Noodles & pany(NDLS) - 2023 Q2 - Quarterly Report

PART I - Financial Information This section presents the unaudited condensed consolidated financial information, including financial statements and related disclosures Item 1. Financial Statements (unaudited) This section presents Noodles & Company's unaudited condensed consolidated financial statements and comprehensive notes for the specified periods Condensed Consolidated Balance Sheets This section provides a snapshot of the company's assets, liabilities, and equity at specific points in time Condensed Consolidated Balance Sheets (in thousands) | Metric | June 28, 2022 | December 28, 2021 | | :--------------------------------- | :------------ | :---------------- | | Assets | | | | Total current assets | $20,495 | $22,562 | | Property and equipment, net | $124,034 | $119,276 | | Operating lease assets, net | $184,947 | $188,440 | | Goodwill | $7,154 | $7,154 | | Total assets | $338,581 | $341,459 | | Liabilities & Stockholders' Equity | | | | Total current liabilities | $69,967 | $76,582 | | Long-term debt, net | $31,142 | $18,931 | | Long-term operating lease liabilities, net | $194,197 | $200,243 | | Total liabilities | $303,694 | $303,826 | | Total stockholders' equity | $34,887 | $37,633 | | Total liabilities and stockholders' equity | $338,581 | $341,459 | Condensed Consolidated Statements of Operations This section details the company's revenues, expenses, and net income or loss over specific reporting periods Condensed Consolidated Statements of Operations (in thousands, except per share data) | Metric | Q2 2022 (Ended June 28) | Q2 2021 (Ended June 29) | YTD Q2 2022 (Ended June 28) | YTD Q2 2021 (Ended June 29) | | :--------------------------------------- | :---------------------- | :---------------------- | :-------------------------- | :-------------------------- | | Total revenue | $131,067 | $125,649 | $243,629 | $235,226 | | Total costs and expenses | $129,189 | $119,439 | $247,826 | $230,381 | | Income (loss) from operations | $1,878 | $6,210 | $(4,197) | $4,845 | | Net income (loss) | $1,345 | $5,683 | $(5,084) | $3,706 | | Basic EPS | $0.03 | $0.12 | $(0.11) | $0.08 | | Diluted EPS | $0.03 | $0.12 | $(0.11) | $0.08 | Condensed Consolidated Statements of Stockholders' Equity This section outlines changes in the company's equity accounts, including common stock and accumulated deficit Condensed Consolidated Statements of Stockholders' Equity (in thousands) | Metric | Balance—March 29, 2022 | Balance—June 28, 2022 | | :--------------------------------- | :--------------------- | :-------------------- | | Common Stock Amount | $483 | $484 | | Treasury Stock Amount | $(35,000) | $(35,000) | | Additional Paid-In Capital | $208,065 | $209,561 | | Accumulated Deficit | $(141,503) | $(140,158) | | Total Stockholders' Equity | $32,045 | $34,887 | | Metric | Balance—December 28, 2021 | Balance—June 28, 2022 | | :--------------------------------- | :---------------------- | :-------------------- | | Common Stock Amount | $481 | $484 | | Treasury Stock Amount | $(35,000) | $(35,000) | | Additional Paid-In Capital | $207,226 | $209,561 | | Accumulated Deficit | $(135,074) | $(140,158) | | Total Stockholders' Equity | $37,633 | $34,887 | - Net income for Q2 2022 was $1,345 thousand, contributing to a reduction in accumulated deficit from $(141,503) thousand to $(140,158) thousand[12] - Stock-based compensation expense was $1,515 thousand for Q2 2022 and $2,655 thousand for the first two quarters of 2022[12][13] Condensed Consolidated Statements of Cash Flows This section reports the cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (in thousands) | Activity | YTD Q2 2022 (Ended June 28) | YTD Q2 2021 (Ended June 29) | | :----------------------------------------- | :-------------------------- | :-------------------------- | | Net cash provided by operating activities | $6,043 | $23,246 | | Net cash used in investing activities | $(15,147) | $(7,476) | | Net cash provided by (used in) financing activities | $8,638 | $(6,286) | | Net (decrease) increase in cash and cash equivalents | $(466) | $9,484 | | Cash and cash equivalents, end of period | $1,789 | $17,324 | Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and additional information supporting the condensed consolidated financial statements 1. Business Summary and Basis of Presentation This note provides an overview of Noodles & Company's operations and the basis for financial statement presentation - Noodles & Company operates 456 system-wide restaurants (363 company-owned, 93 franchise) across 31 states as of June 28, 2022[19] - The company operates on a 52- or 53-week fiscal year, with fiscal year 2022 containing 53 weeks[21] - The adoption of ASU 2020-04 (Reference Rate Reform) in Q3 2022 is not expected to have a material impact on financial statements[22] 2. Supplemental Financial Information This note offers additional detail on specific balance sheet accounts, including receivables, prepaid expenses, and liabilities Accounts Receivable (in thousands) | Category | June 28, 2022 | December 28, 2021 | | :----------------------- | :------------ | :---------------- | | Delivery program receivables | $1,432 | $1,467 | | Vendor rebate receivables | $605 | $695 | | Franchise receivables | $958 | $644 | | Other receivables | $972 | $1,152 | | Total Accounts Receivable | $3,967 | $3,958 | Prepaid Expenses and Other Assets (in thousands) | Category | June 28, 2022 | December 28, 2021 | | :--------------------------------- | :------------ | :---------------- | | Prepaid insurance | $1,719 | $853 | | Current assets held for sale | $0 | $3,514 | | Prepaid expenses | $2,666 | $2,272 | | Total Prepaid Expenses and Other Assets | $4,598 | $6,837 | Property and Equipment, Net (in thousands) | Category | June 28, 2022 | December 28, 2021 | | :--------------------------------- | :------------ | :---------------- | | Leasehold improvements | $204,573 | $197,722 | | Furniture, fixtures and equipment | $144,212 | $140,698 | | Construction in progress | $9,640 | $6,306 | | Accumulated depreciation and amortization | $(234,391) | $(225,450) | | Property and equipment, net | $124,034 | $119,276 | Accrued Payroll and Benefits (in thousands) | Category | June 28, 2022 | December 28, 2021 | | :--------------------------------- | :------------ | :---------------- | | Accrued payroll and related liabilities | $10,756 | $9,851 | | Accrued bonus | $993 | $5,078 | | Insurance liabilities | $3,023 | $3,671 | | Total Accrued Payroll and Benefits | $14,772 | $18,600 | Accrued Expenses and Other Current Liabilities (in thousands) | Category | June 28, 2022 | December 28, 2021 | | :--------------------------------- | :------------ | :---------------- | | Gift card liability | $2,447 | $2,850 | | Current portion of finance lease liability | $2,075 | $1,956 | | Liabilities held for sale | $0 | $1,671 | | Total Accrued Expenses and Other Current Liabilities | $12,398 | $13,791 | 3. Long-Term Debt This note details the company's long-term debt obligations, including credit facility terms and interest rates - As of June 28, 2022, the Company had $32.2 million in indebtedness and $3.0 million in letters of credit outstanding under the Second Amended Credit Facility[34] - Interest rates on outstanding indebtedness ranged from 2.35% to 6.25% during the first two quarters of 2022[34] - On July 27, 2022, the Third Amendment to the Credit Agreement increased the facility to $125.0 million, eliminated the term loan, removed capital expenditure covenants, and transitioned to SOFR plus a margin of 1.50% to 2.50%[35] 4. Fair Value Measurements This note describes the methodologies and inputs used to determine the fair value of financial and non-financial assets and liabilities - Carrying amounts of cash, receivables, payables, and current liabilities approximate fair value due to their short-term nature[36] - Borrowings approximate fair value as they vary with market interest rates; fair value is measured using Level 2 inputs[36] - Non-recurring fair value measurements for assets like leasehold improvements, property, operating lease assets, and goodwill are discussed in Note 7 (Restaurant Impairments)[37] 5. Income Taxes This note presents the provision for income taxes and the effective tax rates for the reporting periods Provision for (Benefit from) Income Taxes (in thousands) | Metric | Q2 2022 (Ended June 28) | Q2 2021 (Ended June 29) | YTD Q2 2022 (Ended June 28) | YTD Q2 2021 (Ended June 29) | | :-------------------------- | :---------------------- | :---------------------- | :-------------------------- | :-------------------------- | | Provision for income taxes | $44 | $29 | $(39) | $19 | | Effective tax rate | 3.2% | 0.5% | 0.8% | 0.5% | - The effective tax rate reflects the impact of a previously recorded valuation allowance, and no material income tax expense or benefit is anticipated for the remainder of fiscal 2022[38] 6. Stock-Based Compensation This note outlines the company's stock incentive plan and the expense recognized for stock-based awards - Approximately 2.4 million share-based awards were available for grant under the Stock Incentive Plan as of June 28, 2022[39] Stock-Based Compensation Expense (in thousands) | Metric | Q2 2022 (Ended June 28) | Q2 2021 (Ended June 29) | YTD Q2 2022 (Ended June 28) | YTD Q2 2021 (Ended June 29) | | :--------------------------------- | :---------------------- | :---------------------- | :-------------------------- | :-------------------------- | | Stock-based compensation expense | $1,499 | $1,611 | $2,668 | $2,413 | | Capitalized stock-based compensation expense | $18 | $16 | $38 | $34 | 7. Restaurant Impairments, Closure Costs and Asset Disposals This note details expenses related to restaurant impairments, closure activities, and gains or losses from asset disposals Restaurant Impairments, Closure Costs and Asset Disposals (in thousands) | Metric | Q2 2022 (Ended June 28) | Q2 2021 (Ended June 29) | YTD Q2 2022 (Ended June 28) | YTD Q2 2021 (Ended June 29) | | :----------------------------------------- | :---------------------- | :---------------------- | :-------------------------- | :-------------------------- | | Restaurant impairments | $668 | $178 | $774 | $680 | | Closure costs | $465 | $288 | $855 | $593 | | Loss (gain) on disposal of assets and other | $838 | $(76) | $1,731 | $348 | | Total | $1,971 | $390 | $3,360 | $1,621 | - Two restaurants were identified as impaired in Q2 2022 and YTD Q2 2022, compared to none in Q2 2021 and one in YTD Q2 2021[41] - Closure costs in Q2 2022 include ongoing costs for previously closed restaurants and two company-owned restaurant closures in YTD Q2 2022[42] - Loss on disposal of assets in 2022 includes expenses from the divestiture of company-owned restaurants related to the Warner Sale[42] 8. Earnings (Loss) Per Share This note provides the calculation of basic and diluted earnings per share, including the impact of potentially dilutive securities Earnings (Loss) Per Share (in thousands, except per share data) | Metric | Q2 2022 (Ended June 28) | Q2 2021 (Ended June 29) | YTD Q2 2022 (Ended June 28) | YTD Q2 2021 (Ended June 29) | | :----------------------------------------- | :---------------------- | :---------------------- | :-------------------------- | :-------------------------- | | Net income (loss) | $1,345 | $5,683 | $(5,084) | $3,706 | | Basic weighted average shares outstanding | 45,881,354 | 45,506,476 | 45,803,927 | 45,303,160 | | Diluted weighted average shares outstanding | 46,108,720 | 46,246,169 | 45,803,927 | 45,992,119 | | Basic earnings (loss) per share | $0.03 | $0.12 | $(0.11) | $0.08 | | Diluted earnings (loss) per share | $0.03 | $0.12 | $(0.11) | $0.08 | - Potentially dilutive securities are excluded from diluted EPS calculations during periods of net loss, as their inclusion would be anti-dilutive[44][46] - Shares excluded from diluted EPS due to anti-dilutive effect totaled 1,798,409 for Q2 2022 and 2,278,371 for YTD Q2 2022[46] 9. Leases This note presents supplemental balance sheet and cash flow information related to the company's operating and finance leases Supplemental Balance Sheet Information Related to Leases (in thousands) | Category | June 28, 2022 | December 28, 2021 | | :--------------------------------- | :------------ | :---------------- | | Operating lease assets, net | $184,947 | $188,440 | | Property and equipment (Finance) | $5,924 | $6,394 | | Current operating lease liabilities | $27,518 | $26,617 | | Long-term operating lease liabilities | $194,197 | $200,243 | | Total leased assets | $190,871 | $194,834 | | Total lease liabilities | $227,940 | $233,470 | Supplemental Cash Flow Information Related to Leases (in thousands) | Category | Q2 2022 (Ended June 28) | Q2 2021 (Ended June 29) | YTD Q2 2022 (Ended June 28) | YTD Q2 2021 (Ended June 29) | | :----------------------------------------- | :---------------------- | :---------------------- | :-------------------------- | :-------------------------- | | Cash paid for operating leases | $10,415 | $7,929 | $20,859 | $19,595 | | Cash paid for finance leases | $599 | $699 | $1,213 | $1,224 | | Right-of-use assets obtained (Operating) | $4,275 | $6,123 | $8,107 | $6,696 | | Right-of-use assets obtained (Finance) | $121 | $49 | $843 | $700 | - Sublease income recognized was $0.8 million for Q2 2022 and $1.6 million for YTD Q2 2022[48] 10. Supplemental Disclosures to Condensed Consolidated Statements of Cash Flows This note provides additional disclosures for non-cash investing and financing activities and other cash flow details Supplemental Cash Flow Disclosures (in thousands) | Metric | YTD Q2 2022 (Ended June 28) | YTD Q2 2021 (Ended June 29) | | :----------------------------------------- | :-------------------------- | :-------------------------- | | Interest paid (net of capitalized amounts) | $461 | $864 | | Income taxes paid | $106 | $28 | | Purchases of property and equipment accrued in accounts payable | $5,504 | $4,002 | 11. Revenue Recognition This note describes the company's policies for recognizing revenue from restaurant sales, franchise activities, and gift cards - Revenue sources include restaurant operations, franchise royalties and fees, and sublease income[52] - Gift card revenue is recognized upon redemption or when breakage is determined (approximately 9% over 24 months) Current gift card liability was $2.4 million as of June 28, 2022[53][54] - Franchise royalties are based on a percentage of restaurant revenues, while initial franchise fees are recognized ratably over the typical 20-year agreement term[55] - The Noodles Rewards loyalty program defers revenue for earned points, net of estimated non-redemptions, with points generally expiring after six months[56] 12. Commitments and Contingencies This note outlines the company's legal proceedings and other commitments that may impact its financial position - The Company is subject to various legal proceedings in the normal course of business, but believes unfavorable outcomes are remote or not material to its consolidated financial statements as of June 28, 2022[57] 13. Subsequent Event This note discloses significant events occurring after the balance sheet date, specifically an amendment to the credit facility - On July 27, 2022, the Company amended its credit facility, increasing it to $125.0 million, eliminated the term loan, removed capital expenditure covenants, and transitioned to SOFR-based interest rates[58] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Noodles & Company's financial performance and condition, discussing the impact of the COVID-19 pandemic, recent trends in revenue and costs, key performance metrics, and a detailed comparison of results for Q2 2022 and YTD Q2 2022 against prior periods It also covers liquidity, capital resources, and critical accounting policies Overview and Forward-Looking Statements This section provides an overview of the company's fiscal year and highlights the nature of forward-looking statements - Noodles & Company operates on a 52- or 53-week fiscal year, with fiscal year 2022 containing 53 weeks[61] - The discussion includes forward-looking statements, which involve risks and uncertainties, and actual results may differ materially[62] Our Ongoing Response to the COVID-19 Pandemic This section discusses the ongoing impact of the COVID-19 pandemic on the restaurant industry and the company's mitigation strategies - The COVID-19 pandemic has adversely affected the restaurant industry, leading to temporary closures, reduced operating hours, supply chain disruptions, and labor shortages[63] - The Company believes its investments in off-premise and digital channels position it well to navigate ongoing challenges[63] - The extent of future impact remains highly uncertain due to the unknown duration and severity of the outbreak and new variants[64] Recent Trends, Risks and Uncertainties This section analyzes recent operational and financial trends, including sales growth, cost fluctuations, and unit development - System-wide comparable restaurant sales increased 5.1% in Q2 2022 (5.1% company-owned, 5.3% franchise), driven by strong brand positioning, off-premise sales, dine-in growth, and price increases[65][66] - Average Unit Volumes (AUV) increased 5.3% over Q2 2021 and 18.3% compared to Q2 2019[65] - Cost of sales increased due to commodity and food ingredient volatility (especially chicken) and packaging costs, partially offset by supply chain efficiencies[67] - Labor availability improved in Q2 2022, but wage inflation persisted due to high competition, partially mitigated by hiring focus and labor efficiencies[68] - Other restaurant operating costs increased due to higher third-party delivery fees[68] - In YTD Q2 2022, the Company opened eight new company-owned and two franchise restaurants, and divested 15 company-owned restaurants, entering a 12-year growth plan for 40 new locations in California[69] - The Company plans for approximately 5% annual unit growth in 2022, increasing to 10% thereafter[69] Key Measures We Use to Evaluate Our Performance This section defines the primary financial and operational metrics used by management to assess company performance - Key performance measures include revenue (restaurant sales, franchise royalties/fees), comparable restaurant sales, average unit volumes (AUVs), restaurant contribution and margin, EBITDA, and Adjusted EBITDA[71][72][74][76][79][81] - Comparable restaurant sales are year-over-year comparisons for restaurants open at least 18 full periods, reflecting changes in traffic and per-person spend[74] - AUVs represent average annualized sales of company-owned restaurants, assessing consumer traffic and spending patterns[76] - Restaurant contribution (revenue less operating costs) and restaurant contribution margin are non-GAAP metrics used to evaluate restaurant-level productivity and efficiency[79][80] - EBITDA and Adjusted EBITDA are non-GAAP measures providing a clearer picture of operating results by excluding non-recurring and non-cash expenses[81] Results of Operations This section provides a detailed analysis of the company's financial results for the current and prior reporting periods EBITDA and Adjusted EBITDA Reconciliation This section reconciles net income to EBITDA and Adjusted EBITDA, highlighting non-GAAP adjustments EBITDA and Adjusted EBITDA Reconciliation (in thousands) | Metric | Q2 2022 (Ended June 28) | Q2 2021 (Ended June 29) | YTD Q2 2022 (Ended June 28) | YTD Q2 2021 (Ended June 29) | | :----------------------------------------- | :---------------------- | :---------------------- | :-------------------------- | :-------------------------- | | Net income (loss) | $1,345 | $5,683 | $(5,084) | $3,706 | | Depreciation and amortization | $5,763 | $5,576 | $11,484 | $11,163 | | Interest expense, net | $489 | $498 | $926 | $1,120 | | Provision for (benefit from) income taxes | $44 | $29 | $(39) | $19 | | EBITDA | $7,641 | $11,786 | $7,287 | $16,008 | | Restaurant impairments, closure costs and asset disposals | $1,971 | $390 | $3,360 | $1,621 | | Stock-based compensation expense | $1,499 | $1,611 | $2,668 | $2,413 | | Fees and costs related to transactions | $63 | $0 | $63 | $0 | | Adjusted EBITDA | $11,174 | $13,787 | $13,378 | $20,042 | Restaurant Openings, Closures and Relocations This section summarizes changes in the number of company-owned and franchise restaurants during the period Restaurant Activity | Activity | Q2 2022 (Ended June 28) | Q2 2021 (Ended June 29) | YTD Q2 2022 (Ended June 28) | YTD Q2 2021 (Ended June 29) | | :--------------------------------- | :---------------------- | :---------------------- | :-------------------------- | :-------------------------- | | Company-Owned Restaurant Activity | | | | | | Beginning of period | 360 | 372 | 372 | 378 | | Openings | 3 | 2 | 8 | 2 | | Closures | 0 | 0 | (2) | (6) | | Divestitures | 0 | 0 | (15) | 0 | | Restaurants at end of period | 363 | 374 | 363 | 374 | | Franchise Restaurant Activity | | | | | | Beginning of period | 93 | 76 | 76 | 76 | | Openings | 0 | 1 | 2 | 1 | | Acquisitions | 0 | 0 | 15 | 0 | | Restaurants at end of period | 93 | 77 | 93 | 77 | | Total restaurants | 456 | 451 | 456 | 451 | Statement of Operations as a Percentage of Revenue This section presents each line item of the statement of operations as a percentage of total revenue for comparative analysis Statement of Operations as a Percentage of Revenue | Metric | Q2 2022 (Ended June 28) | Q2 2021 (Ended June 29) | YTD Q2 2022 (Ended June 28) | YTD Q2 2021 (Ended June 29) | | :----------------------------------------- | :---------------------- | :---------------------- | :-------------------------- | :-------------------------- | | Restaurant revenue | 97.9% | 98.5% | 97.8% | 98.4% | | Franchising royalties and fees, and other | 2.1% | 1.5% | 2.2% | 1.6% | | Total revenue | 100.0% | 100.0% | 100.0% | 100.0% | | Cost of sales | 27.8% | 24.9% | 27.9% | 25.0% | | Labor | 30.3% | 29.8% | 31.2% | 30.8% | | Occupancy | 8.6% | 9.3% | 9.3% | 10.0% | | Other restaurant operating costs | 17.8% | 17.0% | 18.7% | 17.8% | | General and administrative | 9.7% | 10.3% | 10.1% | 10.2% | | Depreciation and amortization | 4.4% | 4.4% | 4.7% | 4.7% | | Pre-opening | 0.3% | 0.1% | 0.3% | 0.1% | | Restaurant impairments, closure costs and asset disposals | 1.5% | 0.3% | 1.4% | 0.7% | | Total costs and expenses | 98.6% | 95.1% | 101.7% | 97.9% | | Income (loss) from operations | 1.4% | 4.9% | (1.7)% | 2.1% | | Net income (loss) | 1.0% | 4.5% | (2.1)% | 1.6% | Second Quarter Ended June 28, 2022 Compared to Second Quarter Ended June 29, 2021 This section compares the financial performance of the second quarter of 2022 against the same period in 2021 Q2 2022 vs Q2 2021 Financial Performance (in thousands, except percentages) | Metric | Q2 2022 | Q2 2021 | Change ($) | Change (%) | | :----------------------------------------- | :------ | :------ | :--------- | :--------- | | Total revenue | $131,067 | $125,649 | $5,418 | 4.3% | | Restaurant revenue | $128,274 | $123,715 | $4,559 | 3.7% | | Franchising royalties and fees, and other | $2,793 | $1,934 | $859 | 44.4% | | Total costs and expenses | $129,189 | $119,439 | $9,750 | 8.2% | | Income from operations | $1,878 | $6,210 | $(4,332) | (69.8)% | | Net income | $1,345 | $5,683 | $(4,338) | (76.3)% | | Company-owned AUV | $1,421 | $1,350 | $71 | 5.3% | | Comparable restaurant sales | 5.1% | 55.7% | | | - Total revenue increased by $5.4 million (4.3%) due to comparable restaurant sales growth and new openings, partially offset by the refranchising of 15 restaurants[93] - Cost of sales increased by $4.9 million (15.8%) and as a percentage of restaurant revenue (27.8% vs 24.9%) due to higher commodity pricing, especially protein[94] - Labor costs increased by $1.9 million (5.2%) and as a percentage of restaurant revenue (30.3% vs 29.8%) due to wage inflation, partially offset by labor efficiencies[95] - Occupancy costs decreased by $0.4 million (3.9%) and as a percentage of revenue (8.6% vs 9.3%) due to restaurant closures and refranchising[96] - Other restaurant operating costs increased by $1.7 million (8.1%) and as a percentage of restaurant revenue (17.8% vs 17.0%) due to higher third-party delivery fees and utilities[97] - Restaurant impairments, closure costs, and asset disposals increased by $1.6 million due to divestiture expenses and two restaurant impairments[100] Two Quarters Ended June 28, 2022 Compared to Two Quarters Ended June 29, 2021 This section compares the year-to-date financial performance for the first two quarters of 2022 against the same period in 2021 YTD Q2 2022 vs YTD Q2 2021 Financial Performance (in thousands, except percentages) | Metric | YTD Q2 2022 | YTD Q2 2021 | Change ($) | Change (%) | | :----------------------------------------- | :---------- | :---------- | :--------- | :--------- | | Total revenue | $243,629 | $235,226 | $8,403 | 3.6% | | Restaurant revenue | $238,235 | $231,459 | $6,776 | 2.9% | | Franchising royalties and fees, and other | $5,394 | $3,767 | $1,627 | 43.2% | | Total costs and expenses | $247,826 | $230,381 | $17,445 | 7.6% | | (Loss) income from operations | $(4,197) | $4,845 | $(9,042) | * | | Net (loss) income | $(5,084) | $3,706 | $(8,790) | * | | Company-owned AUV | $1,337 | $1,260 | $77 | 6.1% | | Comparable restaurant sales | 5.2% | 29.8% | | | - Total revenue increased by $8.4 million (3.6%) due to comparable restaurant sales and new openings, offset by temporary closures and refranchising impact[105] - Cost of sales increased by $8.7 million (15.0%) and as a percentage of restaurant revenue (27.9% vs 25.0%) due to sales increase, commodity inflation, and higher discounts[107] - Labor costs increased by $3.1 million (4.3%) and as a percentage of restaurant revenue (31.2% vs 30.8%) due to wage inflation and labor inefficiencies from reduced operating hours[108] - Occupancy costs decreased by $0.9 million (4.1%) and as a percentage of revenue (9.3% vs 10.0%) due to restaurant closures/impairments and sales leverage[109] - Other restaurant operating costs increased by $3.4 million (8.2%) and as a percentage of restaurant revenue (18.7% vs 17.8%) due to higher revenue, third-party delivery fees, repairs, maintenance, and utilities[110] - Restaurant impairments, closure costs, and asset disposals increased by $1.7 million due to more impairments (two in 2022 vs one in 2021) and losses from asset disposals related to refranchising[113] - Interest expense decreased by $0.2 million due to lower average borrowings[114] - The estimated annual effective tax rate for 2022 is between 0.25% and 1.25%, reflecting the impact of a valuation allowance[115] Liquidity and Capital Resources This section discusses the company's cash flow, debt, and ability to fund operations and capital expenditures - The Company uses cash and its revolving credit facility for capital expenditures, restaurant reinvestment, infrastructure, and working capital[116] - Net cash provided by operating activities decreased to $6.0 million in YTD Q2 2022 from $23.2 million in YTD Q2 2021, primarily due to lower net income and working capital changes[118][119] - Net cash used in investing activities increased to $15.1 million in YTD Q2 2022 from $7.5 million in YTD Q2 2021, driven by higher investments in new restaurant openings[118][120] - Net cash provided by financing activities was $8.6 million in YTD Q2 2022, mainly from revolving credit facility draws to fund new restaurant openings, partially offset by debt repayments[118][121] - Estimated capital expenditures for fiscal year 2022 are $30.0 million to $33.0 million, funded by available cash, operations, and the revolving credit line[123] - As of June 28, 2022, cash balance was $1.8 million, with $60.9 million available under the Second Amended Credit Facility[124] - The Third Amendment to the Credit Agreement (July 27, 2022) increased the credit facility to $125.0 million, eliminated the term loan, and removed capital expenditure covenants[128] - The Company had no off-balance sheet arrangements as of June 28, 2022[129] Critical Accounting Policies and Estimates This section highlights accounting policies requiring significant management judgment and assumptions - The Company's critical accounting estimates, which require significant management judgment and assumptions, are detailed in its Annual Report on Form 10-K for the fiscal year ended December 28, 2021[130] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section outlines the Company's exposure to market risks, specifically interest rate risk on variable-rate debt, commodity price risk affecting food costs, and inflationary pressures on food, labor, energy, and construction costs - The Company is exposed to interest rate risk on its $32.2 million outstanding variable-rate bank debt; a 1.0% change in interest rate would result in an approximate $0.3 million pre-tax interest expense fluctuation annually[131] - Commodity price risk affects product costs due to market volatility, leading to higher food costs in H1 2022 due to shorter-duration contracts and floating rates[132] - Inflationary factors, particularly in food, labor, energy, and construction, have affected operating results in H1 2022 and are expected to continue impacting results in the near future[133] Item 4. Controls and Procedures Management evaluated the effectiveness of disclosure controls and procedures, concluding they are effective for timely and accurate reporting - The CEO and CFO concluded that disclosure controls and procedures were effective as of June 28, 2022, providing reasonable assurance for timely and accurate reporting[134][135] - No material changes in internal control over financial reporting occurred during the most recent fiscal quarter[137] PART II - Other Information This section provides additional information not covered in the financial statements, including legal, equity, and risk disclosures Item 1. Legal Proceedings The Company is not currently a party to any material legal proceedings, though litigation outcomes are uncertain - The Company is not currently a party to any material legal proceedings[139] - Litigation, even if not material, can have an adverse impact due to defense costs, diversion of management resources, and reputational harm[139] Item 1A. Risk Factors No material changes to risk factors have occurred since the Annual Report on Form 10-K for fiscal year ended December 28, 2021 - No material changes to risk factors have occurred since the Annual Report on Form 10-K for fiscal year ended December 28, 2021[140] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report during the period Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities to report during the period Item 4. Mine Safety Disclosures This item is not applicable to the Company Item 5. Other Information There is no other information to report under this item Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including the Third Amendment to Credit Agreement and certifications - Key exhibits include the Third Amendment to Credit Agreement (Exhibit 10.1), CEO and CFO certifications (Exhibits 31.1, 31.2, 32.1), and Inline XBRL documents[142] SIGNATURES This section confirms the official signing and submission of the financial report by authorized personnel - The report was signed by Carl Lukach, Chief Financial Officer, on July 28, 2022[144]