locations and 90 franchise locati ons. Noodles & Company is a Delaware corporation that was organized in 2002.
In select restaurants, particularly new locations, we offer the added convenience of order-ahead drive through windows. We believe that the breadth of ways that consumers can access our brand, the variety inherent in our menu, and how well our food travels is a business strength in relation to consumer trends towards convenience. Variety .
We believe that the breadth of ways that consumers can access our brand, the variety inherent in our menu, and how well our food travels is a business strength in relation to consumer trends towards convenience. We have purposefully chosen a range of healthy to indulgent dishes to satisfy multiple dietary and lifestyle preferences.
Our revenue per restaurant is typically lower in the first and fourth quarters, due to reduced winter and holiday traffic, and higher in the second and third quarters. Other factors also have a seasonal effect on our results. For example, restaurants located near colleges and universities generally do more business during the academic year.
Seasonality/Quarterly Financial Information Seasonal factors and the timing of holidays cause our revenue to fluctuate from quarter to quarter. Our revenue per restaurant is typically lower in the first and fourth quarters, due to reduced winter and holiday traffic, and higher in the second and third quarters. Other factors also have a seasonal effect on our results.
Our Noodles Rewards program grew 12.5% during 2022 to more th an 4.5 million m embers and allows us to connect directly with each guest. The program allows guests to accumulate reward points associated with each purchase that can be redeemed for offers such as free bowls, shareables and delivery.
The Rewards program provides us with guest data that can be used to target and personalize offers and communications. The program allows guests to accumulate reward points associated with each purchase that can be redeemed for offers such as free bowls, free shareables, discounts, and free delivery.
We require all of our dishes to be cooked to order at food safe temperatures or, in the case of salads, subject to our produce washing protocols, which helps to ensure that the food we serve to our customers is safe.
We provide each customer with individual attention and make every effort to respond to customer suggestions and concerns in a personal and hospitable way. 2 Table of Contents We require all of our dishes to be cooked to order at food safe temperatures or, in the case of salads, subject to our produce washing protocols, which helps to ensure that the food we serve to our customers is safe as food safety is a top priority for us.
We have demonstrated a history of investing in our workforce by offering competitive salaries and wages. To foster a stronger sense of ownership and align the interests of our team members with shareholders, restricted stock units are provided to eligible team members under our stock incentive programs.
To foster a stronger sense of ownership and align the interests of our team members with shareholders, restricted stock units are provided to eligible team members under our stock incentive programs. Additionally, we provide incentive compensation through annual bonus plans for all eligible team members. Furthermore, we offer competitive, targeted and innovative benefits to all eligible team members.
We recognize the diversity of our team members, guests and communities, and believe in creating an inclusive and equitable environment that represents a broad spectrum of backgrounds and cultures. Working under these principles, our Human Resources department is tasked with managing employment-related matters, including recruiting and hiring, onboarding and training, compensation and benefit planning, performance management and talent development.
Working under these 3 Table of Contents principles, our Human Resources department is tasked with managing employment-related matters, including recruiting and hiring, onboarding and training, compensation and benefit planning, organizational design, performance management, succession planning and talent development.
We offer approximately 20 globa lly-inspired and highly customizable dishes together on a single menu that can be enjoyed inside our restaurants, taken to-go, or deliver ed to our customers.
We are focused on offering customers flavorful, cooked-to-order dishes in a warm and welcoming environment at an attractive value. We offer approximately 20 globally-inspired and highly customizable dishes that can be enjoyed inside our restaurants, taken to-go, or delivered to our customers.
Management provides input into the design of our incentive compensation programs to ensure that these programs support the Company’s business objectives and strategic priorities. The annual business plan initially established by our management, but approved by our Board, is an important element of our Compensation Committee’s decision-making process for performance measures and goals. 5 Table of Contents Total Rewards.
The annual business plan initially established by our management, but approved by our Board, is an important element of our Compensation Committee’s decision-making process for performance measures and goals. Total Rewards. We have demonstrated a history of investing in our workforce by offering competitive salaries and wages.
Consistent with our culture of enhanced customer service, we seek to hire, develop and retain individuals who will deliver prompt, attentive service by engaging customers the moment they enter our restaurants. Our training philosophy empowers both our restaurant managers and team members, also referred to as employees, to add a personal touch when engaging with our customers.
We’ve recently engaged a third-party culinary expert to evaluate our menu architecture and offerings, with anticipated rollout of our updated menu in late 2024 and 2025. Consistent with our culture of enhanced customer service, we seek to hire, develop and retain individuals who will deliver prompt, attentive service by engaging customers the moment they enter our restaurants.
We carefully select suppliers based on quality and their understanding of our brand, and we seek to develop mutually beneficial long-term relationships with them. We work closely with our suppliers and use a mix of forward, fixed and formula pricing protocols.
Suppliers Maintaining a high degree of quality in our restaurants depends in part on our ability to acquire fresh ingredients and other necessary supplies that meet our specifications from reliable suppliers. We carefully select suppliers based on quality and their understanding of our brand, and we seek to develop mutually beneficial long-term relationships with them.
This design demonstrates our commitment to cooking fresh food in an accessible manner. We provide each customer with individual attention and make every effort to respond to customer suggestions and concerns in a personal and hospitable way.
This design demonstrates our commitment to cooking fresh food in an accessible manner.
Rewards members are typically the first to learn about new offerings, and in some cases are provided exclusive access to certain menu items. The data acquired from rewards members is used to target and personalize offers and communications. • Seamless Digital Experiences. Digital properties inclusive of our website and our app offer guests a differentiated and seamless ordering experience.
Rewards members are typically the first to learn about new offerings, and in some cases are provided exclusive access to certain menu items for a limited time. • Digital Business. We continue to make strategic investments in our digital capabilities to improve the overall guest experience and increase our digital sales.
Our second group is PROUD which supports the LGBTQIA+ community and their allies. These groups are designed to help elevate the voice of these underrepresented populations and increase recruiting and retention efforts.
One of the most impactful programs we put in place is Noodles’ versions of Employee Resource Groups, called NRGs (“Noodles Resource Groups”). These groups are designed to help elevate the voice of these underrepresented populations and increase recruiting and retention efforts.
None of o ur employees are unionized or covered by a collective bargaining agreement, and we consider our current employee relations to be good. 6 Table of Contents Suppliers Maintaining a high degree of quality in our restaurants depends in part on our ability to acquire fresh ingredients and other necessary supplies that meet our specifications from reliable suppliers.
As of January 2, 2024, we had approximately 7,600 employees, including approximately 600 salaried employees and approximately 7,000 hourly employees. None of o ur employees are unionized or covered by a collective bargaining agreement, and we consider our current employee relations to be good.
We focus some of our marketing efforts on new menu offerings to broaden our appeal to our customers. For example, during 2022, our new menu offering efforts centered around the launch of 4 Table of Contents LEANguini, our proprietary low-carb, high-protein noodle dish.
We focus some of our marketing efforts on new menu offerings to broaden our appeal to our customers. At the same time, we showcase the dishes that continue to be loved by many. For instance, in 2023, our focus on new menu offering efforts centered around the launch of our baked chicken parmesan. • Brand Platf orm .
We are currently executing a smaller square footage design which largely includ es order ahead drive-thru windows as we embed an off-premise focused operating model into new restaurants. We anticipate that this design will better facilitate future expansion and better meet the needs of the changing consumer experience. Restaurant De velopment.
We anticipate that this design will bet ter facilitate future expansion and better meet the needs of the changing consumer experience. Restaurant De velopment. In 2023, we opened 18 new company-owned restaurants. In 2024, we plan to open 10-12 new company-owned restaurants.
This helps to increase top of mind awareness with potential guests and drives frequency, trial and guest spend. We leverage zero-party and first-party data to drive effective and efficient advertising spend, ensuring we are improving the return on our investment.
We leverage zero-party, first-party and third-party data to drive effective and efficient advertising spend, helping us to improve the return on our investment. In 2022, we began the rollout of digital menu boards across our locations, which was completed in 2023.
Our restaurant managers are critical to our success, as we believe that their entrepreneurial spirit and outreach efforts build our brand in our communities. Our guests also experience the Noodles brand through our digital platforms, including orders placed on our website or our mobile app, contactless and in-restaurant pick-ups and delivery through our own channels or a third-party aggregator.
Our training philosophy empowers both our restaurant managers and team members, also referred to as employees, to add a personal touch when engaging with our customers. Our restaurant managers are critical to our success, as we believe that their entrepreneurial spirit and outreach efforts build our brand in our communities. Restaurant Portfolio and Franchising Restaurant Portfolio.
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We believe we will continue to benefit from recent trends in consumer preferences such as the increasing desire for convenience and to engage with brands digitally, as well as the broader demand for international cuisines. At many restaurants, customers are limited to a particular ethnic cuisine or type of dish, such as a sandwich, burrito or burger.
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Due to increased construction and development costs and lower than expected returns on investment on recent new restaurant openings, we have reduced our new restaurant development pipeline for 2024 and 2025. 1 Table of Contents Certain Restaurant Closures.
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At Noodles & Company, we aim to eliminate the “veto vote” by satisfying the preferences of a wide range of customers, whether a family or parent with kids, a group of coworkers, an individual or a large party.
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Uncommon Goodness continues to be a key differentiator, and we will continue to leverage this platform to showcase the distinctive qualities of our brand. • Loyalty Program. Our Noodles Rewards program gre w 13.4% during 2023 to approximately 5.2 million mem bers.
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Our menu is well suited for off-premise dining occasions in which customers order at our restaurant or online but then eat their meal from the comfort of their home or office. Our menu items travel particularly well, with a high variety of options to meet a broad range of lifestyle needs.
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Our digital platforms, inclusive of our website and our app, offer guests a differentiated and seamless ordering experience and make it convenient for guests to purchase their favorites. We use our digital platforms to increase brand engagement and usage of the Rewards program.
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In addition, our digital capabilities position the brand well for consumer trends focused on convenience. We also believe that our globally-inspired menu, focused on noodle and pasta dishes, differentiates us from other restaurants.
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Additionally, we have expanded our third-party partnerships to increase our brand’s reach among guests who primarily place orders through these delivery providers; We invest in digital advertising to advertise specific product categories, highlight convenient off-premise channel offerings, communicate rewards and encourage guest action and long-term guest loya lty.
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We believe our attributes—global flavors, variety, dishes prepared-to-order and fast service—allow us to compete against multiple segments throughout the restaurant industry and provide us a larger addressable market for lunch and dinner than competitors who focus on a single cuisine.
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We recognize the diversity of our team members, guests and communities, and believe in creating an inclusive and equitable environment that represents a broad spectrum of backgrounds and cultures.
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We strive to provide a pleasant dining, pick-up or delivery experience by quickly preparing fresh food with friendly service at a price point we believe is attractive to our customers. Noodles & Company is a Delaware corporation that was organized in 2002.
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In 2023, we were named one of America's Great Places to Work for Diversity and Great Places to Work for Women by Newsweek, and one of the Top 500 Franchises by Franchise Times.
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We have purposefully chosen a range of healthy to indulgent dishes to satisfy multiple dietary and lifestyle preferences. Our menu encourages customers to customize their meals to meet their tastes and nutritional preferences with our selection of a variety of fresh vegetables an d seven proteins.
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In 2023 the National Restaurant Association Educational Foundation (“NRAEF”) awarded Noodles with the 2023 Restaurants Advance Leadership Award for our DEI Leadership. This award included a grant that NRAEF would donate to a non-profit organization of our choice.
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Additionally, customers are able to customize the noodle that their dish is prepared with, including healthy options such as our zucchini noodle (“Zoodles”), gluten free pipette noodle or the recently launched LEANguini noodle (“LEANguini”), which features significantly fewer carbs and more protein than a traditional wheat noodle.
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This has led us to a partnership with Momentum Advisory Council / Café Momentum, an organization committed to helping juveniles who have been involved in the judicial system back into society, building life skills that will help them stay out of the judicial system.
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All of our dishes are cooked-to-order with fresh, high quality ingredients sourced from our carefully selected suppliers. Our commitment to the freshness of our ingredients is further demonstrated by our use of fresh produce and healthy add-in options such as seasoned tofu.
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For example, restaurants located near colleges and universities 4 Table of Contents generally do more business during the academic year.
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This focus on culinary innovation allows us to prepare and serve high quality food, meet changing consumer trends and acquire new customers. As we add healthy alternatives, we additionally from time to time introduce more classic noodle and pasta dis hes, such as our Tortelloni. 1 Table of Contents Value.
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In addition, in order to develop and construct restaurants, we need to comply with applicable zoning, land use and environmental regulations.
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The quality of our food and the welcoming ambiance of our restaurants creates an overall customer experience that we believe is unique and differentiated. Our per person spend is competitive not only within the fast-casual segment, but also within the quick-service segment.
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Our digital menu available on our mobile app and website, features an Everyday Value landing page where guests can select an entry-level item for around $7 per dish. During 2022, we featured our Everyday Value menu through a brand marketing message called 7 for $7 .
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In addition, we also offer kids meals which, at a fixed low price, provide the opportunity for parents to feed their children a balanced meal with sides s uch as broccoli, applesauce and a smaller portion of our house made rice crispy treat. Our Brand Experience. Our locations are designed individually, which we believe creates an inviting restaurant environment.
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We believe the ambiance is warm and welcoming, with muted lighting and colors, comfortable seating and our own custom music mix, which is intended to make our customers feel relaxed and at home. We believe we deliver an exceptional overall dining experience. Our customers expect not only great food from our restaurants, but also warm hospitality and attentive service.
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Our multi-channel approach allows us to adapt to potential changes in customer behavior, and has been strengthened by our investments in our off-premise channel, such as our elevated technology capabilities and our quick-pick up counters. Additionally, in some of our locations, we provide curbside pick-up available to our guests directly through our mobile app and website.
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Finally, the majority of our new locations have incorporated order ahead drive-thru windows to increase our level of convenience. Our Operational Strategy We believe our brand and globally-inspired menu resonates with consumers, and we believe our restaurants, team members and online engagement provide customers a unique and high-quality experience.
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We are focused on offering customers flavorful, cooked-to-order dishes in a warm and welcoming environment at an attractive value. Restaurant initiatives. Our plan to improve our performance includes the following four key strategies: • Enhancing convenience for our customers . We have meaningfully improved convenience for customers during the past few y ears.
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In 2022, we revamped our website and digital app layout which enhanced customization of orders and quick add options. In addition, we added convenience with group ordering, Apple pay and order status. Our Noodles Rewards program, relaunched in 2019 incorporates points and tier-based rewards to further drive customer engagement.
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We believe there still remains a significant opportunity to enhance our Noodles Rewards program and digital experience for our guests. Additionally, we have reduced friction for off-premise channels through the use of our quick pick-up counter within our locations and through our third-party delivery program. • Focusing on our global flavors and menu offerings.
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We believe that our globally-inspired menu, focused on noodle and pasta dishes, differentiates us from other restaurants. We also believe this global variety, which includes a range of healthy to indulgent dishes that are cooked to order with fresh, high-quality ingredients, remains a competitive strength.
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Our menu innovation has significant potential to broaden awareness and drive new guests with our healthy noodle alternatives, including zucchini and LEANguini dishes, and continued innovation in our classic noodle dishes. 2 Table of Contents • Improving efficiencies and unit-level margins.
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The increased demand for off-premise and digital sales has accelerated our ability to optimize our staffing model and vendor efficiencies. We are actively enhancing our supply chain and food preparation procedures to reduce inbound ingredient costs and improve labor efficiency through our ongoing Kitchen of the Future Initiative.
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Since 2018, the Kitchen of the Future Initiative has identified several areas of in-restaurant labor reductions, including upgrading to a sales-based labor model, reducing hours for front of house cashiers, optimizing pre-prepared ingredients and investing in steamer equipment.
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This ongoing initiative is anticipated to further optimize our restaurant efficiencies by identifying new processes, equipment and technology which we believe will help offset increases in food and wage inflation. • Improving manager selection, training and development of o ur teams . Team member retention is a critical component to our success.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

66 edited+41 added−14 removed149 unchanged
Biggest changeThese disruptions could materially adversely affect our business, financial condition, results of operations or cash flows. We also partner with various third-party vendors to deliver our food. If any of our delivery vendors perform inadequately, or our delivery relationships are disrupted for any reason, our business, financial condition, results of operations or cash flows could be materially adversely affected.
Biggest changeIf any of our delivery vendors perform inadequately, or our delivery relationships are disrupted for any reason, our business, financial condition, results of operations or cash flows could be materially adversely affected. Our ability to continue to expand our digital business, delivery orders, and catering is uncertain, and these business lines are subject to risks.
Various federal and state labor laws govern the relationship with our employees and affect operating costs. These laws include employee classification as exempt/non-exempt for overtime and other purposes, minimum wage requirements, unemployment tax rates, workers’ compensation rates, mandatory health benefits, immigration status and other wage and benefit requirements.
Various federal and state labor laws govern the relationship with our employees and affect labor and operating costs. These laws include employee classification as exempt/non-exempt for overtime and other purposes, minimum wage requirements, unemployment tax rates, workers’ compensation rates, mandatory health benefits, immigration status and other wage and benefit requirements.
Franchisees may not be able to negotiate an acceptable lease or purchase terms for the sites, obtain the necessary permits and government approvals or meet construction schedules . Given the present inflationary environment, prospective franchises may face high financing costs to develop new restaurants and may move more deliberately than our expectations, as was the case in 2022.
Franchisees may not be able to negotiate an acceptable lease or purchase terms for the sites, obtain the necessary permits and government approvals or meet construction schedules . Given the present inflationary environment, prospective franchises may face high financing costs to develop new restaurants and may move more deliberately than our expectations, as was the case in 2022 and 2023.
We also outsource certain accounting, payroll and human resource functions to business process service providers. The failure of such vendors to fulfill their obligations could disrupt our operations. Additionally, any changes we may make to the services we obtain from our vendors, or new vendors we employ, may disrupt our operations.
We also outsource certain accounting, payroll and human resource functions to business process service providers. The failure of such vendors to fulfill their obligations could disrupt our operations. Any changes we may make to the services we obtain from our vendors, or new vendors we employ, may disrupt our operations.
Such delivery and catering offerings also increase the risk of illnesses associated with our food because the food is transported and/or served by third parties in conditions we cannot control. Changes in food and supply costs could adversely affect our results of operations.
Delivery and catering offerings also increase the risk of illnesses associated with our food because the food is transported and/or served by third parties in conditions we cannot control. Changes in food and supply costs could adversely affect our results of operations.
Any of these problems could reduce our franchise reven ues. 15 Table of Contents Risks Related to Our Supply Chain and Technology We rely heavily on information technology, and any material failure, weakness, interruption or breach of security could prevent us from effectively operating our business.
Any of these problems could reduce our franchise reven ues. 14 Table of Contents Risks Related to Our Supply Chain and Technology We rely heavily on information technology, and any material failure, weakness, interruption or breach of security could prevent us from effectively operating our business.
If our technology systems, or those of third-party vendors we or our franchisees rely upon, are compromised as a result of a cyber-attack (including from circumvention of security systems, denial-of-service attacks, hacking, “phishing” attacks, computer viruses, ransomware, malware, or social engineering) or other external or internal methods, it could materially adversely affect our reputation, business, financial condition, results of operations or cash flows.
If our technology systems, or those of third-party vendors we or our franchisees rely upon, are compromised as a result of a cyber-attack (including from circumvention of security systems, denial-of-service attacks, hacking, “phishing” attacks, computer viruses, ransomware, malware, or social engineering) or other external or 15 Table of Contents internal methods, it could materially adversely affect our reputation, business, financial condition, results of operations or cash flows.
These competitors may have, among other things, lower operating costs, food offerings more responsive to consumer preferences, better locations and facilities, more experienced management, more effective marketing and more efficient operations. Several of our competitors compete by offering menu items that are specifically identified as low in carbohydrates, gluten-free, or rich in protein.
These competitors may have, among other things, lower operating costs, 9 Table of Contents food offerings more responsive to consumer preferences, better locations and facilities, more experienced management, more effective marketing and more efficient operations. Several of our competitors compete by offering menu items that are specifically identified as low in carbohydrates, gluten-free, or rich in protein.
Our ability to open new restaurants also depends on other factors, including: site selection; negotiating leases with acceptable terms; identifying, hiring and training qualified employees; the state of the labor market in each local market; timely delivery of leased premises to use; managing construction and development costs; avoiding the impact of inclement weather, natural disasters and other calamities; obtaining construction materials and labor at acceptable costs; securing required governmental approvals, permits and licenses; and accessing sufficient capital.
Our ability to open new restaurants also depends on other factors, including: site selection; negotiating leases with acceptable terms; identifying, hiring and training qualified employees; the state of the labor market in each local market; timely delivery of leased premises to use; managing construction and development costs; avoiding the impact of inclement weather, natural disasters and other calamities; obtaining construction materials and labor at acceptable costs; securing required governmental approvals, permits and licenses; generating sufficient returns on our new restaurant investments; and accessing capital.
We could also become subject to fines, penalties and other costs related to claims that we did not fully comply with all recordkeeping obligations of federal and state immigration compliance laws. These factors could materially adversely affect our business, financial condition, results of operations or cash flows.
We could also become subject to fines, penalties and other 19 Table of Contents costs related to claims that we did not fully comply with all recordkeeping obligations of federal and state immigration compliance laws. These factors could materially adversely affect our business, financial condition, results of operations or cash flows.
To the extent we are able to identify franchisees for the franchising of existing restaurants or the development of new restaurants, our success is dependent on the performance of our franchisees in successfully operating the restaurants.
To the extent we are able to attract and identify franchisees for the franchising of existing restaurants or the development of new restaurants, our success is dependent on the performance of our franchisees in successfully operating the restaurants.
Our core business strategy does not entail opening new restaurants that we believe will materially affect sales at our existing restaurants, but we may selectively open new restaurants in and around areas of existing restaurants that are operating at or near capacity to effectively serve our customers.
Our core business strategy does not entail opening new restaurants that we believe will materially affect sales at our existing restaurants, 12 Table of Contents but we may selectively open new restaurants in and around areas of existing restaurants that are operating at or near capacity to effectively serve our customers.
Furthermore, any inappropriate use of social media platforms by our employees could also result in negative publicity that could materially damage our reputation or lead to litigation that materially increases our costs. 18 Table of Contents New technologies or changes in consumer behavior facilitated by these technologies could negatively affect our business.
Furthermore, any inappropriate use of social media platforms by our employees could also result in negative publicity that could materially damage our reputation or lead to litigation that materially increases our costs. New technologies or changes in consumer behavior facilitated by these technologies could negatively affect our business.
Any failure of our new initiatives could materially adversely affect our business, financial condition, results of operations or cash flows. Further, we have had, and expect to continue to have, initiatives in various stages of testing, evaluation and implementation, upon which we expect to rely to improve our results of operations and financial condition.
Any failure of our new initiatives could materially adversely affect our business, financial condition, results of operations or cash flows. 8 Table of Contents Further, we have had, and expect to continue to have, initiatives in various stages of testing, evaluation and implementation, upon which we expect to rely to improve our results of operations and financial condition.
We have taken strategic steps to attempt to make our restaurant operations more labor-efficient, including reconfigured restaurant operations, increased off-premise offerings, and new technology and equipment, but in certain instances these may require initial investment costs and there can be no assurances that these strategies will succeed. We may not be successful in executing our franchise strategy.
We have taken strategic steps to attempt to make our restaurant operations more labor-efficient, including reconfigured restaurant operations, increased off-premise offerings, and new technology and equipment, but in certain instances these may require initial investment costs and there can be no assurances that these strategies will succeed. 13 Table of Contents We may not be successful in executing our franchise strategy.
An unfavorable report on, or reaction to, our menu ingredients, the size of our portions or the nutritional content of our menu items could negatively influence the demand for our offerings. 20 Table of Contents Compliance with current and future laws and regulations regarding the ingredients and nutritional content of our menu items may be costly and time-consuming.
An unfavorable report on, or reaction to, our menu ingredients, the size of our portions or the nutritional content of our menu items could negatively influence the demand for our offerings. Compliance with current and future laws and regulations regarding the ingredients and nutritional content of our menu items may be costly and time-consuming.
As time passes, however, we may have difficulty maintaining our culture or adapting it sufficiently to meet the needs of our business. Among other important factors, our culture depends on our ability to attract, retain and motivate employees who share our enthusiasm and dedication to our concept.
As time passes, however, we may have difficulty adapting our culture sufficiently to meet the needs of our business. Among other important factors, our culture depends on our ability to attract, retain and motivate employees who share our enthusiasm and dedication to our concept.
One or more instances of foodborne illness in any of our restaurants or markets or related to food products we sell could negatively affect our restaurant sales nationwide if highly publicized on national media outlets or through social media.
One or more instances of foodborne illness in any of our restaurants or markets or related to 10 Table of Contents food products we sell could negatively affect our restaurant sales nationwide if highly publicized on national media outlets or through social media.
The level of comparable restaurant sales, which represent the change in year-over-year sales for restaurants open for at least 18 full periods, affects our restaurant revenue growth and will continue to be a critical factor affecting profitability. Our ability to increase comparable restaurant sales depends in part on our ability to successfully implement our initiatives.
The level of comparable restaurant sales, which represent the change in year-over-year sales for restaurants open for at least 18 full periods, affects our restaurant revenue growth and will continue to be a critical factor affecting profitability. Our ability to increase comparable restaurant sales depends in part on our ability to successfully implement our initiatives, including increasing guest traffic.
The third-party delivery 17 Table of Contents services with which we work may struggle to compete effectively, and if they were to cease or curtail operations, or fail to provide timely delivery services in a cost-effective manner, or if they give greater priority on their platforms to our competitors, our delivery business may be negatively impacted.
The third-party delivery services with which we work may struggle to compete effectively, and if they were to cease or curtail operations, or fail to provide timely delivery services in a cost-effective manner, or if they give greater priority on their platforms to our competitors, our delivery business may be negatively impacted.
We may in the future have to modify restaurants, for example, by adding access ramps or redesigning certain architectural fixtures, to provide service to or make reasonable accommodations for disabled persons. The expenses associated with these modifications could be material. 19 Table of Contents Our operations are also subject to the U.S.
We may in the future have to modify restaurants, for example, by adding access ramps or redesigning certain architectural fixtures, to provide service to or make reasonable accommodations for disabled persons. The expenses associated with these modifications could be material. Our operations are also subject to the U.S.
The identification of a material weakness could indicate a lack of controls adequate to generate accurate financial statements that, in turn, could cause a loss of investor confidence and decline in the market price of our common stock.
The identification of a material weakness could indicate a 18 Table of Contents lack of controls adequate to generate accurate financial statements that, in turn, could cause a loss of investor confidence and decline in the market price of our common stock.
Moreover, as of that date, approxi mately 2.0 million shares of our common stock are available for future grants under our stock incentive plan and for future purchase under our employee stock purchase plan. Provisions in our organizational documents and Delaware law may delay or prevent our acquisition by a third party.
Moreover, as of that date, approxi mately 3.8 million shares of our common stock are available for future grants under our stock incentive plan and for future purchase under our employee stock purchase plan. Provisions in our organizational documents and Delaware law may delay or prevent our acquisition by a third party.
If we are unable to attract, develop, retain and incentivize sufficiently experienced and capable management personnel, our business and financial results may suffer. 14 Table of Contents If we or our franchisees face labor shortages or increased labor costs, our operating results could be adversely affected.
If we are unable to attract, develop, retain and incentivize sufficiently experienced and capable management personnel, our business and financial results may suffer. If we or our franchisees face labor shortages or increased labor costs, our operating results could be adversely affected.
We do not own any real property. Payments under our operating leases account for a significant portion of our operating expenses and we expect the new restaurants we open in the future will similarly be leased. Our leases generally have an initial term of ten years and generally can be extended only in five-year increments (at increased rates).
Payments under our operating leases account for a significant portion of our operating expenses and we expect the new restaurants we open in the future will similarly be leased. Our leases generally have an initial term of ten years and generally can be extended only in five-year increments (at increased rates).
If our new restaurants do not perform as planned, our business and future prospects could be harmed. In addition, if we are unable to achieve our expected average restaurant sales, our business, financial condition, results of operations or cash flows could be materially adversely affected. Opening new restaurants in existing markets may negatively affect sales at our existing restaurants.
If our new restaurants do not perform as planned, our business and future prospects could be harmed. In addition, if we are unable to achieve our expected average restaurant sales, our business, financial condition, results of operations or cash flows could be materially adversely affected.
Additionally, these changes in market conditions may impact our development pipeline, including the availability of new sites, increased construction costs and availability of contract labor. Changes in economic conditions, particularly with respect to inflationary pressures, may result in increased interest rates, labor shortages, and supply chain disruptions.
Additionally, these changes in market conditions may impact our development pipeline, including the availability of new sites, increased construction costs and availability of contract labor. Changes in economic conditions, particularly with respect to inflationary pressures, may result in increased interest rates persisting for longer than expected and/or further increases in interest rates, labor shortages, and supply chain disruptions.
Moreover, such breaches could result in a violation of various privacy-related laws, including the California Consumer Privacy Act, and subject us to investigations or private litigation, which, in turn, could expose us to civil or criminal liability, fines and penalties imposed by state and federal regulators, claims for purportedly fraudulent transactions arising out of the actual or alleged theft of credit or debit card information, compromised security and information systems, failure of our employees to comply with applicable laws, the unauthorized acquisition or use of such information by third parties, or other similar claims, and various costs associated with such matters. 16 Table of Contents We rely heavily on certain vendors, suppliers and distributors, which could adversely affect our business.
Moreover, such breaches could result in a violation of various privacy-related laws, including the various state specific privacy laws and subject us to investigations or private litigation, which, in turn, could expose us to civil or criminal liability, fines and penalties imposed by state and federal regulators, claims for purportedly fraudulent transactions arising out of the actual or alleged theft of credit or debit card information, compromised security and information systems, failure of our employees to comply with applicable laws, the unauthorized acquisition or use of such information by third parties, or other similar claims, and various costs associated with such matters.
Conditions during the novel coronavirus pandemic (the “COVID-19 Pandemic”) have exacerbated the difficulty of successfully hiring and retaining quality employees. In addition, during 2022, we experienced a higher level of turnover driven by a more competitive labor market and wage inflation, which had an impact on our ability to hire qualified employees.
During 2022, we experienced a higher level of turnover driven by conditions during the novel coronavirus pandemic (the “COVID-19 Pandemic”) and a more competitive labor market and wage inflation, which had an impact on our ability to retain and hire qualified employees.
These provisions also may delay, prevent or deter a merger, acquisition, tender offer, proxy contest or other transaction that might otherwise result in our stockholders receiving a premium over the market price for their common stock. Our credit facility has a variable interest rate and increases in interest rates could increase the cost of servicing such debt.
These provisions also may delay, prevent or deter a merger, acquisition, tender offer, proxy contest or other transaction that might otherwise result in our stockholders receiving a premium over the market price for their common stock. Our credit facility has variable interest rates and increases in or sustained high interest rates could continue to result in high borrowing costs.
Our Third Amended Credit Facility has a variable interest rate equal to the Secured Overnight Financing Rate (“SOFR”) plus a margin of 1.50% to 2.50% per annum, based upon the consolidated total lease-adjusted leverage ratio. Interest rates increased during 2022 and may continue to rise in the future due to inflation or other causes.
Our Amended and Restated Credit Facility has a variable interest rate equal to the Secured Overnight Financing Rate (“SOFR”) plus a margin of 1.75% to 3.00% per annum, based upon the consolidated total lease adjusted leverage ratio. Interest rates may rise in the future due to inflation or other causes. Interest rates have remained high during 2022 and 2023.
Our ability to maintain consistent price, quality and safety throughout our restaurants depends in part upon our ability to acquire specified food products and supplies in sufficient quantities from third-party vendors, suppliers and distributors at a reasonable cost.
We rely heavily on certain vendors, suppliers and distributors, which could adversely affect our business. Our ability to maintain consistent price, quality and safety throughout our restaurants depends in part upon our ability to acquire specified food products and supplies in sufficient quantities from third-party vendors, suppliers and distributors at a reasonable cost.
In addition, federal, state and local proposals have been made related to paid sick leave and similar matters. Changes in these laws or implementation of new proposals could materially adversely affect our business, financial condition, results of operations or cash flows. Changes in employment laws may adversely affect our business.
In addition, federal, state and local proposals have been made related to paid sick leave and similar matters. Changes in these laws or implementation of new proposals could materially adversely affect our business, financial condition, results of operations or cash flows. Our franchising activities are subject to federal rules and regulations administered by the U.S.
Moreover, if we are unable to successfully defend against such claims, we may be prevented from using our trademarks or service marks in the future, may be liable for damages and may have to change our marketing efforts, which in turn could materially adversely affect our business, financial condition, results of operations or cash flows.
Moreover, if we are unable to successfully defend against such claims, we may be prevented from using our trademarks or service marks in the future, may be liable for damages and may have to change our marketing efforts, which in turn could materially adversely affect our business, financial condition, results of operations or cash flows. 20 Table of Contents We could be party to litigation that could adversely affect us by distracting management, increasing our expenses or subjecting us to material money damages and other remedies.
For example, in 2022, the cost of several of our food ingredients increased as a result of inflation in many commodities, particularly our cost of chicken. To mitigate this increase, we implemented a temporary chicken-price surcharge of $1.00 for several months while chicken was at its peak of the commodity cycle.
Also in 2022, the cost of several of our food ingredients increased as a result of inflation in many commodities, particularly our cost of chicken. As a result, we implemented a temporary chicken-price surcharge of $1.00 for several months while chicken was at its peak of the commodity cycle and made certain other menu price increases throughout 2022.
Given the present inflationary environment, particularly higher interest rates and cost of borrowings, in addition to construction cost inflation, prospective franchises may face high financing costs and move more deliberately than our expectations, as was the case in 2022.
A high inflationary environment, and in particular continued elevated interest rates and cost of borrowings, in addition to construction cost inflation, may cause our prospective franchises to experience high financing costs and move more deliberately than our expectations, as was the case in 2022 and 2023.
It is possible that such initiatives will not be successful, that we will not achieve our target comparable restaurant sales growth or that the change in comparable restaurant sales could be negative, which may cause a decrease in restaurant revenue and profitability that could materially adversely affect our business, financial condition, results of operations or cash flows. 10 Table of Contents Changes in economic conditions, including higher inflationary pressures and increased interest rates, may reduce customer demand and increase our costs.
It is possible that such initiatives will not be successful, that we will not achieve our target comparable restaurant sales growth or that the change in comparable restaurant sales could be negative, which may cause a decrease in restaurant revenue and profitability that could materially adversely affect our business, financial condition, results of operations or cash flows.
One element of our operational strategy is the opening of new restaurants and operating those restaurants on a profitable basis. In 2022, we opened sixteen company-owned restaurants and closed five company-owned restaurants. Our franchisees opened three restaurants and closed one restaurant.
One element of our operational strategy is the opening of new restaurants and operating those restaurants on a profitable basis. In 2023, we opened eighteen company-owned restaurants and closed six company-owned restaurants. Our franchisees did not open any new restaurants and closed three restaurants.
In the future, operating results may fall below the expectations of securities analysts and investors. In that event, the price of our common stock would likely decrease. Future sales of our common stock, or the perception that such sales may occur, could depress our common stock price.
In that event, the price of our common stock would likely decrease. Future sales of our common stock, or the perception that such sales may occur, could depress our common stock price.
These inflationary pressures may also increase our costs including our labor and raw material costs, utilities, and our cost of borrowing, and we may not be able to fully offset such higher costs through price increases.
These inflationary pressures may also increase our costs including our labor and raw material costs, utilities, and our cost of borrowing, and we may not be able to fully offset such higher costs through price increases. For example, in 2023, we executed an amendment to our credit agreement which resulted in increased borrowing rates.
As of January 3, 2023, we have 46,040,427 outstanding shares of Class A common stock and no outstanding shares of Class B common stock. In addition, as of such date, approximately 3,016,279 shares of Class A common stock are issuable upon the exercise of outstanding stock options and the vesting of restricted stock units.
As of January 2, 2024, we have 44,989,714 outstanding shares of Class A common stock and no outstanding shares of Class B common stock. In addition, as of such date, approximately 3,500,591 shares of Class A common stock are issuable upon the exercise of outstanding stock options and the vesting of restricted stock units.
If we are unable to fully implement our development plan, our business, financial condition, results of operations or cash flows could be materially adversely affected. 13 Table of Contents New restaurants, once opened, may not be profitable.
If we are unable to fully implement our development plan, our business, financial condition, results of operations or cash flows could be materially adversely affected. New restaurants, once opened, may not be profitable. New restaurants may not be profitable, their sales performance may not follow historical patterns, or our average restaurant sales and comparable restaurant sales may underperform our expectations.
As a result, the costs of servicing our variable interest rate debt have and could continue to increase even if the amount borrowed under such credit facility remains the same.
As a result, the costs of servicing our variable interest rate debt have and could increase again even if the amount borrowed under such credit facility remains the same. Increased servicing costs could adversely affect our business, financial condition, results of operations or cash flows.
We have taken strategic steps to improve the retention of our labor force, which has improved sequentially since peak levels in mid-2022. There m ay be a small supply of qualified individuals in some of the communities in which we operate, and competition in these communities for qualified individuals could require us to pay higher wages and provide greater benefits.
There m ay be a small supply of qualified individuals in some of the communities in which we operate, and competition in these communities for qualified individuals could require us to pay higher wages and provide greater benefits.
In addition, stringent and varied requirements of local regulators with respect to zoning, land use and environmental factors could delay or prevent development of new restaurants in particular locations. Due to the COVID-19 Pandemic, there could be additional governmental regulations that arise that could impact our business.
In addition, stringent and varied requirements of local regulators with respect to zoning, land use and environmental factors could delay or prevent development of new restaurants in particular locations.
We may be harmed by breaches of security of information technology systems or our confidential consumer, employee, financial, or other proprietary data. We use many information technology systems throughout our operations, including systems that record and process customer sales, manage human resources and generate accounting and financial reports.
We use many information technology systems throughout our operations, including systems that record and process customer sales, manage human resources and generate accounting and financial reports.
As a result, if we do not appropriately manage our social media strategies, our marketing efforts in this area may not be successful and could damage our reputation, negatively impacting our restaurant sales and financial performance. 11 Table of Contents Negative publicity relating to one or more of our restaurants, including our franchised restaurants, could reduce sales at some or all of our other restaurants.
As a result, if we do not appropriately manage our social media strategies, our marketing efforts in this area may not be successful and could damage our reputation, negatively impacting our restaurant sales and financial performance.
Digital orders as a percentage of total revenue have remained fairly consistent at over 50% through 2022. In response to this trend, we have promoted our digital business through our rewards program, partnered with third-party delivery companies and are developing new-store concepts with reduced indoor-seating, pick-up shelves, and order-ahead drive-thru windows.
In response to these trends, we have promoted our digital business through our rewards program, partnered with third-party delivery companies, and have developed new-store concepts with reduced indoor-seating, pick-up shelves, and order-ahead drive-thru windows.
Any increase in the prices of the food products most critical to our menu, such as pasta, beef, chicken, wheat flour, cheese and other dairy products, tofu and vegetables, could materially adversely affect our operating results. In 2022, the cost of several of our food ingredients increased as a result of inflation in many commodities, particularly chicken.
Any increase in the prices of the food products most critical to our menu, such as pasta, beef, chicken, wheat flour, cheese and other dairy products, tofu and vegetables, could materially adversely affect our operating results, especially if we are unable to increase our menu prices in order to pass these increased costs on to consumers.
In addition, the implementation of our GM equity program to improve retention levels is expected to increase our stock-based compensation expense during 2023 and beyond.
In addition, the implementation of our GM equity program to improve retention levels has increased our stock-based compensation expense during 2023 and we expect it will continue in future years.
Our inability or failure to recognize, respond to and effectively manage the accelerated impact of social media could have an adverse effect on our business. There has been a widespread and dramatic increase in the use of social media platforms that allow users to access a broad audience of consumers and other interested persons.
There has been a widespread and dramatic increase in the use of social media platforms that allow users to access a broad audience of consumers and other interested persons.
As a result of these factors, our quarterly and annual operating results and comparable restaurant sales may fluctuate significantly. Accordingly, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for any year and comparable restaurant sales for any particular future period may decrease.
Accordingly, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for any year and comparable restaurant sales for any particular future period may decrease. In the future, operating results may fall below the expectations of securities analysts and investors.
New restaurants may not be profitable, their sales performance may not follow historical patterns. or our average restaurant sales and comparable restaurant sales may underperform our expectations. In addition, the construction costs supporting the new restaurant opening may be higher than historical averages, placing a higher profitability threshold to generate an attractive cash-on-cash return.
In addition, the construction costs supporting the new restaurant openings may be higher than historical averages, placing a higher profitability threshold to generate an attractive cash-on-cash return.
We anticipate our new restaurants may be smaller in terms of square footage and seating than our current restaurants, in accordance with our increased focus on off-premise dining opportunities. We expect that most of our new restaurants will ultimately incorporate order-ahead, drive-thru windows.
We are enhancing our operating model and researching a new prototype. We anticipate our new restaurants may be smaller in terms of square footage and seating than our current restaurants, in accordance with our increased focus on off-premise dining opportunities.
Our success is dependent in part upon our ability to maintain and enhance the value of our brand, consumers’ connection to our brand and positive relationships with our franchisees.
Negative publicity relating to one or more of our restaurants, including our franchised restaurants, could reduce sales at some or all of our other restaurants. Our success is dependent in part upon our ability to maintain and enhance the value of our brand, consumers’ connection to our brand and positive relationships with our franchisees.
For example, in the second half of 2022, several new restaurants were delayed as a result of material adverse weather and permitting delays. Delays or failures in opening new restaurants could occur in the future and could materially adversely affect our business strategy and our expected results.
Delays or failures in opening new restaurants could occur in the future and could materially adversely affect our business strategy and our expected results.
We plan to develop a pipeline to support an annual unit growth rate of approximately 7% in 2023, with 7 to 10% unit growth thereafter. Opening new restaurants presents numerous risks and uncertainties. We may not be able to open new restaurants as quickly as planned. In the past, we have experienced delays in opening some restaurants.
We expect future annual unit growth rate of approximately 1-3% in the next few years. 11 Table of Contents Opening new restaurants presents numerous risks and uncertainties. We may not be able to open new restaurants as quickly as planned. In the past, we have experienced delays in opening some restaurants due to adverse weather and permitting delays.
Any adverse publicity resulting from these allegations, even if proven to be false, may also materially adversely affect our reputation or prospects, which in turn could materially adversely affect our business, financial condition, results of operations or cash flows. 21 Table of Contents Risks Related to Our Common Stock and Debt Financing Our quarterly operating results may fluctuate significantly and could fall below the expectations of securities analysts and investors due to seasonality and other factors, some of which are beyond our control, resulting in a decline in our stock price.
If our ESG-related data, processes and reporting are incomplete or inaccurate, or if we fail to achieve progress with respect to our goals within the scope of ESG on a timely basis, or at all, our reputation, business, financial performance and growth could be adversely affected. 21 Table of Contents Risks Related to Our Common Stock and Debt Financing Our quarterly operating results may fluctuate significantly and could fall below the expectations of securities analysts and investors due to seasonality and other factors, some of which are beyond our control, resulting in a decline in our stock price.
As a result, specifically for our chicken purchases, we entered into temporary formula pricing contracts with our vendors and were susceptible to fluctuations in the commodities markets. If food inflation in the chicken market or any other food ingredient persists, our financial condition and business operations could be more severely impacted.
In 2022, the cost of several of our food ingredients increased as a result of inflation in many commodities, particularly chicken. As a result, specifically for our chicken purchases, we entered into temporary formula pricing contracts with our vendors and were susceptible to fluctuations in the commodities markets.
Seasonal factors, particularly weather disruptions, and the timing of holidays also cause our revenue to fluctuate from quarter to quarter. Our revenue per restaurant is typically lower in the first and fourth quarters due to reduced winter and holiday traffic and higher in the second and third quarters.
Our revenue per restaurant is typically lower in the first and fourth quarters due to reduced winter and holiday traffic and higher in the second and third quarters. As a result of these factors, our quarterly and annual operating results and comparable restaurant sales may fluctuate significantly.
Increased servicing costs could adversely affect our business, financial condition, results of operations or cash flows. 22 Table of Contents We may be unable to negotiate favorable borrowing terms, and any additional capital we may require could be senior to existing equity holders, dilute existing equity holders or include unfavorable restrictions.
During 2023, we amended our credit agreement which resulted in, among other things, an increase in our borrowing rates. 22 Table of Contents We may be unable to negotiate favorable borrowing terms, and any additional capital we may require could be senior to existing equity holders, dilute existing equity holders or include unfavorable restrictions.
It is possible that weather conditions may impact our business more than other businesses in our industry because of the significant concentration of our restaurants in the Upper Midwest, Rocky Mountain and Mid-Atlantic states. 12 Table of Contents We are subject to risks associated with long-term non-cancellable leases and the costs of exiting leases at restaurants we have closed or may close in the future may be greater than we estimate or could be greater than the funds we raise to address closure costs.
We are subject to risks associated with long-term non-cancellable leases and the costs of exiting leases at restaurants we have closed or may close in the future may be greater than we estimate or could be greater than the funds we raise to address closure costs. We do not own any real property.
Failure to provide our franchisees with adequate support and resources could materially adversely affect these franchisees, as well as cause disputes between us and them and potentially lead to material liabilities. Franchisees’ new unit growth is dependent in part upon borrowing incremental capital to develop new units.
Failure to provide our franchisees with adequate support and resources could materially adversely affect these franchisees, as well as cause disputes between us and them and potentially lead to material liabilities. When we sell restaurants to franchisees, we frequently remain liable on the related restaurant facility leases.
However, several food ingredients, including chicken, experienced significant inflation predominantly in the second and third quarters of 2022, resulting in higher cost of food.
However, several food ingredients, including chicken, experienced significant inflation predominantly in the second and third quarters of 2022, resulting in higher cost of food. We did not experience any significant supply chain disruptions in 2023. In addition, we use various third-party vendors to provide, support and maintain most of our management information systems.
Moreover, if we issue new debt securities, the debt holders would have rights senior to common stockholders to make claims on our assets. In addition, variable-rate borrowings under our Amended and Restated Credit Agreement, dated as of July 27, 2022, use the SOFR to determine the cost of borrowing, instead of the recently discontinued LIBOR.
Moreover, if we issue new debt securities, the debt holders would have rights senior to common stockholders to make claims on our assets.
Our ability to continue to expand our digital business, delivery orders and catering is uncertain, and these business lines are subject to risks. Our revenue from digital orders increased significantly during 2020, especially in response to changing customer habits resulting from the COVID-19 Pandemic.
Our revenue from digital orders increased significantly during 2020, especially in response to changing customer habits resulting from the COVID-19 Pandemic. Digital orders as a percentage of total revenue have remained fairly consistent at over 50% throughout 2022 and 2023. We experience d 37% growth in our catering business from 2022 to 2023.
Removed
Our strategies include innovating our menu offerings, such as through the introduction of LEANguini ; pursuing off-premise opportunities, for example through our dedicated pick-up shelving, order-ahead drive-thru windows and third-party delivery; improving efficiencies and unit level margins by simplifying operations and introducing new technology and equipment, such as steamers; enhancing our menu structure and layout, including the implementation of digital menu boards; and improving manager selection, training and development of our teams.
Added
Forward-looking statements may relate to, among other things: (i) our business objectives and strategic plans, including projected or anticipated growth rates, including in guest traffic, digital orders, and new restaurants, revenues, planned improvements in operational efficiencies, gross margins, and cost management, and enhancements to our restaurant environments and guest engagement, including the anticipated impacts of innovations, improvements, and marketing efforts; (ii) our expectations about pricing strategy; (iii) our expectations about the competitiveness of the labor market and our ability to hire, train, and retain qualified personnel; (iv) anticipated capital investments and the results of such investments, including in new restaurant openings, local marketing, our digital capabilities, and information technology systems, and the anticipated related benefits; (v) our expectations about restaurant operating costs, including commodity and food prices, occupancy costs, and labor and energy costs; and our ability to offset higher costs with menu price increases and related impacts on consumer behavior; (vi) anticipated legislation and other regulation of our business, the expected impacts of government regulations on our operations and financial condition, and changes in such regulation, including in relation to our franchise operations; (vii) our ability to attract and build relationships with experienced franchise partners; (viii) our expectations about anticipated uses of, and risks associated with, future cash flows, liquidity, future capital expenditures, and other capital deployment opportunities, and taxes; (ix) our expectations regarding competition; (x) our expectations regarding demand and business recovery, consumer preferences, and consumer discretionary spending; (xi) our ability to successfully implement our food safety programs; (xii) our ability to successfully implement our health and safety initiatives; (xiii) anticipated impacts of future pandemics; (xiv) the seasonality of our business; (xv) our expectations and other statements regarding interest rates, commodity prices, and other factors; (xvi) the other risks discussed under Risk Factors below.
Removed
Our business, and the restaurant industry in general, depends on consumer discretionary spending.
Added
Our strategies include innovating our menu offerings, enhancing our menu structure and layout, improving operational effectiveness, optimizing our catering offerings, analyzing our pricing strategies, better understanding and tailoring communications to customers through the implementation of a customer data platform, introducing new technology and equipment, and continued focus on manager selection, training and development of our teams.
Removed
Adverse weather conditions could affect our sales. Adverse weather conditions, such as regional winter storms, floods and hurricanes, and any changes associated with global climate change could affect our sales at restaurants in locations that experience these weather conditions, which could materially adversely affect our business, financial condition, results of operations or cash flows.
Added
For example, in 2023 we experienced a decline in same store sales, as well as an increased loss from operations. Changes in economic conditions, including higher inflationary pressures and continued elevated interest rates, may reduce customer demand and increase our costs. Our business, and the restaurant industry in general, depends on consumer discretionary spending.
Removed
During the fourth quarter of 2022, we saw material market improvement in chicken and other food ingredients, which allowed us to realize improvement in our cost of goods sold and enter into fixed-based pricing agreements fiscal 2023. In addition, we use various third-party vendors to provide, support and maintain most of our management information systems.
Added
We may raise menu prices or revise our pricing structure, which may not be sufficient to offset rising costs or which could decrease customer demand.
Removed
We have also introduced catering offerings on both a pick-up and delivery basis, and customers may choose our competitors’ catering offerings over ours, be disappointed with their experience with our catering, or experience food safety problems if they do not serve our food in a safe manner, which may negatively impact us.
Added
We have historically, and expect to continue to, utilize menu price increases to help offset cost increases, including increased cost for food ingredients and supplies, wages, employee benefits, insurance costs, construction, utilities and other key operating costs.
Removed
We could be party to litigation that could adversely affect us by distracting management, increasing our expenses or subjecting us to material money damages and other remedies.
Added
If our selection and amount of menu price increases are not accepted by consumers and reduce guest traffic, or are insufficient to counter increased costs, our financial results could be negatively affected.
Removed
At this time, it is not possible to predict the effect the discontinuance of LIBOR, or the establishment of alternative reference rates such as SOFR, will have on us or our borrowing costs. SOFR is a relatively new reference rate and its composition and characteristics are not the same as LIBOR.
Added
For example, in 2022 and in the first quarter of 2023, primarily in response to inflationary food and labor costs, we made certain menu price increases, which we believe negatively affected our traffic. Unexpected events have impacted and may in the future impact our business, financial condition and results of operations.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeState Company- owned Franchised Total Arizona 6 — 6 California — 14 14 Colorado 58 — 58 Connecticut — 5 5 Florida — 6 6 Idaho 6 — 6 Illinois 51 5 56 Indiana 22 1 23 Iowa 9 1 10 Kansas 9 — 9 Kentucky 1 4 5 Maryland 22 — 22 Michigan — 23 23 Minnesota 45 1 46 Missouri 3 7 10 Montana — 2 2 Nebraska — 5 5 Nevada 1 — 1 New York 2 — 2 North Carolina 8 4 12 North Dakota — 5 5 Ohio 18 — 18 Oregon 6 — 6 Pennsylvania 9 — 9 South Carolina — 1 1 South Dakota — 2 2 Tennessee — 4 4 Utah 16 — 16 Virginia 25 — 25 Washington 2 — 2 Wisconsin 49 3 52 368 93 461 We are obligated under non-cancelable leases for our restaurants and our central support office.
Biggest changeState Company- owned Franchised Total Arizona 7 — 7 California — 14 14 Colorado 57 — 57 Connecticut — 5 5 Florida — 6 6 Idaho 6 — 6 Illinois 53 5 58 Indiana 23 1 24 Iowa 9 1 10 Kansas 9 — 9 Kentucky 1 4 5 Maryland 22 — 22 Michigan — 21 21 Minnesota 45 1 46 Missouri 3 6 9 Montana — 2 2 Nebraska — 5 5 Nevada 1 — 1 New York 2 — 2 North Carolina 8 4 12 North Dakota — 5 5 Ohio 19 — 19 Oregon 6 — 6 Pennsylvania 10 — 10 South Carolina — 1 1 South Dakota — 2 2 Tennessee — 4 4 Utah 17 — 17 Virginia 27 — 27 Washington 1 — 1 Wisconsin 54 3 57 380 90 470 We are obligated under non-cancelable leases for our restaurants and our central support office.
Our restaurant leases generally have initial terms of 10 years with two or more five-year renewal options. Our restaurant leases may require us to pay a proportionate share of real estate taxes, insurance, common area maintenance charges and other operating costs. 24 Table of Contents
Our restaurant leases generally have initial terms of 10 years with two or more five-year renewal options. Our restaurant leases may require us to pay a proportionate share of real estate taxes, insurance, common area maintenance charges and other operating costs. 25 Table of Contents
ITEM 2. Properties As of January 3, 2023, we and our franchisees operated 461 restaurants in 31 states. Our restaurants are typically between 2,000 and 2,600 square feet and are located i n a variety of suburban, collegiate and urban markets. We lease the property for our central support office and all of the properties on which we operate restaurants.
ITEM 2. Properties As of January 2, 2024, we and our franchisees operated 470 restaurants in 31 states. Our restaurants are typically between 2,000 and 2,600 square feet and are located i n a variety of suburban, collegiate and urban markets. We lease the property for our central support office and all of the properties on which we operate restaurants.
The chart below shows the locations of our company-owned and franchised restaurants as of January 3, 2023.
The chart below shows the locations of our company-owned and franchised restaurants as of January 2, 2024.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeConsequently, the Company is unable to ascertain the ultimate aggregate amount of monetary liability or financial impact with respect to these matters as of January 3, 2023. These matters could affect the operating results of any one financial reporting period when resolved in future periods.
Biggest changeConsequently, the Company is unable to ascertain the ultimate aggregate amount of monetary liability or financial impact with respect to these matters as of January 2, 2024. These matters could affect the operating results of any one financial reporting period when resolved in future periods.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeITEM 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our Class A common stock trades on the Nasdaq Global Select Market under the symbol NDLS. As of March 3, 2023 , there were approximately 31 holders of record of our common stock.
Biggest changeITEM 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our Class A common stock trades on the Nasdaq Global Select Market under the symbol NDLS. As of March 1, 2024 , there were approximatel y 168 holders of record of our common stock.
Purchases of Equity Securities by the Issuer We had no share repurchases during the fourth quarter of 2022. Sales of Unregistered Securities by the Issuer We sold no unregistered securities that have not been previously included in a Quarterly Report on Form 10-Q or in a Current Report on Form 8-K.
Purchases of Equity Securities by the Issuer We had no share repurchases during the fourth quarter of 2023. Sales of Unregistered Securities by the Issuer We sold no unregistered securities that have not been previously included in a Quarterly Report on Form 10-Q or in a Current Report on Form 8-K.
Dividends No dividends have been declared or paid on our shares of common stock. We do not anticipate paying any cash dividends on any of our shares of common stock in the foreseeable future. We currently intend to retain any earnings to finance the development and expansion of our business.
Dividends No dividends have been declared or paid on our shares of common stock. We do not anticipate paying any cash dividends on any of our shares of common stock in the foreseeable future. We currently intend to retain any earnings to reduce outstanding debt and finance the development and expansion of our business.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeThe table below presents our operating results for 2022 and 2021, and the related year-over-year changes: Fiscal Year Increase / (Decrease) 2022 2021 $ % (in thousands) Revenue: Restaurant revenue $ 498,359 $ 467,336 $ 31,023 6.6 % Franchising royalties and fees, and other 11,121 7,816 3,305 42.3 % Total revenue 509,480 475,152 34,328 7.2 % Costs and Expenses: Restaurant operating costs (exclusive of depreciation and amortization, shown separately below): Cost of sales 137,859 117,894 19,965 16.9 % Labor 155,023 145,622 9,401 6.5 % Occupancy 45,213 45,956 (743) (1.6) % Other restaurant operating costs 91,220 83,603 7,617 9.1 % General and administrative 49,903 47,535 2,368 5.0 % Depreciation and amortization 23,268 22,333 935 4.2 % Pre-opening 1,662 665 997 149.9 % Restaurant impairments, closure costs and asset disposals 6,164 5,727 437 7.6 % Total costs and expenses 510,312 469,335 40,977 8.7 % (Loss) income from operations (832) 5,817 (6,649) * Interest expense, net 2,445 2,082 363 17.4 % (Loss) income before income taxes (3,277) 3,735 (7,012) * Provision for income taxes 37 70 (33) (47.1) % Net (loss) income $ (3,314) $ 3,665 $ (6,979) * Company-owned: Average unit volumes $ 1,360 $ 1,300 $ 60 4.6 % Comparable restaurant sales 6.0 % 21.3 % _____________ * Not meaningful.
Biggest changeThe table below presents our operating results for 2023 and 2022, and the related year-over-year changes: Fiscal Year Increase / (Decrease) 2023 2022 $ % (in thousands) Revenue: Restaurant revenue $ 492,648 $ 498,359 $ (5,711) (1.1) % Franchising royalties and fees, and other 10,757 11,121 (364) (3.3) % Total revenue 503,405 509,480 (6,075) (1.2) % Costs and Expenses: Restaurant operating costs (exclusive of depreciation and amortization, shown separately below): Cost of sales 124,102 137,859 (13,757) (10.0) % Labor 157,608 155,023 2,585 1.7 % Occupancy 45,925 45,213 712 1.6 % Other restaurant operating costs 91,559 91,220 339 0.4 % General and administrative 51,833 49,903 1,930 3.9 % Depreciation and amortization 26,792 23,268 3,524 15.1 % Pre-opening 2,215 1,662 553 33.3 % Restaurant impairments, closure costs and asset disposals 8,400 6,164 2,236 36.3 % Total costs and expenses 508,434 510,312 (1,878) (0.4) % Loss from operations (5,029) (832) (4,197) * Interest expense, net 4,803 2,445 2,358 96.4 % Loss before income taxes (9,832) (3,277) (6,555) (200.0) Provision for income taxes 24 37 (13) (35.1) % Net loss $ (9,856) $ (3,314) $ (6,542) (197.4) Company-owned: Average unit volumes $ 1,329 $ 1,360 $ (31) (2.3) % Comparable restaurant sales (2.0) % 6.0 % _____________ * Not meaningful.
Our long-term obligations consist primarily of certain lease and other contractual commitments related to our operations and payment of our outstanding debt obligations. In addition, our growth target for new store development will require capital each year which is expected to be funded by currently available cash and cash equivalents, cash flows from operations and our revolving credit facility.
Our long-term obligations consist primarily of certain lease and other contractual commitments related to our operations and payment of our outstanding debt obligations. In addition, new store development will require capital each year which is expected to be funded by currently available cash and cash equivalents, cash flows from operations and our revolving credit facility.
In addition, we receive trade credit for the purchase of food, beverages and supplies, therefore reducing the need for incremental working capital to support growth. 37 Table of Contents Critical Accounting Policies and Estimates Our consolidated financial statements and accompanying notes are prepared in accordance with GAAP.
In addition, we receive trade credit for the purchase of food, beverages and supplies, therefore reducing the need for incremental working capital to support growth. Critical Accounting Policies and Estimates Our consolidated financial statements and accompanying notes are prepared in accordance with GAAP.
If our estimates or underlying assumptions, including discount rate and sublease income change in the future, our operating results may be materially impacted. 38 Table of Contents
If our estimates or underlying assumptions, including discount rate and sublease income change in the future, our operating results may be materially impacted. 39 Table of Contents
This measure 28 Table of Contents highlights performance of existing restaurants, as the impact of new restaurant openings is excluded. Restaurants that were temporarily closed or operating at reduced hours and dining capacity due to the COVID-19 Pandemic remained in comparable restaurant sales.
This measure highlights performance of existing restaurants, as the impact of new restaurant openings is excluded. Restaurants that were temporarily closed or operating at reduced hours and dining capacity due to the COVID-19 Pandemic remained in comparable restaurant sales.
Fiscal Year 2022 2021 Revenue: Restaurant revenue 97.8 % 98.4 % Franchising royalties and fees, and other 2.2 % 1.6 % Total revenue 100.0 % 100.0 % Costs and expenses: Restaurant operating costs (exclusive of depreciation and amortization, shown separately below): Cost of sales 27.7 % 25.2 % Labor 31.1 % 31.2 % Occupancy 9.1 % 9.8 % Other restaurant operating costs 18.3 % 17.9 % General and administrative 9.8 % 10.0 % Depreciation and amortization 4.6 % 4.7 % Pre-opening 0.3 % 0.1 % Restaurant impairments, closure costs and asset disposals 1.2 % 1.2 % Total costs and expenses 100.2 % 98.8 % (Loss) income from operations (0.2) % 1.2 % Interest expense, net 0.5 % 0.4 % (Loss) income before income taxes (0.6) % 0.8 % Provision for income taxes 0.1 % — % Net (loss) income (0.7) % 0.8 % 33 Table of Contents Fiscal Year 2022 compared to Fiscal Year 2021 Fiscal year 2022 contained 53 operating weeks and fiscal year 2021 contained 52 operating weeks.
Fiscal Year 2023 2022 Revenue: Restaurant revenue 97.9 % 97.8 % Franchising royalties and fees, and other 2.1 % 2.2 % Total revenue 100.0 % 100.0 % Costs and expenses: Restaurant operating costs (exclusive of depreciation and amortization, shown separately below): Cost of sales 25.2 % 27.7 % Labor 32.0 % 31.1 % Occupancy 9.3 % 9.1 % Other restaurant operating costs 18.6 % 18.3 % General and administrative 10.3 % 9.8 % Depreciation and amortization 5.3 % 4.6 % Pre-opening 0.4 % 0.3 % Restaurant impairments, closure costs and asset disposals 1.7 % 1.2 % Total costs and expenses 101.0 % 100.2 % Loss from operations (1.0) % (0.2) % Interest expense, net 1.0 % 0.5 % Loss before income taxes (2.0) % (0.6) % Provision for income taxes — % 0.1 % Net loss (2.0) % (0.7) % 33 Table of Contents Fiscal Year 2023 compared to Fiscal Year 2022 Fiscal year 2023 contained 52 operating weeks and fiscal year 2022 contained 53 operating weeks.
“Financial Statements and Supplementary Data.” This section of the Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons of 2022 to 2021.
“Financial Statements and Supplementary Data.” This section of the Form 10-K generally discusses 2023 and 2022 items and year-to-year comparisons of 2023 to 2022.
Comparable Restaurant Sales Comparable restaurant sales refer to year-over-year sales comparisons for the comparable restaurant base. We define the comparable restaurant base to include restaurants open for at least 18 full peri ods. As of the end of 2022, 2021 and 2020, there were 347, 359 and 368 restaurants, re spectiv ely, in our comparable restaurant base for company-owned locations.
Comparable Restaurant Sales Comparable restaurant sales refer to year-over-year sales comparisons for the comparable restaurant base. We define the comparable restaurant base to include restaurants open for at least 18 full peri ods. As of the end of 2023, 2022 and 2021, there were 355, 347 and 359 restaurants, re spectiv ely, in our comparable restaurant base for company-owned locations.
Among other things, the Third Amendment: (i) increased the credit facility from $100.0 million to $125.0 million; (ii) eliminated the term loan and principal amortization components of the credit facility; (iii) removed the Company’s capital expenditure covenant; (iv) enhanced flexibility for certain covenants and restrictions; and (v) lowered the spread within the Company’s cost of borrowing and transitioned from LIBOR to SOFR plus a margin of 1.50% to 2.50% per annum, based upon the consolidated total lease-adjusted leverage ratio.
Among other things, the A&R Credit Agreement: (i) increased the credit facility from $100.0 million to $125.0 million; (ii) eliminated the term loan and principal amortization components of the credit facility; (iii) removed the capital expenditure covenant; (iv) enhanced flexibility for certain covenants and restrictions; and (v) lowered the spread within our cost of borrowing and transitioned from LIBOR to SOFR plus a margin of 1.50% to 2.50% per annum, based upon the consolidated total lease-adjusted leverage ratio.
Various factors impact comparable restaurant sales, including, but not limited to: • consumer recognition of our brand and our ability to respond to changing consumer preferences; • overall economic trends, particularly those related to consumer spending; • our ability to operate restaurants effectively and efficiently to meet consumer expectations; • pricing; • the number of restaurant transactions, per-person spend and average check amount; • marketing and promotional efforts; • abnormal weather patterns; • food safety and foodborne illness concerns; • the impact of the COVID-19 Pandemic; • local competition; • trade area dynamics; • introduction of new and seasonal menu items and limited time offerings; and • opening new restaurants in the vicinity of existing locations.
Various factors impact comparable restaurant sales, including, but not limited to: • consumer recognition of our brand and our ability to respond to changing consumer preferences; • overall economic trends, particularly those related to consumer spending; • our ability to operate restaurants effectively and efficiently to meet consumer expectations; • pricing; • the number of restaurant transactions, per-person spend and average check amount; • marketing and promotional efforts; • abnormal weather patterns; • food safety and foodborne illness concerns; • the impact of health pandemics; 29 Table of Contents • competition; • trade area dynamics; • introduction of new and seasonal menu items and limited time offerings; and • opening new restaurants in the vicinity of existing locations.
We operate on a 52- or 53-week fiscal year ending on the Tuesday closest to December 31. Fiscal year 2022, which ended on January 3, 2023 contained 53 weeks. Fiscal 2021, which ended on December 28, 2021 contained 52 weeks. We refer to our fiscal years as 2022 and 2021.
We operate on a 52- or 53-week fiscal year ending on the Tuesday closest to December 31. Fiscal year 2023, which ended on January 2, 2024 contained 52 weeks. Fiscal year 2022, which ended on January 3, 2023 contained 53 weeks. We refer to our fiscal years as 2023 and 2022.
Our revenue per restaurant is typically lower in the first and fourth quarters due to reduced winter and holiday traffic and is typically higher in the second and third quarters. As a result of these factors, as well as the periodic effects of the COVID-19 Pandemic, our quarterly and annual operating results and comparable restaurant sales may fluctuate.
Our revenue per restaurant is typically lower in the first and fourth quarters due to reduced winter and holiday traffic and is typically higher in the second and third quarters. As a result of these factors, our quarterly and annual operating results and comparable restaurant sales may fluctuate.
We believe that we have sufficient liquidity to meet our liquidity needs and capital resource requirements for at least the next twelve months primarily through currently available cash and cash equivalents, cash flows from operations, and borrowings under the Third Amended Credit Facility.
We believe that we have sufficient liquidity to meet our liquidity needs and capital resource requirements for at least the next twelve months primarily through currently available cash and cash equivalents, cash flows from operations, and borrowings under the A&R Credit Agreement.
Discussions of 2020 items and year-to-year comparisons of 2021 and 2020 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 on our Annual Report on Form 10-K for the year ended December 28, 2021.
Discussions of 2021 items and year-to-year comparisons of 2022 and 2021 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 on our Annual Report on Form 10-K for the year ended January 3, 2023.
Restaurant revenue represents sales of food and beverages in company-owned restaurants. Several factors affect our restaurant revenue in any period, including the number of restaurants in operation and per-restaurant sales. Franchise royalties and fees represent royalty income and initial franchise fees.
Several factors affect our restaurant revenue in any period, including the number of restaurants in operation and per-restaurant sales. Franchise royalties and fees represent royalty income and initial franchise fees.
Availability of borrowings under the Third Amended Credit Facility is conditioned upon our compliance with the terms of the Amendment, including the financial covenants and other customary affirmative and negative covenants, such as limitations on additional borrowings, acquisitions, dividend payments and lease commitments, and customary representations and warranties.
Availability of borrowings under the A&R Credit Agreement is conditioned upon our compliance with the terms of the A&R Credit Agreement, including the financial covenants and other customary affirmative and negative covenants, such as limitations on additional borrowings, acquisitions, dividend payments and lease commitments, and customary representations and warranties.
Pre-Opening Costs Pre-opening costs relate to the costs incurred prior to the opening of a restaurant. These include management labor costs, staff labor costs during training, food and supplies utilized during training, marketing costs and other pre-opening related costs. Pre-opening costs also include rent recorded between the date of possession and the opening date for our restaurants.
These include management labor costs, staff labor costs during training, food and supplies utilized during training, marketing costs and other pre-opening related costs. Pre-opening costs also include rent recorded between the date of possession and the opening date for our restaurants.
Fiscal year 2022 contained 53 operating weeks and fiscal year 2021 contained 52 operating weeks.
Fiscal year 2023 contained 52 operating weeks and fiscal year 2022 contained 53 operating weeks.
Investing Activities Net cash used in investing activities was primarily related to new restaurant capital expenditures for the opening of sixteen and six company-owned restaurants in 2022 and 2021, respectively, as well as information technology expenses and investments in restaurant equipment and restaurant upgrades.
Investing Activities Net cash used in investing activities was primarily related to information technology expenses including digital menu boards, new restaurant capital expenditures for the opening of eighteen and sixteen company-owned restaurants in 2023 and 2022, respectively, as well as investments in restaurant equipment and restaurant upgrades.
Our capital expenditures in 2023 are expected to be primarily related to our construction of new restaurants, which excludes landlord reimbursements that we typically receive, in addition to reinvestment in existing restaurants and investments in digital menu boards. Our contractual obligations consist of lease obligations, purchase obligations, long-term debt and other liabilities.
Our capital expenditures in 2024 are expected to be primarily related to our construction of new restaurants, which excludes landlord reimbursements that we typically receive, in addition to reinvestment in existing restaurants. 37 Table of Contents Our contractual obligations consist of lease obligations, purchase obligations, long-term debt and other liabilities.
See Note 4 Long-Term Debt and Note 12 Leases for further discussion. We are obligated under non-cancelable leases for our restaurants, administrative offices and equipment. In addition to those lease obligations, we have legally binding minimum lease payments for leases signed but not yet commenced amounting to $17.8 million as of January 3, 2023 .
See Note 4 Long-Term Debt and Note 12 Leases to our consolidated financial statements for further discussion. We are obligated under non-cancelable leases for our restaurants, administrative offices and equipment. In addition to those lease obligations, we have legally binding minimum lease payments for leases signed but not yet commenced amounting to $14.0 million as of January 2, 2024 .
As of January 3, 2023, we were in compliance with all of our debt covenants. We expect that we will meet all applicable financial covenants in our Third Amended Credit Facility through at least the next four fiscal quarters. However, there can be no assurance we will meet such financial covenants.
As of January 2, 2024, we were in compliance with all of our debt covenants. We expect that we will meet all applicable financial covenants in our A&R Credit Agreement through at least the next four fiscal quarters. However, there can be no assurance we will meet such financial covenants.
On May 9, 2018, we entered into the 2018 Credit Facility which consisted of a term loan facility in an aggregate principal amount of $25.0 million and a revolving line of credit of $65.0 million, which included a letter of credit subfacility in the amount of $15.0 million and a swingline subfacility in the amount of $10.0 million.
The Credit Agreement consisted of a term loan facility in an aggregate principal amount of $25.0 million and a revolving line of credit of $65.0 million, which included a letter of credit subfacility in the amount of $15.0 million and a swingline subfacility in the amount of $10.0 million.
We enter into various purchase obligations in the ordinary course of business. As of January 3, 2023, our short-term binding purchase obligations amounted to $40.1 million and our long-term binding purchase obligations amounted to $2.9 million . These amounts relate to volume commitments for beverage and food products, as well as binding commitments for the construction of new restaurants.
We enter into various purchase obligations in the ordinary course of business. As of January 2, 2024, all of our binding purchase obligations are short-term amounting to $40.8 million . These amounts relate to volume commitments for beverage and food products, as well as binding commitments for the construction of new restaurants.
We were able to partially mitigate the impact of these market factors through a continued focus on our hiring process and retaining existing employees, in addition to maximizing efficiencies of labor hour usage per restaurant. Other Restaurant Operating Costs.
However, we continue to see a highly competitive environment for restaurant workers. We have been able to partially mitigate the impact of these market factors through a continued focus on our hiring process and retaining existing employees, in addition to maximizing efficiencies of labor hour usage per restaurant. Other Restaurant Operating Costs.
Interest Expense Interest expense consists primarily of interest on our outstanding indebtedness and amortization of debt issuance costs over the life of the related debt reduced by capitalized interest.
Interest Expense Interest expense consists primarily of interest on our outstanding indebtedness and amortization of debt issuance costs over the life of the related debt reduced by capitalized interest. Provision for Income Taxes Provision for income taxes consists of federal, state and local taxes on our income.
Our total capital expenditures for 2022 were $33.9 million, which includes amounts for restaurants that will be opening in 2023. We expect our 2023 c apital expenditures to be in the range of $53.0 million to $58.0 million.
Our total capital expenditures for 2023 were $52.0 million, which includes amounts for restaurants that will be opening in 2024. We expect our 2024 c apital expenditures to be in the range of $28.0 million to $32.0 million.
During 2022, we implemented greater menu price increases relative to historical years as a result of meaningful inflation in our cost of food, wages and general restaurant expenses. In addition, we applied a pricing premium for third party delivery.
During 2022 and in the beginning of 2023, we implemented greater menu price increases relative to historical years as a result of meaningful inflation in our cost of food, wages and general restaurant expenses.
In connection with the Third Amendment, the Company wrote off a portion of the unamortized debt issuance costs related to the Second Amended Credit Facility in the amount of $0.3 million in the third quarter of 2022.
In connection with the entry into the A&R Credit Agreement, we wrote off a portion of the unamortized debt issuance costs related to the Credit Agreement in the amount of $0.3 million in the third quarter of 2022.
W e will continue to maintain a 35 Table of Contents valuation allowance against deferred tax assets until there is sufficient evidence to support a full or partial reversal. The reversal of a previously recorded valuation allowance will generally result in a benefit from income tax.
Provision for Income Taxes The effective tax rate was (0.2)% in 2023 compared to (1.1)% in 2022. W e will continue to maintain a valuation allowance against deferred tax assets until there is sufficient evidence to support a full or partial reversal. The reversal of a previously recorded valuation allowance will generally result in a benefit from income tax.
The 2018 Credit Facility was subsequently amended on November 20, 2019 (as amended, the First Amended Credit Facility) and June 16, 2020 (as amended, the Second Amended Credit Facility).
The Credit Agreement was subsequently amended on November 20, 2019 and June 16, 2020.
Financing Activities Net cash provided by financing activities was $22.0 million in 2022 largely related to draws on our revolving credit facility to fund new restaurant openings, partially offset by debt issuance costs and payments on finance leases.
Financing Activities Net cash provided by financing activities was $25.8 million in 2023 largely related to draws on our revolving credit facility and swingline to fund new restaurant openings, partially offset by the $5.0 million repurchase of the Company’s common stock in the open market, debt issuance costs and payments on finance leases.
We have incurred incremental costs of sales driven by historical and ongoing volatility in the commodity and food ingredients markets, particularly with our chicken products, in addition to an increase in packaging costs and distribution.
In recent years, we incurred incremental costs of sales driven by volatility in the commodity and food ingredients markets, particularly with our chicken products, in addition to an increase in packaging costs and distribution. However, in 2023, the commodity markets underlying our cost of food improved substantially, particularly in regards to the price of chicken.
Impairment is based on our cu rrent assessment of the expected future cash flows of various restaurants based on recent results and other specific market factors.
Impairment is based on our cu rrent assessment of the expected future cash flows of various restaurants based on recent results and other specific market factors. Key Measures We Use to Evaluate Our Performance To evaluate the performance of our business, we utilize a variety of financial and performance measures.
Other Restaurant Operating Costs Other restaurant operating costs include the costs of repairs and maintenance, utilities, restaurant-level marketing, credit card processing fees, third-party delivery fees, restaurant supplies and other restaurant operating costs.
Other Restaurant Operating Costs Other restaurant operating costs include the costs of repairs and maintenance, utilities, restaurant-level marketing, credit card processing fees, third-party delivery fees, restaurant supplies and other restaurant operating costs. Similar to certain other costs, they are expected to grow proportionally as restaurant revenue grows.
Restaurant Impairments, Closure Costs and Asset Disposals Restaurant impairments, closure costs and asset disposals include the net gain or loss on disposal of long-lived assets related to retirements and replacement of equipment or leasehold improvements, restaurant closures, divestitures and impairment charges.
Restaurant Impairments, Closure Costs and Asset Disposals Restaurant impairments, closure costs and asset disposals include the net gain or loss on disposal of long-lived assets related to retirements and replacement of equipment or leasehold improvements, lease expenses that the Company is still obligated for, refranchising gains or losses, gains or losses on lease terminations, other restaurant closure costs and impairment charges.
Our other liabilities of $0.7 million as of January 3, 2023 includes our commitment u nder our non-qualified deferred compensation plan.
Our other liabilities of $2.1 million as of January 2, 2024 includes our commitment u nder our non-qualified deferred compensation plan and severance.
Labor Costs Labor costs include wages, payroll taxes, workers’ compensation expense, benefits and incentives paid to our restaurant teams. Similar to certain other expense items, we expect labor costs to change proportionally as our restaurant revenue changes.
Other important factors causing fluctuations in cost of sales include seasonality, discounting activity, distribution costs and restaurant level management of food waste. Labor Costs Labor costs include wages, payroll taxes, workers’ compensation expense, benefits and incentives paid to our restaurant teams. Similar to certain other expense items, we expect hourly labor costs to change proportionally as our restaurant revenue changes.
If such covenants are not met, we would be required to seek a waiver or amendment from the banks participating in the credit facility. There can be no assurance that such waiver or amendment would be granted, which could have a material adverse impact on our liquidity.
If such covenants are not met, we would be required to seek a waiver or amendment from the banks participating in the credit facility.
Key Financial Definitions Cost of Sales Cost of sales includes the direct costs associated with the food, beverage and packaging of our menu items. Cost of sales also includes any costs related to discounted menu items. Cost of sales is a substantial expense and can be expected to change proportionally as our restaurant revenue changes.
Cost of sales also includes any costs related to discounted menu items. Cost of sales is a substantial expense and can be expected to change proportionally as our restaurant revenue changes. Fluctuations in cost of sales are caused primarily by volatility in the cost of commodity food items and related contracts for such items.
Throughout these periods of volatility, we have continued to work with our suppliers for ongoing supply chain efficiencies, including managing food waste and adding additional suppliers as necessary.
Throughout these periods of volatility, we have continued to work with our suppliers for ongoing supply chain efficiencies, including managing food waste and adding additional suppliers as necessary. Labor Costs. Similar to much of the restaurant industry, our base labor costs have risen in recent years. In 2023, wage inflation decelerated as we progressed throughout the year.
The change in operating cash flows resulted from a decrease in net income, as adjusted for non-cash items including depreciation, as well as working capital changes. The working capital variance includes uses of cash related to payroll timing, decreases in liabilities held for sale related to the Warner Sale and normal changes in accounts payable and other accrued expenses.
The change in operating cash flows resulted primarily from working capital changes. The working capital variance includes uses of cash related to payroll timing and normal changes in accounts payable and other accrued expenses.
As of January 3, 2023, we had $47.7 million of indebtedness (excluding $1.6 million of unamortized debt issuance costs) and $3.0 million of letters of credit outstanding under the Third Amended Credit Facility.
As of January 2, 2024, we had $82.2 million of indebtedness (excluding $2.0 million of unamortized debt issuance costs) and $3.0 million of letters of credit outstanding under the A&R Credit Agreement.
Key Measures We Use to Evaluate Our Performance To evaluate the performance of our business, we utilize a variety of financial and performance measures. These key measures include revenue, comparable restaurant sales, average unit volumes (“AUVs”), EBITDA and adjusted EBITDA. EBITDA and adjusted EBITDA are non-GAAP financial measures. Revenue Revenue includes both restaurant revenue and franchise royalties and fees.
These key measures include revenue, comparable restaurant sales, average unit volumes (“AUVs”), EBITDA and adjusted EBITDA. EBITDA and adjusted EBITDA are non-GAAP financial measures. Revenue Revenue includes both restaurant revenue and franchise royalties and fees. Restaurant revenue represents sales of food and beverages in company-owned restaurants.
General and administrative expense also includes the non-cash stock compensation expense related to our stock incentive plan. Depreciation and Amortization Our principal depreciation and amortization charges relate to depreciation of long-lived assets, such as property, equipment and leasehold improvements, from restaurant construction and ongoing maintenance.
Depreciation and Amortization Our principal depreciation and amortization charges relate to depreciation of long-lived assets, such as property, equipment and leasehold improvements, from restaurant construction and ongoing maintenance. Pre-Opening Costs Pre-opening costs relate to the costs incurred prior to the opening of a restaurant.
Similar to certain other costs, they are expected to grow proportionally as restaurant revenue grows. 30 Table of Contents General and Administrative Expense General and administrative expense is composed of payroll, other compensation, travel, marketing, accounting and legal fees, insurance and other expenses related to the infrastructure required to support our restaurants.
General and Administrative Expense 31 Table of Contents General and administrative expense is composed of payroll, other compensation, travel, marketing, accounting and legal fees, insurance and other expenses related to the infrastructure required to support our restaurants. General and administrative expense also includes the non-cash stock compensation expense related to our stock incentive plan.
Liquidity and Capital Resources Current Resources As of January 3, 2023, our available cash and cash equivalents balance was $1.5 million, and $74.3 million was available for future borrowings under our Third Amended Credit Facility (defined below).
Liquidity and Capital Resources Current Resources 35 Table of Contents As of January 2, 2024, our available cash and cash equivalents balance was $3.0 million, and $39.9 million was available for future borrowings under our A&R Credit Agreement (defined below).
Certain Restaurant Closures. We closed five and twelve company-owned restaurants in 2022 and 2021, respectively, most of which were at or approaching the expiration of their leases. We currently do not anticipate significant restaurant closures for the foreseeable future; however, we may from time to time close certain restaurants, including closures at, or near, the expiration of their leases.
We currently do not anticipate significant restaurant closures for the 28 Table of Contents foreseeable future; however, we may from time to time close certain restaurants, including closures at, or near, the expiration of their leases. Impairment of Long-lived Asse ts. We impaired two restaurants in 2023 a nd four restaurants in 2022.
Right of use (“ROU”) assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make future lease payments arising from the lease.
Pursuant to FASB Accounting Standards Codification (“ASC”) Topic 842, all operating and finance lease assets and liabilities are recognized on our Consolidated Balance Sheets. 38 Table of Contents Right of use (“ROU”) assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make future lease payments arising from the lease.
Cash Flow Analysis Cash flows from operating, investing and financing activities are shown in the following table: Fiscal Year Ended January 3, 2023 December 28, 2021 (in thousands) Net cash provided by operating activities $ 9,557 $ 36,165 Net cash used in investing activities (32,309) (18,370) Net cash provided by (used in) financing activities 22,020 (23,380) Net decrease in cash and cash equivalents $ (732) $ (5,585) 36 Table of Contents Operating Activities Net cash provided by operating activities in 2022 was $9.6 million compared to $36.2 million in 2021.
There can be no assurance that such waiver or amendment would be granted, which could have a material adverse impact on our liquidity. 36 Table of Contents Cash Flow Analysis Cash flows from operating, investing and financing activities are shown in the following table: Fiscal Year Ended January 2, 2024 January 3, 2023 (in thousands) Net cash provided by operating activities $ 27,495 $ 9,557 Net cash used in investing activities (51,800) (32,309) Net cash provided by financing activities 25,795 22,020 Net increase (decrease) in cash and cash equivalents $ 1,490 $ (732) Operating Activities Net cash provided by operating activities in 2023 was $27.5 million compared to $9.6 million in 2022.
We believe that EBITDA and adjusted EBITDA provide clear pictures of our operating results by eliminating certain non-recurring and non-cash expenses that may vary widely from period to period and are not reflective of the underlying business performance. 29 Table of Contents The presentation of EBITDA and adjusted EBITDA is not intended to be considered in isolation or as a substitute for, or to be superior to, the financial information prepared and presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
We believe that EBITDA and adjusted EBITDA provide clear pictures of our operating results by eliminating certain non-recurring and non-cash expenses that may vary widely from period to period and are not reflective of the underlying business performance.
Other Restaurant Operating Costs Other restaurant operating costs increased by $7.6 million, or 9.1%, in 2022 compared to 2021, due primarily to higher third-party delivery fees and higher utility rates in 2022 . As a percentage of restaurant revenue, other restaurant operating costs increased to 18.3% in 2022 from 17.9% in 2021 .
As a percentage of restaurant revenue, occupancy costs increased to 9.3% in 2023 from 9.1% in 2022, due primarily to a decrease in restaurant revenue. Other Restaurant Operating Costs Other restaurant operating costs increased by $0.3 million, or 0.4%, in 2023 compared to 2022, due primarily to planned increased marketing spend in 2023.
(2) During 2022, we sold fifteen company-owned restaurants to a franchisee. 32 Table of Contents Results of Operations The following table summarizes key components of our results of operations for the periods indicated as a percentage of our total revenue, except for the components of restaurant operating costs, which are expressed as a percentage of restaurant revenue.
Restaurant Openings, Closures and Relocations The following table shows restaurants opened or closed in the years indicated: Fiscal Year 2023 2022 Company-Owned Restaurants Beginning of period 368 372 Openings 18 16 Divestitures (1) — (15) Closures and relocations (6) (5) End of period 380 368 Franchise Restaurants Beginning of period 93 76 Openings — 3 Acquisitions (1) — 15 Closures (3) (1) End of period 90 93 Total restaurants 470 461 _____________________________ (1) During 2022, we sold fifteen company-owned restaurants to a franchisee. 32 Table of Contents Results of Operations The following table summarizes key components of our results of operations for the periods indicated as a percentage of our total revenue, except for the components of restaurant operating costs, which are expressed as a percentage of restaurant revenue.
Labor Costs Labor costs increased by $9.4 million, or 6.5%, in 2022 compared to 2021, due primarily to the increase in wage inflation. This was partially offset by labor efficiency initiatives and lower benefits costs related to our health insurance plan. As a percentage of restaurant revenue, labor costs decreased to 31.1% in 2022 compared to 31.2% in 2021.
As a percentage of restaurant revenue, labor costs increased to 32.0% in 2023 compared to 31.1% in 2022, primarily due to a 1.6% impact from wage and benefits inflation, partially offset by a 0.6% impact from labor productivity. Occupancy Costs Occupancy costs increased by $0.7 million, or 1.6%, in 2023 compared to 2022, due primarily to new restaurant openings.
Pre-Opening Costs Pre-opening costs increased $1.0 million in 2022 compared to 2021 due to the increased number of restaurant openings in 2022 compared to 2021. Restaurant Impairments, Closure Costs and Asset Disposals Restaurant impairments, closure costs and asset disposals increased by $0.4 million, or 7.6%, in 2022 compared to 2021.
Restaurant Impairments, Closure Costs and Asset Disposals Restaurant impairments, closure costs and asset disposals increased by $2.2 million, or 36.3%, in 2023 compared to 2022 .
The Third Amended Credit Facility is secured by a pledge of stock of substantially all of the Company’s subsidiaries and a lien on substantially all of the personal property assets of the Company and its subsidiaries.
The A&R Credit Agreement is secured by a pledge of stock of substantially all of our subsidiaries and a lien on substantially all of our and our subsidiaries’ personal property assets. On December 21, 2023, we amended our A&R Credit Agreement by entering into that certain First Amendment to Amended and Restated Credit Agreement (the “Amendment”).
We have and expect to continue to incur additional third-party delivery fees resulting from a significant expansion of our use of third-party delivery services. In addition, during 2022 we experienced an increase in utility costs driven by volatility in the energy markets. Restaurant Development.
We have and expect to continue to incur additional third-party delivery fees resulting from a significant expansion of our use of third-party delivery services. In addition, during 2023 we increased marketing expenses related primarily to digital advertising. Restaurant Developm ent. In 2023 , we opened eighteen company-owned restaura nts.
Depreciation and Amortization Depreciation and amortization increased by $0.9 million, or 4.2%, in 2022 compared to 2021 , due primarily to new restaurant openings and an additional week in the fiscal year, partially offset by restaurants impaired or closed. As a percentag e of revenue, depreciation and amortization remained relatively flat .
As a percentage of revenue, general and administrative expense increased to 10.3% in 2023 compared to 9.8% in 2022, due primarily to a decline in revenue. Depreciation and Amortization Depreciation and amortization increased by $3.5 million, or 15.1%, in 2023 compared to 2022, due primarily to new restaurant and technology investments, partially offset by restaurants impaired or closed.
System-wide comparable restaurant sales increased 5.6% in 2022 , comprised of a 6.0% increase at company-owned restaurants a nd a 3.4% increase at franchise-owned restaurants. 34 Table of Contents Cost of Sales Cost of sales increased by $20.0 million, or 16.9%, in 2022 compared to 2021, due primarily to the increase in our cost of food, predominantly chicken.
Average unit volumes decreased 2.3% to $1.3 million in 2023 compared to $1.4 million in 2022 primarily due to decreases in traffic. System-wide comparable restaurant sales decreased 1.9% in 2023, comprised of a 2.0% decrease at company-owned restaurants and a 1.1% decrease at franchise-owned restaurants.
We define adjusted EBITDA as net income (loss) before net interest expense, provision (benefit) for income taxes, depreciation and amortization, restaurant impairments, closure costs and asset disposals, fees and costs related to transactions and other acquisition/disposition costs and stock-based compensation.
We define adjusted EBITDA as net income (loss) before net interest expense, provision (benefit) for income taxes, depreciation and amortizatio n, restaurant impairments, loss on disposal of assets, net lease exit costs (benefits), loss on sale of restaurants, severance and executive transition costs and stoc k-based compensation.
The increase was mainly due to higher average borrowings and a higher average interest rate in 2022 compared to 2021 as well as an additional week in the fiscal year 2022. With the refinancing of our debt in mid-2020, interest expense for all amounts outstanding is variable.
Interest Expense Interest expense increased by $2.4 million, or 96.4% in 2023 c ompared to 2022. The increase was mainly due to higher average borrowings and a higher average interest rate in 2023 compared to 2022. Interest rates for all amounts outstanding are variable.
Occupancy Costs Occupancy costs decreased by $0.7 million, or 1.6%, in 2022 compared to 2021, due primarily to the favorable impact of refranchising 15 restaurants in early 2022. As a percentage of restaurant revenue, occupancy costs decreased to 9.1% in 2022 from 9.8% in 2021, due primarily to an increase in restaurant revenue.
As a percentage of restaurant revenue, cost of sales decreased to 25.2% in 2023 from 27.7% in 2022, primarily due to a 1.8% impact from a combination of menu price increases and menu mix and a 0.7% impact from lower commodities prices. 34 Table of Contents Labor Costs Labor costs increased by $2.6 million, or 1.7%, in 2023 compared to 2022.
The increase was partially offset by $1.4 million of impairment charges on four restaurants in 2022 compared to $3.4 million of impairment charges on six restaurants in 2021. Both years include ongoing equipment costs for restaurants previously impaired. Interest Expense Interest expense increased by $0.4 million, or 17.4% in 2022 compared to 2021 .
The increase was largely due to an increase in write-downs of lease related assets partially offset by lower fixed asset impairment charges with only two restaurants impaired in 2023 compared to four restaurants impaired in 2022, Both years include on going equipment costs for restaurants previously impaired and lease related costs and expenses in connection with the divestiture of company-owned restaurants in previous years.
Revenue Total revenue increased by $34.3 million, or 7.2%, in 2022 compared to 2021. This increase was primarily due to an increase in restaurant average unit volumes and new restaurant openings, partially offset by a decrease in revenue of $18.2 million from refranchising 15 restaurants in the Warner Sale in early 2022.
This decrease was primarily due to: $10.0 million from a decline in company same store sales, $9.1 million from overlapping the impact of an additional operating week in 2022, and $3.1 million due to permanent restaurant closures, partially offset by $17.0 million from growth in new restaurant revenue.
General and Administrative Expense General and administ rative expense increased by $2.4 million, or 5.0%, in 2022 compared to 2021, due primarily to increases in wages, marketing expense, software related costs and travel costs, as well as increased expenses from the additional week in the fiscal year, partially offset by decreases in bonus expense.
General and Administrative Expense General and administrative expense increased by $1.9 million, or 3.9%, in 2023 compared to 2022, due primarily to increases in third party services of $1.5 million, executive severance costs of $1.1 million and bad debt expense of $0.5 million, partially offset by a decrease in incentive-based compensation expense of $1.2 million.
Leases We lease all restaurant facilities, office space and certain equipment. Pursuant to FASB Accounting Standards Codification (“ASC”) Topic 842, all operating and finance lease assets and liabilities are recognized on our Consolidated Balance Sheets.
Leases We lease all restaurant facilities, office space and certain equipment.
Removed
We believe we offer our customers value with per person spend of approximately $12.50 in 2022. Recent Trends, Risks and Uncertainties The COVID-19 Pandemic has adversely affected our historical operations and financial results. However, throughout 2022, the impacts to our operations, financial performance and cash flows have diminished materially.
Added
We believe we offer our customers value with per person spend of $13.21 in 2023. Recent Trends, Risks and Uncertainties Comparable Restaurant Sales. In fiscal 2023, system-wide com parable restaurant sales decreased 1.9%, comprised of a 2.0% decrease for company-owned restaurants and a 1.1% decrease for franch ise restauran ts.
Removed
In addition, we remain in regular contact with our major suppliers and to date we have not experienced significant disruptions in our supply chain.
Added
During 2023, we saw a decline in restaurant level traffic, and correspondingly in total revenue, that we believe was at least partially due to consumer response to our recent price increases.
Removed
If the COVID-19 Pandemic were to become more widespread or another pandemic were to occur, our business could be similarly impacted in the future, including business disruption, employee absences and changes in the availability or cost of labor. Comparable Restaurant Sales.
Added
We have taken actions to address this response including moderating the level of price increases and offering value oriented options, but there is no guarantee these actions will ultimately be successful and we cannot predict the extent and duration of this decline. Cost of Sales.
Removed
In fiscal 2022, system-wide comparable restaurant sales increased 5.6%, comprised of a 6.0% increase for company-owned restaurants and a 3.4% increase for franchise restauran ts. These increases reflect continued strength across both digital and in-person channels, in addition to price increases in our core menu.
Added
As of January 2, 2024, we had 380 company-owned restaurants and 90 franchise restaurants in 31 states. In 2024 , we plan to open 10-12 new company-owned restaurants. Certain Restaurant Closures. We closed six and five company-owned restaurants in 2023 and 2022, respectively, most of which were at or approaching the expiration of their leases.
Removed
If we continue to see inflationary pressures on our cost of operations, we may continue to further increase menu prices in the future. In addition, our revenue is highly dependent on our customers’ future willingness to order from restaurants given consumer inflationary pressures and potential recessionary market dynamics.
Added
The presentation of EBITDA and adjusted EBITDA, which may not be comparable to similarly titled financial measures used by other companies, is not intended to be considered in isolation or as a substitute for, or to be superior to, the financial information prepared and presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Removed
Revenue has also been favorably impacted by recent restaurant openings not in the Company’s comparable restaurant base, many of which offer order ahead drive-thru pickup windows.
Added
We believe that they provide useful information to management and investors about operating results, enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to key metrics used by management in its financial and operational decision making. 30 Table of Contents The following table presents a reconciliatio n of net loss to EBIT DA and adjusted EBITDA: Fiscal Year 2023 2022 (1) (in thousands) Net loss $ (9,856) $ (3,314) Depreciation and amortization 26,792 23,268 Interest expense, net 4,803 2,445 Provision for income taxes 24 37 EBITDA $ 21,763 $ 22,436 Restaurant impairments (2) 2,987 1,362 Loss on disposal of assets 1,979 946 Lease exit costs (benefits), net 396 267 Loss on sale of restaurants — 263 Severance and executive transition costs 1,559 — Stock-based compensation expense 4,346 4,395 Adjusted EBITDA $ 33,030 $ 29,669 _____________ (1) Amounts for fiscal year 2022 include modifications to the adjusted EBITDA calculation to remove adjustments for non-cash rent expense related to sub-leases, certain costs associated with closed restaurants and costs related to corporate matters to conform to the current year presentation.
Removed
Our new restaurants from the class of 2019 and 2020 which have reached maturity continue to perform as a group at the highest sales level of any class of new restaurants in the Company’s history. Cost of Sales.
Added
(2) Restaurant impairments in all periods presented above include amounts related to restaurants previously impaired. See Note 6, Restaurant Impairments, Closure Costs and Asset Disposals. Key Financial Definitions Cost of Sales Cost of sales includes the direct costs associated with the food, beverage and packaging of our menu items.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

6 edited+2 added−0 removed3 unchanged
Biggest changeInflation has more significantly impacted our operating results during 2022 than compared to prior years, particularly in our commodity and construction markets, in addition to increased wage inflation that has continued to affect our results from 2019 through 2022. We expect inflation may continue to affect our results in the near future. 39 Table of Contents
Biggest changeWe expect inflation may continue to affect our results in the near future. 40 Table of Contents
Inflation The primary inflationary factors affecting our operations are food costs, labor costs, energy costs and materials used in the construction of new restaurants and maintenance of existing restaurants. Increases in federal, state or local minimum wages directly affect our labor costs.
Inflation The primary inflationary factors affecting our operations are food costs, labor costs, energy costs and materials used in the construction of new restaurants and maintenance of existing restaurants. Increases in federal, state or local minimum wages directly affect our l abor costs.
Our exposure to interest rate fluctuations is limited to our outstanding borrowing under our Third Amended Credit Facility, which bears interest at variable rates equal to SOFR plus a margin of 1.50% to 2.50% per annum, based upon the consolidated total lease-adjusted leverage ratio.
Our exposure to interest rate fluctuations is limited to our outstanding borrowing u nder our A&R Credit Agreement, which bears interest at variable rates equal to SOFR plus a margin of 1.75% to 3.00% per annum, based upon the consolidated total lease-adjusted leverage ratio.
As of January 3, 2023, $47.7 million in borrowings were outstanding under our Third Amended Credit Facility. An increase or decrease of 1.0% in the effective interest rate applied to our borrowings would have resulted in a pre-tax interest expense fluctuation of approximately $0.5 million on an annualized basis.
A s of January 2, 2024, $82.2 million in borrowings were outstanding under our A&R Credit Agreement. An increase or decrease of 1.0% in the effective interest rate applied to our borrowings would have resulted in a pre-tax interest expense fluctuation of approximately $0.8 million on an annualized basis.
Many of our leases require us to pay taxes, maintenan ce, repairs, insurance and utilities, all of which are generally subject to inflationary increases. Additionally, the cost of constructing our restaurants is subject to inflationary increases in the costs of labor and material.
Many of our leases require us to pay taxes, maintenance, repairs, insurance and utilities, all of which are generally subject to inflationary increases. Additionally, the cost of constructing our restaurants is subject to inflationary increases in the costs of labor and material. During 2023, the degree of inflation moderated compared to 2022 although total inflation remains above historical averages.
In many cases, we believe we will be able to address material commodity cost increases by adjusting our menu pricing. In 2022, we optimized efficiencies with our chicken vendor to mitigate chicken price increases . However, increases in commodity prices, without adjustments to our menu prices, could increase restaurant operating costs as a percentage of restaurant revenue.
In 2023, the commodity markets underlying our cost of food began to improve materially, particularly in regard to the price of chicken. However, increases in commodity prices, without adjustments to our menu prices, could increase restaurant operating costs as a percentage of restaurant revenue.
Added
In many cases, we believe we may be able to address material commodity cost increases by adjusting our menu pricing, but multiple price increases over a short period of time may negatively affect customer behavior, as we observed in 2023.
Added
During 2022, due to the volatility in several commodity markets and driven by vendor availability, many of our contracts were shorter duration than typical and, in some cases, were based on floating rate prices rather than fixed rate. As a result, we saw higher cost of food in 2022 than in prior years.