Results
First Watch Restaurant Group Inc.
02/24/2026 | Press release | Distributed by Public on 02/24/2026 06:12
Annual Report for Fiscal Year Ending December 28, 2025 (Form 10-K)
Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
First Watch is an award-winning Daytime Dining concept serving made-to-order breakfast, brunch and lunch using fresh ingredients. Our common stock trades on Nasdaq under the ticker symbol "FWRG." A recipient of many local "Best Breakfast" and "Best Brunch" accolades, First Watch's award-winning chef-driven menu includes elevated executions of classic favorites for breakfast, brunch and lunch. For four consecutive years, First Watch has been named a Top 100 Most Loved Workplace® by the Best Practice Institute, and in 2025, was named the #1 Most Loved Workplace for the second year in a row, featured in The Wall Street Journal. Also, in 2025, First Watch was named one of Yelp's Most-Loved Brands nationwide.
We operate and franchise restaurants in32 states under the "First Watch" trade name and as of December 28, 2025, had 560 company-owned restaurants and 73 franchise-owned restaurants. We do not operate outside of the United States.
Our 52- or 53-week fiscal years end on the last Sunday of each calendar year. Our fiscal quarters are comprised of 13 weeks each and end on the 13th Sunday of each quarter, except for 53-week years, during which the fourth quarter ends on the 14th Sunday of the fourth quarter. All references to 2025 and 2024 reflect the results of the 52-week fiscal years ended December 28, 2025 and December 29, 2024, respectively. All references to 2023 reflect the results of the 53-week fiscal year ended December 31, 2023 unless otherwise stated. We report financial and operating information in one segment.
This section of this Annual Report on the Form 10-K generally discusses Fiscal 2025 and Fiscal 2024 and year-over-year comparisons between Fiscal 2025 and Fiscal 2024. A discussion of Fiscal 2023 and year-over-year comparisons between Fiscal 2024 and Fiscal 2023 that are not included in this Annual Report on Form 10-K can be found in Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations"in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, as filed with the SEC on March 5, 2024.
Key Performance Indicators
Throughout this"Management's Discussion and Analysis of Financial Condition and Results of Operations"we commonly discuss the following key operating metrics that we believe will drive our financial results and long-term growth model. We believe these metrics are useful to investors because our Management uses these metrics to evaluate performance and assess the growth of our business as well as the effectiveness of our marketing and operational strategies.
New Restaurant Openings ("NROs"): the number of new company-owned First Watch restaurants commencing operations during the period. Management reviews the number of new restaurants to assess new restaurant growth and company-owned restaurant sales.
Franchise-owned New Restaurant Openings ("Franchise-owned NROs"): the number of new franchise-owned First Watch restaurants commencing operations during the period.
Same-Restaurant Sales Growth: the percentage change in year-over-year restaurant sales (excluding gift card breakage) for the comparable restaurant base, which we define as the number of company-owned First Watch branded restaurants open for 18 months or longer as of the beginning of the fiscal year ("Comparable Restaurant Base"). This operating metric compares the 52-week periods ended December 28, 2025, December 29, 2024 and December 31, 2023, rather than, the 53-week fiscal year ended December 31, 2023, in order to compare like-for-like periods. For the 52-weeks ended December 28, 2025, December 29, 2024 and December 31, 2023 there were 381, 344 and 327 restaurants, in our Comparable Restaurant Base, respectively. Measuring our same-restaurant sales growth allows Management to evaluate the performance of our existing restaurant base. We believe this measure is useful for investors to provide a consistent comparison of restaurant sales results and trends across periods within our core, established restaurant base, unaffected by results of store openings, closings and other transitional changes.
Same-Restaurant Traffic Growth: the percentage change in year-over-year traffic counts using the Comparable Restaurant Base. This operating metric compares the 52-week periods ended December 28, 2025, December 29, 2024 and December 31, 2023, - (rather than the 53-week fiscal year ended December 31, 2023), in order to compare like-for-like periods. Measuring our same-restaurant traffic growth allows our Management to evaluate the performance of our existing
restaurant base. We believe this measure is useful for investors because same-restaurant traffic provides an indicator as to the development of our brand and the effectiveness of our marketing strategy.
Average Unit Volume ("AUV"): the total restaurant sales (excluding gift card breakage) recognized in the Comparable Restaurant Base, divided by the number of restaurants in the Comparable Restaurant Base during the period. This measurement allows Management to assess changes in consumer spending patterns at our restaurants and the overall performance of our restaurant base.
System-wide restaurants: the total number of restaurants, including all company-owned and franchise-owned restaurants.
System-wide sales: consists of restaurant sales from our company-owned restaurants and franchise-owned restaurants. We do not recognize the restaurant sales from our franchise-owned restaurants as revenue.
Non-GAAP Financial Measures
To supplement the consolidated financial statements, which are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"), we use the following non-GAAP measures, which present operating results on an adjusted basis: (i) Adjusted EBITDA, (ii) Adjusted EBITDA margin, (iii) Restaurant level operating profit and (iv) Restaurant level operating profit margin. Our presentation of these non-GAAP measures includes isolating the effects of some items that are either nonrecurring in nature or have no meaningful correlation to our ongoing core operating performance. These supplemental measures of performance are not required by or presented in accordance with GAAP. Management believes these non-GAAP measures provide investors with additional visibility into our operations, facilitate analysis and comparisons of our ongoing business operations because they exclude items that may not be indicative of our ongoing operating performance, help to identify operational trends and allow for greater transparency with respect to key metrics used by Management in our financial and operational decision making. Our non-GAAP measures may not be comparable to similarly titled measures used by other companies and have important limitations as analytical tools. These non-GAAP measures should not be considered in isolation or as substitutes for analysis of our results as reported under GAAP as they may not provide a complete understanding of our performance. These non-GAAP measures should be reviewed in conjunction with our consolidated financial statements prepared in accordance with GAAP.
We use Adjusted EBITDA and Adjusted EBITDA margin (i) as factors in evaluating management's performance when determining incentive compensation, (ii) to evaluate our operating results and the effectiveness of our business strategies and (iii) internally as benchmarks to compare our performance to that of our competitors.
We use Restaurant level operating profit and Restaurant level operating profit margin (i) to evaluate the performance and profitability of operating restaurants, individually and in the aggregate, and (ii) to make decisions regarding future spending and other operational decisions.
Adjusted EBITDA: represents Net income before depreciation and amortization, interest expense, income taxes and items that we do not consider in our evaluation of ongoing core operating performance as identified in the reconciliation of Net income, the most directly comparable measure in accordance with GAAP, to Adjusted EBITDA, included in the section Non-GAAP Financial Measure Reconciliations below.
Adjusted EBITDA Margin: represents Adjusted EBITDA as a percentage of total revenues. SeeNon-GAAP Financial Measure Reconciliationsbelow for a reconciliation to Net income margin, the most directly comparable GAAP measure.
Restaurant Level Operating Profit: represents restaurant sales, less restaurant operating expenses, which include food and beverage costs, labor and other related expenses, other restaurant operating expenses, pre-opening expenses and occupancy expenses. Restaurant level operating profit excludes corporate-level expenses and other items that we do not consider in the evaluation of the ongoing core operating performance of our restaurants as identified in the reconciliation of Income from operations, the most directly comparable GAAP measure, to Restaurant level operating profit, included in the section Non-GAAP Financial Measure Reconciliations below.
Restaurant Level Operating Profit Margin: represents Restaurant level operating profit as a percentage of restaurant sales. SeeNon-GAAP Financial Measure Reconciliations below for a reconciliation to Income from operations margin, the most directly comparable GAAP measure.
Financial Highlights
The financial results of 2025 reflect the continued growth of the Company. In 2025, we executed our growth strategy with 55 new restaurant openings and the acquisition of 19 operating restaurants from our franchisees.
Financial highlights for 2025 as compared to 2024 include the following:
•Total revenues increased 20.3% to $1.2 billion from $1.0 billion in 2024
•System-wide sales increased to $1.4 billion from $1.2 billionin 2024
•Same-restaurant sales growth of 3.6%
•Same-restaurant traffic growth of 0.5%
•Income from operations decreased to $27.5 million from $38.9 million in 2024
•Income from operations margin decreased to 2.3% from 3.9% in 2024
•Restaurant level operating profit* increased to $224.1 million from $201.8 million in 2024
•Restaurant level operating profit margin* decreased to 18.5% from 20.1% in 2024
•Net income increased to $19.4 million from $18.9 million in 2024
•Adjusted EBITDA* increased to $120.9 million from $113.8 million in 2024
•Opened 64 system-wide restaurants (55 company-owned and 9 franchise-owned) across 23 states, resulting in a total of 633 system-wide restaurants (560 company-owned and 73 franchise-owned) across 32 states
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* See Non-GAAP Financial Measure Reconciliationssection below.
Business Trends
During 2025, our same-restaurant sales growth was 3.6% with positive traffic growth. We expect annual same-restaurant sales growth in 2026 to be between 1% and 3%.
Commodity inflation was 5.0% in 2025, largely driven by eggs, coffee, avocado and bacon. We expect 2026 commodity prices to increase approximately 1% to 3% as compared to the prior year, primarily related to coffee.
Restaurant level labor inflation during 2025 was 3.7%, largely offset by price increases. At year end, we were staffed with over 100 managers to lead and operate future new company-owned restaurants. We expect 3% to 5% labor inflation in 2026.
Continuing our growth strategy, we intend to open 59 to 63 net new system-wide restaurants in 2026.
Development Highlights
During 2025, we had a total of 64new system-wide restaurants in23 states. Three company-owned restaurants closed in 2025. We also acquired 19 operating restaurants from our franchisees in the execution of our growth strategy. See Note 3, Business Acquisitions, in the accompanying notes to the consolidated financial statements for additional information. At December 28, 2025, the Company had a total of 633 system-wide restaurants.
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FISCAL YEAR 2025
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| Company-owned | Franchise-owned | Total | |||||||||||||||
|
Beginning of period
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489 | 83 | 572 | ||||||||||||||
|
New restaurants
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55 | 9 | 64 | ||||||||||||||
| Acquisitions of franchise-owned restaurants | 19 | (19) | - | ||||||||||||||
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Closures
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(3) | - | (3) | ||||||||||||||
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End of period
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560 | 73 | 633 | ||||||||||||||
We expect to open between 53 to 55 company-owned restaurants and 9 to 11 franchise-owned restaurants during 2026. We also plan to close three company-owned restaurants, resulting in a total of 59 to 63 net new system-wide restaurants in 2026.
Selected Operating Data
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| FISCAL YEAR | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Number of weeks in fiscal year | 52 | 52 | 53 | ||||||||||||||
| System-wide restaurants | 633 | 572 | 524 | ||||||||||||||
| Company-owned | 560 | 489 | 425 | ||||||||||||||
| Franchise-owned | 73 | 83 | 99 | ||||||||||||||
| System-wide sales (in thousands) | 1,375,045 | 1,184,469 | 1,103,089 | ||||||||||||||
|
Same-restaurant sales growth (1)
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3.6 | % | (0.5) | % | 7.6 | % | |||||||||||
|
Same-restaurant traffic growth (1)
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0.5 | % | (4.0) | % | 0.2 | % | |||||||||||
| AUV (in thousands) | $ | 2,294 | $ | 2,204 | $ | 2,250 | |||||||||||
| Income from operations (in thousands) | $ | 27,511 | $ | 38,907 | $ | 41,267 | |||||||||||
| Income from operations margin | 2.3 | % | 3.9 | % | 4.7 | % | |||||||||||
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Restaurant level operating profit (in thousands) (2)
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$ | 224,125 | $ | 201,761 | $ | 175,658 | |||||||||||
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Restaurant level operating profit margin (2)
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18.5 | % | 20.1 | % | 20.0 | % | |||||||||||
| Net income (in thousands) | $ | 19,432 | $ | 18,925 | $ | 25,385 | |||||||||||
| Net income margin | 1.6 | % | 1.9 | % | 2.8 | % | |||||||||||
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Adjusted EBITDA (in thousands)(3)
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$ | 120,918 | $ | 113,836 | $ | 99,483 | |||||||||||
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Adjusted EBITDA margin(3)
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9.9 | % | 11.2 | % | 11.2 | % | |||||||||||
(1) Comparing the 52-week periods ended December 28, 2025, December 29, 2024and December 31, 2023in order to compare like-for-like periods. See "Key Performance Indicators" for additional information.
(2) Reconciliations from Income from operations and Income from operations margin, the most comparable GAAP measures to Restaurant level operating profit and Restaurant level operating profit margin, respectively, are set forth in the schedules within the Non-GAAP Financial Measure Reconciliations section below.
(3) Reconciliations from Net income and Net income margin, the most comparable GAAP measures to Adjusted EBITDA and Adjusted EBITDA margin, respectively, are set forth in the schedules within the Non-GAAP Financial Measure Reconciliations section below.
Results of Operations
The discussion that follows includes a comparison of our results of operations for 2025 and 2024.
The following table summarizes our results of operations and the percentages of items in our Consolidated Statements of Operations and Comprehensive Income in relation to Total revenues or, where indicated, Restaurant sales for 2025 and 2024:
| FISCAL YEAR | |||||||||||||||||||||||
| (in thousands) | 2025 | 2024 | |||||||||||||||||||||
| Revenues | |||||||||||||||||||||||
| Restaurant sales | $ | 1,212,173 | 99.2 | % | $ | 1,004,355 | 98.9 | % | |||||||||||||||
| Franchise revenues | 10,328 | 0.8 | % | 11,555 | 1.1 | % | |||||||||||||||||
| Total revenues | 1,222,501 | 100.0 | % | 1,015,910 | 100.0 | % | |||||||||||||||||
| Operating costs and expenses | |||||||||||||||||||||||
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Restaurant operating expenses (1)(exclusive of depreciation and amortization shown below):
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| Food and beverage costs | 280,098 | 23.1 | % | 223,097 | 22.2 | % | |||||||||||||||||
| Labor and other related expenses | 405,544 | 33.5 | % | 335,038 | 33.4 | % | |||||||||||||||||
| Other restaurant operating expenses | 188,685 | 15.6 | % | 151,968 | 15.1 | % | |||||||||||||||||
| Occupancy expenses | 100,788 | 8.3 | % | 82,694 | 8.2 | % | |||||||||||||||||
| Pre-opening expenses | 12,933 | 1.1 | % | 10,109 | 1.0 | % | |||||||||||||||||
| General and administrative expenses | 128,950 | 10.5 | % | 113,270 | 11.1 | % | |||||||||||||||||
| Depreciation and amortization | 75,011 | 6.1 | % | 57,715 | 5.7 | % | |||||||||||||||||
| Impairments and loss on disposal of assets | 448 | - | % | 525 | 0.1 | % | |||||||||||||||||
| Transaction expenses, net | 2,533 | 0.2 | % | 2,587 | 0.3 | % | |||||||||||||||||
| Total operating costs and expenses | 1,194,990 | 97.7 | % | 977,003 | 96.2 | % | |||||||||||||||||
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Income from operations (1)
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27,511 | 2.3 | % | 38,907 | 3.9 | % | |||||||||||||||||
| Interest expense | (16,699) | (1.4) | % | (12,640) | (1.2) | % | |||||||||||||||||
| Other income, net | 1,321 | 0.1 | % | 1,759 | 0.2 | % | |||||||||||||||||
| Income before income taxes | 12,133 | 1.0 | % | 28,026 | 2.8 | % | |||||||||||||||||
| Income tax benefit (expense) | 7,299 | 0.6 | % | (9,101) | (0.9) | % | |||||||||||||||||
| Net income | $ | 19,432 | 1.6 | % | $ | 18,925 | 1.9 | % | |||||||||||||||
(1) As a percentage of restaurant sales.
Restaurant Sales
Restaurant sales represent the aggregate sales of food and beverages, net of discounts, at company-owned restaurants. Restaurant sales in any period are directly influenced by the number of operating weeks in the period, the number of open restaurants, customer traffic and average check. Average check growth is driven by our menu price increases and changes to our menu mix.
| FISCAL YEAR | |||||||||||||||||||||||
| (in thousands) | 2025 | 2024 | Change | ||||||||||||||||||||
| Restaurant sales: | |||||||||||||||||||||||
| In-restaurant dining sales | $ | 982,349 | $ | 829,048 | $ | 153,301 | 18.5 | % | |||||||||||||||
| Third-party delivery sales | 142,255 | 97,444 | 44,811 | 46.0 | % | ||||||||||||||||||
| Take-out sales | 87,569 | 77,863 | 9,706 | 12.5 | % | ||||||||||||||||||
| Total Restaurant sales | $ | 1,212,173 | $ | 1,004,355 | $ | 207,818 | 20.7 | % | |||||||||||||||
The increase in total restaurant sales was primarily due to (i) new restaurant openings and acquiring restaurants from franchisees in 2025, (ii) recognizing a full year of sales for restaurants opened and acquired in 2024, (iii) positive same-
restaurant sales growth of 3.6%, and (iv) positive traffic of 0.5%. The increase was partially offset by increased promotional usage.
Franchise Revenues
Franchise revenues are comprised of sales-based royalty fees, system fund contributions and the amortization of upfront initial franchise fees, which are recognized as revenue on a straight-line basis over the term of the franchise agreement. Franchise revenues in any period are directly influenced by the number of open franchise-owned restaurants.
| FISCAL YEAR | |||||||||||||||||||||||
| (in thousands) | 2025 | 2024 | Change | ||||||||||||||||||||
| Franchise revenues: | |||||||||||||||||||||||
| Royalty and system fund contributions | $ | 9,705 | $ | 10,864 | $ | (1,159) | (10.7) | % | |||||||||||||||
| Initial fees | 225 | 278 | (53) | (19.1) | % | ||||||||||||||||||
| Business combinations - revenues recognized | 398 | 413 | (15) | - | % | ||||||||||||||||||
| Total Franchise revenues | $ | 10,328 | $ | 11,555 | $ | (1,227) | (10.6) | % | |||||||||||||||
The decrease in franchise revenues during 2025 as compared to 2024 was primarily driven by the Company's acquisition of 19 and 22 franchise-owned restaurants during 2025 and 2024, respectively, partially offset by incremental revenue from nine franchise-owned NROs in 2025 and seven franchise-owned NROs in 2024.
Food and Beverage Costs
Food and beverage costs at company-owned restaurants vary with sales volume and are subject to increases and declines in commodity costs.
| FISCAL YEAR | ||||||||||||||||||||||||||
| (in thousands) | 2025 | 2024 | Change | |||||||||||||||||||||||
| Food and beverage costs | $ | 280,098 | $ | 223,097 | $ | 57,001 | 25.5 | % | ||||||||||||||||||
| As a percentage of restaurant sales | 23.1 | % | 22.2 | % | 0.9% | |||||||||||||||||||||
Food and beverage costs as a percent of restaurant sales increased during 2025 as compared to 2024 primarily due to (i) commodity inflation of 5.0%, as discussed below, and (ii) increased portion size in certain menu items. The increase was partially offset by the impact of menu price increases.
Food and beverage costs increased during 2025 as compared to 2024 primarily as a result of (i) the 20.7% increase in restaurant sales, (ii) opening and acquiring restaurants in 2025, (iii) recognizing a full year of costs for restaurants opened and acquired in 2024, (iv) commodity inflation experienced in eggs, coffee, bacon and avocados and (v) increased portion size in certain menu items.
Labor and Other Related Expenses
Labor and other related expenses include hourly and management wages, bonuses, payroll taxes, workers' compensation expense and employee benefits. Factors that influence labor costs include minimum wage and payroll tax legislation, health care costs, the number and performance of our company-owned restaurants and competition for qualified staff.
| FISCAL YEAR | |||||||||||||||||||||||
| (in thousands) | 2025 | 2024 | Change | ||||||||||||||||||||
| Labor and other related expenses | $ | 405,544 | $ | 335,038 | $ | 70,506 | 21.0 | % | |||||||||||||||
| As a percentage of restaurant sales | 33.5 | % | 33.4 | % | 0.1% | ||||||||||||||||||
Labor and other related expenses as a percentage of restaurant sales increased during 2025 as compared to 2024 primarily as a result of (i) wage increases and (ii) higher health insurance costs. This increase was mostly offset by (i) menu price increases and (ii) improved hourly labor efficiency.
The increase in labor and other related expenses during 2025 as compared to 2024 was primarily due to (i) the increase in staffing levels to support the increase in company-owned restaurants, (ii) wage increases and (iii) higher health insurance costs. The increase was partially offset by hourly labor efficiency.
Other Restaurant Operating Expenses
Other restaurant operating expenses consist of marketing and advertising expenses, utilities, insurance and other variable expenses incidental to operating company-owned restaurants, such as operating supplies (including paper products, menus and to-go supplies), credit card fees, repairs and maintenance and third-party delivery services fees.
| FISCAL YEAR | ||||||||||||||||||||||||||
| (in thousands) | 2025 | 2024 | Change | |||||||||||||||||||||||
| Other restaurant operating expenses | $ | 188,685 | $ | 151,968 | $ | 36,717 | 24.2 | % | ||||||||||||||||||
| As a percentage of restaurant sales | 15.6 | % | 15.1 | % | 0.5% | |||||||||||||||||||||
Other restaurant operating expenses as a percentage of restaurant sales during 2025 increased as compared to 2024 primarily due to (i) third-party delivery fees, (ii) utility expenses and (iii) supply costs, which increased as a percentage of restaurant sales. This increase was partially offset by (i) leveraging menu price increases and (ii) credit card, restaurant-level legal, accounting, and licensing fees, which decreased as a percentage of restaurant sales.
The increase in other restaurant operating expenses during 2025 as compared to 2024 was primarily due to the increase in the number of restaurants driving increases in certain expenses including (i) $10.9 million related to operating supplies, (ii) $10.4 million in utilities and repair and maintenance expenses, (iii) $9.1 million in third-party delivery fees, (iv) $4.0 million in credit card fees and (v) $1.4 million in insurance expenses.
Occupancy Expenses
Occupancy expenses primarily consist of rent expense, property insurance, common area expenses and property taxes.
| FISCAL YEAR | ||||||||||||||||||||||||||
| (in thousands) | 2025 | 2024 | Change | |||||||||||||||||||||||
| Occupancy expenses | $ | 100,788 | $ | 82,694 | $ | 18,094 | 21.9 | % | ||||||||||||||||||
| As a percentage of restaurant sales | 8.3 | % | 8.2 | % | 0.1% | |||||||||||||||||||||
The increase in occupancy expenses as a percentage of restaurant sales during 2025 as compared to 2024 was primarily due to higher rent expense associated with new restaurants mostly offset by leveraging increased restaurant sales.
The increase in occupancy expenses during 2025 as compared to 2024 was primarily due to the increase in the number of company-owned restaurants.
Pre-opening Expenses
Pre-opening expenses are costs incurred to open new company-owned restaurants. Pre-opening expenses include rent expense, manager salaries, recruiting expenses, employee payroll and training costs. Pre-opening expenses can fluctuate from period to period, based on the number and timing of new company-owned restaurant openings.
| FISCAL YEAR | |||||||||||||||||||||||
| (in thousands) | 2025 | 2024 | Change | ||||||||||||||||||||
| Pre-opening expenses | $ | 12,933 | $ | 10,109 | $ | 2,824 | 27.9 | % | |||||||||||||||
The increase in 2025 pre-opening expenses as compared to 2024 was primarily due to (i) the higher number of new restaurants opened and under construction and (ii) the related increase in rent expense.
General and Administrative Expenses
General and administrative expenses primarily consist of costs associated with our corporate and administrative functions that support restaurant development and operations including marketing and advertising costs incurred as well as legal fees, professional fees, stock-based compensation and expenses associated with being a public company, including costs associated with our compliance with the Sarbanes-Oxley Act. General and administrative expenses are impacted by changes in our employee headcount and costs related to strategic and growth initiatives.
| FISCAL YEAR | |||||||||||||||||||||||
| (in thousands) | 2025 | 2024 | Change | ||||||||||||||||||||
| General and administrative expenses | $ | 128,950 | $ | 113,270 | $ | 15,680 | 13.8 | % | |||||||||||||||
The increase in general and administrative expenses during 2025 as compared to 2024 was mainly due to (i) an $8.0 million increase in marketing expenses, (ii) a $6.7 million increase in compensation and other related expenses from wage increases and additional employee headcount to support growth, and (iii) a $2.1 million increase in licenses and fees related to information technology due to increase in restaurants. The increase in 2025 was partially offset in part by a $2.4 million decrease in recruiting and training expenses.
Depreciation and Amortization
Depreciation and amortization consists of the depreciation of fixed assets, including leasehold improvements, fixtures and equipment and the amortization of definite-lived intangible assets, which are primarily comprised of franchise rights.
| FISCAL YEAR | |||||||||||||||||||||||
| (in thousands) | 2025 | 2024 | Change | ||||||||||||||||||||
| Depreciation and amortization | $ | 75,011 | $ | 57,715 | $ | 17,296 | 30.0 | % | |||||||||||||||
The increase in depreciation and amortization during 2025 as compared to 2024 was primarily due to additional NRO assets and restaurants acquired, including reacquired rights from franchisees.
Transaction Expenses, Net
Transaction expenses, net principally include (i) costs incurred in connection with the acquisition of franchise-owned restaurants and (ii) costs related to secondary equity offerings.
| FISCAL YEAR | |||||||||||||||||||||||
| (in thousands) | 2025 | 2024 | Change | ||||||||||||||||||||
| Transaction expenses, net | $ | 2,533 | $ | 2,587 | $ | (54) | (2.1)% | ||||||||||||||||
Income from Operations
| FISCAL YEAR | |||||||||||||||||||||||
| (in thousands) | 2025 | 2024 | Change | ||||||||||||||||||||
| Income from operations | $ | 27,511 | $ | 38,907 | $ | (11,396) | (29.3) | % | |||||||||||||||
| Income from operations margin | 2.3 | % | 3.9 | % | (1.6)% | ||||||||||||||||||
Income from operations margin decreased during 2025 as compared to 2024 due to increases in operating expenses as a percentage of restaurant sales, primarily (i) food and beverage cost inflation, (ii) other restaurant operating expenses and (iii) depreciation and amortization expense driven by restaurant growth and our acquisition of restaurants from franchisees, offset in part by the leveraging of certain general and administrative expenses.
Income from operations decreased during 2025 as compared to 2024 due to higher (i) restaurant operating expenses, (ii) depreciation and amortization expenses driven by our restaurant growth and our acquisition of restaurants from franchisees, and (iii) general and administrative expenses primarily attributable to increased marketing costs, additional employee headcount and compensation. This was partially offset by the increase in revenues.
Interest Expense
Interest expense primarily consists of interest and fees on our outstanding debt and the amortization expense for debt discount and deferred issuance costs.
| FISCAL YEAR | |||||||||||||||||||||||
| (in thousands) | 2025 | 2024 | Change | ||||||||||||||||||||
| Interest expense | $ | (16,699) | $ | (12,640) | $ | (4,059) | 32.1 | % | |||||||||||||||
The increase in interest expense during 2025 as compared to 2024 was primarily due an increase in borrowings associated with franchise acquisitions.
Other Income, Net
Other income, net includes items deemed to be non-operating based on Management's assessment of the nature of the item in relation to our core operations.
| FISCAL YEAR | |||||||||||||||||||||||
| (in thousands) | 2025 | 2024 | Change | ||||||||||||||||||||
| Other income, net | $ | 1,321 | $ | 1,759 | $ | (438) | (24.9) | % | |||||||||||||||
Other income, net decreased in 2025 primarily due to a reduction in interest income, partially offset by an increase in insurance recoveries recognized in 2025.
Income Tax
Income tax consists of federal and state taxes.
| FISCAL YEAR | |||||||||||||||||||||||
| (in thousands) | 2025 | 2024 | Change | ||||||||||||||||||||
| Income tax benefit (expense) | $ | 7,299 | $ | (9,101) | $ | 16,400 | (180.2)% | ||||||||||||||||
| Effective income tax rate | (60.2) | % | 32.5 | % | (92.7)% | ||||||||||||||||||
The change in the effective income tax rate and provision for income taxes for 2025 as compared to 2024 was primarily due to the favorable impact of the increase in the tax benefit from the FICA tip credits and the net change in the valuation allowance against the FICA tip credit carryforward. The adjustment to the valuation allowance was determined as part of Management's year-end assessment of the realizability of the Company's deferred tax assets.
Net Income
| FISCAL YEAR | |||||||||||||||||||||||
| (in thousands) | 2025 | 2024 | Change | ||||||||||||||||||||
| Net income | $ | 19,432 | $ | 18,925 | $ | 507 | 2.7 | % | |||||||||||||||
| Net income margin | 1.6 | % | 2.8 | % | (1.2)% | ||||||||||||||||||
The decrease in net income margin during 2025 as compared to 2024 was primarily due to (i) the decrease in income from operations as expenses inflated rapidly early in the year, (ii) increased depreciation and amortization associated with new company-owned restaurants opened and acquired in 2025 and 2024 and (iii) interest expense from the borrowings to fund acquisitions, partially offset by the impact of the income tax benefit recognized in 2025.
The increase in net income during 2025 as compared to 2024 was primarily due to the impact of the income tax benefit recognized in 2025. The increase was partially offset by (i) the decrease in income from operations, (ii) the increase in depreciation and amortization attributed primarily to locations opened and acquired in 2025 and 2024, and (iii) the increase in interest expense associated with increased borrowings to fund acquisitions.
Restaurant Level Operating Profit and Restaurant level Operating Profit Margin
| FISCAL YEAR | |||||||||||||||||||||||
| (in thousands) | 2025 | 2024 | Change | ||||||||||||||||||||
| Restaurant level operating profit | $ | 224,125 | $ | 201,761 | $ | 22,364 | 11.1 | % | |||||||||||||||
| Restaurant level operating profit margin | 18.5 | % | 20.1 | % | (1.6)% | ||||||||||||||||||
Restaurant level operating profit margin during 2025 decreased as compared to 2024 primarily due to an increase in (i) food and beverage costs as a percent of sales and (ii) other restaurant operating expenses as a percent of sales. This was partially offset by leverage associated with our positive same-restaurant sales growth.
Restaurant level operating profit during 2025 increased as compared to 2024 due to sales growth driven primarily by the increase in (i) restaurant locations, (ii) menu prices and (iii) traffic. This was partially offset by (i) the increase in inflation across commodities and (ii) increases in operating expenses due to restaurant growth.
Adjusted EBITDA and Adjusted EBITDA Margin
| FISCAL YEAR | |||||||||||||||||||||||
| (in thousands) | 2025 | 2024 | Change | ||||||||||||||||||||
| Adjusted EBITDA | $ | 120,918 | $ | 113,836 | $ | 7,082 | 6.2 | % | |||||||||||||||
| Adjusted EBITDA margin | 9.9 | % | 11.2 | % | (1.3)% | ||||||||||||||||||
The decrease in Adjusted EBITDA margin during 2025 as compared to 2024 was primarily due the decrease in restaurant level operating profit margin, partially offset by the decrease in general and administrative expenses as a percentage of revenues.
The increase in Adjusted EBITDA during 2025 as compared to 2024 was primarily due to the increase in restaurant level operating profit. This was partially offset by the increase in general and administrative expenses.
Non-GAAP Financial Measure Reconciliations
Adjusted EBITDA and Adjusted EBITDA margin- The following table reconciles Net income and Net income margin, the most directly comparable GAAP measures to Adjusted EBITDA and Adjusted EBITDA margin, respectively, for the periods indicated:
| FISCAL YEAR | |||||||||||||||||
| (in thousands) | 2025 | 2024 | 2023 | ||||||||||||||
| Net income | $ | 19,432 | $ | 18,925 | $ | 25,385 | |||||||||||
| Depreciation and amortization | 75,011 | 57,715 | 41,223 | ||||||||||||||
| Interest expense | 16,699 | 12,640 | 8,063 | ||||||||||||||
| Income taxes | (7,299) | 9,101 | 10,690 | ||||||||||||||
| EBITDA | 103,843 | 98,381 | 85,361 | ||||||||||||||
|
Stock-based compensation, net of amounts capitalized (1)
|
10,760 | 8,525 | 7,604 | ||||||||||||||
|
Transaction expenses, net (2)
|
2,533 | 2,587 | 3,147 | ||||||||||||||
|
Strategic transition costs (3)
|
3,279 | 1,843 | 892 | ||||||||||||||
|
Impairments and loss on disposal of assets (4)
|
448 | 525 | 1,359 | ||||||||||||||
|
Delaware Voluntary Disclosure Agreement Program (5)
|
55 | 126 | 1,250 | ||||||||||||||
|
Recruiting and relocation costs (6)
|
- | 888 | 465 | ||||||||||||||
|
Severance costs (7)
|
- | 204 | 26 | ||||||||||||||
|
Insurance proceeds in connection with natural disasters, net (8)
|
- | 329 | (621) | ||||||||||||||
| Loss on extinguishment of debt | - | 428 | - | ||||||||||||||
| Adjusted EBITDA | $ | 120,918 | $ | 113,836 | $ | 99,483 | |||||||||||
| Total revenues | $ | 1,222,501 | $ | 1,015,910 | $ | 891,551 | |||||||||||
| Net income margin | 1.6 | % | 1.9 | % | 2.8 | % | |||||||||||
| Adjusted EBITDA margin | 9.9 | % | 11.2 | % | 11.2 | % | |||||||||||
| Additional information | |||||||||||||||||
|
Deferred rent expense (9)
|
$ | 309 | $ | 1,318 | $ | 2,090 | |||||||||||
(1) Represents non-cash, stock-based compensation expense, net of amounts capitalized, which is recorded within General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income.
(2) Represents costs incurred in connection with the acquisition of franchise-owned restaurants, secondary offering costs, costs related to restaurant closures, expenses related to debt and revaluations of contingent consideration liability.
(3) Represents costs related to process improvements and strategic initiatives. These costs are recorded within General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income.
(4) Representsimpairment charges and costs related to the disposal of assets due to retirements, replacements, restaurant closures and natural disasters.
(5) Represents professional service costs incurred in connection with the Delaware Voluntary Disclosure Agreement Program related to unclaimed or abandoned property. These costs are recorded in General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income.
(6) Represents costs incurred for hiring qualified individuals. These costs are recorded within General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income.
(7) Severance costs are recorded in General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income.
(8) Represents insurance recoveries, net of costs incurred, in connection with hurricane damage, which were recorded in Other income, net on the Consolidated Statements of Operations and Comprehensive Income.
(9) Represents the non-cash portion of straight-line rent expense recorded within both Occupancy expenses and General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income.
Restaurant level operating profit and Restaurant level operating profit margin- The following table reconciles Income from operations and Income from operations margin, the most comparable GAAP measures to Restaurant level operating profit and Restaurant level operating profit margin, respectively, for the periods indicated:
| FISCAL YEAR | |||||||||||||||||
| (in thousands) | 2025 | 2024 | 2023 | ||||||||||||||
| Income from operations | $ | 27,511 | $ | 38,907 | $ | 41,267 | |||||||||||
| Less: Franchise revenues | (10,328) | (11,555) | (14,459) | ||||||||||||||
| Add: | |||||||||||||||||
| General and administrative expenses | 128,950 | 113,270 | 103,121 | ||||||||||||||
| Depreciation and amortization | 75,011 | 57,715 | 41,223 | ||||||||||||||
|
Transaction expenses, net (1)
|
2,533 | 2,587 | 3,147 | ||||||||||||||
|
Impairments and loss on disposal of assets (2)
|
448 | 525 | 1,359 | ||||||||||||||
|
Costs in connection with natural disasters (3)
|
- | 312 | - | ||||||||||||||
| Restaurant level operating profit | $ | 224,125 | $ | 201,761 | $ | 175,658 | |||||||||||
| Restaurant sales | $ | 1,212,173 | $ | 1,004,355 | $ | 877,092 | |||||||||||
| Income from operations margin | 2.3 | % | 3.9 | % | 4.7 | % | |||||||||||
| Restaurant level operating profit margin | 18.5 | % | 20.1 | % | 20.0 | % | |||||||||||
| Additional information | |||||||||||||||||
|
Deferred rent expense (4)
|
$ | 167 | $ | 1,119 | $ | 1,891 | |||||||||||
(1) Represents costs incurred in connection with the acquisition of franchise-owned restaurants, secondary offering costs, costs related to restaurant closures, expenses related to debt and revaluations of contingent consideration liability.
(2) Represents impairment charges and costs related to the disposal of assets due to retirements, replacements, restaurant closures and natural disasters.
(3) Represents costs incurred in connection with hurricane damage. The costs include inventory spoilage and labor costs, which were recorded in Food and beverage costs and Labor and other related expenses, respectively, on the Consolidated Statements of Operations and Comprehensive Income.
(4) Represents the non-cash portion of straight-line rent expense recorded within Occupancy expenses on the Consolidated Statements of Operations and Comprehensive Income.
Liquidity and Capital Resources
Liquidity
As of December 28, 2025, we had cash and cash equivalents of $21.2 million and outstanding borrowings under the Credit Facility of $267.6 million, excluding unamortized debt discount and deferred issuance costs. We had availability of $66.9 million under our revolving credit facility of $125.0 million, of which $2.1 million is reserved under letters of credit pursuant to our credit agreement dated as of October 6, 2021 as amended ("Credit Agreement"). Our principal uses of cash include capital expenditures for the development, acquisition or remodeling of restaurants, lease obligations, debt service payments and strategic infrastructure investments. Our working capital requirements are low due to our restaurants storing minimal inventory and customers pay for purchases at the time of the sale, which frequently precedes our payment terms with suppliers.
We believe that our cash flow from operations combined with our availability under the Credit Facility and our cash and cash equivalents will be sufficient to meet our liquidity needs for at least the next 12 months. We anticipate that to the extent that we require additional liquidity, or should we decide to pursue one or more significant acquisitions, the funds would be furnished first through additional indebtedness and thereafter through the issuance of equity. Although we believe that our current level of total available liquidity is sufficient to meet our short-term and long-term liquidity requirements, we regularly evaluate opportunities to improve our liquidity position in order to enhance financial flexibility.
We estimate that our capital expenditures will total approximately $150.0 million to $160.0 million in 2026. This capital is invested primarily in new restaurant projects and planned remodels. We intend to fund the capital expenditures primarily with cash generated from our operating activities as well as with borrowings pursuant to our Credit Agreement.
Summary of Cash Flows
The following table presents a summary of our cash provided by (used in) operating, investing and financing activities for 2025 and 2024:
| FISCAL YEAR | |||||||||||
| (in thousands) | 2025 | 2024 | |||||||||
| Cash provided by operating activities | $ | 125,912 | $ | 115,673 | |||||||
| Cash used in investing activities | (213,764) | (206,653) | |||||||||
| Cash provided by financing activities | 75,786 | 74,331 | |||||||||
| Net decrease in cash and cash equivalents | $ | (12,066) | $ | (16,649) | |||||||
Cash provided by operations is our typical source of liquidity used (i) to fund capital expenditures for new restaurants, (ii) to maintain and remodel existing restaurants and (iii) for debt service. Cash provided by operations increased in 2025as compared to 2024primarily due to (i) the addition of new and acquired restaurants, (ii) the timing of operational payments and (iii) the impact of non-cash charges, offset by the decrease to income from operations.
Cash used in investing activities increased during 2025 from 2024 primarily as a result of the increase in capital expenditures to support our restaurant growth, partially offset by the decrease in amounts paid to acquire restaurants from our franchisees.
Cash provided by financing activities increased slightly in 2025 compared to 2024 andincluded borrowings under our Credit Agreement to fund capital projects and the acquisition of restaurants from our franchisees and proceeds from stock option exercises, partially offset by debt repayments.
Contractual Obligations
Material contractual obligations arising in the normal course of business primarily consist of operating and finance lease obligations, long-term debt and purchase obligations. The timing and nature of these commitments are expected to have an impact on our liquidity and capital requirements in future periods. Refer to Note 10, Debt,in the accompanying consolidated financial statements for additional information relating to our long-term debt and Note 12, Leases, in the accompanying consolidated financial statements included in Item 8 of Part II of this Annual Report on Form 10-K for additional information related to our operating and financing leases.
Purchase obligations include agreements related to the construction or remodeling of restaurant facilities, the purchase of food, beverages, paper goods and other supplies, equipment purchases, marketing-related contracts, software license commitments, technology and other service contracts in the normal course of business. These obligations are generally pursuant to short-term purchase orders at prevailing market prices and are recorded as liabilities when the related goods are received or services rendered. These commitments are cancellable and there are no material financial penalties associated with these commitments in the event of early termination.
Purchase obligations also include firm minimum commitments in excess of 12 months for certain contracts. Refer to Note 18, Commitments and Contingencies, in the accompanying consolidated financial statements included in Item 8 of Part II of this Annual Report on Form 10-K for additional information.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K, which have been prepared in accordance with GAAP. The preparation of these financial statements and related notes requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Certain of our accounting policies require the application of significant judgment by Management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, terms of existing contracts, our evaluation of trends in the industry, and information available from other outside sources, as appropriate. We evaluate our estimates and judgments on an on-going basis. Our actual results may differ from these estimates. Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions. The
accounting policies and estimates that we believe to be the most critical to an understanding of our financial condition and results of operations and that require the most complex and subjective management judgments are discussed below.
Business Combinations
We account for acquisitions using the purchase method of accounting. As such, the fair value of purchase consideration is allocated to the tangible assets acquired, liabilities assumed and intangible assets acquired based on estimated fair values at the acquisition date. The excess of the purchase consideration over the fair values of identifiable assets and liabilities is recorded as goodwill. The fair values assigned, defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants, are based on estimates and assumptions determined by Management. We determine the fair values of tangible and intangible assets acquired generally in consultation with a third-party valuation advisor. In addition, we have estimated the value and economic lives of certain tangible assets based on historical information, industry estimates and averages, which are used to calculate depreciation and amortization expense. If the subsequent actual results and updated projections of the underlying business activity change, compared with the assumptions and projections used to develop these values, we could experience impairment charges. If our estimates of the economic lives change, depreciation or amortization expense could be accelerated or extended. Management's estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.
If the initial accounting for a business combination is incomplete at the end of a reporting period that falls within a measurement period not to exceed a year from the date of acquisition, we report provisional amounts in our consolidated financial statements. During the measurement period, we adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. We record these adjustments to the provisional amounts with a corresponding adjustment to goodwill. Any adjustments identified after the measurement period are recorded in the Consolidated Statements of Operations and Comprehensive Income.
The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date and costs that we incur to complete the business combination, such as legal and other professional fees, are expensed as they are incurred.
Goodwill and Indefinite-Lived Intangibles
Goodwill and indefinite-lived intangibles are tested for impairment annually on the first day of the fourth quarter of the fiscal year, or when events or changes in circumstances indicate that the carrying amount may not be recoverable. Significant judgments are used to determine if an indicator of impairment has occurred. Such indicators could include negative operating performance of our restaurants, economic and restaurant industry trends, legal factors, significant competition or changes in our business strategy. Adverse changes in these factors could have a significant impact on the recoverability of our goodwill and indefinite-lived intangible assets and could have a material impact on our consolidated financial statements.
We have identified one reporting unit to which we have attributed goodwill. Management may elect to perform a qualitative assessment to determine whether it is more likely than not that the reporting unit and/or asset group is impaired. If the qualitative assessment is not performed, or if it is not more likely than not that the estimated fair value of the reporting unit and indefinite-lived intangible assets exceeds the respective carrying value, a quantitative analysis is required.
If the qualitative assessment is not performed or if we determine that it is not more likely than not that the fair value of the reporting unit exceeds the carrying value, the fair value of the reporting unit is calculated using the best information available, including market information (also referred to as the market approach) and discounted cash flow projections (also referred to as the income approach). The market approach estimates fair value by applying projected cash flow earnings multiples to the reporting unit's operating performance. The multiples are derived from comparable publicly-traded companies with similar operating and investment characteristics. The income approach uses internal future cash flow estimates, which are influenced by revenue growth rates, operating margins and new restaurant openings, that are discounted using a weighted-average cost of capital that reflects current market conditions. We recognize an impairment loss when the carrying value of the reporting unit exceeds the estimated fair value.
In performing the quantitative assessment for indefinite-lived intangibles, we estimate the fair value of trade names and trademarks using the relief-from-royalty method, which requires assumptions related to projected sales, assumed royalty
rates that could be payable if we did not own the trademarks and a discount rate. We recognize an impairment loss when the carrying value of the asset exceeds the estimated fair value.
The subjective estimates associated with Management's judgments and assumptions in fair value calculations at the measurement date are affected by various factors including changes in economic conditions, our operating performance and our business strategies.
During 2025 and 2024, we elected to perform a qualitative assessment for our annual impairment review of goodwill and indefinite-lived intangibles. In considering the qualitative approach related to goodwill, we considered factors including, but not limited to, macro-economic conditions, market and industry conditions, the competitive environment, results of prior impairment tests, operational stability, the overall financial performance of the reporting unit and the impacts of the discount rates. Management also considered the specific future outlook for the reporting unit. As it relates to our trade names and trademarks, we evaluate similar factors as the goodwill assessment, in addition to impacts of potential changes to the assumed royalty rate. Based on the results of the qualitative assessment, Management concluded that impairment of goodwill and its indefinite-lived intangibles was not likely and as a result, Management was not required to perform a quantitative assessment.
Long-Lived Assets and Definite-Lived Intangible Assets
Long-lived assets deployed at company-owned restaurants include (i) property, fixtures and equipment, (ii) operating lease right-of-use assets, net of the related operating lease liabilities and (iii) reacquired rights to the extent the restaurants have been acquired by the Company. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability is measured by a comparison of the carrying amount of an asset group to the estimated undiscounted future cash flows expected to be generated by the asset group. The comparison is performed at the lowest level of identifiable cash flows, which is primarily at the individual restaurant level. Significant judgment is used to determine the expected useful lives of long-lived assets and the estimated future cash flows, including projected sales growth, operating margins and ongoing maintenance and improvement of the assets. If the carrying amount of the asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized.
Definite-lived intangible assets consist of rights valued in business combinations. Definite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives and are reviewed for impairment when events or change in circumstances indicate that the carrying amount of such assets may not be recoverable. Significant judgment is used to determine if an indicator of impairment has occurred. Such indicators may include, among others: negative operating performance of our restaurants, economic and restaurant industry trends, legal factors, significant competition or changes in our business strategy. Adverse changes in these factors could have a significant impact on the recoverability of these assets and the resulting impairment charge could be material to our consolidated financial statements.
Recoverability of definite-lived intangible assets is measured by a comparison of the carrying amount of the asset group to the estimated undiscounted future cash flows expected to be generated by the asset group. If the total future undiscounted net cash flows are less than the carrying amount, this may be an indication of impairment. An impairment loss is recognized when the asset's carrying value exceeds its estimated fair value, which is generally estimated using discounted future cash flows expected from future use of the asset group.
Leases
We lease our restaurant facilities and corporate offices, as well as certain restaurant equipment, under various non-cancelable agreements. At the inception of each lease, we evaluate the expected term which includes reasonably certain renewal options, and classify the lease as either an operating leases or a finance lease. Lease liabilities represent the present value of future lease payments. To determine the present value of the lease liability, we estimate the incremental borrowing rates corresponding to the reasonably certain lease term as our leases do not provide implicit rates. Assumptions used in determining our incremental borrowing rate include a market yield implied by our outstanding secured term loans interpolated for various maturities using our synthetic credit rating, which is determined using a regression analysis of rated comparable publicly-traded companies and their financial data.
We assess the impairment of the right-of-use asset at the asset group level whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable.
Changes in Management's judgments and in the assumptions being used may produce materially different amounts in the recognition of the right-of-use assets, lease liabilities and lease expense.
Income Taxes
The provision for income taxes, deferred income tax assets and liabilities and any related valuation allowance requires the use of estimates based on Management's interpretation and application of complex tax laws and accounting guidance. The estimates made under this method include, among other items, depreciation and amortization expense allowable for tax purposes, credits for items such as taxes paid on reported employee tip wages, effective tax rates for state and local income taxes and the deductibility of certain items.
Income taxes are accounted for utilizing the asset and liability method, under which deferred income tax assets and liabilities are recognized based on the differences between the financial reporting bases and the respective tax bases of assets and liabilities.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which we expect the temporary differences to reverse. Any effects of changes in the income tax rates or tax laws are included in the provision for income taxes in the period that includes the enacted date.
Management routinely assesses the realizability of deferred tax assets and may record a valuation allowance if, based on all available positive and negative evidence, the determination is reached that some portion of the deferred tax assets may not be realized prior to expiration. If we determine that we may be able to realize the deferred tax assets in the future, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes during the period in which the determination was made.
Stock-Based Compensation and Fair Value of Common Stock
Stock-based compensation expense is measured based on the award's fair value at the date of grant. Stock-based compensation expense related to time-based stock option awards issued under our 2017 Equity Plan is recognized on an accelerated recognition method over the requisite service period. No awards were granted under the 2017 Equity Plan during 2025, 2024 and 2023, and we do not intend to grant any further awards under the 2017 Equity Plan. Stock-based compensation expense related to time-based stock option awards issued under our 2021 Equity Plan is recognized on a straight-line basis over the requisite service period. Forfeitures are recognized as they occur for all awards.
Management estimates the fair value of stock option awards using the Black-Scholes valuation model, which involves several assumptions and judgments including the expected term of the stock option, expected volatility, the risk-free interest rate and the expected dividend yield. The Company does not have sufficient historical stock option exercise activity and therefore the expected term of stock options granted under the 2021 Equity Plan is estimated using the simplified method, which represents the mid-point between the vesting period and the contractual term for each grant. Prior to our IPO in October 2021, the expected term of stock option awards was determined based on data from publicly-traded companies. The expected volatility of stock option awards is based on the historical volatilities of a set of publicly-traded peer companies in a similar industry, as we lack company-specific historical or implied volatility information. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve for time periods approximately equal to the expected term of the stock option award. The expected dividend yield is based on the fact that the Company has never paid cash dividends and there is no intent to pay dividends in the foreseeable future. These assumptions represented Management's best estimate, which involved inherent uncertainties and the application of Management's judgment. As a result, use of significantly different assumptions or estimates could yield a materially different stock-based compensation expense.
The fair value of our common stock and our stock-based awards' grant date fair value is determined based on the closing price on our common stock on Nasdaq.
See Note 17, Stock-Based Compensation, in the accompanying notes to the consolidated financial statements included in Item 8 of Part II of this Annual Report on Form 10-K for additional information.
Insurance Reserves
The Company is self-insured for employee group health claims and Ohio workers' compensation and carry retention levels and per-claim deductibles for a significant portion of expected losses associated with other workers' compensation and general liability programs. Liabilities for unresolved and incurred but not reported claims are recognized at the anticipated cost below applicable retention levels or per-claim deductible amounts. Insurance reserve liabilities are established using actuarial assumptions and judgments regarding the frequency and severity of claims.
Recently Issued Accounting Pronouncements
For a discussion of recently issued accounting pronouncements, see Note 2, Summary of Significant Accounting Policies, in the accompanying notes to the consolidated financial statements included in Item 8 of Part II of this Annual Report on Form 10-K.
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