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Filed Pursant to Rule 424(b)(4)
Registration No. 333-259360

PROSPECTUS

 

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9,459,000 Shares

First Watch Restaurant Group, Inc.

Common Stock

 

 

This is an initial public offering of common stock by First Watch Restaurant Group, Inc. (the “Company”). We are offering 9,459,000 shares of our common stock.

Prior to this offering, there has been no public market for our common stock. The initial public offering price per share is $18.00. We have been approved to have our common stock listed on the Nasdaq Global Select Market (“Nasdaq”) under the symbol “FWRG.”

We are an “emerging growth company” as defined under the federal securities laws and, as such, will be subject to reduced public company reporting requirements. See “Prospectus Summary – Implications of Being an Emerging Growth Company.”

Following the closing of this offering, Advent (as defined on page 5 of this prospectus) will indirectly beneficially own approximately 81% of our outstanding common stock, or approximately 79% if the underwriters’ option to purchase additional shares is fully exercised. As a result, Advent will beneficially own shares sufficient for majority votes over all matters requiring stockholder votes and will be able to exercise significant voting influence over fundamental and significant corporate matters and transactions. Therefore, after the completion of this offering, we expect to be a “controlled company” within the meaning of the corporate governance standards of Nasdaq. See “Risk Factors—Risks Related to this Offering and Ownership of Our Common Stock,” “Management—Director Independence and Controlled Company Exemption” and “Principal Stockholders.”

 

 

See “Risk Factors” on page 29 to read about factors you should consider before buying shares of our common stock.

 

 

Neither the Securities and Exchange Commission (the “SEC”) nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.     

 

 

 

 

     Per Share      Total  

Initial public offering price

   $ 18.00      $ 170,262,000  

Underwriting discount(1)

   $ 1.26      $ 11,918,340  

Proceeds, before expenses, to us

   $ 16.74      $ 158,343,660  

 

(1)

We refer you to “Underwriting,” beginning on page 158 of this prospectus, for additional information regarding total underwriter compensation.

To the extent that the underwriters sell more than 9,459,000 shares of common stock, the underwriters have an option to purchase up to an additional 1,418,850 shares from us at the initial public offering price less the underwriting discount.

 

 

 

BofA Securities      Goldman Sachs & Co. LLC    Jefferies

 

 

 

Barclays   Citigroup         Piper Sandler   Cowen   Guggenheim Securities           Stifel

 

 

Telsey Advisory Group

 

 

The underwriters expect to deliver the shares against payment in New York, New York on October 5, 2021.

The date of this prospectus is September 30, 2021.


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BETTER COFFEE. BETTER WORLD PROJECT SUNRISE HUILA COLOMBIA


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ORIGINATED IN 1983 BUT WE'RE JUST GETTING STARTED


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YOU FIRST. IT FEELS GOOD TO SERVE.


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FIRST WATCH BREAKFAST BRUNCH LUNCH


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* YEAH, * IT'S FRESH FIRST WATCH


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TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1  

The Offering

     19  

Summary Historical Consolidated Financial and Other Data

     21  

Risk Factors

     29  

Cautionary Note Regarding Forward-Looking Statements

     65  

Use of Proceeds

     66  

Dividend Policy

     67  

Capitalization

     68  

Dilution

     69  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     71  

Business

     102  

Management

     121  

Executive Compensation

     128  

Principal Stockholders

     139  

Certain Relationships and Related Party Transactions

     142  

Description of Material Indebtedness

     144  

Description of Capital Stock

     148  

Shares Eligible for Future Sale

     152  

Material U.S. Federal Income Tax Considerations for Non-U.S. Holders

     154  

Underwriting

     158  

Legal Matters

     166  

Experts

     166  

Where You Can Find More Information

     166  

Index to Financial Statements

     F-1  

 

 

You should rely only on the information contained in this prospectus or in any free writing prospectus we may specifically authorize to be delivered or made available to you. Neither we nor the underwriters (or any of our or their respective affiliates) have authorized anyone to provide any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. Neither we nor the underwriters (or any of our or their respective affiliates) take any responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We and the underwriters (or any of our or their respective affiliates) are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus or any free writing prospectus is accurate only as of its date, regardless of its time of delivery or the time of any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

Trademarks and Trade Names

We and our subsidiaries own or have the rights to various trademarks, trade names, service marks and copyrights, including the following: “First Watch,” “You First,” “Yeah, It’s Fresh!” and various logos used in association with these terms. Solely for convenience, the trademarks, trade names, service marks and copyrights referred to herein are listed without the ©, ® and TM symbols, but such references are not intended to indicate, in any way, that we, or the applicable owner, will not assert, to the fullest extent under applicable law, our or their, as applicable, rights to these trademarks, trade names, service marks and copyrights. Other trademarks, trade names, service marks or copyrights appearing in this prospectus are the property of their respective owners.

 

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Market and Industry Information

Unless otherwise indicated, market data and industry for information used throughout this prospectus is based on management’s knowledge of the industry and the good faith estimates of management. We also relied, to the extent available, upon independent industry surveys and publications and other publicly available information prepared by a number of sources, including third-party industry sources, such as a market report titled “Restaurant, Food & Beverage Market Research Handbook 2020-2021” published in September 2019 by Richard K. Miller & Associates (“RKMA”), information published by the NPD Group and a five-year longitudinal study of employee surveys on Glassdoor published in June 2019 by William Blair. All of the market data and industry information used in this prospectus involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. Although we believe that these sources are reliable, neither we nor the underwriters can guarantee the accuracy or completeness of this information and neither we nor the underwriters have independently verified this information. While we believe the estimated market position, market opportunity and market size information included in this prospectus is generally reliable, such information, which is derived in part from management’s estimates and beliefs, is inherently uncertain and imprecise. Projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in our estimates and beliefs and in the estimates prepared by independent parties.

Basis of Financial Presentation

We use a 52- or 53-week fiscal year ending on the last Sunday of each calendar year. All references to fiscal 2020 and fiscal 2019 reflect the results of the 52-week fiscal year ended December 27, 2020 and the 52-week fiscal year ended December 29, 2019, respectively. Our fiscal quarters are comprised of 13 weeks each, except for fiscal years consisting of 53 weeks for which the fourth quarter will consist of 14 weeks, and end on the 13th Sunday of each quarter (14th Sunday of the fourth quarter, when applicable). All consolidated financial statements presented in this prospectus have been prepared in U.S. dollars and in accordance with generally accepted accounting principles in the United States of America (“GAAP”). We report financial and operating information in one segment.

Key Metrics

Average Unit Volume (“AUV”)

AUV is the total restaurant sales (excluding gift card breakage) recognized in 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”), divided by the number of restaurants in the Comparable Restaurant Base during the period.

Cash-on-Cash Return

Cash-on-Cash Return is defined as restaurant level operating profit (excluding gift card breakage and deferred rent (income) expense) in the third year of operation (months 25-36 of operation) for our company-owned restaurants divided by their cash build-out expenses, net of landlord incentives. Restaurant level operating profit is defined as restaurant sales, less restaurant operating expenses, which include food and beverage costs, labor and other related expenses, other restaurant operating expenses and occupancy expenses. Restaurant level operating profit excludes corporate level expenses and other items that we do not consider in our evaluation of ongoing core operating performance of our restaurants as identified in the reconciliation of Net income (loss) from operations, the most directly comparable GAAP measure, to restaurant level operating profit, included in “Prospectus Summary – Summary Historical Consolidated Financial and Other Data.”

 

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Franchise-owned New Restaurant Openings (“Franchise-owned NROs”)

Franchise-owned NROs are the number of new franchise-owned First Watch restaurants commencing operations during the period.

New Restaurant Openings (“NROs”)

NROs are the number of new company-owned First Watch restaurants commencing operations during the period.

Same-Restaurant Sales Growth

Same-restaurant sales growth is the percentage change in year-over-year restaurant sales (excluding gift card breakage) for the Comparable Restaurant Base. For fiscal 2020 and fiscal 2019, there were 212 restaurants and 168 restaurants, respectively, in our Comparable Restaurant Base. For the twenty-six weeks ended June 27, 2021 and the twenty-six weeks ended June 28, 2020, there were 270 restaurants and 212 restaurants, respectively, in our Comparable Restaurant Base.

We gather daily sales data and regularly analyze the customer traffic counts and the mix of menu items sold to aid in developing menu pricing, product offerings and promotional strategies designed to produce sustainable same-restaurant sales growth.

Same-Restaurant Traffic Growth

Same-restaurant traffic growth is the percentage change in traffic counts as compared to the same period in the prior year using the Comparable Restaurant Base. For fiscal 2020 and fiscal 2019, there were 212 restaurants and 168 restaurants, respectively, in our Comparable Restaurant Base. For the twenty-six weeks ended June 27, 2021 and the twenty-six weeks ended June 28, 2020, there were 270 restaurants and 212 restaurants, respectively, in our Comparable Restaurant Base. We gather daily traffic data and regularly analyze customer traffic to aid in developing menu pricing, product offerings and promotional strategies.

System-wide New Restaurant Openings (“System-wide NROs”)

System-wide NROs are the number of NROs and Franchise-owned NROs commencing operations during the period.

System-wide restaurants

System-wide restaurants is the total number of restaurants, including all company-owned and franchised restaurants.

System-wide sales

System-wide sales consist of restaurant sales from our company-owned restaurants and franchised restaurants. We do not recognize the restaurant sales from our franchised restaurants as revenue. See Note 2, Summary of Significant Accounting Policies, in the notes to the audited consolidated financial statements included elsewhere in this prospectus for a description of our revenue recognition policy.

 

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PROSPECTUS SUMMARY

This summary highlights information appearing elsewhere in this prospectus. This summary is not complete and does not contain all of the information that you should consider before making a decision to participate in the offering. You should carefully read the entire prospectus, including the information presented under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the consolidated financial statements as of and for the fiscal years ended December 27, 2020 and December 29, 2019 and the interim unaudited consolidated financial statements for the twenty-six weeks ended June 27, 2021 and June 28, 2020 and notes related thereto included elsewhere in this prospectus, before making an investment decision. Unless the context requires otherwise, references to “our company,” “the Company,” “we,” “us,” “our” and “First Watch” refer to First Watch Restaurant Group, Inc. and its direct and indirect subsidiaries on a consolidated basis.

 

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We Are First Watch

We are First Watch – an award-winning daytime restaurant concept serving made-to-order breakfast, brunch and lunch using fresh ingredients. Since our founding in 1983, we have built our brand on our commitment to operational excellence, our “You First” culture and our culinary mission centered around a fresh, innovative menu that is continuously evolving. These foundational brand pillars have established First Watch as the largest and fastest growing concept in daytime dining (“Daytime Dining”) - an emerging restaurant segment that is differentiated from legacy segments by operating exclusively during daytime hours with a progressive on-trend chef-driven menu. Our one shift, from 7:00 a.m. to 2:30 p.m., and one main menu enable us to optimize restaurant operations and attract and retain employees who are passionate about hospitality and drawn to our “No Night Shifts Ever” approach. This differentiation has driven high employee satisfaction and retention, and strong consumer demand and operating performance as evidenced by our 28 consecutive quarters of same-restaurant sales growth from fiscal 2013 to fiscal 2019 and positive annual same-restaurant traffic growth from fiscal 2014 to fiscal 2019, prior to the emergence of the COVID-19 pandemic. In January 2020, we were recognized as “America’s Favorite Restaurant Brand” in Market Force’s annual consumer study and as one of three industry finalists for Black Box Intelligence’s 2020 Best Practices award.


 

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Our unique one-shift and one-menu approach, coupled with our commitment to our employees and customers throughout the COVID-19 pandemic allowed us to retain and attract employees and reopen our restaurants with accelerating operating momentum in the second half of 2020 and into 2021, recording same-restaurant sales growth of 16.3% in the second fiscal quarter ended June 27, 2021 (“second fiscal quarter of 2021”) relative to the fiscal quarter ended June 30, 2019 (“second fiscal quarter of 2019”). Importantly, our same-restaurant traffic growth in the second fiscal quarter of 2021 was ahead of the comparable quarter in 2019 by 1.0%. Throughout the COVID-19 pandemic, we invested in supplemental compensation and expanded health benefits for our people while at the same time we accelerated strategic investments in our business and continued to expand our footprint, opening 42 and 18 System-wide NROs in fiscal 2020 and during the twenty-six weeks ended June 27, 2021, respectively. As of June 27, 2021, we had 423 System-wide restaurants across 28 states, 335 of our restaurants were company-owned and 88 were operated by our franchisees.

Our Promise: Yeah, It’s Fresh!

 

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At First Watch, we take a creative approach to Daytime Dining led by a focus on and commitment to freshness. Each item is made-to-order and prepared with care – you will not find microwave ovens, heat lamps or deep fryers in our kitchens. Every morning, we arrive at the crack of dawn to slice and juice fresh fruits and vegetables, bake muffins, brew our fresh coffee and whip up our French Toast batter from scratch. Our award-winning chef-driven menu includes elevated executions of classic favorites for breakfast, lunch and brunch, along with First Watch-specific specialties such as our protein-packed Quinoa Power Bowl®, Farmstand Breakfast Tacos, Avocado Toast, Morning Meditation (juiced in-house daily), our new Vodka Kale Tonic, Chickichangas and our famous Million Dollar Bacon. While our menu constantly evolves, our focus on – and commitment to – freshness never wavers.


 

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Our Mission: You First

For more than 38 years, we have cultivated an organizational culture built on our mission of “You First,” which puts serving others above all else. As a company, we put our employees first and empower them to do whatever it takes to put our customers first. We give back in meaningful ways to the local communities in which we operate and also support national and international causes we care about, such as our Project Sunrise partnership that supports women-owned coffee farms in Colombia, which in turn empowers them to reinvest in their communities. Our “You First” mission, in addition to our quality of life advantage inherent in our single-shift operating model, has led us to be recognized as an employer of choice in our industry, according to a five-year longitudinal study of employee surveys on Glassdoor published in June 2019 by William Blair. We believe that our approach to our employees not only long before but also during the COVID-19 pandemic has enabled us to retain and attract employees to get our restaurants staffed up to meet the current consumer demand better than our peers.

 

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Proven Record of Sustained Growth

We have delivered almost four decades of sales and unit growth as a result of our broad brand appeal, compelling economic proposition and difficult-to-replicate business model. We have achieved consistent growth in total System-wide restaurants to 423 as of June 27, 2021, from 277 restaurants in fiscal 2015. Over the six-year period ended December 29, 2019 (prior to the emergence of the COVID-19 pandemic), we:

 

   

Consistently delivered same-restaurant sales growth, averaging 6.3% annually

 

   

Consistently achieved positive annual same-restaurant traffic growth, averaging 1.4% annually

Over the five-year period ended December 29, 2019 (prior to the emergence of the COVID-19 pandemic), we:

 

   

Consistently increased AUVs by 25.7%, from $1.3 million in fiscal 2015 to $1.6 million in fiscal 2019

 

   

Consistently opened new company-owned restaurants with an average Cash-on-Cash Return of 50.8%


 

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Our COVID-19 Response and How We Emerged as a Stronger Company

Our strong momentum in fiscal 2019 continued into January 2020 and February 2020 with same-restaurant sales growth of 7.4% and 4.7%, respectively. However, as the COVID-19 pandemic emerged in March 2020, our management team devised a strategy not only to prioritize the health and safety of our employees and customers in keeping with our “You First” culture, but also to accelerate planned strategic initiatives that would position us


 

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to be more nimble in capturing sales. The following are some of the actions we took that enabled us to persevere during the pandemic and emerge as a stronger company in 2021:

 

   

Aligned with our sponsor, Advent International Corporation (“Advent”), to commit capital both to our people as well as to our continued new restaurant development and real estate pipeline;

 

   

Began closing all dining rooms during the week of March 15, 2020 (regardless of state and local orders), transitioning to off-premises sales only and rapidly deploying our first phase of new hardware and software enhancements to enable this critical sales channel;

 

   

Furloughed most of our employees, but provided relief payments to help with immediate needs for those hourly employees with more than three years of service, while committing to make managers and corporate employees “whole” upon return for any financial shortfall between the state and federal benefits they received and their base salaries;

 

   

Paid both employer and employee portion of healthcare premiums for furloughed employees enrolled in our healthcare plans, covered 100% of out-of-pocket costs for insured employees and their families for medical visits related to the COVID-19 pandemic and secured telemedicine services for employees;

 

   

Temporarily suspended all operations at our company-owned restaurants on April 13, 2020 to prioritize the health and safety of our team members;

 

   

Established the “You First Fund,” which provides tax-free grants to in-need employees and which had distributed approximately $800,000 in such grants through June 2021;

 

   

Deployed new safety protocols and procedures as well as an employee wellness screening tool with COVID-19 contact tracing. Our efforts were recognized in a Technomic survey in the third quarter of 2020 that rated First Watch as best in its peer group with regard to customer safety and sanitation; and

 

   

Offered employees a payment in consideration for the time taken to receive their full schedule of immunization, once COVID-19 vaccines were available.

With respect to our operations, we rapidly addressed new consumer behaviors by accelerating previously planned initiatives to position ourselves for short-term recovery and long-term growth such as online ordering to enable third-party delivery services, the expansion of our carefully curated alcohol program and touchless payment technology:

 

   

Developed and launched a new mobile app to allow customers to order takeout and delivery and to join our dining room waitlist remotely;

 

   

Integrated technology into our waitlist management solution to gather customer data on consumer preferences;

 

   

Accelerated the rollout of our alcohol program, which has proven to be an incremental occasion for consumers, increasing overall beverage incidence by 230 basis points;

 

   

Maintained the entirety of our menu throughout the COVID-19 pandemic while also prioritizing culinary innovation through our seasonal menu program;

 

   

Expanded our patio and outdoor service areas and reduced and distanced our freestanding tables;

 

   

Proactively contacted our landlords to negotiate rent deferrals or abatements, postpone turnover dates for certain restaurants, secure waivers of alcohol sales restrictions and obtain dedicated curbside parking for off-premises order pick up; and

 

   

Continued to invest in new company-owned restaurants and develop our future NRO pipeline, leading to a 7.4% increase in our company-owned restaurants from 299 in fiscal 2019 to 321 in fiscal 2020.


 

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A total of approximately $4.8 million of costs were incurred in fiscal 2020 in connection with the COVID-19 pandemic, and were comprised of the following: (i) inventory obsolescence and spoilage of approximately $0.6 million, (ii) compensation paid to employees upon furlough and return from furlough of $1.4 million, (iii) $0.7 million for health insurance costs paid for furloughed employees, net of employee retention credits and (iv) supplies, such as personal protection equipment, of approximately $2.1 million.

Since beginning our phased reopening in May 2020, our restaurants have steadily grown sales and transactions despite the seating capacity of restaurant dining rooms remaining constrained by state and local government mandates as well as our own internal standards taken to protect employees and customers. In Florida, for example, where approximately 30% of our company-owned restaurants are located, despite the state lifting indoor dining distancing restrictions on September 25, 2020, we maintained six-foot distances between tables through the first fiscal quarter ended March 28, 2021 (“first fiscal quarter of 2021”) for the safety of our customers and employees.

As a result of the new initiatives that we put in place, when our company-owned restaurants reopened, we were able to meet the new customer demand for off-premises dining while also serving the in-restaurant customer traffic as it continued to increase. Our off-premises sales channel had been a relatively small portion of our sales pre-pandemic; in the fiscal quarter ended December 29, 2019 (“fourth fiscal quarter of 2019”) our average weekly off-premises sales were $1,897 per restaurant. In fiscal 2020, our off-premises sales benefited significantly from our technology investments and initiatives to reduce customer friction when ordering off-premises as well as changes in consumer behavior; this resulted in average weekly off-premises sales increasing to $8,082 per restaurant during the fiscal quarter ended December 27, 2020 (“fourth fiscal quarter of 2020”). Moreover, even as we saw our dine-in traffic grow steadily in 2021, our off-premises business remained relatively consistent with average weekly sales of $8,079 per restaurant in the second fiscal quarter of 2021. To ensure that our third-party delivery business was positioned for long-term success, we introduced a surcharge for third-party orders. We believe that off-premises sales will remain an incremental channel for us that serves an additional use occasion for our customers and that it will be an important part of growing average unit volumes to higher than pre-pandemic levels.

According to Nation’s Restaurant News, in 2019, First Watch was the fastest-growing full-service restaurant concept in the United States, based on year-over-year System-wide sales growth metrics, and in 2020, FSR Magazine identified First Watch as the fastest-growing full-service restaurant chain based on unit growth. Despite the COVID-19 pandemic, we continued to build and open new restaurants in 2020 with 23 company-owned restaurants in fiscal 2020 and continued to develop our pipeline for fiscal 2021 and the fiscal year ended December 25, 2022 (“fiscal 2022”) new restaurant growth. During the twenty-six weeks ended June 27, 2021, our NROs have performed exceptionally well, even when compared to the strong performance of our existing restaurants, and generated annualized average sales of $2.0 million, relative to our existing restaurants that generated annualized average sales of $1.7 million.

Starting in March 2021, we began to consistently report positive same-restaurant sales growth measured against pre-COVID results, including 5.9%, 13.4%, 14.8% and 19.7% same-restaurant sales growth in March, April, May and June of 2021, respectively, relative to March, April, May and June of 2019, respectively. Our momentum has continued into the third quarter of fiscal 2021 with same-restaurant sales for the month of July up 64.9% over 2020 and up 20.2% over 2019 and the month of August was up 45.2% over 2020 and up 17.0% over 2019. Similarly, our traffic in those months was up 5.1% and up 2.0% in July and August over 2019, respectively.


 

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Monthly Same-Restaurant Sales Growth Since January 2020

 

 

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Long-Term Consumer Trends in Our Favor

We believe that we are well-positioned to continue to benefit from the confluence of a number of long-term multi-generational consumer trends:

Increasing Morning Meal Occasions.

The morning meal (Breakfast and morning Snack) has been the only foodservice daypart with consistent year-over-year growth for the last several years, according to RKMA. The restaurant industry captured two additional breakfast visits per capita, from 2015 to 2018, and with 78% of breakfasts still being prepared at home during 2019 according to the NPD Group. With 102 billion breakfast occasions and 50 billion morning snack occasions in 2019, per a January 2020 NPD Breakfast Insights report, morning restaurant traffic provides a compelling long-term opportunity for future growth. We believe that the broad appeal of our menu and the quality of our ingredients gives us a competitive advantage over many alternatives that offer breakfast and lunch. We believe that migration from dense urban to suburban areas, where most of our restaurants are located, will result in increased traffic and brand awareness. Increased work-from-home routines have kept people in suburban areas for larger portions of the day, increasing First Watch exposure to an incremental customer base.


 

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Demand for Fresh, Healthy Food.

 

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According to RKMA, almost two thirds of consumers consider a healthy menu an important factor in their restaurant choice and according to the NPD Group, 60% of consumers say they want more protein in their diet. The COVID-19 pandemic has progressed trends globally towards wellness with consumers becoming more focused than ever on living and eating healthier. Our freshly made food, with simple, high-quality, protein-rich ingredients, such as cage-free eggs and quinoa, aligns well with these consumer trends. According to Market Force data in January 2020, First Watch scored 36 and 23 points higher than the second place breakfast brand in categories of healthy choices and food quality, respectively.

Consumers Want “On-Demand” Dining.

Consumers want the ability to order what they want and when they want it without regard to traditional daypart conventions. Increasingly busy schedules, the rise of the “gig” economy, flexible job hours and growth of remote workers, trends magnified by the COVID-19 pandemic, are powering demand for convenient, fast and flexible Daytime Dining offerings from our all-day menu, for which traditional rigid breakfast and lunch dayparts were not designed. In the second fiscal quarter of 2021, our average weekly off-premises sales per restaurant were $8,079 compared to $1,897 in the fourth fiscal quarter of 2019 and $8,082 in the fourth fiscal quarter of 2020.

We Are Disrupting a Massive Category

As consumer needs have evolved, so have we. Our “Urban Farm” positioning provides a creative, farm-fresh breakfast, brunch and lunch menu in a warm and rustic yet contemporary atmosphere – creating an energizing Daytime Dining experience that resonates with consumers. We enjoy broad appeal to a customer base that includes the morning traditionalists as well as a growing segment of younger, healthier and more affluent customers. These digital-centric consumers care about food and quality, are willing to pay more, and report higher advocacy for and share of visits to First Watch. There is no other concept with an offering similar to ours at a comparable scale. Our operating hours encompass breakfast, brunch and lunch, which represent 63% of all restaurant sales in the U.S., according to RKMA. Our business model and our scale position us for continued growth within this massive category.


 

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Unrelenting Commitment to Fresh Ingredients and Culinary Innovation

Our creative, on-trend menu and seasonal offerings define the culinary voice of our brand and highlight our commitment to quality and freshness. We believe this commitment is a key differentiator between First Watch and larger restaurant concepts that have failed to evolve. When we say, “Yeah, It’s Fresh,” we mean it. While many established restaurant concepts are outsourcing a large part of the preparation of their food, we still do much of it in-house in each restaurant every day.

 

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That commitment to quality and freshness is further evidenced throughout our award-winning menu with ingredients such as cage-free eggs, organic mixed greens and all-natural chicken, just to name a few. Our highly-curated menu of approximately 60 entrée items – small relative to most in our industry – features a thoughtful balance of classic favorites prepared and presented in an elevated way using high-quality ingredients, along with innovative and interesting specialty dishes that take the consumer on a culinary exploration.

Our creativity and innovation extend beyond today’s offerings and into our overall menu strategy. Successful platform introductions such as our Fresh Juice program and Shareables, which include menu items such as Million Dollar Bacon and Holey Donuts, were added in the past few years, adding incremental revenue opportunities while enhancing our culinary credibility. We have seen our Fresh Juice and Shareables platforms rise from 9.6% and 3.4% of customers purchasing in the fourth fiscal quarter ended December 30, 2018, respectively, to 15.6% and 5.7% in the second fiscal quarter of 2021 and our gross per person average over that same period rose from $12.29 to $14.69.

One Shift, One Menu, One Focus

We believe that our compelling business model, built around “One Shift, One Menu, One Focus” affords us competitive advantages. Our single-shift restaurant hours, by design, result in “No Night Shifts Ever.” This helps make us an employer of choice in the foodservice industry, which we believe allows us to attract superior talent, retain employees longer and create a unifying organizational culture. Our single menu, throughout the day and across all restaurants in our system, streamlines our supply chain and restaurant operations, simplifies our employee training and provides for a consistent customer experience. Our singular emphasis on Daytime Dining gives us the clarity of purpose to relentlessly focus on delivering a superior experience.


 

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“You First” Culture Elevates Employee and Customer Satisfaction

Our “You First” culture is palpable at every level of our organization. Our hiring, training and retention strategies empower our more than 9,000 employees, united by our culture, to deliver superior customer experiences. We invest heavily in our leaders by conducting 11 weeks of training for all managers, including a one-week F.A.R.M. (First Watch Academy of Restaurant Management) program traditionally held at our corporate headquarters (“Home Office”) in Florida, where each of our managers-in-training is immersed in our culture, vision and mission. Our restaurant-level manager turnover was 29% during the last twelve months ending March 2020, which is meaningfully lower than our peer average of 41% as reported by Black Box.

During the COVID-19 pandemic, we continued to invest in our employee relationships through a high touch program of outreach, communication and, where possible, assistance. As a result of our proactive approach, 75% of the hourly employees who had been working for us for over three years and approximately 90% of general managers returned to work with us when our restaurants reopened.

We have always believed our employees are our greatest asset, and the initiatives we had in place prior to the COVID-19 pandemic and the additional steps we subsequently took further enhanced our culture and elevated our employee, and ultimately customer, satisfaction. First Watch ranked first in Market Force’s Composite Loyalty Index metric as of January 2020, evidencing the compelling level of satisfaction amongst our customers. We believe that the incredible culture at First Watch became even stronger as a result of the pandemic, evidenced by our overall score in the Glassdoor survey having increased relative to the pre-pandemic period. A five-year longitudinal study of employee surveys on Glassdoor published in June 2019 by William Blair ranked us #1 for work/life balance and for overall employee satisfaction in the restaurant industry.

Track Record of Resilience and Exceptional Same-Restaurant Traffic and Sales Growth

Our strong brand with growing awareness, broad consumer appeal and excellence in execution have created outstanding and consistent performance over time. Over the five-year fiscal period ended December 29, 2019, our same-restaurant sales growth was positive every year, averaging 6.8% annually, and our same-restaurant traffic growth was 1.5%. This positive momentum has continued in the second fiscal quarter of 2021 performance with same-restaurant sales growth of 16.3% and same-restaurant traffic growth of 1.0% compared to the same fiscal period in 2019.

In addition to exemplary historical performance, our concept has proven to be highly adaptable and resilient during adverse market conditions. During the unprecedented COVID-19 restrictions, we temporarily closed all our company-owned restaurants and navigated significant capacity restrictions in the months following. In response, we rapidly enhanced our off-premises technological and operational capabilities to meet the change in consumer demand through those channels.

We have also seen rapid sales recovery as many geographies reduced on-premises dining restrictions that were imposed after the onset of the COVID-19 pandemic. For example, by March 2021, nearly all our restaurants had reopened to full dining-room capacity and we began to consistently achieve highly positive same-restaurant sales growth, including 5.9% 13.4%, 14.8% and 19.7% same-restaurant sales growth in March, April, May and June of 2021, respectively, relative to March, April, May and June of 2019, respectively. Our momentum has continued into the third quarter of fiscal 2021 with same-restaurant sales for the month of July up 64.9% over 2020 and up 20.2% over 2019 and the month of August was up 45.2% over 2020 and up 17.0% over 2019. Similarly, our traffic in those months was up 5.1% and up 2.0% in July and August over 2019, respectively.


 

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Strong Restaurant Productivity and Proven Portability

The success of our brand is reflected in our restaurant-level performance and Cash-on-Cash Return. In fiscal 2019, prior to the pandemic, we generated an AUV of $1.6 million in a single shift (seven and a half hours daily), comparable to many restaurants open for several shifts or in some cases around the clock. We have demonstrated the portability of our model by successfully operating restaurants in 28 states. Restaurants in our top decile, by fiscal 2019 sales, span nine different states and 14 different DMAs. DMAs are geographic areas in the United States in which local television viewing is measured by The Nielsen Company. Despite the challenges of the COVID-19 pandemic and its impact on our sales, we have seen a broad and rapid sales recovery and opened 42 and 18 System-wide NROs in fiscal 2020 and during the twenty-six weeks ended June 27, 2021, respectively. Our NROs have displayed exemplary performance evidenced by the current momentum in our business. Our fiscal 2020 NROs have generated annualized average sales of $1.6 million and our NROs opened during the twenty-six weeks ended June 27, 2021 have generated annualized average sales of $2.0 million.

 

LOGO

 

  (1)

Represents annualized average sales of all company-owned restaurants opened through fiscal 2019.

  (2)

Represents annualized average sales of all company-owned restaurants opened during fiscal 2020.

  (3)

Represents annualized average sales of all company-owned restaurants opened during the twenty-six weeks ended June 27, 2021.

Experienced, Passionate Leadership Team and Deep Bench of Talent

Our team is led by passionate executives who have an extensive mix of experience in our brand and with other leading consumer facing businesses. Christopher A. Tomasso, our President, Chief Executive Officer and Director, has more than 24 years of industry experience and joined First Watch in 2006. Mr. Tomasso sets the strategic vision and brand positioning for the company, while enhancing its organizational culture. Mr. Tomasso was recognized with FSR Reader’s Choice Award as one of two top C-Suite Executives in 2021. Mel Hope, our Chief Financial Officer and Treasurer, has more than 36 years of public accounting and industry experience including serving as Chief Financial Officer of large, successful public and private companies. We have a deep bench of talent throughout the organization. Our executives and key employees average more than 15 years of industry experience and our restaurant general managers have an average tenure at First Watch of five years. In addition, we have dozens of fully-trained, tested, high-performing managers positioned throughout our system who are poised to step into the general manager role as we execute our growth strategy and open new restaurants.


 

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How We Will Continue to Grow Sales and Profits

While we are proud of our success in having grown sales and restaurant level operating profit consistently for many years prior to the pandemic, our focus is on the future. We believe our continued growth will come from opening new restaurants in existing and new geographies and driving traffic and building sales at our existing restaurants as new customers discover First Watch and regulars come and enjoy us more frequently. While 2020 was a challenging year given the COVID-19 pandemic, the investment in our employees and operational capabilities have enabled us to emerge as an even stronger company with greater abilities to leverage multiple channels for growth. We are even more confident in our growth strategies based on the consumer reaction to our brand and strong resurgence we have seen throughout 2021 since reopening our restaurants and since capacity restrictions have been reduced.

Grow Our Brand Footprint by Consistently Opening New Restaurants

First Watch has grown from 277 restaurants in fiscal 2015 to 423 System-wide restaurants as of June 27, 2021 while increasing annual AUV from $1.3 million in fiscal 2015 to $1.6 million in fiscal 2019 and achieving positive same-restaurant sales growth and traffic except for fiscal 2020. In Florida, our most mature market with the greatest number of company-owned restaurants, we have grown from 54 to 99 restaurants over the last six years, while generating average annual same-restaurant sales growth of 6.8% from fiscal 2015 to fiscal 2019. We believe we have significant potential to expand our presence within all the states in which we currently operate as well as new ones. We have a significant opportunity to grow density both in existing and new markets. Our deeply experienced restaurant development team in partnership with a third-party real estate analytics firm conducted an in-depth study that concludes we have the potential for more than 2,200 locations in the United States.

Restaurant Count by State as of June 27, 2021

 

LOGO


 

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Despite the challenges of the COVID-19 pandemic, First Watch remained committed to invest in growth throughout 2020 and 2021 and continued to open new restaurants. We opened 42 and 18 System-wide NROs in fiscal 2020 and during the twenty-six weeks ended June 27, 2021, respectively, representing growth rates of 11.1% and 9.3%, respectively, over the prior periods. Furthermore, those NROs have performed exceptionally well, evidencing our compelling business momentum and ability to successfully grow our footprint. Our NROs during the twenty-six weeks ended June 27, 2021, have generated annualized average sales of $2.0 million relative to our existing restaurants’ annualized average sales of $1.7 million. Our pipeline for the full fiscal year of 2021 remains robust and we expect a total of 32 System-wide NROs.

We employ a comprehensive, data-driven real estate approval process to select and develop every new site. In selecting new locations, we combine rigorous data on specific market characteristics, demographics, and growth, with a human element that takes into account brand impact and opportunity of individual market and sites. Every new restaurant further drives brand awareness and creates meaningful marketing buzz when we open in new markets. We intend to leverage our rigorous real estate site selection process to open more than 130 company-owned restaurants from 2022 through 2024. While our existing franchisees are committed to developing restaurants in the future, we expect company-owned restaurants will be the primary growth driver of our footprint over the long term.

Drive Restaurant Traffic and Build Sales

We have a significant runway to continue to grow traffic and restaurant sales by executing against a defined set of strategies.

 

   

Continue Menu Innovation. We continuously evolve our offering to keep our menu fresh and exciting yet operationally efficient. Our chef-led culinary innovation team maintains a keen awareness of emerging culinary trends and immerses themselves in the marketplace through frequent culinary inspiration tours using experiences to develop a robust pipeline of exciting new recipes and menu offerings. We intend to drive continued incremental customer spending through our five highly-anticipated seasonal menus and the introduction of new menu platforms similar to our introductions of Fresh Juices and Shareables. For fiscal 2019, 8.5% of customers purchased items from our seasonal menu, 12.0% purchased Fresh Juices and 4.5% purchased Shareables. We expect menu innovation to continue to provide incremental growth opportunities in the future.

 

   

Offer Alcohol as Only First Watch Can. The alcoholic beverage offerings at First Watch are unique and reflect our culinary innovation in combining fresh juices and ingredients with a variety of liquors. At the end of fiscal 2019, early tests showed that offering alcoholic beverages where practical throughout our system was a highly-incremental new sales growth platform, opening up new occasions for our consumers to enjoy dining out and allowing us to reach new demographics. During the COVID-19 pandemic, we accelerated this initiative to better position the First Watch brand upon recovery as we learned that customers joining us for breakfast or lunch were interested in making the meal more of a celebration at times. As of June 27, 2021, our alcohol menu is offered in 244 System-wide restaurants with clear plans to continue the expansion to all restaurants where feasible. Since the rollout in fiscal 2020, the presence of alcohol on our menu has lifted overall dine-in beverage attachment by 230 basis points in restaurants where it is served, indicating the incrementality of the offering. Further, for the second fiscal quarter of 2021, alcohol accounted for 3.6% of in-restaurant sales at company-owned restaurants and increased the average in-restaurant customer spend by $0.30 as compared to our restaurants that do not offer alcohol. These incremental alcohol sales are highly profitable. More importantly, we remain confident in the long-term opportunity to innovate within this platform to further elevate the social occasion of breakfast, brunch and lunch. Similar to the establishment of our Fresh Juice and Shareables platforms, we remain optimistic that further consumer awareness and excitement (through new items and promotion) around alcohol will drive new, additional occasions and broaden our appeal to a new demographic seeking an experiential occasion over a meal.


 

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LOGO

 

   

Convenience and Increased Accessibility through Our Off-Premises Offering. During the COVID-19 pandemic, we integrated technology into our business to enhance customer access and enable off-premises consumption. In fiscal 2019, off-premises sales accounted for $1,971 in average weekly sales. We have now built the foundation to optimize the off-premises opportunity through our digital channels (both through direct ordering as well as third-party delivery). These off-premises platforms, now available in all restaurants, contributed $8,079 of average weekly sales per restaurant during the second fiscal quarter of 2021, compared to $1,897 in the fourth fiscal quarter of 2019. Even as our dining room sales recovered during the twenty-six weeks ended June 27, 2021, off-premises sales remained strong, indicating continued customer demand. We see future opportunity to refine and grow this demand largely by focusing on in-restaurant infrastructure, especially in our new restaurant prototypes. We have seen encouraging results in 2021 NROs from innovations such as dedicated make lines and to-go rooms, separate entrances and dedicated parking spots to enhance the experience of both our off-premises and dine-in customers.

 

   

Increase Our Brand Awareness. We believe First Watch is still in the early stages of our life cycle, as consumers in our existing and new markets continue to discover the First Watch brand. Over 38 years, First Watch has grown primarily through word-of-mouth as our service, menu and environment created ardent fans as evident in our numerous local awards and customer satisfaction scores. In January 2020, First Watch was named “America’s Favorite Restaurant Brand” by Market Force. This study evaluated restaurants across multiple sectors and based its ranking on customer recommendations and brand satisfaction. This strong customer affinity was also highlighted in a recent 2021 national study where First Watch ranked 10th in net promoter score among the country’s 74 largest restaurant brands and comparable to the industry’s most highly regarded names. Despite this, brand awareness remains low as indicated by a 2021 nationally represented survey where only 11% were aware of First Watch. The combination of both high customer satisfaction and opportunity for growing awareness highlights strong potential for the brand.

As our development of new restaurants continues, we believe the increased penetration in new and existing markets will contribute to higher brand awareness. While we believe that organic growth of awareness contributes more to our local feel, we also recognize the future potential of strategically


 

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applying advertising dollars in appropriate channels to accelerate this opportunity. Our advertising costs represented approximately 1% of total revenues in fiscal 2019 and in fiscal 2020. We intend to grow our brand awareness primarily through increased investment in cost-efficient digital channels in order to further leverage our first party, owned, customer data to target and reach the right audiences that will lead to higher conversion and higher return on investment. We have successfully piloted these approaches to-date and remain confident that this approach provides further growth opportunity to build traffic and sales.

Deliver an Excellent On-Premise Dining Experience. Excellence in restaurant-level execution, recognized by customers and reinforced by the hundreds of accolades we have received, increases the visit frequency of our customer, promotes trial by new consumers and ultimately encourages loyalty. We have received hundreds of awards from local and national media outlets that we believe matter to consumers – including being named one of TripAdvisor’s Best Restaurant Chains in 2019. While off-premises dining during the COVID-19 pandemic has emerged as a sizeable use occasion for many customers cautious to eat outside their homes, we believe that our unwavering focus will remain on delivering an amazing dining experience in our restaurants to every customer in every visit. We aim to continue to leverage our “One Shift, One Menu, One Focus” model to stay distinguishably different from our competitors by executing on delivering a superior dining experience every day to further drive traffic and build sales.

Additional Platforms and Initiatives. We have seen the opportunity, over time, to selectively evolve our concept and offerings via the implementation of key strategies and initiatives. Future initiatives include:

 

   

Weekday Lunch: We believe that we have the opportunity to significantly increase market share by driving incremental customer visits during the weekday lunch daypart through the evolution of our menu with fresh, convenient and differentiated lunch-oriented offerings. In fiscal 2019, only 6.0% of our weekday customers purchased lunch entrées. As a result of the evolving consumer landscape driven by the COVID-19 pandemic, there has been a significant migration of people from urban to suburban areas, where a meaningful portion of our restaurants exist. This migration, coupled with an increasing work-from-home trend, presents First Watch with an incremental customer opportunity during the weekday business hours which we believe will further propel growth in our lunch daypart. With the evolution of a new optimized core menu, the presence of our off-premises channels and the opportunity to apply targeted marketing, we believe the weekday lunch occasion holds future opportunity to build sales and traffic.

LOGO

 

   

Customer Technology & Customer Data: As we fast-tracked the implementation of our off-premises platforms in fiscal 2020, we also took the opportunity to accelerate the implementation of customer data acquisition systems in order to better inform the habits and behaviors of our customers. With the large increase in remote digital orders, we also sought to digitize in-restaurant orders for the purpose of creating an omnichannel view of the First Watch customer. By integrating remote waitlist, remote orders, tokenized credit card transactions and WiFi into one system, we now have the ability to better


 

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understand trial, frequency and customer lifetime value. Since the establishment of these systems, we have gathered 2.9 million unique customer profiles. The advancements in these foundational systems provide future opportunity for targeted communication and the development of more advanced customer relationship management systems aimed at growing customer frequency.

 

   

Restaurant Technology Unlocking Throughput & Capacity: For 38 years, we grew organically from an intense focus on people and service, delivering a unique restaurant experience that has been difficult for competitors to duplicate at scale. The introduction of our off-premises platform laid a strong foundation for certain technologies that will now unlock further in-restaurant innovation, enabling greater peak hour throughput and capacity, thus the ability to serve more demand. In many of our restaurants, we experience more weekend demand than we are currently able to serve, indicated by extended wait times during peak hours. Through new technological tools to enable optimal seating configurations, lower table turn times and more efficient kitchen order routing, we believe that we have the opportunity to achieve higher peak hour sales. Most key among these opportunities is the installation of kitchen display screens, a core technology system in the industry, to our back-of-house to automate our order routing. We remain confident that the addition of this technology will unlock greater efficiency within our kitchens and raise our ability to serve more of our unfulfilled demand.

Our Sponsor

In August 2017, we entered into a merger transaction through which we were acquired by funds affiliated with or managed by Advent (the “Advent Acquisition”). Founded in 1984, Advent has invested in more than 375 private equity transactions in 42 countries and, as of March 31, 2021, had $74.6 billion in assets under management. Advent’s current portfolio comprises investments across five sectors – Retail, Consumer & Leisure; Business and Financial Services; Healthcare; Industrial and Technology. The Advent team includes more than 240 investment professionals across Europe, North America, Latin America and Asia.

Following the closing of this offering, funds managed by Advent are expected to own approximately 81% of our outstanding common stock, or approximately 79% if the underwriters’ option to purchase additional shares is fully exercised. As a result, Advent will be able to exercise significant voting influence over fundamental and significant corporate matters and transactions. See “Risk Factors – Risks Related to this Offering and Ownership of Our Common Stock” and “Principal Stockholders.”

Debt Refinancing

Following this offering and the repayment of a portion of the outstanding debt under our Senior Credit Facilities (as defined in “Description of Material Indebtedness”) using the net proceeds from this offering, we intend to refinance the remaining indebtedness under such facilities with new senior credit facilities. Assuming the application of the net proceeds to be received by us as described in “Use of Proceeds,” we expect that the new senior credit facilities will consist of a revolving credit facility and a term loan debt facility. We refer to these proposed transactions as the “debt refinancing.” We expect to incur a penalty of approximately $3.0 million related to the repayment of certain of our indebtedness in connection with the debt refinancing. We also expect our interest expense for the new senior credit facilities to be lower than the interest expense under our Senior Credit Facilities in future periods as a result of the reduction in the principal amount of our indebtedness and our ability to obtain more favorable terms, including lower interest rates, under the new senior credit facilities. See “Description of Material Indebtedness – Senior Credit Facilities,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Interest Expense” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Senior Credit Facilities and Unused Borrowing Capacity.” No assurance can be given that we will be able to complete the debt refinancing on these terms or at all. For an additional description of our Senior Credit Facilities, please see “Description of Material Indebtedness.”


 

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Corporate Information

First Watch Restaurant Group, Inc. was incorporated in Delaware on August 10, 2017, under the name AI Fresh Super Holdco, Inc. We changed our name on December 20, 2019 to First Watch Restaurant Group, Inc. Our principal executive offices are located at 8725 Pendery Place, Suite 201, Bradenton, FL 34201, and our telephone number is (941) 907-9800. Our corporate website address is www.firstwatch.com. Our corporate website and the information contained on, or that can be accessed through, the website is not deemed to be incorporated by reference in, and is not considered part of, this prospectus. You should not rely on any such information in making your decision whether to purchase our common stock.

Risks Associated With Our Business

Investing in our common stock involves a number of risks. These risks represent challenges to the successful implementation of our strategy and the growth of our business. Some of these risks are:

 

   

continued adverse effects of the COVID-19 pandemic, including the potential impact of the emergence of COVID-19 variants, or other infectious disease on our financial condition, results of operations, and supply chain;

 

   

our vulnerability to changes in consumer preferences and economic conditions;

 

   

our inability to open new restaurants in new and existing markets;

 

   

the number of visitors to areas where our restaurants are located may decline;

 

   

our inability to generate same-restaurant sales growth;

 

   

our marketing programs and limited-time menu offerings may fail to generate profits;

 

   

shortages or disruptions in the supply or delivery of frequently used food items or increases in the cost of our frequently used food items;

 

   

our inability to prevent instances of food-borne illness in our restaurants;

 

   

our inability to compete successfully with other breakfast and lunch restaurants;

 

   

issues with our existing franchisees, including their financial performance, our lack of control over their operations and conflicting business interests;

 

   

our vulnerability to adverse demographic, unemployment, economic, regulatory and weather conditions;

 

   

damage to our reputation and negative publicity, even if unwarranted;

 

   

our reliance on a small number of suppliers for a substantial amount of our food and coffee;

 

   

our inability to effectively manage our internal controls over financial reporting;

 

   

our failure to adequately protect our network security;

 

   

compliance with federal and local environmental, labor, employment and food safety laws and regulations;

 

   

our level of indebtedness and our duty to comply with covenants under our Credit Agreement; and

 

   

the interests of Advent may differ from those of our public stockholders.

For a discussion of these and other risks you should consider before making an investment in our common stock, see the section entitled “Risk Factors.”


 

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Implications of Being an Emerging Growth Company

As a company with less than $1.07 billion in gross revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”). An emerging growth company may take advantage of specified reduced reporting and other regulatory requirements for up to five years that are otherwise applicable generally to public companies. These provisions include, among other matters:

 

   

requirement to present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations;

 

   

exemption from the auditor attestation requirement on the effectiveness of our system of internal controls over financial reporting pursuant to the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”);

 

   

exemption from the adoption of new or revised financial accounting standards until they would apply to private companies;

 

   

exemption from compliance with any new requirements adopted by the Public Company Accounting Oversight Board (“PCAOB”) requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer;

 

   

an exemption from the requirement to seek non-binding advisory votes on executive compensation and golden parachute arrangements; and

 

   

reduced disclosure about executive compensation arrangements.

We will remain an emerging growth company until the last day of the fiscal year following the fifth anniversary of the completion of our initial public offering unless, prior to that time, we have more than $1.07 billion in annual gross revenue, have a market value for our common stock held by non-affiliates of more than $700 million as of the last day of our second fiscal quarter of the fiscal year and a determination is made that we are deemed to be a “large accelerated filer,” as defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or issue more than $1.0 billion of non-convertible debt over a three-year period, whether or not issued in a registered offering. We have availed ourselves of the reduced reporting obligations with respect to audited financial statements and related Management’s Discussion and Analysis of Financial Condition and Results of Operations and executive compensation disclosure in this prospectus and expect to continue to avail ourselves of the reduced reporting obligations available to emerging growth companies in future filings.

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933 (the “Securities Act”) for complying with new or revised accounting standards. An emerging growth company can, therefore, delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of that extended transition period and, as a result, we plan to comply with new and revised accounting standards on the relevant dates on which adoption of those standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

As a result of our decision to avail ourselves of certain provisions of the JOBS Act, the information that we provide may be different from what you may receive from other public companies in which you hold an equity interest. In addition, it is possible that some investors will find our common stock less attractive as a result of our elections, which may cause a less active trading market for our common stock and more volatility in our stock price.


 

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THE OFFERING

 

Issuer

First Watch Restaurant Group, Inc.

 

Common stock offered by us

9,459,000 shares of common stock (10,877,850 shares if the underwriters exercise their option to purchase additional shares in full).

 

Common stock to be outstanding after this offering

57,629,596 shares of common stock (59,048,446 shares if the underwriters exercise their option to purchase additional shares in full).

 

Option to purchase additional shares of common stock

The underwriters have an option to purchase an additional 1,418,850 shares of common stock from us. The underwriters can exercise this option at any time within 30 days from the date of this prospectus.

 

Use of proceeds

We estimate that the net proceeds from the sale of our common stock in this offering, after deducting the underwriting discount and estimated offering expenses payable by us, will be approximately $153.3 million ($177.1 million if the underwriters exercise their option to purchase additional shares in full).

 

  We intend to use the net proceeds from this offering to repay borrowings outstanding under our Senior Credit Facilities (as defined herein). See “Use of Proceeds.”

 

Dividend policy

We do not anticipate paying any dividends on our common stock for the foreseeable future; however, we may change this policy in the future. See “Dividend Policy.”

 

Risk Factors

Investing in our common stock involves a high degree of risk. See the “Risk Factors” section of this prospectus beginning on page 29 for a discussion of factors you should carefully consider before investing in our common stock.

 

Listing

We have been approved to have our common stock listed on Nasdaq under the symbol “FWRG.”

Except as otherwise indicated, the number of shares of our common stock outstanding after this offering:

 

   

gives effect to a 11.838-for-1 stock split of our common stock effected on September 20, 2021;

 

   

gives effect to the automatic conversion of our preferred stock into 3,156,812 shares of common stock immediately prior to and in connection with the consummation of this offering;

 

   

excludes 4,409,331 shares of our common stock issuable upon the exercise of outstanding stock options at a weighted average exercise price of $9.48 per share, which stock options were granted under our 2017 Omnibus Equity Incentive Plan (the “2017 Plan”);

 

   

excludes an aggregate of 4,034,072 shares of our common stock that will be available for future equity awards under the First Watch Restaurant Group, Inc. 2021 Equity Incentive Plan (the “2021 Plan”);


 

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gives effect to our amended and restated certificate of incorporation and our amended and restated bylaws, which will be in effect prior to the consummation of this offering; and

 

   

assumes no exercise of the underwriters’ option to purchase additional shares.


 

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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA

The following tables set forth our summary historical consolidated financial and other data for the periods as of the dates indicated. We derived the historical summary consolidated statements of operations data and consolidated statements of cash flows data for the twenty-six weeks ended June 27, 2021 and June 28, 2020 and the consolidated balance sheet data as of June 27, 2021 from the interim unaudited consolidated financial statements and related notes thereto included elsewhere in this prospectus. We derived the historical summary consolidated statements of operations data and consolidated statements of cash flows data for fiscal 2020 and fiscal 2019 and the consolidated balance sheet data as of December 27, 2020 from the audited consolidated financial statements and related notes thereto included elsewhere in this prospectus. We have prepared the interim unaudited consolidated financial statements on the same basis as the audited consolidated financial statements and have included all adjustments necessary for the fair statement of the consolidated financial statements for the interim periods presented.

Our historical results are not necessarily indicative of future results of operations. You should read the information set forth below together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Capitalization” and the interim unaudited and audited consolidated financial statements and the related notes thereto included elsewhere in this prospectus.

 

    Twenty-Six Weeks Ended     Fiscal  
    June 27, 2021     June 28, 2020     2020     2019  
    (in thousands, except share and per share data)  

Consolidated Statements of Operations Data:

       

Revenues:

       

Restaurant sales

  $ 277,054     $ 131,193     $ 337,433     $ 429,309  

Franchise revenues

    4,078       2,053       4,955       7,064  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    281,132       133,246       342,388       436,373  
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating costs and expenses:

       

Restaurant operating expenses (exclusive of depreciation and amortization shown below):

       

Food and beverage costs

    60,512       30,987       76,975       100,689  

Labor and other related expenses

    85,999       50,012       120,380       148,537  

Other restaurant operating expenses

    46,815       23,282       63,776       59,402  

Occupancy expenses

    27,757       25,182       51,375       46,151  

General and administrative expenses

    27,341       22,278       46,322       55,818  

Depreciation and amortization

    15,762       15,028       30,725       28,027  

Impairments and loss on disposal of assets

    163       255       315       33,596  

Transaction expenses (income), net

    626       99       (258     1,709  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

    264,975       167,123       389,610       473,929  
 

 

 

   

 

 

   

 

 

   

 

 

 

Income (Loss) from operations

    16,157       (33,877     (47,222     (37,556

Interest expense

    (12,605     (10,667     (22,815     (20,080

Other income (expense), net

    321       360       483       (255
 

 

 

   

 

 

   

 

 

   

 

 

 

Income (Loss) before income tax expense (benefit)

    3,873       (44,184     (69,554     (57,891

Income tax expense (benefit)

    2,110       (12,762     (19,873     (12,419
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) and total comprehensive income (loss)

  $ 1,763     $ (31,422     (49,681     (45,472

Less: Net loss attributable to non-controlling interest

                      (33
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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    Twenty-Six Weeks Ended     Fiscal  
    June 27, 2021     June 28, 2020     2020     2019  
    (in thousands, except share and per share data)  

Net income (loss) and comprehensive income (loss) attributable to First Watch Restaurant Group, Inc.

  $ 1,763     $ (31,422   $ (49,681   $ (45,439
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per common share attributable to First Watch Restaurant Group, Inc. – basic

  $ 0.04     $ (0.70   $ (1.10   $ (1.01

Net income (loss) per common share attributable to First Watch Restaurant Group, Inc. – diluted

  $ 0.04     $ (0.70   $ (1.10   $ (1.01

Weighted average number of common shares outstanding – basic

    45,013,784       45,013,784       45,013,784       45,013,784  

Weighted average number of common shares outstanding – diluted

    45,560,575       45,013,784       45,013,784       45,013,784  

Unaudited pro forma net income (loss) per common share attributable to First Watch Restaurant Group, Inc. – basic(a)

  $ 0.09       $ (0.93  

Unaudited pro forma net income (loss) per common share attributable to First Watch Restaurant Group, Inc. – diluted(a)

  $ 0.08       $ (0.93  

Unaudited pro forma weighted average common stock outstanding – basic(a)

    57,629,596         57,629,596    

Unaudited pro forma weighted average common stock outstanding – diluted(a)

    58,513,538         57,629,596    

Consolidated Statements of Cash Flows Data (in thousands):

       

Net cash provided by (used in):

       

Operating activities

  $ 30,428     $ (19,908   $ (18,364   $ 21,465  

Investing activities

  $ (19,524   $ (19,352   $ (26,974   $ (82,389

Financing activities

  $ (1,717   $ 40,474     $ 73,314     $ 55,761  

Other Data:

       

Restaurant sales (in thousands)

  $ 277,054     $ 131,193     $ 337,433     $ 429,309  

System-wide sales (in thousands)

  $ 350,596     $ 166,290     $  426,303     $  558,397  

Same-restaurant sales growth

    95.9     (43.4 )%      (29.0 )%      5.6

AUV (in thousands)

  $ 829     $ 430     $ 1,119     $ 1,594  

System-wide restaurants at period end

    423       387       409       368  

Company-owned

    335       309       321       299  

Franchise operated

    88       78       88       69  

Income (loss) from operations margin

    5.8     (25.8 )%      (14.0 )%      (8.7 )% 

Net income (loss) and total comprehensive income (loss) margin

    0.6     (23.6 )%      (14.5 )%      (10.4 )% 

Adjusted EBITDA (in thousands)(b)

  $ 35,182     $ (11,803   $ (5,744   $ 38,099  

Adjusted EBITDA Margin(b)

    12.5     (8.9 )%      (1.7 )%      8.7

Restaurant level operating profit (in thousands)(c)

  $ 55,990     $ 4,440     $ 28,236     $ 74,530  

Restaurant level operating profit margin(c)

    20.2     3.4     8.4     17.4

Pre-opening expenses(1)

  $ 2,063     $ 2,076     $ 3,880     $ 5,815  

Deferred rent (income) expense(2)

  $ (1,807   $ 8,752     $ 10,087     $ 4,272  

 

(1)

Represents expenses directly incurred to open new restaurants, including pre-opening rent, manager salaries, recruiting expenses, employee payroll, training and marketing costs. These expenses are recorded in other restaurant operating expenses and occupancy expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss).


 

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(2)

Consists of the non-cash portion of straight-line rent expense primarily included in occupancy expenses and general and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss). This amount represents the extent to which our straight-line rent expense exceeds or is less than our cash rent payments and varies depending on the average age of our lease portfolio. For newer leases, straight-line rent expense typically exceeds cash rent payments. For more mature leases, straight-line rent expense is typically less than cash rent payments.

 

     As of June 27, 2021  
     Actual     Pro Forma
As Adjusted(d)
 
     (in thousands)  

Consolidated Balance Sheet Data:

    

Cash and cash equivalents

   $ 48,033     $ 48,033  

Total assets

   $ 1,033,695     $ 1,032,646  

Total debt(e)

   $ 294,012     $ 140,771  

Total liabilities

   $ 710,750     $ 557,819  

Working capital(f)

   $ (22,707   $ (21,026

Total equity

   $ 322,945     $ 474,827  

 

(a)

Unaudited pro forma net income (loss) per common share attributable to First Watch Restaurant Group, Inc. – basic and – diluted for the twenty-six weeks ended June 27, 2021 and fiscal 2020 is computed by dividing the unaudited pro forma net income (loss) by the unaudited pro forma weighted-average number of common shares outstanding – basic and – diluted. For both the twenty-six weeks ended June 27, 2021 and for fiscal 2020, unaudited pro forma net income (loss) gives effect to (i) the reduction of $6.2 million and $9.8 million, respectively, of interest expense resulting from the application of $153.3 million of net proceeds to repay $153.3 million in borrowings under our Senior Credit Facilities as set forth under “Use of Proceeds,” (ii) the recognition of $2.0 million and $15.4 million, respectively, of stock-based compensation expense related to performance-based stock options (a) for which the performance condition and market condition are satisfied or will convert to time-based options in connection with this offering, both of which convert to time-based options that vest generally one-third (1/3rd) on each of the first two anniversaries of an initial public offering and one-third (1/3rd) on the 273rd day following the second anniversary of an initial public offering upon the completion of this offering, and (b) for which the market condition is not met in connection with this offering resulting in an immediate charge upon the completion of this offering and (iii) the recognition of $1.1 million income tax expense and $1.4 million income tax benefit, respectively, related to the interest expense and stock-based compensation expense adjustments described above. All pro forma adjustments are calculated as if the offering had occurred on December 30, 2019, the first day of fiscal 2020.

Unaudited pro forma weighted-average common shares outstanding – basic gives effect to (i) the conversion of all outstanding shares of preferred stock into common stock immediately prior to the completion of this offering and (ii) the issuance of 9,459,000 shares of common stock, which is the number of shares that would be attributable to the proceeds used to repay $153.3 million of the Senior Credit Facilities as described in “Use of Proceeds.” As we are in an unaudited pro forma net income position for the twenty-six weeks ended June 27, 2021, unaudited pro forma weighted-average common shares outstanding – diluted gives effect to (i) the issuance of 9,459,000 shares of common stock, which is the number of shares that would be attributable to the proceeds used to repay $153.3 million of the Senior Credit Facilities as described in “Use of Proceeds,” (ii) the incremental dilutive common shares outstanding after giving effect to the conversion of the preferred stock and the 11.838-for-1 stock split, which proportionally adjusted the preferred stock conversion ratio and (iii) to the performance-based option awards for which the performance condition and market condition have been met or convert to time-based options, upon completion of this offering, which have a dilutive effect and are therefore included in the computation of unaudited pro forma


 

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diluted net income (loss) per common share attributable to First Watch Restaurant Group, Inc. For fiscal 2020, as we are in a pro forma net loss position, our pro forma net income (loss) per common share basic and diluted would be equal as outstanding options would be antidilutive. This unaudited pro forma per common share information is presented for informational purposes only and does not purport to represent what our net income (loss) or net income (loss) per common share would have actually been had the offering and use of proceeds occurred on December 30, 2019, or to project our net income (loss) or net income (loss) per common share for any future period.

The following table sets forth the computation of unaudited pro forma net income (loss) per common share – basic and – diluted after giving effect to the pro forma adjustments described above:

 

     Twenty-Six Weeks Ended
June 27, 2021
    Fiscal 2020  
     (in thousands, except share
and per share data)
 

Numerator:

    

Net income (loss)

   $ 1,763     $ (49,681

Plus: Stock-based compensation expense related to performance-based stock options

     (1,969     (15,413

Minus: Reduced interest expense related to the repayment of certain Senior Credit Facilities

     6,187       9,838  

Plus: Income tax (expense) benefit related to adjustments above

     (1,055     1,393  
  

 

 

   

 

 

 

Pro forma net income (loss)

   $ 4,926     $ (53,863
  

 

 

   

 

 

 

Denominator:

    

Weighted average number of common shares outstanding – basic

     45,013,784       45,013,784  

Pro forma adjustment to reflect the conversion of preferred stock to common stock upon the completion of this offering

     3,156,812       3,156,812  

Pro forma adjustment to reflect the issuance of common stock in this offering attributable to the use of proceeds

     9,459,000       9,459,000  
  

 

 

   

 

 

 

Pro forma weighted average number of common shares outstanding – basic

     57,629,596       57,629,596  
  

 

 

   

 

 

 

Pro forma net income (loss) per common share – basic

   $ 0.09     $ (0.93
  

 

 

   

 

 

 
    

Weighted average number of common shares outstanding – diluted

     45,560,575       57,629,596  

Pro forma adjustment to reflect the incremental shares due to the conversion of preferred stock to common stock upon the completion of this offering

     2,890,145       N/A  

Pro forma adjustment to reflect the issuance of common stock in this offering attributable to the use of proceeds

     9,459,000       N/A  

Pro forma adjustment to incorporate performance-based option awards for which the performance condition and market condition have been met or convert to time-based options upon the completion of this offering

     603,818       N/A  
  

 

 

   

 

 

 

Pro forma weighted average number of common shares outstanding – diluted

     58,513,538       57,629,596  
  

 

 

   

 

 

 

Pro forma net income (loss) per common share – diluted

   $ 0.08     $ (0.93
  

 

 

   

 

 

 

 

(b)

Adjusted EBITDA and Adjusted EBITDA Margin as presented in this prospectus are supplemental measures of our performance that are neither required by, nor presented in accordance with GAAP. Adjusted EBITDA and Adjusted EBITDA Margin are not measurements of our financial performance under GAAP and should not be considered as an alternative to net income (loss), income (loss) from operations, or


 

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  any other performance measures derived in accordance with GAAP, or as alternatives to cash flow from operating activities as a measure of our liquidity. Adjusted EBITDA represents net income (loss) 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 (loss) and comprehensive income (loss), the most directly comparable measure under GAAP, to Adjusted EBITDA. Adjusted EBITDA as shown is not adjusted to reflect the impact of pre-opening expenses or deferred rent (income) expense. See “Prospectus Summary – Historical Consolidated Financial and Other Data.” Adjusted EBITDA Margin represents Adjusted EBITDA as a percentage of total revenues.

Management uses 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. The use of Adjusted EBITDA and Adjusted EBITDA Margin as performance measures permit a comparative assessment of our operating performance relative to our performance based on our GAAP results, while isolating the effects of some items that are either non-recurring in nature or vary from period to period without any correlation to our ongoing core operating performance.

Adjusted EBITDA and Adjusted EBITDA Margin or similar non-GAAP measures are frequently used by securities analysts, investors and other interested parties as supplemental measures of financial performance within our industry. Management believes that Adjusted EBITDA and Adjusted EBITDA Margin provide investors with additional transparency of our operations.

Our presentation of Adjusted EBITDA and Adjusted EBITDA Margin should not be construed to imply that our future results will be unaffected by these items. Adjusted EBITDA and Adjusted EBITDA Margin have important limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. Some of these limitations are:

 

   

Adjusted EBITDA and Adjusted EBITDA Margin do not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

 

   

Adjusted EBITDA and Adjusted EBITDA Margin do not reflect changes in, or cash requirements for our working capital needs;

 

   

Adjusted EBITDA and Adjusted EBITDA Margin do not adjust for all non-cash income or expense items that are reflected in our Consolidated Statements of Cash Flows;

 

   

although depreciation is a non-cash charge, the assets being depreciated will often have to be replaced in the future, Adjusted EBITDA and Adjusted EBITDA Margin do not reflect any cash requirements for such replacements;

 

   

Adjusted EBITDA and Adjusted EBITDA Margin do not reflect the impact of stock-based compensation on our results of operations;

 

   

Adjusted EBITDA and Adjusted EBITDA Margin do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments on our debt;

 

   

Adjusted EBITDA and Adjusted EBITDA Margin do not reflect our income tax expense (benefit) or the cash requirements to pay our income taxes; and

 

   

other companies in our industry may calculate Adjusted EBITDA and Adjusted EBITDA Margin differently than we do, limiting their usefulness as comparative measures.

We compensate for these limitations by providing specific information regarding the GAAP amounts excluded from such non-GAAP financial measures. We further compensate for the limitations in our use of


 

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non-GAAP financial measures by presenting comparable GAAP measures more prominently. In addition, our Credit Agreement allows us to exclude those amounts when calculating Adjusted EBITDA under the Credit Agreement.

In evaluating Adjusted EBITDA and Adjusted EBITDA Margin, you should be aware that in the future we may incur expenses similar to those adjusted for in the reconciliation of Net income (loss) and total comprehensive income (loss) and margin, the most directly comparable GAAP measures, to Adjusted EBITDA and margin as follows:

 

     Twenty-Six Weeks Ended      Fiscal  
     June 27,
2021
     June 28,
2020
     2020      2019  
    

(in thousands)

 

Net income (loss) and total comprehensive income (loss)

   $ 1,763      $ (31,422    $ (49,681    $ (45,472

Depreciation and amortization

     15,762        15,028        30,725        28,027  

Interest expense

     12,605        10,667        22,815        20,080  

Income tax expense (benefit)

     2,110        (12,762      (19,873      (12,419
  

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA

     32,240        (18,489      (16,014      (9,784

Initial public offering (“IPO”)-readiness and strategic transition costs (1)

     1,179        1,655        4,247        10,012  

COVID-19 – related charges (2)

     211        3,882        4,749        —    

Impairments and loss on disposal of assets (3)

     163        255        315        33,596  

Transaction expenses (income), net (4)

     626        99        (258      1,709  

Stock-based compensation (5)

     316        379        750        1,160  

Recruiting and relocation costs (6)

     182        172        228        1,081  

Severance costs (7)

     265        244        239        325  
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 35,182      $ (11,803    $ (5,744    $ 38,099  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 281,132      $ 133,246      $ 342,388      $ 436,373  

Net income (loss) and comprehensive income (loss) margin

     0.6%        (23.6)%        (14.5%      (10.4%

Adjusted EBITDA margin

     12.5%        (8.9)%        (1.7)%        8.7%  

 

  (1)

Represents costs related to information technology support and external professional service costs incurred in connection with IPO-readiness efforts as well as the assessment and redesign of our systems and processes. These costs are recorded within general and administrative expenses on the Consolidated Statements of Operations and Comprehensive Loss.

  (2)

Consists of costs incurred in connection with the economic impact of the COVID-19 pandemic, which primarily includes inventory obsolescence and spoilage, compensation for employees upon furlough and return from furlough, health insurance costs paid for furloughed employees, net of employee retention credit and costs incurred to amend certain financial commitments. See Note 4, COVID-19 Charges, in the notes to the audited consolidated financial statements and Note 4, COVID-19 Charges in the notes to the interim unaudited consolidated financial statements included elsewhere in this prospectus for additional information.

  (3)

Includes impairments recognized on intangible assets and fixed assets as well as costs related to the disposal of assets due to retirements, replacements or certain restaurant closures.

  (4)

Primarily represents costs incurred in connection with the acquisition of certain franchised restaurants, costs incurred in connection with the conversion of certain restaurants to company-owned restaurants operating under the First Watch trade name and costs related to restaurant closures. In addition, the amount also includes costs associated with the revaluation of the contingent consideration payable to


 

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  previous stockholders for tax savings generated through use of federal and state loss carryforwards. See Note 14, Income Taxes, in the notes to the audited consolidated financial statements and Note 9, Income Taxes, in the notes to the interim unaudited consolidated financial statements included elsewhere in this prospectus for additional information.
  (5)

Represents non-cash, stock-based compensation expense which is recorded in general and administrative expenses on the Consolidated Statements of Operations and Comprehensive Loss.

  (6)

Represents costs incurred for hiring qualified individuals as we assessed the redesign of our systems and processes. These costs are recorded within general and administrative expenses on the Consolidated Statements of Operations and Comprehensive Loss.

  (7)

Severance costs are recorded in general and administrative expenses on the Consolidated Statements of Operations and Comprehensive Loss.

 

(c)

Restaurant level operating profit and restaurant level operating profit margin are non-GAAP supplemental measures of operating performance of our restaurants that are neither required by, nor presented in accordance with GAAP, and should not be considered as a substitute for analysis of our results as reported under GAAP. 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 and occupancy expenses. In addition, restaurant level operating profit excludes corporate-level expenses and items that we do not consider in our evaluation of ongoing core operating performance. Restaurant level operating profit and restaurant level operating profit margin are not indicative of our overall results, and because they exclude corporate-level expenses, do not accrue directly to the benefit of our stockholders. We will continue to incur such expenses in the future. Restaurant level operating profit margin represents restaurant level operating profit as a percentage of restaurant sales.

Restaurant level operating profit and restaurant level operating profit margin are important measures we use to evaluate the performance and profitability of each operating restaurant, individually and in the aggregate. Additionally, restaurant level operating profit and restaurant level operating profit margin or similar non-GAAP financial measures are frequently used by analysts, investors and other interested parties to evaluate companies in our industry. We believe that restaurant level operating profit and restaurant level operating profit margin, when used in conjunction with GAAP financial measures, provide useful information about our operating results, identify operational trends and allow for greater transparency with respect to key metrics used by us in our financial and operational decision making. We use restaurant level operating profit and restaurant level operating profit margin to make decisions regarding future spending and other operational decisions. Our calculations of restaurant level operating profit and restaurant level operating profit margin may not be comparable to similar measures reported by other companies, have limitations as analytical tools and should not be considered as a substitute for the analysis of our results as a whole as reported under GAAP.


 

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A reconciliation of Income (Loss) from operations and margin, the most directly comparable GAAP financial measure, to restaurant level operating profit and margin is as follows:

 

    Twenty-Six Weeks
Ended
    Fiscal  
    June 27,
2021
    June 28,
2020
    2020     2019  
    (in thousands)  

Income (Loss) from operations

    $16,157       $(33,877)     $ (47,222   $ (37,556

Less: Franchise revenues

    (4,078)       (2,053)       (4,955     (7,064

Add:

       

General and administrative expenses

    27,341       22,278       46,322       55,818  

Depreciation and amortization

    15,762       15,028       30,725       28,027  

COVID-19 – related charges (1)

    19       2,710       3,309       —    

Impairments and loss on disposal of assets (2)

    163       255       315       33,596  

Transaction expenses (income), net (3)

    626       99       (258     1,709  
 

 

 

   

 

 

   

 

 

   

 

 

 

Restaurant level operating profit

    $55,990       $4,440     $ 28,236     $ 74,530  
 

 

 

   

 

 

   

 

 

   

 

 

 

Restaurant sales

    $277,054       $131,193     $ 337,433     $ 429,309  

Income (Loss) from operations margin

    5.8%       (25.8)%       (14.0%     (8.7%

Restaurant level operating profit margin

    20.2%       3.4%       8.4%       17.4%  

 

  (1)

Consists of costs incurred in connection with the economic impact of the COVID-19 pandemic, which primarily includes inventory obsolescence and spoilage, compensation for employees upon furlough and return from furlough, and health insurance costs paid for furloughed employees, net of employee retention credit. See Note 4, COVID-19 Charges, in the notes to the audited consolidated financial statements and Note 4, COVID-19 Charges, in the notes to the interim unaudited consolidated financial statements included elsewhere in this prospectus for additional information.

  (2)

Includes impairments recognized on intangible assets and fixed assets as well as costs related to the disposal of assets due to retirements, replacements or certain restaurant closures.

  (3)

In the twenty-six weeks ended June 27, 2021 and in fiscal 2020, amount primarily represents the revaluation of the contingent consideration payable to previous stockholders for tax savings generated through use of federal and state loss carryforwards. See Note 14, Income Taxes, in the notes to the audited consolidated financial statements included elsewhere in this prospectus for additional information and Note 9, Income Taxes, in the notes to the interim unaudited consolidated financial statements included elsewhere in this prospectus for additional information. In fiscal 2019, primarily represents costs incurred in connection with the acquisition of certain franchised restaurants, costs incurred in connection with the conversion of certain restaurants to company-owned restaurants operating under the First Watch trade name and costs related to restaurant closures.

 

(d)

The unaudited pro forma as adjusted consolidated balance sheet data gives effect to (i) the automatic conversion of all outstanding shares of preferred stock into shares of our common stock, (ii) the filing and effectiveness of our restated certificate of incorporation in Delaware that will become effective immediately prior to the completion of this offering, (iii) the sale by us of 9,459,000 shares of our common stock in this offering, assuming no exercise of the underwriters’ option to purchase additional shares, at the initial public offering price of $18.00 per share, less underwriting discounts and commissions and estimated expenses, and (iv) the application of the net proceeds to be received by us from this offering as described in “Use of Proceeds.”

 

(e)

Total debt includes the current and long-term debt, excluding unamortized debt discount and deferred issuance costs. See Note 10, Debt, in the notes to the audited consolidated financial statements and Note 7, Debt, in the notes to the interim unaudited consolidated financial statements included in this prospectus for additional information. Also, see “Description of Material Indebtedness.”

 

(f)

We define working capital as current assets less current liabilities.


 

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RISK FACTORS

An investment in our common stock involves a high degree of risk. You should carefully consider each of the following risk factors, as well as other information contained in this prospectus, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and related notes, before investing in our common stock. The occurrence of any of the risks described below could materially and adversely affect our business, prospects, financial condition, results of operations and cash flow, in which case the trading price of our common stock could decline and you could lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business, prospects, financial condition, results of operations and cash flow. See “Cautionary Note Regarding Forward-Looking Statements.”

Risks Related to Our Business and Industry

Our financial condition, results of operations, and supply chain have been and may continue to be adversely affected for an extended period of time by the COVID-19 pandemic or other infectious diseases.

The COVID-19 pandemic throughout the United States and internationally has caused businesses, including ours, as well as federal, state and local governments to implement significant actions to attempt to reduce exposure to the COVID-19 pandemic and control its negative effects on public health and the U.S. economy. Such governmental measures remain ongoing and the ultimate duration and severity of the COVID-19 pandemic, including the emergence of COVID-19 variants, remain uncertain. Our operations have thus been and may continue to be impacted by the COVID-19 pandemic.

During 2020, individuals in many areas where we operate our restaurants were required to practice social distancing, restricted from gathering in groups and/or mandated to “stay home” except for “essential” purposes. In response to the COVID-19 pandemic and government restrictions, we temporarily closed our dining rooms and moved to exclusively off-premises sales by April 2020 to comply with government restrictions and, on April 13, 2020, temporarily suspended all operations at company-owned restaurants. The mobility restrictions, fear of contracting COVID-19 and the sharp increase in unemployment caused by the closure of businesses in response to the COVID-19 pandemic, have adversely affected and may continue to adversely affect our customer traffic, which in turn adversely impacts our business, liquidity, financial condition and results of operations. Even as the mobility restrictions were loosened or lifted, some customers remained reluctant to return to in-restaurant dining and the impact of lost wages due to COVID-19 related unemployment has dampened consumer spending. Our restaurant operations have been and could continue to be adversely affected by employees who are unable or unwilling to work, whether because of illness, quarantine, fear of contracting COVID-19 or caring for family members due to COVID-19 disruptions or illness. Restaurant closures, limited service options or modified hours of operation due to staffing shortages could materially adversely affect our business, liquidity, financial condition and results of operations. To protect the health and safety of our employees and customers, we have implemented a wide range of COVID-19 safety measures, including employee screening and safety distancing protocols. In addition, we deployed personal protection equipment and introduced COVID-19 tracing for all employees. Additionally, we increased spending on healthcare benefits, employee assistance measures and employee bonuses as a result of the COVID-19 pandemic. These measures have increased our operating costs and adversely affected our liquidity.

A total of approximately $4.8 million of costs were incurred in fiscal 2020 in connection with the COVID-19 pandemic, and were comprised of the following: (i) inventory obsolescence and spoilage of approximately $0.6 million, (ii) compensation paid to employees upon furlough and return from furlough of $1.4 million, (iii) $0.7 million for health insurance costs paid for furloughed employees, net of employee retention credits and (iv) supplies, such as personal protection equipment, of approximately $2.1 million.

We also modified our capital spending plans for opening new restaurants and remodeling existing restaurants due to the COVID-19 pandemic, in addition to negotiating extensively with our landlords primarily

 

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for rent abatements and rent deferrals and certain modified obligations under our leases. These changes have impacted and could continue to impact our ability to grow our business.

The COVID-19 pandemic also has affected and may continue to adversely affect the ability of certain of our suppliers, from whom we purchase domestic and international commodities, to fulfill their obligations to us, which may negatively affect our restaurant operations. These suppliers include third parties that supply and/or prepare our ingredients, packaging, paper and cleaning products and other necessary operating materials, distribution centers, and logistics and transportation services providers, including those in the trucking industry. If our suppliers are unable to fulfill their obligations to us, we could face shortages of food items or other supplies at our restaurants, which could have a material adverse effect on our business, financial condition and results of operations.

The further spread of COVID-19, including the emergence of COVID-19 variants, or other infectious diseases, and the requirements or measures imposed or taken by federal, state and local governments and businesses to mitigate the spread of such diseases, could disrupt our business or impact our ability to carry out our business as usual, which could have a material adverse impact on our business, liquidity, financial condition and results of operations. Even in regions where we have reopened, our restaurants may be subject to modified hours and operations and/or reduced customer traffic. Moreover, certain of those regions may suffer a COVID-19 relapse after reopening resulting in closing those restaurants again. If any regions fail to fully contain the COVID-19 pandemic, or if additional regions suffer multiple COVID-19 relapses, any of those markets may not recover quickly or at all, which could have a material adverse effect on our business and results of operations. As a result, we may incur material impairment losses to our inventory, goodwill, intangibles and long-lived assets, and our ability to realize the benefits from deferred tax assets may become limited, any of which may have a significant or material impact on our financial results. Increased volatility or significant disruption of global financial markets due in part to the COVID-19 pandemic or other infectious diseases could have a negative impact on our ability to access capital markets and other funding sources on acceptable terms or at all and impede our ability to comply with debt covenants.

In July 2021, new cases of COVID-19 in our markets began to rise substantially, connected to the spread of the Delta variant, which is currently the predominant strain of the virus in the United States and appears to be the most contagious variant to date. On July 27, 2021, the U.S. Centers for Disease Control and Prevention (the “CDC”) changed its mask guidance to, among other things, recommend that fully vaccinated individuals wear masks indoors in areas of “substantial” or “high transmission,” which, according to the CDC, include all of our markets. Additionally, on September 9, 2021, President Biden announced that the Department of Labor’s Occupational Safety and Health Administration (“OSHA”) is developing a rule that will require all employers with 100 or more employees to ensure their workforce is fully vaccinated, including by providing any necessary paid time off for such vaccinations, or require any workers who remain unvaccinated to produce a negative test result on at least a weekly basis before coming to work. Businesses that fail to comply will be subject to fines of up to $13,600 per violation. Though it is anticipated that OSHA will issue an Emergency Temporary Standard to implement this requirement, the rules related to this federal mandate are still evolving and remain unclear, and the mandate is likely to be challenged in court by various states. Furthermore, the Transportation Security Administration has extended its implementing orders for mask-wearing requirements on air and ground travel through January 18, 2022 and has doubled its civil penalty fines imposed on violators. It is unclear how long the resurgence will last, how severe it will be, what additional safety measures governments will impose in response to it and what types of challenges we or our employees may face in complying with such measures. As cases rise, mask mandates, social-distancing, travel restrictions and stay-at-home orders could be reinstated. The restrictions may necessitate restaurant closures or other measures to comply with federal and state law or to ensure the safety of our employees and our customers. The extent to which our operations and financial performance will be impacted by the COVID-19 pandemic during the remainder of 2021 and beyond will depend in part on future developments, including the growth trajectory of the Delta variant or other variants, the long-term efficacy, global availability and acceptance of the vaccines, as well as the effects of governmental stimulus legislation and other actions taken in response to the COVID-19 pandemic. We continue to actively monitor the evolving

 

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situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees and our customers; however, any failure to comply with the recently announced federal mandate or any other governmental rules or regulations may have a material adverse impact on our business, financial condition and results of operations.

We are vulnerable to changes in economic conditions and consumer preferences that could have a material adverse effect on our business, financial condition and results of operations.

Food service businesses depend on consumer discretionary spending and are often affected by changes in consumer tastes, national, regional and local economic conditions and demographic trends. The COVID-19 pandemic has led to changes in consumer spending behaviors as customers choose to avoid public gathering places, which may continue to impact traffic in our restaurants for an extended period of time particularly if trends related to work from home continue. For example, we experienced and continue to experience changes in our breakfast and lunch business as it relates to customers who visit us before starting the workday, on their way to work or during corporate lunch breaks. In addition to the COVID-19 pandemic, factors such as traffic patterns, weather, fuel prices, local demographics and the type, number and locations of competing restaurants may adversely affect the performances of individual locations. In addition, economic downturns, inflation or increased food or energy costs could harm the restaurant industry in general and our restaurants in particular. Adverse changes in any of these factors could reduce consumer traffic or impose practical limits on pricing that could have a material adverse effect on our business, financial condition and results of operations. Further, a new presidential and legislative administration recently took office, and it is not yet known what changes the new administration will make to economic or tax policies and how those policies will impact the economy or consumer discretionary spending. There can also be no assurance that consumers will continue to regard our menu offerings favorably, that we will be able to develop new menu items that appeal to consumer preferences or that there will not be a drop in consumer demands for restaurant dining during breakfast and lunch dayparts. Restaurant traffic and our resulting sales depend in part on our ability to anticipate, identify and respond to changing consumer preferences and economic conditions. In addition, the restaurant industry is subject to scrutiny due to the perception that restaurant company practices have contributed to poor nutrition, high caloric intake, obesity or other health concerns of their customers. If we are unable to adapt to changes in consumer preferences and trends, we may lose customers, which could have a material adverse effect on our business, financial condition and results of operations.

Additionally, government regulation may impact our business as a result of changes in attitudes regarding diet and health or new information regarding the adverse health effects of consuming certain menu offerings. These changes have resulted in, and may continue to result in, laws and regulations requiring us to disclose the nutritional content of our food offerings and laws and regulations affecting permissible ingredients and menu items. A number of counties, cities and states have enacted menu labeling laws requiring multi-unit restaurant operators to disclose to consumers certain nutritional information, or have enacted legislation restricting the use of certain types of ingredients in restaurants. An unfavorable report on, or reaction to, our menu ingredients, the size of our portions or the nutritional content of our menu items could negatively influence the demand for our menu offerings.

Compliance with current and future laws and regulations regarding the ingredients and nutritional content of our menu items may be costly and time-consuming. If we fail to comply with existing or future laws and regulations, we may be subject to governmental or judicial fines or sanctions. The risks and costs associated with nutritional disclosures on our menus could also impact our operations, particularly given differences among applicable legal requirements and practices within the restaurant industry with respect to testing and disclosure, ordinary variations in food preparation among our own restaurants and the need to rely on the accuracy and completeness of nutritional information obtained from third-party suppliers. We may not be able to effectively respond to changes in consumer health perceptions, comply with further nutrient content disclosure requirements or adapt our menu offerings to trends in eating habits, which could have a material adverse effect on our business, financial condition and results of operations.

 

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An important aspect of our growth strategy involves opening new restaurants in existing and new markets. We may be unsuccessful in opening new restaurants or establishing new markets and our new restaurants may not perform as well as anticipated which could have a material adverse effect on our business, financial condition and results of operations.

A key part of our growth strategy includes opening new restaurants in existing and new markets and operating those restaurants on a profitable basis. We opened 23 company-owned restaurants in fiscal 2020. Our franchisees opened 19 Franchise-owned NROs in fiscal 2020. We expect a total of 32 System-wide NROs in fiscal 2021. We must identify target markets where we can enter or expand, and we may not be able to open our planned new restaurants within budget or on a timely basis, and our new restaurants may not perform as well as anticipated. Our and our franchisees’ ability to successfully open new restaurants is affected by a number of factors, many of which are beyond our control, including our and our franchisees’ ability to:

 

   

identify available and suitable restaurant sites;

 

   

compete for restaurant sites;

 

   

reach acceptable agreements regarding the lease or purchase of restaurant sites;

 

   

obtain or have available the financing required to develop and operate new restaurants, including construction and opening costs, which includes access to leases and equipment leases at favorable interest and capitalization rates;

 

   

respond to unforeseen engineering or environmental problems with our selected restaurant sites;

 

   

mitigate the impact of inclement weather, natural disasters and other calamities on the development of restaurant sites;

 

   

hire, train and retain the skilled management and other employees necessary to meet staffing needs of new restaurants;

 

   

obtain, in a timely manner and for an acceptable cost, required licenses, permits and regulatory approvals and respond effectively to any changes in local, state or federal law and regulations that adversely affect our and our franchisees’ costs or ability to open new restaurants; and

 

   

respond to construction and equipment cost increases for new restaurants.

There is no guarantee that a sufficient number of suitable restaurant sites will be available in desirable areas or on terms that are acceptable to us in order to achieve our growth plan. If we are unable to open new restaurants, or if planned restaurant openings are significantly delayed, it could have a material adverse effect on our business, financial condition and results of operations.

As part of our long-term growth strategy, we may open restaurants in geographic markets in which we have little or no prior operating experience. Our system-wide restaurant base is geographically concentrated in the southeast portion of the United States, and we may encounter new challenges as we enter new markets. The challenges of entering new markets include: difficulties in hiring experienced personnel; increased labor costs; unfamiliarity with local real estate markets and demographics; consumer unfamiliarity with our brand; and different competitive and economic conditions, consumer tastes and discretionary spending patterns that are more difficult to predict or satisfy than in our existing markets. Consumer recognition of our brand has been important in the success of company-owned and franchised restaurants in our existing markets, and we may find that our concept has limited appeal in new markets. Restaurants we open in new markets may take longer to reach expected sales and profit levels on a consistent basis and may have higher construction, occupancy and operating costs than existing restaurants. Any failure on our part to recognize or respond to these challenges may adversely affect the success of any new restaurants and could have a material adverse effect on our business, financial condition and results of operations.

 

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Our failure to manage our growth effectively could harm our business and results of operations.

Our growth plan includes opening new restaurants. Our existing restaurant management systems, financial and management controls and information systems may be inadequate to support our planned expansion. Managing our growth effectively will require us to continue to enhance these systems, procedures and controls and to hire, train and retain managers and team members. We may not respond quickly enough to the changing demands that our expansion will impose on our management, restaurant teams and existing infrastructure which could have a material adverse effect on our business, financial condition and results of operations.

Opening new restaurants in existing markets may negatively impact sales at our and our franchisees’ existing restaurants.

The consumer target area of our and our franchisees’ restaurants varies by location, depending on a number of factors, including population density, other local retail and business attractions, area demographics and geography. As a result, if we open new restaurants in or near markets in which we or our franchisees’ already have restaurants, it could have a material adverse effect on sales at these existing restaurants. Existing restaurants could also make it more difficult to build our and our franchisees’ consumer base for a new restaurant in the same market. Our core business strategy does not entail opening new restaurants that we believe will materially affect sales at our or our franchisees’ existing restaurants over the long term. However, due to brand recognition and logistical synergies, as part of our growth strategy, we also intend to open new restaurants in areas where we have existing restaurants. This could have a material adverse effect on the results of operations and same-restaurant sales growth for our restaurants in such markets due to the close proximity with our other restaurants and market saturation. Sales cannibalization between our restaurants may become significant in the future as we continue to open new restaurants and could affect our sales growth, which could, in turn, have a material adverse effect on our business, financial condition and results of operations.

A decline in visitors to any of the retail centers, lifestyle centers, or entertainment centers where our restaurants are located could negatively affect our restaurant sales.

Our restaurants are primarily located in high-activity trade areas that often contain retail centers, lifestyle centers, and entertainment centers. We depend on high visitor rates in these trade areas to attract customers to our restaurants. Factors that may result in declining visitor rates at these locations include economic or political conditions, anchor tenants closing in retail centers in which we operate, changes in consumer preferences or shopping patterns, changes in discretionary consumer spending, increasing petroleum prices, mobility restrictions, fear of contracting COVID-19 or other infectious diseases and the sharp increase in unemployment caused by the closure of businesses in response to the COVID-19 pandemic, or other factors. A decline in traffic at these locations for a sustained period could have a material adverse effect on our business, financial condition and results of operations.

The COVID-19 pandemic and related government restrictions imposed by federal, state and local governments have and may continue to impact customer traffic at our restaurants, possibly for prolonged periods of time. We temporarily closed our dining rooms and moved to exclusively off-premises sales by April 2020 to comply with government restrictions and, on April 13, 2020, to help ensure the safety of our employees, temporarily suspended all operations at the company-owned restaurants. The COVID-19 pandemic has also adversely affected our ability to implement our business strategy, including our ability to build in both new and existing markets and increase brand awareness. These changes and any additional changes could continue to have a material adverse effect on our business, liquidity, financial condition and results of operations, particularly if these changes remain in place for a significant amount of time. If business interruptions caused by the COVID-19 pandemic last longer than we expect or are aggravated due to the emergence of variants, we or our franchisees may need to seek additional sources of liquidity. There can be no guarantee that additional liquidity, whether through the credit markets or government programs, will be readily available or available on favorable terms to our franchisees or us.

 

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Our same-restaurant sales growth may be lower than we expect in future periods.

Same-restaurant sales growth will continue to be a critical factor affecting our ability to generate profits because the profit margin on same-restaurant sales growth is generally higher than the profit margin on new restaurant sales. Our ability to increase same-restaurant sales growth depends in part on our ability to successfully implement our initiatives to build sales. It is possible such initiatives will not be successful, that we will not achieve our target same-restaurant sales growth or that the change in same-restaurant sales growth could be negative, which may cause a decrease in sales growth and ability to achieve profitability. This could have a material adverse effect on our business, financial condition and results of operations. The rise of COVID-19 variants and any associated government-imposed restrictions may frustrate our ability to implement our initiatives to increase our same-restaurant sales growth.

Our marketing programs and our limited time new offerings may not be successful and could fail to meet expectations, and our new menu items, advertising campaigns and restaurant designs and remodels may not generate increased sales or profits.

We incur costs and expend other resources in our marketing efforts on new and seasonal menu items, advertising campaigns and restaurant designs and remodels to raise brand awareness and attract and retain customers. In addition, as the number of our restaurants increases, and as we expand into new markets, we expect to increase our investment in advertising and consider additional promotional activities. Accordingly, in the future, we will incur greater marketing expenditures, resulting in greater financial risk. Additionally, our limited time menu offerings, which we offer as a key part of our promotional activities from time to time, may not perform as anticipated, which could have an adverse impact on our results of operations for the related period. If these initiatives are not successful, it could result in us incurring expenses without the benefit of higher revenues, which could have a material adverse effect on our business, financial condition and results of operations.

Changes in the cost of food could have a material adverse effect on our business, financial condition and results of operations.

Our profitability depends in part on our ability to anticipate and react to changes in the food and beverage costs, including, among other things, pork, coffee, eggs, avocados, potatoes, bread, cheese, fresh fruit and produce items. We are susceptible to increases in the cost of food due to factors beyond our control, such as freight and delivery charges, general economic conditions, seasonal economic fluctuations, weather conditions, global demand, food safety concerns, infectious diseases, fluctuations in the U.S. dollar, tariffs and import taxes, product recalls and government regulations. Dependence on frequent deliveries of fresh produce and other food products subjects our business to the risk that shortages or interruptions in supply could adversely affect the availability, quality or cost of ingredients or require us to incur additional costs to obtain adequate supplies. Deliveries of supplies may be affected by adverse weather conditions, natural disasters, labor shortages, or financial or solvency issues of our distributors or suppliers, product recalls or other issues. Further, increases in fuel prices could result in increased distribution costs. In addition, a material adverse effect on our business, financial condition and results of operations could occur if any of our distributors, suppliers, vendors, or other contractors fail to meet our quality or safety standards or otherwise do not perform adequately, or if any one or more of them seeks to terminate its agreement or fails to perform as anticipated, or if there is any disruption in any of our distribution or supply relationships or operations for any reason.

Changes in the price or availability of certain food products, including as a result of the COVID-19 pandemic, could affect our profitability and reputation. While other commodities we purchase are subject to contract pricing and therefore have not been impacted by price inflation as a result of the COVID-19 pandemic thus far, as our contracts expire, we may not be able to successfully re-negotiate terms that protect us from price inflation in the future. International commodities we purchase are also subject to supply shortages or interruptions due to the COVID-19 pandemic.

Changes in the cost of ingredients can result from a number of factors, including seasonality, increases in the cost of grain, disease and viruses and other factors that affect availability and greater international demand for

 

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domestic pork products. In the event of cost increases with respect to one or more of our raw ingredients, we may choose to temporarily suspend or permanently discontinue serving menu items rather than paying the increased cost for the ingredients. Any such changes to our available menu could negatively impact our restaurant traffic, business and same-restaurant sales growth during the shortage and thereafter. While future cost increases can be partially offset by increasing menu prices, there can be no assurance that we will be able to offset future cost increases by increasing menu prices. If we or our franchisees implement menu prices increases, there can be no assurance that increased menu prices will be fully absorbed by our customers without any resulting change to their visit frequencies or purchasing patterns. Competitive conditions may limit our menu pricing flexibility and if we or our franchisees implement menu price increases to protect our margins, restaurant traffic could be materially adversely affected, at both company-owned and franchised restaurants.

Food safety and quality concerns may negatively impact our business and profitability, our internal operational controls and standards may not always be met and our employees may not always act professionally, responsibly and in our and our customers’ best interests. Any possible instances of food-borne illness could reduce our restaurant sales.

Food safety is a top priority, and we dedicate substantial resources to help ensure that our customers enjoy safe, quality food products. However, food-borne illnesses and other food safety issues have occurred in the food industry in the past, and could occur in the future. Incidents or reports of food-borne or water-borne illness or other food safety issues, food contamination or tampering, employee hygiene and cleanliness failures or improper employee conduct, customers entering our restaurants while ill and contaminating food ingredients or surfaces at our restaurants could lead to product liability or other claims. Such incidents or reports could negatively affect our brand and reputation and could have a material adverse effect on our business, financial condition and results of operations. Similar incidents or reports occurring at competitors in our industry unrelated to us could likewise create negative publicity, which could negatively impact consumer behavior towards us.

We cannot guarantee to consumers that our food safety controls, procedures and training will be fully effective in preventing all food safety and public health issues at our restaurants, including any occurrences of pathogens (i.e., Ebola, “mad cow disease,” “SARS,” “swine flu,” Zika virus, avian influenza, hepatitis A, porcine epidemic diarrhea virus, norovirus or other virus), bacteria (i.e., salmonella, listeria or E.coli), parasites or other toxins infecting our food supply. These potential public health issues, in addition to food tampering, could adversely affect food prices and availability of certain food products, generate negative publicity, and lead to closure of restaurants resulting in a decline in our sales or profitability. In addition, there is no guarantee that our restaurant locations will maintain the high levels of internal controls and training we require at our restaurants. Furthermore, our reliance on third-party food processors makes it difficult to monitor food safety compliance and may increase the risk that food-borne illness would affect multiple locations rather than single restaurants. Some food-borne illness incidents could be caused by third-party food suppliers and transporters outside of our control, and may affect multiple restaurant locations as a result. We cannot assure that all food items will be properly maintained during transport throughout the supply chain and that our employees will identify all products that may be spoiled and should not be used in our restaurants. The risk of food-borne illness may also increase whenever our menu items are served outside of our control, such as by third-party food delivery services companies, customer take out or at catered events. We do not have direct control over our third-party suppliers, transporters or delivery services, including in their adherence to additional sanitation protocols and guidelines as a result of the COVID-19 pandemic or other infectious diseases, and may not have visibility into their practices. New illnesses resistant to our current precautions may develop in the future, or diseases with long incubation periods could arise, that could give rise to claims or allegations on a retroactive basis. One or more instances of food-borne illness in one of our company-owned or franchised restaurants could negatively affect sales at all our restaurants if highly publicized, such as on national media outlets or through social media, especially due to the geographic concentration of many of our restaurants. This risk exists even if it were later determined that the illness was wrongly attributed to one of our restaurants. Furthermore, due to the COVID-19 pandemic, we must comply with stricter health regulations and guidelines and increased public concern and expectations over food safety standards and controls. Potential food safety incidents, whether at our restaurants or involving our business

 

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partners, could lead to wide public exposure and negative publicity, which could materially harm our business. A number of other restaurant chains have experienced incidents related to food-borne illnesses that have had material adverse impacts on their operations, and we cannot assure you that we could avoid a similar impact upon the occurrence of a similar incident at one of our restaurants. Additionally, even if food-borne illnesses were not identified at our restaurants, our restaurant sales could be adversely affected if instances of food-borne illnesses at other restaurant chains were highly publicized.

Finally, although we have followed industry standard food safety protocols in the past and have endeavored to continually enhance our food safety procedures to ensure that our food is as safe as it can possibly be, we may still be at a higher risk for food-borne illness occurrences than some competitors due to our greater use of fresh, unprocessed produce and meats, our reliance on employees cooking with traditional methods rather than automation, and our avoidance of frozen ingredients.

New restaurants may not be profitable or may close, and the performance of our restaurants that we have experienced in the past may not be indicative of future results.

Some of our restaurants open with an initial start-up period of higher or lower than normal sales volumes. Our restaurant level operating profit margins are generally lower through the first 12 months of operation. In new markets, the length of time before average sales for new restaurants stabilize is less predictable as a result of our limited knowledge of these markets and consumers’ limited awareness of our brand. In addition, our AUV and same-restaurant sales growth may not increase at the rates our existing restaurants have achieved over the past several years. Our ability to operate new restaurants profitably and increase AUV and same-restaurant sales growth will depend on many factors, some of which are beyond our control, including:

 

   

consumer awareness and understanding of our brand;

 

   

general economic conditions, which can affect restaurant traffic, local labor costs and prices we pay for the food products and other supplies we use;

 

   

consumption patterns and food preferences that may differ from region to region;

 

   

changes in consumer preferences and discretionary spending;

 

   

difficulties obtaining or maintaining adequate relationships with distributors or suppliers in new markets;

 

   

increases in prices for commodities;

 

   

inefficiency in our labor costs as the staff gains experience;

 

   

competition, either from our competitors in the restaurant industry or our own restaurants;

 

   

temporary and permanent site characteristics of new restaurants;

 

   

changes in government regulation; and

 

   

other unanticipated increases in costs, any of which could give rise to delays or cost overruns.

Although we target specified operating and financial metrics, new restaurants may not meet these targets or may take longer than anticipated to do so. If our new restaurants do not perform as planned or close, or if we are unable to achieve our expected restaurant sales, it could have a material adverse effect on our business, financial condition and results of operations.

We face significant competition for customers, and our inability to compete effectively may affect our traffic, our sales and our operating profit margins, which could have a material adverse effect on our business, financial condition and results of operations.

The restaurant industry is intensely competitive with many companies that compete directly and indirectly with us with respect to food quality, brand recognition, service, price and value, convenience, design and

 

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location. We compete in the restaurant industry with national, regional and locally-owned and/or operated limited-service restaurants and full-service restaurants. We compete with fast casual restaurants, quick service restaurants and casual dining restaurants. Some of our competitors have significantly greater financial, marketing, personnel and other resources than we do, and many of our competitors are well-established in markets in which we have existing restaurants or intend to locate new restaurants. In addition, many of our competitors have greater name recognition nationally or in some of the local markets in which we have or plan to have restaurants. We also compete with a number of non-traditional market participants, such as convenience stores, grocery stores, coffee shops, meal kit delivery services, and “ghost” or dark kitchens, where meals are prepared at separate takeaway premises rather than a restaurant. Competition from food delivery services companies has also increased in recent years, particularly during the COVID-19 pandemic, and is expected to continue to increase. Any inability to successfully compete with the restaurants in our existing or new markets will place downward pressure on our customer traffic and could have a material adverse effect on our business, financial condition and results of operations. Additionally, all delivery from our restaurants is through third-party delivery companies. If these third-party delivery companies cease doing business with us, cannot make their scheduled deliveries, do not continue their relationship with us on favorable terms or fail to effectively compete with other third-party delivery providers in the sector, it may have a negative impact on sales or result in increased third-party delivery fees. If any third-party delivery provider we partner with experiences damage to their brand image, we may also see ramifications due to our partnership with them. As delivery, as well as the partnerships we have made in connection with delivery, is still a growing business for us, it may be difficult for us to anticipate its impact to our sales as well as the challenges we may face in the future.

Our continued success also depends in part on the continued popularity of our menu and the experience we offer customers at our restaurants. Consumer tastes, nutritional and dietary trends, traffic patterns and the type, number, and location of competing restaurants often affect the restaurant business, and our competitors may react more efficiently and effectively to changes in those conditions. In addition, some of our competitors in the past have implemented promotional programs that provide price discounts on certain menu offerings, and they may continue to do so in the future. If we are unable to continue to compete effectively, our traffic, restaurant sales and restaurant operating profit margins could decline, which could have a material adverse effect on our business, financial condition and results of operations.

Additionally, our competitors with greater financial resources are able to spend significantly more on marketing and advertising and other initiatives than we are able to. Should our competitors increase spending on marketing and advertising and other initiatives or our marketing expenditures decrease for any reason, or should our advertising, promotions, new menu items and restaurant designs and locations be less effective than our competitors’, it could have a material adverse effect on our business, financial condition and results of operations.

The financial performance of our franchisees can have a material adverse effect on our business, financial condition and results of operations.

As 21% and 22% of our System-wide restaurants were franchised as of June 27, 2021 and December 27, 2020, respectively, our results of operations are dependent in part upon the operational and financial success of our franchisees. We receive royalties, franchise fees and contributions to a system fund used for advertising from our franchisees. We have limited control over how our franchisees’ businesses are run, and our franchisees may not comply with our established operational standards and guidelines. While we are responsible for ensuring the success of our System-wide restaurants and for taking a long-term view with respect to system-wide improvements, our franchisees have individual business strategies and objectives, which may conflict with our interests. Our franchisees may not be able to secure adequate financing to open or continue operating their restaurants. If they incur too much debt or if economic or sales trends deteriorate such that they are unable to repay existing debt, our franchisees could experience financial distress or even bankruptcy. If a significant number of franchisees become financially distressed or close their restaurants, it could result in reduced franchise revenues, which could have a material adverse effect on our business, financial condition and results of operations.

 

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We have limited control with respect to the operations of our franchisees, which could have a material adverse effect on our business, financial condition and results of operations.

Franchisees are independent business operators and are not our employees, and we do not exercise control over the day-to-day operations of the franchised restaurants. We provide training and support to franchisees, and set and monitor operational standards and guidelines, however, because we do not have day-to-day control over the franchisees, we cannot give assurance that the franchisees operate restaurants in a manner consistent with our standards, guidelines and requirements, or hire and train qualified managers and other restaurant personnel. If franchisees do not operate to our expectations, our image and reputation, and the image and reputation of other franchisees, may suffer, which could have a material adverse effect on our business, financial condition and results of operations.

If we are unable to maintain good relationships with our franchisees, revenues could decrease and we may be unable to expand our presence in certain markets.

Our franchisees pay us fees pursuant to our franchise agreements. The viability of our franchise business depends on our ability to maintain good relationships with our franchisees. If we are unable to maintain good relationships with our franchisees, we may be unable to renew franchise agreements, which would result in a decrease in our franchise revenues and our presence in certain markets, which could have a material adverse effect on our business, financial condition and results of operations.

The interests of our franchisees may conflict with yours or ours in the future and we could face liability from our franchisees or related to our relationship with our franchisees.

Franchisees, as independent business operators, may from time to time disagree with us on our strategies regarding the business or our interpretation of our respective rights and obligations under the franchise agreement and the terms and conditions of the franchisee/franchisor relationship. In addition, franchise agreements require us and our franchisees to comply with operational and performance conditions that are subject to interpretation and could result in disagreements. As a result, at any given time, we may be in disputes with one or more of our franchisees. Such disputes may result in legal action against us. To the extent we have such disputes, the attention, time and financial resources of our management and our franchisees will be diverted from our restaurants, which could, even if we prevail, have a material adverse effect on our business, financial condition and results of operations.

In addition, various state and federal laws govern our relationship with our franchisees. A franchisee and/or a government agency may bring legal action against us based on the franchisee/franchisor relationship that could result in the award of damages to franchisees and/or the imposition of fines or other penalties against us.

Our system-wide restaurant base is geographically concentrated in the southeast portion of the United States, and we could be negatively affected by conditions specific to that region.

Our restaurants in the southeast portion of the United States represented approximately 41% of our System-wide restaurants as of December 27, 2020. Our restaurants in Florida represented approximately 24% of our System-wide restaurants as of December 27, 2020. Adverse changes in demographic, unemployment, economic, regulatory or weather conditions in the southeast portion of the United States have had, and may continue to have, material adverse effects on our business, financial condition and results of operations. As a result of our concentration in this market, we have been, and in the future may be, disproportionately affected by conditions in this geographic area compared to other chain restaurants with a national footprint.

In addition, our competitors could open additional restaurants in the southeast portion of the United States, which could result in reduced market share for us in this key geographic region, which could have a material adverse effect on our business, financial condition and results of operations.

 

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Damage to our reputation and negative publicity could have a material adverse effect on our business, financial condition and results of operations.

Our reputation and the quality of our brand are critical to our business and success in existing markets, and will be critical to our success as we enter into new markets. Any incident that erodes consumer loyalty for our brand could significantly reduce its value and damage our business. We may be adversely affected by negative publicity relating to food quality, the safety, sanitation and welfare of our restaurant facilities, customer complaints or litigation alleging illness or injury, health inspection scores, integrity of our or our suppliers’ food processing and other policies, practices and procedures, employee relationships and welfare or other matters at one or more of our restaurants. Any publicity relating to health concerns, perceived or specific outbreaks of the COVID-19 pandemic or other infectious diseases attributed to one or more of our restaurants, or non-compliance with COVID-19 related government restrictions imposed by federal, state and local governments could result in a significant decrease in customer traffic in all of our restaurants and could have a material adverse effect on our results of operations. Furthermore, similar negative publicity or occurrences with respect to other restaurants or other restaurant chains could also decrease our customer traffic and have a similar material adverse effect on our business. In addition, incidents of restaurant commentary have increased dramatically with the proliferation of social media platforms. Negative publicity may adversely affect us, regardless of whether the allegations are valid or whether we are held responsible. In addition, the negative impact of adverse publicity may extend far beyond the restaurant involved, especially due to the high geographic concentration of many of our restaurants, and affect some or all our other restaurants, including our franchised restaurants. For example, we, or other restaurant companies generally, could come under criticism from animal rights and welfare activists for our business practices or those of our suppliers. Such criticisms could impair our brand, our restaurant sales, our hiring, our expansion plans, and the performance of our franchisees. If we changed our practices because of concerns about animal welfare, or in response to such criticisms, our costs might increase, or we may have to change our suppliers or our menu. The risk of negative publicity is particularly great with respect to our franchised restaurants because we are limited in the manner in which we can regulate them, especially on a real-time basis and negative publicity from our franchised restaurants may also significantly impact company-owned restaurants. A similar risk exists with respect to food service businesses unrelated to us, if customers mistakenly associate such unrelated businesses with our operations. Employee claims against us based on, among other things, wage and hour violations, discrimination, harassment or wrongful termination may also create not only legal and financial liability but negative publicity that could adversely affect us and divert our financial and management resources that would otherwise be used to benefit the future performance of our operations. These types of employee claims could also be asserted against us, on a co-employer theory, by employees of our franchisees. A significant increase in the number of these claims or an increase in the number of successful claims could have a material adverse effect on our business, financial condition and results of operations.

Our inability or failure to recognize, respond to and effectively manage the accelerated impact of social media could have a material adverse effect on our business, financial condition and results of operations.

Our marketing efforts rely heavily on the use of social media. In recent years, there has been a marked increase in the use of social media platforms, including weblogs (blogs), mini-blogs, chat platforms, social media websites, and other forms of Internet-based communications, which allow individuals access to a broad audience of consumers and other interested persons. Many of our competitors are expanding their use of social media, especially since the beginning of the COVID-19 pandemic, and new social media platforms are rapidly being developed, potentially making more traditional social media platforms obsolete. As a result, we need to continuously innovate and develop our social media strategies in order to maintain broad appeal with customers and brand relevance, particularly given the rise in digital orders by customers at home due to the COVID-19 pandemic. We also continue to invest in other digital marketing initiatives that allow us to reach our customers across multiple digital channels and build their awareness of, engagement with, and loyalty to our brand. These initiatives may not be successful, resulting in expenses incurred without the benefit of higher sales or increased brand recognition. Additionally, negative commentary regarding our restaurants, our food or our service may be posted on our website or social media platforms and may be adverse to our reputation or business. This harm may be immediate, without affording us an opportunity for redress or correction.

 

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As laws and regulations rapidly evolve to govern the use of these platforms and devices, the failure by us or third parties acting at our direction to abide by applicable laws and regulations in the use of these platforms and devices could subject us to regulatory investigations, class action lawsuits, liability, fines or other penalties and have a material adverse effect on our business, financial condition and results of operations. In addition, an increase in the use of social media for product promotion and marketing may cause an increase in the burden on us to monitor compliance of such materials and increase the risk that such materials could contain problematic product or marketing claims in violation of applicable regulations.

We have a limited number of suppliers and distributors for several of our frequently used ingredients. If our suppliers or distributors are unable to fulfill their obligations under our arrangements with them, we could encounter supply shortages and incur higher costs.

We contract with one distributor, which we refer to as our “broadline” distributor, to provide virtually all of our food distribution services in the United States. As of December 27, 2020, approximately 80% of certain food and beverage ingredients, including pork and eggs were processed through our broadline distributor for distribution and delivery to each of our restaurants.

As of December 27, 2020, we utilized 15 affiliated distribution centers and each distribution center carries two to three weeks of inventory for our core ingredients. In the event of a catastrophe, such as a fire, our broadline distributor can supply the restaurants affected by their respective distribution center from another affiliated distribution center. If a catastrophe, such as a fire or extreme adverse weather conditions such as storms, floods, severe thunderstorms and hurricanes, were to occur at the distribution center that services the concentration of our restaurants located in Florida, we would be at immediate risk of product shortages because that distribution center supplies 30% of our company-owned restaurants as of December 27, 2020, which collectively represented 32% of our restaurant sales for fiscal 2020. The other 14 distribution centers collectively supply the other 70% of our company-owned restaurants, which represented the remaining 68% of our sales.

As of December 27, 2020, we purchased 100% of our pork from two suppliers, 100% of our eggs from two suppliers and 80% of our avocados from one supplier. We purchase these ingredients pursuant to purchase orders at prevailing market or negotiated contract prices and are not limited by minimum purchase requirements. We also purchased 100% of our coffee from one supplier. The cancellation of our supply arrangements with any one of these suppliers or the disruption, delay or inability of these suppliers to deliver these major products to our restaurants or distribution centers due to problems in production or distribution, inclement weather, unanticipated demand or other conditions may materially and adversely affect our results of operations while we establish alternative supplier and distribution channels, all of which may materially and adversely affect our results of operations while we establish these alternate supplier and distribution channels. Accordingly, although we believe that alternative supply and distribution sources are available, there can be no assurance that we will continue to be able to identify or negotiate with such sources on terms that are commercially reasonable to us. If our existing suppliers or distributors are unable to fulfill their obligations under their contracts or we are unable to identify alternative sources, we could encounter supply shortages and incur higher costs, each of which could have a material adverse effect on our results of operations.

In addition, if our suppliers or distributors fail to comply with food safety or other laws and regulations, or face allegations of non-compliance, their operations may be disrupted. We also could experience shortages of key ingredients if our suppliers need to close or restrict operations due to the impact of the COVID-19 pandemic or other infectious diseases. If our suppliers’ employees are unable to work or our suppliers’ operations are disrupted due to the COVID-19 pandemic, we and our franchisees could face shortages of food items or other supplies, and our and our franchisees’ operations and sales could be materially adversely impacted by such supply interruptions. If that were to occur, we may not be able to find replacement suppliers on commercially reasonable terms or a timely basis, if at all.

 

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Risks Related to Information Technology and Intellectual Property

Information technology system failures or breaches of our network security could interrupt our operations and have a material adverse effect on our business, financial condition and results of operations.

We and our franchisees rely heavily on our computer systems and network infrastructure across our operations, including point-of-sale processing at our restaurants, for management of our supply chain, accounting, payment of obligations, collection of cash, credit and debit card transactions and other processes and procedures. Our ability to efficiently and effectively manage our business depends significantly on the reliability and capacity of these systems. Our and our franchisees’ operations depend upon our and our franchisees’ ability to protect our computer equipment and systems against damage from physical theft, fire, power loss, telecommunications failure or other catastrophic events, as well as from internal and external security breaches, viruses and other disruptive problems. Any actual or perceived breach in the security of our information technology systems or those of our franchisees and third-party service providers could lead to damage or failure of our computer systems or network infrastructure that causes an interruption in our operations could have a material adverse effect on our business and a significant theft, loss, disclosure, modification or misappropriation of, or access to, guests’, employees’, third parties’ or other proprietary data or other breach of our information technology systems could subject us or our franchisees to litigation or to actions by regulatory authorities. Furthermore, before and during the COVID-19 pandemic, at various times we have allowed certain of our team members in our corporate headquarters to work from home. The significant increase in remote working, particularly for an extended period of time, could increase certain risks to our business, including an increased risk of cybersecurity events, vulnerability of our systems and improper dissemination of confidential or personal information, if our physical and cybersecurity measures or our corporate policies are not effective. The costs to us to eliminate any of the foregoing cybersecurity vulnerabilities or to address a cyber-incident could be significant and have a material adverse impact on our business, financial condition and results of operations.

The techniques and sophistication used to conduct cyber-attacks and breaches of information technology systems, as well as the sources and targets of these attacks, may take many forms (including phishing, social engineering, denial or degradation of service attacks, malware or ransomware), change frequently and are often not recognized until such attacks are launched or have been in place for a period of time. In addition, our employees, franchisees, contractors, or third parties with whom we do business or to whom we outsource business operations may attempt to circumvent our security measures in order to misappropriate regulated, protected, or personally identifiable information, and may purposefully or inadvertently cause a breach involving or compromise of such information. Third parties may have the technology or know-how to breach the security of the information collected, stored, or transmitted by us or our franchisees, and our respective security measures, as well as those of our technology vendors, may not effectively prohibit others from obtaining improper access to this information. Advances in computer and software capabilities and encryption technology, new tools, and other developments may increase the risk of such a breach or compromise. There is no assurance that any security procedures or controls that we or our third-party providers have implemented will be sufficient to prevent data-security related incidents from occurring.

We may be required to expend significant capital and other resources to protect against, respond to, and recover from any potential, attempted or existing security breaches or failures and their consequences. As data security-related threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities. We could be forced to expend significant financial and operational resources in responding to a security breach, including investigating and remediating any information security vulnerabilities, defending against and resolving legal and regulatory claims and complying with notification obligations, all of which could divert resources and the attention of our management and key personnel away from our business operations and adversely affect our business, financial condition and results of operations. In addition, our remediation efforts may not be successful and we could be unable to implement, maintain and upgrade adequate safeguards.

We are continuing to expand, upgrade and develop our information technology capabilities, including implementing a new credit card processing system in all of our company-owned locations in 2020, and we plan

 

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to work with our franchisees to have their restaurants upgrade to the same system. If we are unable to successfully upgrade or expand our technological capabilities, we may not be able to take advantage of market opportunities, manage our costs and transactional data effectively, satisfy customer requirements, execute our business plan or respond to competitive pressures. Additionally, unforeseen problems with our point-of-sale system or our credit card processing system may affect our operational abilities and internal controls and we may incur additional costs in connection with such upgrades and expansion.

Failure to comply with federal and state laws and regulations relating to privacy, data protection, advertising and consumer protection, or the expansion of current or the enactment of new laws or regulations relating to privacy, data protection, advertising and consumer protection, could have a material adverse effect on our business, financial condition and results of operations.

Our business requires the collection, transmission and retention of large volumes of customer and employee data, including credit and debit card numbers and other personally identifiable information, in various information technology systems that we and our franchisees maintain, and in those maintained by our third parties with whom we contract to provide services. The integrity and protection of that customer and employee data is critical to us. Further, our customers and employees have a high expectation that we and our service providers will adequately protect their personal information.

Further, the standards for systems currently used for transmission and approval of electronic payment transactions, and the technology utilized in electronic payment themselves, all of which can put electronic payment data at risk, are determined and controlled by the payment card industry, not by us. For example, we are subject to industry requirements such as the Payment Card Industry Data Security Standard, or PCI-DSS, as well as certain other industry standards. Any failure to comply with these rules and/or requirements could significantly harm our brand, reputation, business and results of operations, and in the case of PCI-DSS, could result in monetary penalties and/or the exclusion from applicable card brands. We also rely on independent service providers for payment processing, including payments made using credit and debit cards. If these independent service providers become unwilling or unable to provide these services to us or if the cost of using these providers increases, our business could be harmed.

We rely on a variety of marketing and advertising techniques, including email communications, affiliate partnerships, social media interactions, digital marketing, direct mailers, public relations initiatives and local community sponsorships, promotions and partnerships, and we are subject to various laws and regulations that govern such marketing and advertising practices. A variety of federal and state laws and regulations govern the collection, use, retention, sharing and security of consumer data, particularly in the context of digital marketing, which we rely upon to attract new customers. We are, and may increasingly become, subject to other various laws, directives, industry standards and regulations, as well as contractual obligations, relating to data privacy and security in the jurisdictions in which we operate. The information, security and privacy requirements imposed by governmental regulation are increasingly demanding and are subject to potentially differing interpretations. In the United States, various federal and state regulators, including governmental agencies like the Consumer Financial Protection Bureau and the Federal Trade Commission (the “FTC”), have adopted, or are considering adopting, laws and regulations concerning personal information and data security and have prioritized privacy and information security violations for enforcement actions.

Laws and expectations relating to privacy continue to evolve, and we continue to adapt to changing needs. For example, the definition of “personal information” or “personal data” under newer privacy laws is much broader than the definition of “personally identifiable information” that appears in older privacy laws, and many jurisdictions have or will soon enact new privacy laws. Specifically, certain states in which we operate or may operate in the future have enacted or may soon enact comprehensive privacy laws that may be more stringent or broader in scope, or offer greater individual rights, with respect to personal information than current federal, international or other state laws, and such laws may differ from each other, all of which may complicate compliance efforts. For example, the California Consumer Privacy Act (“CCPA”), which went into effect on

 

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January 1, 2020, imposes new and enhanced data privacy obligations and creates new privacy rights for California residents, including the right to access and delete their personal information and to opt-out of certain sharing and sales of their personal information. The CCPA allows for significant civil penalties and statutory damages for violations and contains a private right of action for certain data breach incidents. Similarly, on March 2, 2021, the Virginia Consumer Data Protection Act (“CDPA”) was signed into law. The CDPA becomes effective beginning January 1, 2023, and contains provisions that require businesses to conduct data protection assessments in certain circumstances and obtain opt-in consent from consumers to process certain sensitive personal information, among other requirements. Efforts are underway in numerous other states to pass data privacy laws that are similar to the CCPA and/or the CDPA, further complicating the legal landscape. In addition, laws in all 50 states require businesses to provide notice to consumers whose personal information has been accessed or acquired as a result of a data breach (and, in some cases, to regulators and/or the media). There is also the possibility that Congress could strengthen federal privacy laws and/or enact a new comprehensive federal privacy law that would apply to us, which may add additional complexity, variation in requirements, restrictions and potential legal risks, require additional investment of resources in compliance programs, impact strategies and the availability of previously useful data and could result in increased compliance costs or changes in business practices and policies. Our failure to adhere to or successfully implement appropriate processes to adhere to the requirements of evolving laws and regulations in this area could expose us and our franchisees to financial penalties and legal liability. Our and our franchisees’ systems may not be able to satisfy these changing requirements and customer and employee expectations, or may require significant additional investments or time in order to do so.

Any failure, or perceived failure, by us to comply with our posted privacy policies or with any federal or state privacy or consumer protection-related laws, regulations, industry self-regulatory principles, industry standards or codes of conduct, regulatory guidance, orders to which we may be subject or other legal obligations relating to privacy or consumer protection could adversely affect our reputation, brand and business, and may result in claims, proceedings or actions against us by governmental entities, customers, suppliers or others or other liabilities or may require us to change our operations and/or cease using certain data sets. Any such claims, proceedings or actions could hurt our reputation, brand and business, force us to incur significant expenses in defense of such proceedings or actions, distract our management, increase our costs of doing business, result in a loss of customers, suppliers or vendors and result in the imposition of monetary penalties. We may also be contractually required to indemnify and hold harmless third parties from the costs or consequences of non-compliance with any laws, regulations or other legal obligations relating to privacy or consumer protection or any inadvertent or unauthorized use or disclosure of data that we store or handle as part of operating our business. Although we endeavor to comply with our public statements and documentation, we may at times fail to do so or be alleged to have failed to do so. The publication of our privacy policies and other statements that provide promises and assurances about data privacy and security can subject us to potential government or legal action if they are found to be deceptive, unfair or misrepresentative of our actual practices. Any concerns about our data privacy and security practices, even if unfounded, could damage the reputation of our businesses and discourage potential users from our products and services. Any of the foregoing could have an adverse effect on our business, financial condition and results of operations.

Federal and state governmental authorities continue to evaluate the privacy implications inherent in the use of third-party “cookies” and other methods of online tracking for behavioral advertising and other purposes. The U.S. government has enacted, has considered or is considering legislation or regulations that could significantly restrict the ability of companies and individuals to engage in these activities, such as by regulating the level of consumer notice and consent required before a company can employ cookies or other electronic tracking tools or the use of data gathered with such tools. Additionally, some providers of consumer devices and web browsers have implemented, or announced plans to implement, means to make it easier for Internet users to prevent the placement of cookies or to block other tracking technologies, which could if widely adopted result in the use of third-party cookies and other methods of online tracking becoming significantly less effective. For example, Apple recently moved to “opt-in” privacy models, requiring users to voluntarily choose to receive targeted ads, which may reduce the value of ad impressions on its iOS mobile application platform. Many applications and

 

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other devices allow consumers to avoid receiving advertisements by paying for subscriptions or other downloads. The regulation of the use of these cookies and other current online tracking and advertising practices or a loss in our ability to make effective use of services that employ such technologies could increase our costs of operations and limit our ability to acquire new customers on cost-effective terms and, consequently, have a material adverse effect on our business, financial condition and results of operations.

We face potential liability with our gift cards under the property laws of some states.

Our gift cards, which may be used to purchase food and beverages in our restaurants, may be considered stored value cards by certain states in accordance with their abandoned and unclaimed property laws. These laws could require a company to remit to the state cash in an amount equal to all or a designated portion of the unredeemed balance on the gift cards based on certain card attributes and the length of time that the cards are inactive; however, we are not required to remit any amounts relating to unredeemed gift cards to states as that obligation has been assumed by the third-party issuer of the gift cards. We recognize income from unredeemed cards when we determine that the likelihood of the cards being redeemed is remote and that recognition is appropriate based on governing state statutes.

The analysis of the potential application of the abandoned and unclaimed property laws to our gift cards is complex, involving an analysis of constitutional, statutory provisions and factual issues. In the event that one or more states change their existing abandoned and unclaimed property laws or successfully challenge our position on the application of its abandoned and unclaimed property laws to our gift cards, or if the estimates that we use in projecting the likelihood of the cards being redeemed prove to be inaccurate, our liabilities with respect to unredeemed gift cards may be materially higher than the amounts shown in our consolidated financial statements. If we are required to materially increase the estimated liability recorded in our consolidated financial statements with respect to unredeemed gift cards, our financial condition and results of operations could be adversely affected.

Additionally, we rely on third-party service providers to administer aspects of our gift cards. Any failure on the part of this service provider to fulfill their contract in a way that adversely effects the use or purchase of our gift cards could result in a material adverse effect on our business, financial condition and results of operations.

The failure to enforce and maintain our trademarks and protect our other intellectual property could have a material adverse effect on our business, including our ability to establish and maintain brand awareness.

We have registered First Watch® and certain other names, logos and slogans used by our restaurants as trademarks or service marks with the United States Patent and Trademark Office (“USPTO”). The First Watch® trademark is also registered in Canada. In addition, the First Watch logo, website domain name and Facebook, Instagram and Twitter accounts are our intellectual property. The success of our business strategy depends on our continued ability to use our existing trademarks and service marks in order to increase brand awareness and develop our branded products. If our efforts to protect our intellectual property are not adequate, or if any third-party misappropriates or infringes on our intellectual property, whether in print, on the Internet or through other media, the value of our brands may be negatively affected, which could have a material adverse effect on our business, including the failure of our brands and branded products to achieve and maintain market acceptance. There can be no assurance that all the steps we have taken to protect our intellectual property in the United States will be adequate.

We or our suppliers maintain the seasonings and additives for our menu items, as well as certain standards, specifications and operating procedures, as trade secrets or confidential information. We may not be able to prevent the unauthorized disclosure or use of our trade secrets or confidential information, despite the existence of confidentiality agreements and other measures. While we try to ensure that the quality of our brand and branded products is maintained by all our franchisees, we cannot be certain that these franchisees will not take actions that adversely affect the value of our intellectual property or reputation. If any of our trade secrets or

 

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information were to be disclosed to or independently developed by a competitor, it could have a material adverse effect on our business, financial condition and results of operations.

Litigation with respect to intellectual property assets, if decided against us, may result in competing uses or require adoption of new, non-infringing intellectual property, which may in turn adversely affect sales and revenues.

There can be no assurance that third parties will not assert infringement or misappropriation claims against us, or assert claims that our rights in our trademarks, service marks, trade names and other intellectual property assets are invalid or unenforceable. Any such claims could have a material adverse effect on us or our franchisees if such claims were to be decided against us. If our rights in our intellectual property were invalidated or deemed unenforceable, we may not be able to prevent third parties from using such intellectual property or similar intellectual property to compete with us, which, in turn, could lead to a decline in our brand and the goodwill associated therewith and the results of operations. If our intellectual property became subject to third-party infringement, misappropriation or other claims, and such claims were decided against us, we may be forced to pay damages, be required to develop or adopt non-infringing intellectual property or be obligated to acquire a license to the intellectual property that is the subject of the asserted claim. There could be significant expenses associated with the defense of any infringement, misappropriation, or other third-party claims. We may also from time to time be required to institute litigation to enforce our trademarks, service marks and other intellectual property. Any such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on our business, financial condition and results of operations regardless of whether we are able to successfully enforce our rights.

Risks Related to Employees and the Workforce

We depend on our executive officers and certain other key employees, the loss of whom could have a material adverse effect on our business, financial condition and results of operations.

We rely upon the accumulated knowledge, skills and experience of our executive officers and certain other key employees. Our chief executive officer has been with us for more than 14 years and our executive officers have a combined total of 78 years of experience in the food service industry. The loss of the services of any of our executive officers could have a material adverse effect on our business, financial condition and results of operations, as we may not be able to find suitable individuals to replace such personnel on a timely basis or without incurring increased costs, or at all. If our executive officers were to leave us or become incapacitated, it might negatively impact our planning and execution of business strategy and operations. We believe that our future success will depend on our continued ability to attract and retain highly skilled and qualified executive personnel. There is a high level of competition for experienced, successful executive personnel in our industry. Our inability to meet our executive staffing requirements in the future could have a material adverse effect on our business, financial condition and results of operations.

Our inability to identify qualified individuals for our workforce could slow our growth and adversely impact our ability to operate our restaurants.

We believe that the “You First” culture of our employee workforce is a key factor to our success. Accordingly, our success depends in part upon our ability to attract, motivate and retain a sufficient number of qualified managers and employees to meet the needs of our existing restaurants and to staff new restaurants. A sufficient number of qualified individuals to fill these positions may be in short supply in some communities. Competition in these communities for qualified staff could require us to pay higher wages and provide greater benefits. We place a heavy emphasis on the qualification and training of our personnel and spend a significant amount of time and money on training our employees. Any inability to recruit and retain qualified individuals may result in higher turnover and increased labor costs, and could compromise the quality of our service, could have a material adverse effect on our business, financial condition and results of operations. Any such inability

 

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could also delay the planned openings of new restaurants and could adversely impact our existing restaurants. The inability to retain or recruit qualified employees, increased costs of attracting qualified employees or delays in restaurant openings could have a material adverse effect on our business, financial condition and results of operations. The COVID-19 pandemic has created staffing complexities for us and other restaurant operators and, on April 13, 2020, to help ensure the safety of our employees, we temporarily suspended all operations at the company-owned restaurants. On May 18, 2020, in conjunction with municipal health and safety mandates, we began to reopen our company-owned restaurants in four phases, and substantially all our restaurants were open by the end of June 2020. We reopened all of our restaurants in a new environment, filled with increased complexity for our employees and managers, a decreased applicant pool for all positions, safety concerns, and ongoing staff call-outs and exclusions due to illness. The COVID-19 pandemic has also resulted in aggressive competition for talent, wage inflation and pressure to improve benefits and workplace conditions to remain competitive. Furthermore, due to the COVID-19 pandemic, we could experience a shortage of labor for restaurant positions as concern over exposure to COVID-19, any shortage of either fully vaccinated workers or those who are able to produce a negative test result on a weekly basis and other factors could decrease the pool of available qualified talent for key functions. In addition, our existing wages and benefits programs, combined with the challenging conditions due to the COVID-19 pandemic and the highly competitive wage pressure resulting from the labor shortage, may be insufficient to attract and retain the best talent. Our failure to recruit and retain new restaurant employees in a timely manner or higher employee turnover levels all could affect our ability to open new restaurants and grow sales at existing restaurants, and we may experience higher than projected labor costs.

The failure to obtain or to properly verify the employment eligibility of our employees could have a material adverse effect on our business, financial condition and results of operations.

Although we require all workers to provide us with government-specified documentation evidencing their employment eligibility, some of our employees may, without our knowledge, be unauthorized workers. We currently participate in the “E-Verify” program, an Internet-based, free program run by the U.S. government to verify employment eligibility, in states in which participation is required. However, use of the “E-Verify” program does not guarantee that we will properly identify all applicants who are ineligible for employment. Unauthorized workers are subject to deportation and may subject us to fines or penalties, and if any of our workers are found to be unauthorized, we could experience adverse publicity that may negatively impact our brand and may make it more difficult to hire and keep qualified employees. Termination of a significant number of employees who are unauthorized employees may disrupt our operations, cause temporary increases in our labor costs as we train new employees and result in adverse publicity. We could also become subject to fines, penalties and other costs related to claims that we did not fully comply with all recordkeeping obligations of federal and state immigration compliance laws. Failure by our franchisees to comply with employment eligibility or immigration laws may also result in adverse publicity and reputational harm to our brand and could subject them to fines, penalties and other costs. These factors could materially adversely affect our business, financial condition and results of operations.

Failure to maintain our corporate culture as we grow could have a material adverse effect on our business, financial condition and results of operations.

We believe that a critical component to our success has been our corporate culture. We have invested substantial time and resources in building our team. As we continue to grow, we may find it difficult to maintain the innovation, teamwork, passion and focus on execution that we believe are important aspects of our corporate culture. Any failure to preserve our culture could negatively impact our operations, including our ability to retain and recruit personnel and to effectively focus on and pursue our corporate objectives. If we cannot maintain our corporate culture as we grow, it could have a material adverse effect on our business, financial condition and results of operations.

 

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Unionization activities may disrupt our operations and increase our costs.

Although none of our employees are currently covered under collective bargaining agreements, our employees may elect to be represented by labor unions in the future. If a significant number of our employees were to become unionized and collective bargaining agreement terms were significantly different from our current compensation arrangements, it could have a material adverse effect on our business, financial condition and results of operations. In addition, a labor dispute involving some or all our employees may harm our reputation, disrupt our operations and reduce our revenues, and resolution of disputes could increase our costs. Further, if we enter into a new market with unionized construction companies, or the construction companies in our current markets become unionized, construction and build-out costs for new restaurants in such markets could materially increase.

Legal and Regulatory Risks

Matters relating to employment and labor law could have a material adverse effect on our business, financial condition and results of operations and restaurant companies have been the target of class action lawsuits and other proceedings alleging violations of workplace and employment laws. Proceedings of this nature are costly, divert management attention and, if successful could result in our payment of substantial damages or settlement costs.

Various federal and state labor laws govern our relationships with our employees. Our operations are subject to the U.S. Occupational Safety and Health Act, which governs worker health and safety, the U.S. Fair Labor Standards Act, which governs such matters as minimum wages and overtime, and a variety of similar federal, state and local laws that govern these and other employment law matters. These laws include employee classifications as exempt or non-exempt, minimum wage requirements, workers’ compensation rates, overtime, family leave, working conditions, safety standards, immigration status, unemployment tax rates, state and local payroll taxes, federal and state laws which prohibit discrimination, citizenship requirements and other wage and benefit requirements for employees classified as non-exempt. Significant additional government regulations and new laws, including mandated increases in minimum wages, changes in exempt and non-exempt status, or mandated benefits such as health insurance could have a material adverse effect on our business, financial condition and results of operations.

Our business is subject to the risk of litigation by employees, consumers, suppliers, franchisees, stockholders or others through private actions, class actions, administrative proceedings, regulatory actions or other litigation. Moreover, claims asserted against franchisees may at times be made against us as a franchisor. The outcome of litigation, particularly class action and regulatory actions, is difficult to assess or quantify. In recent years, restaurant companies, including us, have been subject to lawsuits, including class action lawsuits, alleging violations of federal and state laws regarding workplace and employment conditions, discrimination and similar matters. A number of these lawsuits have resulted in the payment of substantial damages by the defendants. Similar lawsuits have been instituted from time to time alleging violations of various federal and state wage and hour laws regarding, among other things, employee meal deductions, overtime eligibility of managers and failure to pay for all hours worked. Regardless of whether any claims against us are valid or whether we are liable, claims may be expensive to defend and may divert time and money away from our operations and result in increases in our insurance premiums. In addition, they may generate negative publicity, which could reduce customer traffic and sales. Although we maintain what we believe to be adequate levels of insurance, insurance may not be available at all or in sufficient amounts to cover any liabilities with respect to these or other matters. A judgment or other liability in excess of our insurance coverage for any claims or any adverse publicity resulting from claims could have a material adverse effect on our business, financial condition and results of operations.

 

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We could be party to litigation that could distract management, increase our expenses or subject us to material monetary damages or other remedies.

Our customers occasionally file complaints or lawsuits against us alleging we caused an illness or injury they suffered at or after a visit to our restaurants, or that we have problems with food quality or operations. We may also be subject to a variety of other claims arising in the ordinary course of our business, including personal injury claims, contract claims and claims alleging violations of federal and state law regarding workplace and employment matters, equal opportunity, harassment, discrimination and similar matters, and we could become subject to class action or other lawsuits related to these or different matters in the future. In recent years, a number of restaurant companies have been subject to such claims, and some of these lawsuits have resulted in the payment of substantial damages by the defendants. Regardless of whether any claims against us are valid, or whether we are ultimately held liable, claims may be expensive to defend and may divert time and money away from our operations and hurt our performance. A judgment in excess of our insurance coverage for any claims could have a material adverse effect on our business, financial condition and results of operations. In addition, such allegations could result in adverse publicity and negatively impact our reputation, which could have a material adverse effect on our business, financial condition and results of operations.

In addition, the restaurant industry has been subject to a growing number of claims based on the nutritional content of food products sold and disclosure and advertising practices. We may also be subject to this type of proceeding in the future and, even if we are not, publicity about these matters (particularly directed at the fast casual or traditional fast food segments of the industry) may harm our reputation and could have a material adverse effect on our business, financial condition and results of operations.

If we and our franchisees face labor shortages or increased labor costs or health care costs, it could have a material adverse effect on our business, financial condition and results of operations.

Labor is a primary component in the cost of operating our restaurants. If we or our franchisees face labor shortages or increased labor costs because of increased competition for employees, higher employee-turnover rates, unionization of restaurant workers, or increases in the federally-mandated or state-mandated minimum wage, change in exempt and non-exempt status, unemployment tax rates, workers’ compensation rates, overtime, family leave, safety standards, payroll taxes, citizenship requirements or other employee benefits costs (including costs associated with health insurance coverage or workers’ compensation insurance), our operating expenses could increase and our growth could be adversely affected.

We have a substantial number of hourly employees who are paid wage rates at or based on the applicable federal or state minimum wage and increases in the minimum wage will increase our labor costs and the labor costs of our franchisees. Additionally, we operate in states and localities where the minimum wage is significantly higher than the federal minimum wage and in such areas our staff members receive minimum compensation equal to the state’s or locality’s minimum wage. In other geographic areas, some of our staff members may be paid a tip credit wage that is supplemented by gratuities received from our customers. We rely on our employees to accurately disclose the full amount of their tip income, and we base our Federal Insurance Contributions Act tax reporting on the disclosures provided to us by such employees. Increases in the tip credit minimum wage in these states or localities, or under federal law, may have a material adverse effect on our labor costs, and our financial performance. Increases in federal or state minimum wage may also result in increases in the wage rates paid for non-minimum wage positions. We may be unable to increase our menu prices in order to pass future increased labor costs on to our customers, in which case our operating margins would be negatively affected. If menu prices are increased by us or our franchisees to cover increased labor costs, the higher prices could adversely affect demand for our menu items, resulting in lower sales and decreased franchise revenues.

In addition, our success depends in part upon our and our franchisees’ ability to attract, motivate and retain a sufficient number of well-qualified restaurant operators, management personnel and other employees. Qualified individuals needed to fill these positions can be in short supply in some geographic areas. Competition for these

 

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employees could require us or our franchisees to pay higher wages, which could also result in higher labor costs. In addition, limited service restaurants have traditionally experienced relatively high employee turnover rates. Although we have not yet experienced any significant problems in recruiting employees, our and our franchisees’ ability to recruit and retain such individuals may delay the planned openings of new restaurants or result in higher employee turnover in existing restaurants, which could increase our and our franchisees’ labor costs and have a material adverse effect on our business, financial condition and results of operations.

We are also subject in the ordinary course of business to employee claims against us based, among other things, on discrimination, harassment, wrongful termination, or violation of wage and labor laws. Such claims could also be asserted against us by employees of our franchisees. These claims may divert our financial and management resources that would otherwise be used to benefit our operations. The ongoing expense of any resulting lawsuits, and any substantial settlement payment or damage award against us, could have a material adverse effect on our business, financial condition and results of operations.

With the passage in 2010 of the U.S. Patient Protection and Affordable Care Act (the “ACA”), we are required to provide affordable coverage, as defined in the ACA, to all employees, or otherwise be subject to a payment per employee based on the affordability criteria in the ACA. Additionally, some states and localities have passed state and local laws mandating the provision of certain levels of health benefits by some employers. Increased health care and insurance costs could have a material adverse effect on our business, financial condition and results of operations. In addition, changes in federal or state workplace regulations could adversely affect our ability to meet our financial targets.

We are exposed to risks associated with leasing property subject to long-term and non-cancelable leases and may be unable to renew leases at the end of their terms.

Many of our restaurant leases are non-cancelable and typically have initial terms of 10 years, providing for two to four renewal options of five years each as well as rent escalations. Generally, our leases are triple-net leases that require us to pay our share of the costs of real estate taxes, utilities, building operating expenses, insurance and other charges in addition to rent. We generally cannot cancel these leases, and additional sites that we lease are likely to be subject to similar long-term non-cancelable leases. Even if we close a restaurant, we are required to perform our obligations under the applicable lease, which could include, among other things, a payment of the base rent, property taxes, insurance and common area maintenance costs for the balance of the lease term, which would impact our profitability. Due to the COVID-19 pandemic, on April 13, 2020, to help ensure the safety of our employees, we temporarily suspended all operations at the company-owned restaurants and negotiated extensively with our landlords primarily for rent abatements and rent deferrals and certain modified obligations under our leases, but we still may not be able to recover our investment in these properties. In addition, as leases expire for restaurants that we will continue to operate, we may, at the end of the lease term and any renewal period for a restaurant, be unable to negotiate renewals, either on commercially acceptable terms or at all. As a result, we may close or relocate the restaurant, which could subject us to construction costs related to leasehold improvements and other costs and risks. Additionally, the revenues and profit, if any, generated at a relocated restaurant may not equal the revenues and profit generated at the existing restaurant.

Our business is subject to risks related to our sale of alcoholic beverages.

We serve alcoholic beverages at our restaurants. Alcoholic beverage control regulations generally require our restaurants to apply to a state authority and, in certain locations, county or municipal authorities for a license that must be renewed annually and may be revoked or suspended for cause at any time. Alcoholic beverage control regulations relate to numerous aspects of daily operations of our restaurants, including minimum age of patrons and employees, hours of operation, advertising, trade practices, wholesale purchasing, other relationships with alcoholic beverages manufacturers, wholesalers and distributors, inventory control and handling, storage and dispensing of alcoholic beverages. Any future failure to comply with these regulations and obtain or retain licenses could have a material adverse effect on our business, financial condition and results of operations.

 

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We are also subject in certain states to “dram shop” statutes, which generally provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person. We carry liquor liability coverage as part of our existing comprehensive general liability insurance. Recent litigation against restaurant chains has resulted in significant judgments and settlements under dram shop statutes. Because these cases often seek punitive damages, which may not be covered by insurance, such litigation could have a material effect on our business, financial condition and results of operations. Regardless of whether any claims against us are valid or whether we are liable, claims may be expensive to defend and may divert time and money away from operations and hurt our financial performance. A judgment significantly in excess of our insurance coverage or not covered by insurance could have a material adverse effect on our business, financial condition and results of operations.

We are subject to many federal, state and local laws with which compliance is both costly and complex.

The restaurant industry is subject to extensive federal, state and local laws and regulations, including the recently enacted comprehensive health care reform legislation discussed above, those relating to building and zoning requirements and those relating to the preparation and sale of food. Such laws and regulations are subject to change from time to time. The failure to comply with these laws and regulations could adversely affect our results of operations. Typically, licenses, permits and approvals under such laws and regulations must be renewed annually and may be revoked, suspended or denied renewal for cause at any time if governmental authorities determine that our conduct violates applicable regulations. Difficulties or failure to maintain or obtain the required licenses, permits and approvals could adversely affect our existing restaurants and delay or result in our decision to cancel the opening of new restaurants, which could have a material adverse effect on our business, financial condition and results of operations.

The development and operation of our restaurants depend, to a significant extent, on the selection of suitable sites, which are subject to zoning, land use, environmental, traffic and other regulations and requirements. We are also subject to licensing and regulation by state and local authorities relating to health, sanitation, safety and fire standards.

There is also a potential for increased regulation of certain food establishments in the United States, where compliance with a Hazard Analysis and Critical Control Points (“HACCP”) approach would be required. HACCP refers to a management system in which food safety is addressed through the analysis and control of potential hazards from production, procurement and handling, to manufacturing, distribution and consumption of the finished product. Many states have required restaurants to develop and implement HACCP Systems, and the United States government continues to expand the sectors of the food industry that must adopt and implement HACCP programs. For example, the Food Safety Modernization Act (“FSMA”), signed into law in January 2011, granted the U.S. Food and Drug Administration new authority regarding the safety of the entire food system, including through increased inspections and mandatory food recalls. Although restaurants are specifically exempted from or not directly implicated by some of these requirements, we anticipate that the requirements may impact our industry. Additionally, our suppliers may initiate or otherwise be subject to food recalls that may impact the availability of certain products, result in adverse publicity or require us to take actions that could be costly for us or otherwise impact our business. We may be required to incur additional time and resources to comply with new food safety requirements made under FSMA or other federal or state food safety regulations. Failure to comply with the laws and regulatory requirements of federal, state and local authorities could result in, among other things, revocation of required licenses, administrative enforcement actions, fines and civil and criminal liability. In addition, many applicable laws could require us to expend significant funds to make modifications to our restaurants or operations to comply with such laws. Compliance with these laws can be costly and may increase our exposure to litigation or governmental investigations or proceedings.

We are subject to the Americans with Disabilities Act (the “ADA”), which, among other things, requires our restaurants to meet federally mandated requirements for the disabled. The ADA prohibits discrimination in employment and public accommodations on the basis of disability. Under the ADA, we could be required to

 

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expend funds to modify our restaurants to provide service to, or make reasonable accommodations for the employment of, disabled persons. In addition, our employment practices are subject to the requirements of the Immigration and Naturalization Service relating to citizenship and residency.

In addition, our franchising activities are subject to laws enacted by a number of states, rules and regulations promulgated by the FTC and certain rules and requirements regulating licensing activities in foreign countries. Failure to comply with new or existing licensing laws, rules and regulations in any jurisdiction or to obtain required government approvals could negatively affect our licensing sales and our relationships with our franchisees.

The impact of current laws and regulations, the effect of future changes in laws or regulations that impose additional requirements and the consequences of litigation relating to current or future laws and regulations, or our inability to respond effectively to significant regulatory or public policy issues, could increase our compliance and other costs of doing business and could have a material adverse effect on our business, financial condition and results of operations. Failure to comply with the laws and regulatory requirements of federal, state and local authorities could result in, among other things, revocation of required licenses, administrative enforcement actions, fines and civil and criminal liability. In addition, certain laws, including the ADA, could require us to expend significant funds to make modifications to our restaurants if we failed to comply with applicable standards. Compliance with all these laws and regulations can be costly and can increase our exposure to litigation or governmental investigations or proceedings.

Risks Related to Accounting and Financial Reporting Matters

Changes in accounting principles applicable to us could have a material adverse effect on our financial condition and results of operations.

Generally accepted accounting principles in the U.S. are subject to interpretation by the Financial Accounting Standards Board (“FASB”), the American Institute of Certified Public Accountants, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our financial condition and results of operations, and could affect the reporting of transactions completed before the announcement of a change.

An impairment in the carrying value of our goodwill or indefinite-lived intangible assets could have a material adverse effect on our financial condition and results of operations.

As of June 27, 2021, we had $345.2 million of goodwill and $137.8 million of indefinite-lived intangible assets. We test goodwill and indefinite-lived intangible assets for impairment annually on the first day of the fourth quarter of each fiscal year and whenever events or changes in circumstances indicate that impairment may have occurred. We performed a quantitative annual impairment assessment of goodwill and indefinite-lived intangible assets in April 2020 as the effect of the COVID-19 pandemic was considered a triggering event indicating that the carrying value of goodwill and indefinite-lived intangible assets may not be recoverable. We also performed an annual impairment test for both goodwill and indefinite-lived intangible assets on the first day of the fourth quarter of fiscal 2020. We did not recognize any impairment losses in fiscal 2020. Following our strategic review of our restaurant operations and our assessment of The Egg & I tradename in the second quarter of fiscal 2019, we recognized a non-cash impairment charge of $29.0 million related to the indefinite-lived intangible asset and the remaining net book value of $0.3 million was amortized through the end of fiscal 2019. We performed a qualitative annual impairment test for both goodwill and indefinite-lived intangible assets on the first day of the fourth quarter of fiscal 2019 and we did not recognize any additional impairment losses in fiscal 2019 as a result of this assessment.

We cannot accurately predict the amount and timing of any impairment of assets and an impairment test in the future may indicate that an impairment has occurred. In the event that the book value of goodwill or other

 

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indefinite-lived intangible assets is impaired, any such impairment would be charged to earnings in the period of impairment and could have a material adverse effect on our financial condition and results of operations. See Note 6, Goodwill and Note 7, Intangible Assets, Net in the notes to the audited consolidated financial statements included elsewhere in this prospectus for additional information.

Changes to estimates related to our long-lived assets and definite-lived intangible assets or operating results that are lower than our current estimates at certain restaurant locations may cause us to incur impairment losses on certain long-lived assets, which may adversely affect our results of operations.

Changes to estimates related to our property, fixtures and equipment and definite-lived intangible assets or operating results that are lower than our current estimates at certain restaurant locations may cause us to incur impairment losses or accelerate the amortization on certain long-lived assets, which may adversely affect our results of operations. We evaluated our long-lived assets at company-owned restaurants for impairment in April 2020 as the effect of the COVID-19 pandemic was considered a triggering event indicating that the carrying values of our property, fixtures and equipment and definite-lived intangible assets may not be recoverable and we did not recognize any impairment losses. Following our strategic review of our restaurant operations and our assessment of The Egg & I franchise rights in the second quarter of fiscal 2019, we recognized a non-cash impairment charge of $3.2 million related to the definite-lived intangible assets and accelerated the amortization of the remaining net book value through the end of fiscal 2019. The remaining net book value of the definite-lived intangible assets were amortized through the end of fiscal 2019. See Note 7, Intangible Assets, Net in the notes to the audited consolidated financial statements included elsewhere in this prospectus for additional information.

Compliance with environmental laws or liabilities arising from environmental laws could increase our operating expenses and could have a material adverse effect on our business, financial condition and results of operations.

We are subject to federal, state and local laws, regulations and ordinances that:

 

   

govern activities or operations that may have adverse environmental effects, such as discharges to air and water, as well as waste handling and disposal practices for solid and hazardous wastes; and

 

   

impose liability for the costs of cleaning up, and damage resulting from, sites of past spills, disposals or other releases of hazardous materials.

In particular, under applicable environmental laws, we may be responsible for remediation of environmental conditions and may be subject to associated liabilities, including liabilities for clean-up costs and personal injury or property damage, relating to our restaurants and the land on which our restaurants are located, regardless of whether such environmental conditions were created by us or by a prior owner or tenant. These environmental laws provide for significant fines and penalties for non-compliance and liabilities for remediation, sometimes without regard to whether the owner or operator of the property knew of, or was responsible for, the release or presence of hazardous toxic substances. Third parties may also make claims against owners or operators of properties for personal injuries and property damage associated with releases of, or actual or alleged exposure to, such hazardous or toxic substances at, on or from our restaurants. If we are found liable for the costs of remediating contamination at any of our properties, our operating expenses would likely increase and such finding could have a material adverse effect on our business, financial condition and results of operations. Some of our leases provide for indemnification of our landlords for environmental contamination, clean-up or owner liability. See “Business – Environmental Matters.”

Further, environmental laws and regulations, and the administration, interpretation and enforcement thereof, are subject to change and may become more stringent in the future, which could have a material adverse effect on our business, financial condition and results of operations.

 

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Our insurance may not provide adequate levels of coverage against claims.

We believe that we maintain insurance customary for businesses of our size and type. However, there are types of losses we may incur that cannot be insured against or that we believe are not economically reasonable to insure. Such losses could have a material adverse effect on our business, financial condition and results of operations.

Natural disasters, unusual weather conditions, pandemic outbreaks, political events, war and terrorism could disrupt our business and result in lower sales, increased operating costs and capital expenditures.

Our Home Office, company-owned and franchised restaurant locations, third-party sole distributor and its facilities, as well as certain of our vendors and customers, are located in areas that have been and could be subject to natural disasters such as floods, hurricanes, tornadoes, fires or earthquakes. As a result of the concentration of our restaurants in the southeast portion of the United States, adverse weather conditions or other extreme changes in the weather, including those that may result in electrical and technological failures, may disrupt our and our franchisees’ business and may adversely affect our and our franchisees’ ability to obtain food and supplies and sell menu items. Our business may be harmed if our or our franchisees’ ability to obtain food and supplies and sell menu items is impacted by any such events, any of which could influence customer trends and purchases and may negatively impact our and our franchisees’ revenues, properties or operations. Such events could result in physical damage to one or more of our or our franchisees’ properties, the temporary closure of some or all of our company-owned restaurants, franchised restaurants and third-party sole distributor, the temporary lack of an adequate work force in a market, temporary or long-term disruption in the transport of goods, delay in the delivery of goods and supplies to our company-owned and franchised restaurants and third-party sole distributor, disruption of our technology support or information systems, or fuel shortages or dramatic increases in fuel prices, all of which would increase the cost of doing business. These events also could have indirect consequences such as increases in the costs of insurance if they result in significant loss of property or other insurable damage. Any of these factors, or any combination thereof, could have a material adverse effect on our business, financial condition and results of operations.

We have identified material weaknesses in our internal control over financial reporting, which could result in us failing to detect material misstatements of our consolidated financial statements or failing to prevent fraud. If our remediation of the material weaknesses is not effective, or if we otherwise fail to maintain effective internal control over financial reporting in the future, we may not be able to accurately or timely report our financial condition or results of operations, which, in turn, could negatively impact the market value of our common stock.

Upon becoming a public company, we will be required to comply with Section 404 of the Sarbanes-Oxley Act (“Section 404”), which will require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting commencing with our second annual report after this offering. In addition, under Section 404 our independent registered public accounting firm will also need to attest to the effectiveness of our internal control over financial reporting in the future to the extent that we are no longer an emerging growth company. To achieve compliance with Section 404 within the prescribed period, we will need to continue to dedicate internal resources, engage outside consultants and continue to execute on a detailed work plan to assess and document the adequacy of our internal control over financial reporting, continue taking steps to improve control processes, as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a risk that we will not be able to conclude, within the prescribed timeframe or at all, that our internal control over financial reporting is effective.

 

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In connection with the preparation of our consolidated financial statements, we identified material weaknesses in our internal control over financial reporting. The material weaknesses we identified were as follows:

We did not design and maintain an effective internal control environment commensurate with the financial reporting requirements of a public company. Specifically, we lacked a sufficient complement of personnel with an appropriate level of knowledge, experience and training in internal control over financial reporting and the reporting requirements of a public company. Additionally, we did not formally delegate authority or establish appropriate segregation of duties in our finance and accounting functions. As a result, we did not perform an effective risk assessment nor did we design and maintain internal controls in response to the risks of material misstatement. These material weaknesses contributed to the following material weaknesses:

 

   

We did not design and maintain effective controls over the period-end financial reporting process, including controls over the preparation and review of account reconciliations and journal entries, and the appropriate classification and presentation of accounts and disclosures in the consolidated financial statements. This material weakness resulted in adjustments to accruals and within the statement of cash flows in our fiscal 2018 consolidated financial statements, which were recorded prior to the issuance of our fiscal 2018 consolidated financial statements.

 

   

We did not design and maintain effective controls over the accounting for income taxes over the recording of deferred income taxes and the assessment of the realization of deferred tax assets. This material weakness resulted in adjustments to the income tax benefit, deferred taxes, goodwill, and liabilities in our fiscal 2018 consolidated financial statements, which were recorded prior to the issuance of our fiscal 2018 consolidated financial statements. This material weakness also resulted in immaterial adjustments to the income tax benefit and deferred taxes and related disclosures in the fiscal 2017 and 2019 consolidated financial statements, which were corrected in the fiscal 2019 and 2020 consolidated financial statements, respectively.

 

   

We did not design and maintain effective controls over information technology general controls for information systems and applications that are relevant to the preparation of the consolidated financial statements. Specifically, we did not design and maintain: sufficient user access controls to ensure appropriate segregation of duties and adequately restrict user and privileged access to financial applications, programs and data to appropriate Company personnel; program change management controls to ensure that information technology program and data changes affecting financial information technology applications and underlying accounting records are identified, tested, authorized and implemented appropriately; computer operations controls to ensure that critical batch jobs are monitored, privileges are appropriately granted, and data backups are authorized and monitored; and testing and approval controls for program development to ensure that new software development is aligned with business and information technology requirements. The deficiencies, when aggregated, could impact our ability to maintain effective segregation of duties, as well as the effectiveness of information technology-dependent controls (such as automated controls that address the risk of material misstatement to one or more assertions, along with the information technology controls and underlying data that support the effectiveness of system-generated data and reports) that could result in misstatements potentially impacting all financial statement accounts and disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. Therefore, we concluded the information technology deficiencies resulted in a material weakness. However, these information technology deficiencies did not result in any misstatements to the consolidated financial statements.

Additionally, each of the aforementioned material weaknesses could result in a misstatement of the consolidated financial statements that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.

 

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We have taken certain measures to remediate the material weaknesses described above, including hiring additional personnel, designing and implementing formal procedures and controls supporting the Company’s period-end financial reporting process, such as controls over the preparation and review of account reconciliations and disclosures in the consolidated financial statements and designing certain information technology general controls. We are in the process of implementing additional measures designed to enable us to meet the requirements of being a public company, improve our internal control over financial reporting and remediate the control deficiencies that led to the material weaknesses, including hiring additional information technology, finance and accounting personnel, evaluating our financial and information technology control environment and augmenting our internal controls with new accounting policies and procedures, and designing and implementing financial reporting controls, income tax controls, and information technology general controls.

While we believe that these measures will improve our internal control over financial reporting, the implementation of these measures is ongoing, and we cannot assure you that we will be successful in doing so or that these measures will significantly improve or remediate the material weaknesses described above. We cannot assure you that the measures we have taken to date, and are continuing to implement, will be sufficient to remediate the material weaknesses we have identified or avoid potential future material weaknesses. If the steps we take do not correct the material weaknesses in a timely manner, we will be unable to conclude that we maintain effective internal control over financial reporting. We also cannot assure you that there will not be any additional material weaknesses in our internal control over financial reporting in the future.

We are working to remediate the material weaknesses. At this time, we cannot provide an estimate of costs expected to be incurred in connection with implementing a remediation plan; however, these remediation measures will be time consuming and will place significant demands on our financial and operational resources.

We may not be able to remediate any material weaknesses prior to the deadline imposed by Section 404(a) of the Sarbanes-Oxley Act for management’s assessment of internal control over financial reporting. The failure to achieve and maintain effective internal control over financial reporting could have a material adverse effect on our business, financial condition and results of operations. In the event that we are not able to successfully remediate the existing material weaknesses in our internal control over financial reporting or identify additional material weaknesses, or if our internal control over financial reporting is perceived as inadequate or it is perceived that we are unable to produce timely or accurate consolidated financial statements, investors may lose confidence in our results of operations, the price of our common stock could decline, we could become subject to investigations by the stock exchange on which our common stock is listed, the SEC or other regulatory agencies, which could require additional financial and management resources, or our common stock may not be able to remain listed on such exchange.

Risks Related to Our Indebtedness

We might require additional capital to support business growth and this capital might not be available.

We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges or opportunities, including the need to open additional restaurants, develop new menu items or enhance our existing menu items, and enhance our operating infrastructure. Accordingly, we may need to engage in equity or debt financings to secure additional funds. In addition, we may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited, which could have a material adverse effect on our business, financial condition and results of operations.

 

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Our level of indebtedness could have a material adverse effect on our business, financial condition and results of operations.

The total principal amount of debt outstanding under our Senior Credit Facilities, excluding finance lease liabilities, financing obligations and unamortized debt discount and deferred issuance costs as of June 27, 2021 was $288.8 million. Our indebtedness could have significant effects on our business, such as:

 

   

limiting our ability to borrow additional amounts to fund capital expenditures, acquisitions, debt service requirements, execution of our growth strategy and other purposes;

 

   

limiting our ability to make investments, including acquisitions, loans and advances, and to sell, transfer or otherwise dispose of assets;

 

   

requiring us to dedicate a substantial portion of our cash flow from operations to pay principal and interest on our borrowings, which would reduce availability of our cash flow to fund working capital, capital expenditures, acquisitions, execution of our growth strategy and other general corporate purposes;

 

   

making us more vulnerable to adverse changes in general economic, industry and competitive conditions, in government regulation and in our business by limiting our ability to plan for and react to changing conditions;

 

   

placing us at a competitive disadvantage compared with our competitors that have less debt; and

 

   

exposing us to risks inherent in interest rate fluctuations because our borrowings are at variable rates of interest, which could result in higher interest expense in the event of increases in interest rates.

In addition, we may not be able to generate sufficient cash flow from our operations to repay our indebtedness when it becomes due and to meet our other cash needs. If we are not able to pay our borrowings as they become due, we will be required to pursue one or more alternative strategies, such as selling assets, refinancing or restructuring our indebtedness or selling additional debt or equity securities. We may not be able to refinance our debt or sell additional debt or equity securities or our assets on favorable terms, if at all, and if we must sell our assets, it may negatively affect our financial condition and results of operations.

Pursuant to the Credit Agreement (as defined in “Description of Material Indebtedness”), we are required to maintain, on a consolidated basis, a maximum ratio of consolidated total net debt to consolidated EBITDA (with certain adjustments as set forth in the Senior Credit Facilities), tested as of the last day of each fiscal quarter (the “Leverage Financial Covenant”). Our ability to borrow under our Senior Credit Facilities depends on our compliance with this financial covenant. Events beyond our control, including changes in general economic and business conditions, may affect our ability to satisfy the financial covenant. We cannot assure you that we will satisfy the financial covenant in the future, or that our lenders will waive any failure to satisfy the financial covenant.

The failure to comply with the covenants under our Credit Agreement or the volatile credit and capital markets could have a material adverse effect on our financial condition.

Our ability to manage our debt is dependent on our level of positive cash flow from company-owned and franchised restaurants. An economic downturn may negatively impact our cash flows. Credit and capital markets can be volatile, which could make it more difficult for us to refinance our existing debt or to obtain additional debt or equity financings in the future. Such constraints could increase our costs of borrowing and could restrict our access to other potential sources of future liquidity. Our failure to comply with the covenants under the Credit Agreement or to have sufficient liquidity to make interest and other payments required by our debt could result in a default of such debt and acceleration of our borrowings, which could have a material adverse effect on our business, financial condition and results of operations.

 

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The interest rates of loans under our Credit Agreement are priced using a spread over LIBOR.

LIBOR, the London interbank offered rate, is the basic rate of interest used in lending between banks on the London interbank market and is widely used as a reference for setting the interest rate on loans globally. We typically use LIBOR as a reference rate for the Senior Credit Facilities under our Credit Agreement such that the interest due to the applicable lenders with respect to a term loan or revolving loan under our Senior Credit Facilities is calculated using LIBOR plus an applicable spread above LIBOR. On July 27, 2017, the United Kingdom’s Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. On March 5, 2021 the ICE Benchmark Administration, which administers LIBOR, and the FCA announced that all LIBOR settings will either cease to be provided by any administrator, or no longer be representative, immediately after December 31, 2021 for all 1-week and 2-month U.S. dollar LIBOR settings and, immediately after June 30, 2023, for the remaining U.S. dollar LIBOR settings. The Alternative Reference Rates Committee, a steering committee convened by the U.S. Federal Reserve Board and comprised of large U.S. financial institutions, recommended the Secured Overnight Financing Rate as an alternative to LIBOR. If LIBOR ceases to be available, we may seek to amend the Credit Agreement to replace LIBOR with a new standard to the extent one is established. At this time, due to a lack of consensus as to what rate or rates may become accepted alternatives to LIBOR, it is impossible to predict the effect of any such alternatives on our liquidity, interest expense, or the value of the Senior Credit Facilities.

Risks Related to Our Company and Organizational Structure

The interests of Advent may conflict with our interests or the interests of the holders of our common stock in the future.

Advent engages in a range of investing activities, including investments in restaurants and other consumer-related companies in particular. In the ordinary course of its business activities, Advent may engage in activities where its interests conflict with our interests or those of our stockholders. Our amended and restated certificate of incorporation will contain provisions renouncing any interest or expectancy held by our directors affiliated with Advent in certain corporate opportunities. Accordingly, the interests of Advent may supersede ours, causing them or their affiliates to compete against us or to pursue opportunities instead of us, for which we have no recourse. Such actions on the part of Advent and inaction on our part could have a material adverse effect on our business, financial condition and results of operations. In addition, Advent may have an interest in pursuing acquisitions, divestitures and other transactions that, in its judgment, could enhance its investment in us, even though such transactions might involve risks to you, such as debt-financed acquisitions.

First Watch Restaurant Group, Inc. is a holding company with no operations and relies on its operating subsidiaries to provide it with funds necessary to meet its financial obligations and to pay dividends.

First Watch Restaurant Group, Inc. is a holding company with no material direct operations. First Watch Restaurant Group, Inc.’s principal assets are the equity interests it indirectly holds in its operating subsidiaries which own our operating assets. As a result, First Watch Restaurant Group, Inc. is dependent on loans, dividends and other payments from its operating subsidiaries to generate the funds necessary to meet its financial obligations and to pay dividends on its common stock. Its subsidiaries are legally distinct from First Watch Restaurant Group, Inc. and may be prohibited or restricted from paying dividends, including pursuant to the restrictions contained in our Senior Credit Facilities described below, or otherwise making funds available to us under certain conditions. Although First Watch Restaurant Group, Inc. does not expect to pay dividends on its common stock for the foreseeable future, if it is unable to obtain funds from its subsidiaries, it may be unable to, or its board of directors (the “Board”) may exercise its discretion not to, pay dividends.

Our management does not have experience managing a public company and our current resources may not be sufficient to fulfill our public company obligations.

Following the closing of this offering, we will be subject to various regulatory requirements, including those of the SEC and Nasdaq. These requirements include record keeping, financial reporting and corporate

 

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governance rules and regulations. Our management team does not have experience in managing a public company and, historically, has not had the resources typically found in a public company. Our internal infrastructure may not be adequate to support our increased reporting obligations and we may be unable to hire, train or retain necessary staff and may be reliant on engaging outside consultants or professionals to overcome our lack of experience or employees. If our internal infrastructure is inadequate, we are unable to engage outside consultants at a reasonable rate or attract talented employees to perform these functions or are otherwise unable to fulfill our public company obligations, it could have a material adverse effect on our business, financial condition and results of operations.

For as long as we are an emerging growth company, we will not be required to comply with certain reporting requirements, including those relating to accounting standards and disclosure about our executive compensation, that apply to other public companies.

We are an emerging growth company, as defined in Section 2(a) of the Securities Act, as modified by the JOBS Act. As such, we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and of stockholder approval of any golden parachute payments not previously approved. We may take advantage of some of these exemptions. If we do, we do not know if some investors will find our common stock less attractive as a result. The result may be a less-active trading market for our common stock and our stock price may be more volatile.

In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

We could remain an emerging growth company for up to five years or until the earliest of (a) the last day of the first fiscal year in which our annual gross revenues exceed $1.07 billion, (b) the date that we become a large accelerated filer as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (c) the date on which we have issued more than $1 billion in non-convertible debt securities in the preceding three-year period.

Delaware law and our organizational documents, as well as our existing and future debt agreements, may impede or discourage a takeover, which could deprive our investors of the opportunity to receive a premium for their shares.

We are a Delaware corporation, and the anti-takeover provisions of Delaware law impose various impediments to the ability of a third party to acquire control of us, even if a change of control would be beneficial to our existing stockholders. In addition, provisions of our amended and restated certificate of incorporation and bylaws that will be effective upon closing of this offering may make it more difficult for, or prevent a third party from, acquiring control of us without the approval of our Board. Among other things, these provisions:

 

   

provide for a classified Board with staggered three-year terms;

 

   

do not permit cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates;

 

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delegate the sole power of a majority of the Board to fix the number of directors;

 

   

provide the power of our Board to fill any vacancy on our Board, whether such vacancy occurs as a result of an increase in the number of directors or otherwise;

 

   

authorize the issuance of “blank check” preferred stock without any need for action by stockholders;

 

   

eliminate the ability of stockholders to call special meetings of stockholders; and

 

   

establish advance notice requirements for nominations for election to our Board or for proposing matters that can be acted on by stockholders at stockholder meetings.

In addition, our Senior Credit Facilities impose, and we anticipate that documents governing our future indebtedness may impose, limitations on our ability to enter into change of control transactions. Thereunder, the occurrence of a change of control transaction could constitute an event of default permitting acceleration of the indebtedness, thereby impeding our ability to enter into certain transactions.

The foregoing factors, as well as the significant common stock ownership by Advent could impede a merger, takeover, or other business combination, or discourage a potential investor from making a tender offer for our common stock, which, under certain circumstances, could reduce the market value of our common stock. See “Description of Capital Stock.”

Our amended and restated certificate of incorporation will designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders and will designate the federal district courts of the United States of America as the sole and exclusive forum for claims arising under the Securities Act of 1933, as amended, which, in each case, could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees, agents or other stockholders.

Our amended and restated certificate of incorporation provides that, unless we consent in writing to an alternative forum, the Court of Chancery of the State of Delaware or, if the Court of Chancery lacks jurisdiction, a state court located within the State of Delaware or the federal district court for the District of Delaware, shall, to the fullest extent permitted by law, be the sole and exclusive forum for any (a) derivative action or proceeding brought on behalf of the Corporation; (b) action asserting a claim of breach of a fiduciary duty owed by or other wrongdoing by any current or former director, officer, employee, agent or stockholder of the Corporation to the Corporation or the Corporation’s stockholders; (c) action asserting a claim arising under any provision of the Delaware General Corporation Law (the “DGCL”) or this Certificate or the Bylaws (as either may be amended from time to time), or as to which the DGCL confers jurisdiction on the Court of Chancery of the State of Delaware; or (d) action asserting a claim governed by the internal affairs doctrine. For the avoidance of doubt, our amended and restated certificate of incorporation also provides that the foregoing exclusive forum provision does not apply to actions brought to enforce any liability or duty created by the Securities Act or the Exchange Act, or any other claim or cause of action for which the federal courts have exclusive jurisdiction.

Our amended and restated certificate of incorporation also provides that, unless we consent in writing to an alternative forum, the federal district courts of the United States of America shall be the sole and exclusive forum for the resolution of any action asserting a claim arising under the Securities Act or the rules and regulations promulgated thereunder. Pursuant to the Exchange Act, claims arising thereunder must be brought in federal district courts of the United States of America.

To the fullest extent permitted by law, any person or entity purchasing or otherwise acquiring or holding any interest in any shares of our capital stock shall be deemed to have notice of and consented to the forum provision in our amended and restated certificate of incorporation. This choice of forum provision may limit a stockholder’s ability to bring a claim in a different judicial forum, including one that it may find favorable or convenient for a specified class of disputes with us or our directors, officers, other stockholders, or employees, which may

 

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discourage such lawsuits, make them more difficult or expensive to pursue, and result in outcomes that are less favorable to such stockholders than outcomes that may have been attainable in other jurisdictions. By agreeing to this provision, however, stockholders will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder. The enforceability of similar choice of forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings, and it is possible that a court could find these types of provisions to be inapplicable or unenforceable. If a court were to find the choice of forum provisions in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could have a material adverse effect on our business, financial condition and results of operations.

Risks Related to this Offering and Ownership of Our Common Stock

Future offerings of debt or equity securities by us may have a material adverse effect on the market price of our common stock

In the future, we may attempt to obtain financing or to further increase our capital resources by issuing additional shares of our common stock or by offering debt or other equity securities, including senior or subordinated notes, debt securities convertible into equity or shares of preferred stock.

Any future debt financing could involve restrictive covenants relating to our capital-raising activities and other financial and operational matters, which might make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. Moreover, if we issue debt securities, the debt holders would have rights to make claims on our assets senior to the rights of our holders of our common stock. The issuance of additional shares of our common stock or other equity securities or securities convertible into equity may dilute the economic and voting rights of our existing stockholders or reduce the market price of our common stock or both. Debt securities convertible into equity could be subject to adjustments in the conversion ratio pursuant to which certain events may increase the number of equity securities issuable upon conversion. Preferred shares could have a preference with respect to liquidating distributions or a preference with respect to dividend payments that could limit our ability to pay dividends to the holders of our common stock. Our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, which may have a material adverse effect on the amount, timing, or nature of our future offerings. Thus, holders of our common stock bear the risk that our future offerings may reduce the market price of our common stock and dilute their stockholdings in us.

If the ownership of our common stock continues to be highly concentrated, it may prevent you and other minority stockholders from influencing significant corporate decisions and may result in conflicts of interest.

Following the closing of this offering, Advent will indirectly beneficially own approximately 81% of our outstanding common stock, or approximately 79% if the underwriters’ option to purchase additional shares is fully exercised. As a result, Advent will beneficially own shares sufficient for majority votes over all matters requiring stockholder votes, including: the election of directors; mergers, consolidations and acquisitions; the sale of all or substantially all of our assets and other decisions affecting our capital structure; amendments to our certificate of incorporation or our bylaws; and our winding up and dissolution.

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

 

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price of our common stock because investors may perceive disadvantages in owning shares in a company with significant stockholders. See “Principal Stockholders” and “Description of Capital Stock – Anti-takeover Provisions.”

As a controlled company, we will not be subject to all of the corporate governance rules of Nasdaq.

Upon the listing of our common stock on Nasdaq in connection with this offering, we will be considered a “controlled company” under the rules of Nasdaq. Controlled companies are exempt from the corporate governance rules requiring that listed companies have (i) a majority of the board of directors consist of “independent” directors under the listing standards of Nasdaq, (ii) independent director oversight of director nominations and (iii) a compensation committee composed entirely of independent directors. Following this offering, although we are eligible to use some or all of these exemptions, we expect that our board of directors will be comprised of a majority of independent directors, and that our nominating and corporate governance committee and compensation committee will consist entirely of independent directors. However, if we are to use some or all of these exemptions in the future, you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of Nasdaq. See “Management.”

We do not anticipate paying any dividends on our common stock in the foreseeable future.

We do not expect to declare or pay any cash or other dividends in the foreseeable future on our common stock because we intend to use cash flow generated by operations to grow our business. Our Senior Credit Facilities restrict our ability to pay cash dividends on our common stock. We may also enter into other credit agreements or other borrowing arrangements in the future that restrict or limit our ability to pay cash dividends on our common stock. As a result, you may not receive any return on an investment in our common stock unless you sell our common stock for a price greater than that which you paid for it. See “Dividend Policy.”

Our quarterly results of operations may fluctuate significantly and could fall below the expectations of securities analysts and investors due to seasonality and other factors, some of which are beyond our control, resulting in a decline in our stock price.

Our quarterly results of operations may fluctuate due principally to seasonal factors and the timing of holidays. Accordingly, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for any year and same-restaurant sales growth for any particular future period may decrease. In addition, as we expand our number of restaurants in cold weather climates, the seasonality of our business may be amplified. In the future, results of operations may fall below the expectations of securities analysts and investors. In that event, the price of our common stock could be adversely impacted.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of us, the trading price for our common stock would be negatively impacted. If we obtain securities or industry analyst coverage and if one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if our results of operations do not meet the expectations of the investor community, or one or more of the analysts who cover our company downgrade our stock, our stock price could decline. As a result, you may not be able to sell shares of our common stock at prices equal to or greater than the initial public offering price.

 

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No market currently exists for our common stock and we cannot assure you that an active market will develop for such stock.

Prior to this offering, there has been no public market for our common stock. The initial public offering price for our common stock has been determined through negotiations among us and the representatives of the underwriters and may not be indicative of the market price of our common stock after this offering or to any other established criteria of the value of our business. If you purchase shares of our common stock, you may not be able to resell those shares at or above the initial public offering price. We cannot predict the extent to which investor interest in us will lead to the development of an active trading market on Nasdaq or otherwise or how liquid that market might become. An active public market for our common stock may not develop or be sustained after this offering. If an active public market does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at a price that is attractive to you or at all.

The market price and trading volume of our common stock may be volatile, which could result in rapid and substantial losses for our stockholders, and you may lose all or part of your investment.

Shares of our common stock sold in this offering may experience significant volatility on Nasdaq. An active, liquid and orderly market for our common stock may not be sustained, which could depress the trading price of our common stock or cause it to be highly volatile or subject to wide fluctuations. The market price of our common stock may fluctuate or may decline significantly in the future and you could lose all or part of your investment. Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common stock include:

 

   

variations in our quarterly or annual results of operations;

 

   

changes in our earnings estimates (if provided) or differences between our actual results of operations and those expected by investors and analysts;

 

   

restaurant closures or modified operating hours due to the COVID-19 pandemic;

 

   

reduced customer traffic due to illness, quarantine or government or self-imposed restrictions placed on our restaurants’ operations;

 

   

changes in consumer spending behaviors (e.g. continued practice of social distancing, decrease in consumer confidence in general macroeconomic conditions and a decrease in consumer discretionary spending);

 

   

the contents of published research reports about us or our industry or the failure of securities analysts to cover our common stock;

 

   

additions or departures of key management personnel;

 

   

any increased indebtedness we may incur in the future;

 

   

announcements by us or others and developments affecting us;

 

   

actions by institutional stockholders;

 

   

litigation and governmental investigations;

 

   

legislative or regulatory changes;

 

   

judicial pronouncements interpreting laws and regulations;

 

   

changes in government programs;

 

   

changes in market valuations of similar companies;

 

   

speculation or reports by the press or investment community with respect to us or our industry in general;

 

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announcements by us or our competitors of significant contracts, acquisitions, dispositions, strategic relationships, joint ventures or capital commitments; and

 

   

general market, political and economic conditions, including local conditions in the markets in which we operate.

These broad market and industry factors may decrease the market price of our common stock, regardless of our actual financial performance. The stock market in general has from time to time experienced extreme price and volume fluctuations, including recently. In addition, in the past, following periods of volatility in the overall market and decreases in the market price of a company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources, which could have a material adverse effect on our business, financial condition and results of operations.

The market price of our common stock could be negatively affected by sales of substantial amounts of our common stock in the public markets.

After this offering, we will have 57,629,596 shares of common stock outstanding. Of our issued and outstanding shares, all the common stock sold in this offering will be freely transferable, except for any shares held by our “affiliates,” as that term is defined in Rule 144 under the Securities Act. Following closing of this offering, approximately 81% of our outstanding common stock, or approximately 79% if the underwriters exercise their option to purchase additional shares in full, will be indirectly beneficially owned by Advent, and can be resold into the public markets in the future in accordance with the requirements of Rule 144. See “Shares Eligible For Future Sale.”

We and our officers, directors and holders of substantially all of our outstanding capital stock and other securities have agreed, subject to specified exceptions, not to directly or indirectly:

 

   

sell, offer, contract or grant any option to sell (including any short sale), pledge, transfer, establish an open “put equivalent position” within the meaning of Rule 16a-1(h) under the Exchange Act, or

 

   

otherwise dispose of any shares of common stock, options or warrants to acquire shares of common stock, or securities exchangeable or exercisable for or convertible into shares of common stock currently or hereafter owned either of record or beneficially, or

 

   

publicly announce an intention to do any of the foregoing for a period of 180 days after the date of this prospectus without the prior written consent of the representatives of the underwriters.

This restriction terminates after the close of trading of the common stock on and including the 180th day after the date of this prospectus. The representatives of the underwriters may, in their sole discretion and at any time or from time to time before the termination of the 180-day period release all or any portion of the securities subject to lock-up agreements. See “Underwriting – No Sales of Similar Securities.”

The market price of our common stock may decline significantly when the restrictions on resale by our existing stockholders lapse. A decline in the price of our common stock might impede our ability to raise capital through the issuance of additional common stock or other equity securities.

The future issuance of additional common stock in connection with the 2021 Plan will dilute all other stockholdings.

After this offering, we will have an aggregate of 238,336,332 shares of common stock authorized but unissued and not reserved for issuance under the 2021 Plan. We may issue all these shares of common stock without any action or approval by our stockholders, subject to certain exceptions. Any common stock issued in connection with the 2021 Plan would dilute the percentage ownership held by the investors who purchase common stock in this offering.

 

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You will incur immediate dilution as a result of this offering.

If you purchase common stock in this offering, you will pay more for your shares than the amounts paid by existing stockholders for their shares. As a result, you will incur immediate dilution of $18.24 per share, representing the difference between the initial public offering price of $18.00 per share and our pro forma as adjusted net tangible book deficit per share after giving effect to this offering. See “Dilution.”

As a public company, we incur significant costs to comply with the laws and regulations affecting public companies, which could harm our business and results of operations.

As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, and the listing requirements of Nasdaq, and other applicable securities rules and regulations. These rules and regulations have increased and will continue to increase our legal, accounting and financial compliance costs and have made and will continue to make some activities more time-consuming and costly, particularly after we cease to be an emerging growth company as defined in Section 2(a) of the Securities Act, as modified by the JOBS Act. For example, these rules and regulations could make it more difficult and more costly for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or to incur substantial costs to maintain the same or similar coverage. These rules and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our Board or our board committees or as executive officers. Our management and other personnel will devote a substantial amount of time to these compliance initiatives. As a result, management’s attention may be diverted from other business concerns, which could harm our business and results of operations. We will need to hire more employees in the future to comply with these requirements, which will increase our costs and expenses.

Our management team and other personnel devote a substantial amount of time to new compliance initiatives and we may not successfully or efficiently manage our transition to a public company. To comply with the requirements of being a public company, including the Sarbanes-Oxley Act, we will need to undertake various actions, such as implementing new internal controls and procedures and hiring accounting or internal audit staff or outsourcing certain functions to third parties, which could have a material adverse effect on our business, financial condition and results of operations.

Fluctuations in our tax obligations and effective tax rate and realization of our deferred tax assets may result in volatility of our results of operations.

We are subject to income taxes in various U.S. jurisdictions. We record tax expense based on our estimates of future payments, which may in the future include reserves for uncertain tax positions in multiple tax jurisdictions, and valuation allowances related to certain net deferred tax assets. At any one time, many tax years may be subject to audit by various taxing jurisdictions. The results of these audits and negotiations with taxing authorities may affect the ultimate settlement of these issues. We expect that throughout the year there could be ongoing variability in our quarterly tax rates as events occur and exposures are evaluated.

In addition, our effective tax rate in a given financial reporting period may be materially impacted by a variety of factors including, but not limited to, changes in the mix and level of earnings, varying tax rates in the different jurisdictions in which we operate, fluctuations in the valuation allowance or by changes to existing accounting rules or regulations. Further, tax legislation may be enacted in the future, which could negatively impact our current or future tax structure and effective tax rates.

The U.S. government may enact significant changes to the taxation of business entities including, among others, an increase in the corporate income tax rate and the imposition of minimum taxes or surtaxes on certain types of income. No specific United States tax legislation has been proposed at this time and the likelihood of these changes being enacted or implemented is unclear. We are currently unable to predict whether such changes will occur. If such changes are enacted or implemented, we are currently unable to predict the ultimate impact on our business.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. Forward-looking statements can be identified by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects” and similar references to future periods, or by the inclusion of forecasts or projections. Examples of forward-looking statements include, but are not limited to, statements we make regarding the outlook for our future business and financial performance, such as those contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, by their nature, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. As a result, our actual results may differ materially from those contemplated by the forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include regional, national or global political, economic, business, competitive, market and regulatory conditions and the following:

 

   

continued adverse effects of the COVID-19 pandemic, including the emergence of COVID-19 variants, or other infectious disease on our financial condition, results of operations, and supply chain;

 

   

our vulnerability to changes in consumer preferences and economic conditions;

 

   

our inability to open new restaurants in new and existing markets;

 

   

the number of visitors to areas where our restaurants are located may decline;

 

   

our inability to generate same-restaurant sales growth;

 

   

our marketing programs and limited-time menu offerings may fail to generate profits;

 

   

shortages or disruptions in the supply or delivery of frequently used food items or increases in the cost of our frequently used food items;

 

   

our inability to prevent instances of food-borne illness in our restaurants;

 

   

our inability to compete successfully with other breakfast and lunch restaurants;

 

   

issues with our existing franchisees, including their financial performance, our lack of control over their operations, and conflicting business interests;

 

   

our vulnerability to adverse demographic, unemployment, economic, regulatory and weather conditions;

 

   

damage to our reputation and negative publicity, even if unwarranted;

 

   

our reliance on a small number of suppliers for a substantial amount of our food and coffee;

 

   

our inability to effectively manage our internal controls over financial reporting;

 

   

our failure to adequately protect our network security;

 

   

compliance with federal and local environmental, labor, employment and food safety laws and regulations;

 

   

our level of indebtedness and our duty to comply with covenants under our Credit Agreement; and

 

   

the interests of Advent may differ from those of our public stockholders.

See “Risk Factors” for a further description of these and other factors. For the reasons described above, we caution you against relying on any forward-looking statements, which should also be read in conjunction with the other cautionary statements that are included elsewhere in this prospectus. Any forward-looking statement made by us in this prospectus speaks only as of the date on which we make it. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from our sale of 9,459,000 shares of common stock in this offering will be approximately $153.3 million, after deducting underwriting discounts and commissions and estimated expenses payable by us in connection with this offering. The underwriters also have an option to purchase up to an additional 1,418,850 shares of common stock from us. We estimate that the net proceeds to us, if the underwriters exercise their right to purchase the maximum of 1,418,850 additional shares of common stock from us, will be approximately $177.1 million, after deducting underwriting discounts and commissions and estimated expenses payable by us in connection with this offering.

We intend to use the net proceeds from this offering to repay borrowings outstanding under our Senior Credit Facilities. Our Senior Credit Facilities are comprised of our Initial Term Loan Facility, our Initial Delayed Draw Term Facility, our First Amendment Delayed Draw Term Facility, our Second Amendment Delayed Draw Term Facility and our Revolving Facility. Loans under the Senior Credit Facilities mature on August 21, 2023. As of June 27, 2021, our Initial Term Loan Facility bore interest at a rate of 8.0%, our Initial Delayed Draw Term Facility bore interest at a rate of 8.0%, our First Amendment Delayed Draw Term Facility bore interest at a rate of 8.0% and our Second Amendment Delayed Draw Term Facility bore interest at a rate of 8.0%. See “Description of Material Indebtedness.”

 

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DIVIDEND POLICY

We do not currently intend to pay cash dividends on our common stock in the foreseeable future. However, in the future, subject to the factors described below and our future liquidity and capitalization, we may change this policy and choose to pay dividends.

Our ability to pay dividends is currently restricted by the terms of our Senior Credit Facilities and may be further restricted by any future indebtedness we incur.

We are a holding company that does not conduct any business operations of our own. As a result, our ability to pay cash dividends on our common stock is dependent upon cash dividends and distributions and other transfers from our subsidiaries.

In addition, under Delaware law, our Board may declare dividends only to the extent of our surplus (which is defined as total assets at fair market value minus total liabilities, minus statutory capital) or, if there is no surplus, out of our net profits for the then current and/or immediately preceding fiscal year.

Any future determination to pay dividends will be at the discretion of our Board and will take into account:

 

   

restrictions in our debt instruments, including our Senior Credit Facilities;

 

   

general economic business conditions;

 

   

our earnings, financial condition, and results of operations;

 

   

our capital requirements;

 

   

our prospects;

 

   

legal restrictions; and

 

   

such other factors as our Board may deem relevant.

See “Risk Factors – Risks Related to this Offering and Ownership of Our Common Stock – We do not anticipate paying any dividends on our common stock in the foreseeable future,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Liquidity and Capital Resources,” “Description of Material Indebtedness,” and “Description of Capital Stock.”

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization as of June 27, 2021:

 

   

on an actual basis;

 

   

on a pro-forma basis to give effect to (i) the automatic conversion of all outstanding shares of preferred stock into 3,156,812 shares of our common stock and (ii) the filing and effectiveness of our restated certificate of incorporation in Delaware that will become effective immediately prior to the completion of this offering; and

 

   

on a pro forma as adjusted basis to give further effect to the sale of 9,459,000 shares of our common stock in this offering, assuming no exercise of the underwriters’ option to purchase additional shares, at the initial public offering price of $18.00 per share, less underwriting discounts and commissions and estimated expenses, and the application of the net proceeds received by us from this offering as described under “Use of Proceeds.”

This table should be read in conjunction with “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Capital Stock” and the unaudited consolidated financial statements and notes thereto appearing elsewhere in this prospectus.

 

     As of June 27, 2021  
     Actual     Pro Forma     Pro Forma
As Adjusted
 
     (in thousands, except share and per share
data)
 

Cash and cash equivalents

   $ 48,033     $ 48,033     $ 48,033  
  

 

 

   

 

 

   

 

 

 

Debt:

      

Total debt(1)

   $ 294,012     $ 294,012     $ 140,771  

Equity:

      

Preferred stock, $0.01 par value per share, 266,667 shares authorized, actual, 10,000,000 shares authorized, pro forma and pro forma as adjusted, 266,667 shares issued and outstanding, actual, and no shares issued and outstanding, pro forma and pro forma as adjusted

     3       —         —    

Common stock, $0.01 par value per share, 300,000,000 shares authorized, actual, 300,000,000 shares authorized, pro forma and pro forma as adjusted, 45,013,784 shares issued and outstanding, actual, 48,170,596 shares issued and outstanding, pro forma, and 57,629,596 shares issued and outstanding pro forma as adjusted

     450       482       577  

Additional paid-in capital

     423,661       423,632       576,881  

Accumulated deficit

     (101,169     (101,169     (102,631
  

 

 

   

 

 

   

 

 

 

Total equity

     322,945       322,945       474,827  
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 616,957     $ 616,957     $ 615,598  
  

 

 

   

 

 

   

 

 

 

 

(1)

Total debt includes the current and long-term debt, excluding unamortized debt discount and deferred issuance costs. See Note 7, Debt in the notes to the interim unaudited consolidated financial statements included in this prospectus for additional information. Also, see “Description of Material Indebtedness.”

 

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DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book deficit per share of our common stock upon the consummation of this offering. Dilution results from the fact that the per share offering price of our common stock is in excess of the book deficit per share attributable to new investors.

As of June 27, 2021, our historical net tangible book deficit was $(166.8) million, or $(3.71) per share of common stock. Our historical net tangible book deficit per share represents the amount of our total tangible assets reduced by the amount of our total liabilities and divided by the total number of shares of our common stock outstanding as of June 27, 2021.

As of June 27, 2021, our pro forma net tangible book deficit was $(166.8) million, or $(3.46) per share of common stock. Our pro forma net tangible book deficit per share represents the amount of our total tangible assets reduced by the amount of our total liabilities and divided by the total number of shares of our common stock outstanding as of June 27, 2021 after giving effect to the automatic conversion of all outstanding shares of our preferred stock into 3,156,812 shares of our common stock and the filing and effectiveness of our restated certificate of incorporation that will become effective immediately prior to the completion of this offering.

After giving effect to (i) the pro forma adjustments set forth above, (ii) the sale of 9,459,000 shares of common stock in this offering at the initial public offering price of $18.00 per share after deducting underwriting discounts and commissions and estimated offering expenses and (iii) the application of the net proceeds from this offering, our pro forma as adjusted net tangible book deficit as of June 27, 2021 would have been $(13.9) million, or $(0.24) per share. This represents an immediate decrease in pro forma as adjusted net tangible book deficit of $3.22 per share to our existing investors and an immediate dilution in pro forma as adjusted net tangible book deficit of $18.24 per share to new investors.

The following table illustrates this dilution on a per share of common stock basis:

 

Initial public offering price per share

                       $ 18.00  

Historical net tangible book deficit per share

   $ (3.71   

Increase per share attributable to the pro forma adjustments described above

     0.25     
  

 

 

    

Pro forma net tangible book deficit per share as of June 27, 2021 before giving effect to this offering

     (3.46   

Decrease in pro forma net tangible book deficit per share attributable to new investors in this offering

     3.22     
  

 

 

    

Pro forma as adjusted net tangible book deficit per share after giving effect to this offering

        (0.24
     

 

 

 

Dilution per share to new investors purchasing common stock in this offering

      $ 18.24  
     

 

 

 

The following table summarizes, on an as adjusted basis as of June 27, 2021 after giving effect to this offering, the total number of shares of common stock purchased from us, the total cash consideration paid to us, or to be paid, and the average price per share paid, or to be paid, by new investors purchasing shares in this offering, at the initial public offering price of $18.00 per share, before deducting the underwriting discounts and commissions:

 

     Shares Purchased     Total Consideration     Average
Price
Per Share
 
     Number      Percent     Amount      Percent  

Existing stockholders

     48,170,596        83.6   $ 424,114,571        71.4   $ 8.80  

New investors

     9,459,000        16.4       170,262,000        28.6     $ 18.00  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

     57,629,596        100.0   $ 594,376,571        100.0  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

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If the underwriters were to fully exercise their option to purchase 1,418,850 additional shares of our common stock, the percentage of shares of our common stock held by existing investors would be 81.6%, and the percentage of shares of our common stock held by new investors would be 18.4%.

The above discussion and tables are based on the number of shares and options to purchase shares outstanding as of June 27, 2021. In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities could result in further dilution to our stockholders.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

The following is a discussion and analysis of our financial condition and results of operations as of, and for, the periods presented. You should read the following discussion and analysis of our financial condition and results of operations together with the sections entitled “Prospectus Summary – Summary Historical Consolidated Financial and Other Data,” “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements” and our audited and unaudited interim consolidated financial statements and the related notes thereto included elsewhere in this prospectus. This discussion and analysis contains forward-looking statements, including statements regarding industry outlook, our expectations for the future of our business and our liquidity and capital resources as well as other non-historical statements. These statements are based on current expectations and are subject to numerous risks and uncertainties, including but not limited to the risks and uncertainties described in “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.” Our actual results may differ materially from those contained in or implied by these forward-looking statements.

We use a 52- or 53-week fiscal year ending on the last Sunday of each calendar year. All references to fiscal 2020 and fiscal 2019 reflect the results of the 52-week fiscal year ended December 27, 2020 and the 52-week fiscal year ended December 29, 2019, respectively. Our fiscal quarters are comprised of 13 weeks each, except for fiscal years consisting of 53 weeks for which the fourth quarter will consist of 14 weeks, and end on the 13th Sunday of each quarter (14th Sunday of the fourth quarter, when applicable).

Overview

First Watch is a daytime restaurant concept serving made-to-order breakfast, brunch and lunch using fresh ingredients. The original First Watch opened in 1983 in Pacific Grove, California. Founder John Sullivan and his colleague Kenneth L. Pendery, Jr. set out to create a place of their own based upon their shared vision of what a neighborhood cafe should be. Long before “farm to table” became a culinary mantra, First Watch incorporated fresh, quality ingredients into elevated executions of classic dishes. In addition, the new concept was established as a “daytime café” with limited hours of 7:00 a.m. until 2:30 p.m., which allowed for specialization in breakfast, brunch and lunch. Over the course of the next several decades. First Watch’s passion for people, culture and service drove expansion through acquisition and new restaurant development across 28 states as of June 27, 2021.

Growth Strategies and Outlook

We believe our continued growth will come from: (i) opening new restaurants in existing and new geographies and (ii) driving traffic and building sales at our restaurants.

Grow Our Brand Footprint by Consistently Opening New Restaurants

Opening new company-owned restaurants in new and existing markets is central to our growth strategy.

Drive Restaurant Traffic and Build Sales

We intend to grow same-restaurant sales by continuing to offer innovative menu items, increase awareness of our brand, deliver excellent customer service and launch relevant sales platforms and initiatives.

Continue Menu Innovation: The ongoing evolution of our menu keeps First Watch relevant for our customers. The development of award-winning menu items and the training and experience of our staff enable us to replicate complex preparations across all our restaurants.

 

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Offer Alcohol as Only First Watch Can: We recently extended our successful fresh juice program with innovative, craft alcohol cocktails in many of our restaurants which provides a new platform for growth.

Convenience and Increased Accessibility through Our Off-Premises Offering: In fiscal 2020, we integrated new technology and processes which enable our restaurants to better meet our customers’ demand for convenient, off-premises dining through take-out and delivery.

Increase Our Brand Awareness: The continued evolution of our marketing and advertising strategy to focus on building our brand awareness principally through digital marketing that emphasizes connection with First Watch customers.

Deliver an Excellent On-Premise Dining Experience: We will continue to prioritize service and delivering a memorable dining experience in our restaurants to every customer and in every visit.

Additional Platforms and Initiatives: We believe we can expand our appeal and market share of weekday lunch occasions with evolved menu offerings and promotional support. In addition, we will add tools to capture, interpret and communicate actionable data to improve our abilities to understand customer behaviors and to efficiently serve customer needs.

Changes in general economic conditions can affect our traffic and sales. Our results of operations are impacted by prices of a broad range of ingredients used in our menu, labor costs, costs of occupancy and other restaurant industry expenses. Our results are also impacted by the timing and pace of new restaurant openings. Results for any one quarter are not necessarily indicative of results to be expected for any other quarter, and same-restaurant sales growth for any future period may decrease.

Recent Trends

Our streak of 28 consecutive quarters of positive same-restaurant sales growth from fiscal 2013 to fiscal 2019 ended in the first fiscal quarter of 2020, with the World Health Organization’s declaration of COVID-19 as a global pandemic and recommendation of containment and mitigation measures worldwide. As the severity of the COVID-19 pandemic grew increasingly acute, customer behaviors shifted rapidly, and municipalities mandated public dining room occupancy restrictions.

At a cost of $4.7 million in fiscal 2020, management implemented a series of measures primarily to (i) protect the health and safety of our employees and customers, (ii) provide aid to employees whose financial means were diminished as result of dining closures and furloughs and (iii) amend certain financial commitments.

With respect to our restaurant operations, during the week of March 15, 2020, we began closing our dining rooms and deployed new hardware and software to enable integrated off-premises capability for the first time across all company-owned restaurants. On April 13, 2020, prioritizing the safety of our employees and their families, we suspended all operations in our company-owned restaurants. During the period of suspended operations, we developed and provided for new safety protocols and procedures as well as an employee wellness screening tool with COVID-19 contact tracing. We also rapidly addressed new consumer behaviors by accelerating previously planned initiatives to position ourselves for short-term recovery and long-term growth such as online ordering to enable third-party delivery services, the expansion of our carefully curated alcohol program and touchless payment technology. We also expanded our patio and outdoor service areas while reducing and distancing in our in-dining room seating.

On May 18, 2020, in conjunction with municipal health and safety mandates we began reopening our company-owned restaurants in four phases. Our new tools and training allowed our restaurant staff to meet the customer demand for off-premises dining and as a result, we generally saw our average weekly sales grow after reopening.

 

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Monthly Same-Restaurant Sales Growth Since January 2020

 

LOGO

During the twenty-six weeks ended June 27, 2021, we generally experienced a steady recovery of restaurant sales, which had declined in 2020 as a result of the COVID-19 pandemic, while off-premises sales have been sustained.

Financial highlights for the twenty-six weeks ended June 27, 2021 include the following:

 

   

423 System-wide restaurants comprised of 335 company-owned restaurants and 88 franchise restaurants; 15 new company-owned restaurant openings and three franchise-operated restaurant openings; one company-owned restaurant was relocated and three franchise-owned restaurants were disenfranchised.

 

   

Same-restaurant sales growth of 95.9% compared to (43.4)% in the twenty-six weeks ended June 28, 2020 and 8.4% when compared to the twenty-six weeks ended June 30, 2019.

 

   

Income from operations of $16.2 million and margin of 5.8% compared to Loss from operations of $33.9 million and margin of (25.8)% in the twenty-six weeks ended June 28, 2020 and Loss from operations of $31.4 million and margin of (15.0)% in the twenty-six weeks ended June 30, 2019.

 

   

Restaurant level operating profit and margin of $56.0 million and 20.2% compared to restaurant level operating profit and margin of $4.4 million and 3.4% in the twenty-six weeks ended June 28, 2020 and restaurant level operating profit of $37.9 million and margin of 18.1% in the twenty-six weeks ended June 30, 2019.

 

   

Net income and total comprehensive income of $1.8 million and margin of 0.6% compared to Net loss and total comprehensive loss of $31.4 million and margin of (23.6)% in the twenty-six weeks ended June 28, 2020 and Net loss and total comprehensive loss of $32.7 million and margin of (15.4)% in the twenty-six weeks ended June 30, 2019.

 

   

Adjusted EBITDA of $35.2 million and margin of 12.5% compared to Adjusted EBITDA of $(11.8) million and margin of (8.9)% in the twenty-six weeks ended June 28, 2020 and Adjusted EBITDA of $20.7 million and margin of 9.8% in the twenty-six weeks ended June 30, 2019.

During the balance of 2020, we continued to invest in and open new restaurants, even as management worked with its landlords to modify leases and rent payments. During fiscal 2020, we opened 23 company-owned restaurants of which 10 restaurants were opened in the last two quarters of fiscal 2020.

 

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Financial highlights for fiscal 2020 as compared to fiscal 2019 were severely impacted by the COVID-19 pandemic and are as follows:

 

   

Reduction in same-restaurant sales growth from 5.6% in fiscal 2019 to (29.0)% in fiscal 2020.

 

   

Total restaurant sales declined 21.4% from $429.3 million in fiscal 2019 to $337.4 million in fiscal 2020.

 

   

Loss from operations was $47.2 million in fiscal 2020, as compared to $37.6 million in fiscal 2019. Restaurant level operating profit and restaurant level operating profit margin were $28.2 million and 8.4%, respectively in fiscal 2020 as compared to $74.5 million and 17.4% respectively, in fiscal 2019.

 

   

Net loss and comprehensive loss attributable to First Watch Restaurant Group was $49.7 million in fiscal 2020 as compared to $45.4 million in fiscal 2019. Adjusted EBITDA and Adjusted EBITDA Margin were $(5.7) million and (1.7)%, respectively in fiscal 2020 as compared to $38.1 million and 8.7% in fiscal 2019.

The volume of off-premises sales, which includes both third-party delivery and take-out sales, increased as a result of customers’ growing preference for at-home dining due to the COVID-19 pandemic. In fiscal 2020, total off-premises sales were 23.8% as compared to 6.7% in fiscal 2019. We continued to see the trend of average weekly off-premises sales of approximately $8,000 per restaurant in the second fiscal quarter of 2021, which were consistent with average weekly off-premises sales during the fourth fiscal quarter of 2020, but we cannot predict the extent to which our restaurant sales will be comprised of off-premises sales in future periods, including after the end of the COVID-19 pandemic. Furthermore, although we continue to incur third-party delivery fees in connection with off-premises sales, we have increased our third-party delivery menu prices to compensate for such fees resulting in a relatively neutral margin on off-premises sales as compared to in-restaurant dining sales.

Key Performance Indicators

To evaluate the performance of our business, we utilize a variety of financial and performance measures. These key measures include Cash-on-Cash Return, restaurant sales, same-restaurant sales growth, same-restaurant traffic growth, new restaurant development, AUV, Adjusted EBITDA, Adjusted EBITDA Margin, restaurant level operating profit and restaurant level operating profit margin.

Cash-on-Cash Return

Cash-on-Cash Return is defined as restaurant level operating profit (excluding gift card breakage and deferred rent (income) expense) in the third year of operation (months 25-36 of operation) for our company-owned restaurants divided by their cash build-out expenses, net of landlord incentives.

NROs

NROs are the number of new company-owned First Watch restaurants commencing operations during the period. Management reviews the number of new restaurants to assess net new restaurant growth and company-owned restaurant sales.

Same-Restaurant Sales Growth

Same-restaurant sales growth is the percentage change in year-over-year restaurant sales (excluding gift card breakage) for the Comparable Restaurant Base. For fiscal 2020 and fiscal 2019, there were 212 restaurants and 168 restaurants in our Comparable Restaurant Base, respectively. For the twenty-six weeks ended June 27, 2021, and the twenty-six weeks ended June 28, 2020, there were 270 restaurants and 212 restaurants, respectively, in our Comparable Restaurant Base.

 

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An increase in same-restaurant sales growth is the result of increased restaurant traffic, increased average customer check or a combination of the two. We gather daily sales data and regularly analyze the customer traffic counts and the mix of menu items sold to aid in developing menu pricing, product offerings and promotional strategies designed to produce sustainable same-restaurant sales growth. 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

Same-restaurant traffic growth is the percentage change in traffic counts as compared to the same period in the prior year using the Comparable Restaurant Base. For fiscal 2020 and fiscal 2019, there were 212 restaurants and 168 restaurants in our Comparable Restaurant Base, respectively. For the twenty-six weeks ended June 27, 2021, and the twenty-six weeks ended June 28, 2020, there were 270 restaurants and 212 restaurants, respectively, in our Comparable Restaurant Base. Measuring our same-restaurant traffic growth allows management to evaluate the performance of our existing restaurant base. We believe this measure is useful for investors because an increase in same-restaurant traffic provides an indicator as to the development of our brand and the effectiveness of our marketing strategy.

New Restaurant Development

New restaurant development is central to growing our footprint and executing our growth strategy. New restaurant development has historically included both new restaurant openings and conversion of acquired restaurants.

Potential new restaurant sites are typically identified and evaluated at least 18 months prior to opening. New restaurant opening dates trigger advance staff recruiting and training, in addition to the relocation of experienced general managers from existing restaurants and other pre-opening expenses.

We intend to open more than 130 company-owned restaurants from 2022 through 2024, which is expected to be the primary driver of our expected restaurant sales growth, but which may impact operating profit margins in the interim, as our restaurant level operating profit margins are generally lower through the first 12 months of operation.

The total number of new restaurants per year and the timing of new restaurant openings has, and will continue to have, an impact on our results of operations.

AUV

AUV is 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.

Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA represents net income (loss) before depreciation and amortization, interest expense and 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 (loss) and total comprehensive income (loss), the most directly comparable GAAP measure, to Adjusted EBITDA, included in “Prospectus Summary – Summary Historical Consolidated Financial and Other Data.” Adjusted EBITDA Margin represents Adjusted EBITDA as a percentage of total revenues. 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.

 

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We believe that Adjusted EBITDA and Adjusted EBITDA Margin are important measures of operating performance because they eliminate the impact of expenses that do not relate to our core operating performance. Adjusted EBITDA and Adjusted EBITDA Margin have important limitations as analytical tools and should not be considered in isolation as substitutes for analysis of our results as reported under GAAP. Such non-GAAP measures may not provide a complete understanding of the results of operations of the Company as a whole and should be reviewed in conjunction with its GAAP financial results.

Restaurant Level Operating Profit and Restaurant Level Operating Profit Margin

Restaurant level operating profit margin represents restaurant level operating profit as a percentage of restaurant sales. Restaurant level operating profit and restaurant level operating profit margin are not required by, nor presented in accordance with GAAP. Rather, restaurant level operating profit and restaurant level operating profit margin are supplemental measures of operating performance of our restaurants and our calculations thereof may not be comparable to similar measures reported by other companies. We believe that restaurant level operating profit and restaurant level operating profit margin are important measures to evaluate the performance and profitability of each restaurant, individually and in the aggregate. Restaurant level operating profit and restaurant level operating profit margin are not indicative of our overall results, and because they exclude corporate-level expenses, do not accrue directly to the benefit of our stockholders. Restaurant level operating profit and restaurant level operating profit margin have limitations as analytical tools and should not be considered as a substitute for analysis of our results as reported under GAAP. Such non-GAAP measures may not provide a complete understanding of the results of operations of the Company as a whole and should be reviewed in conjunction with its GAAP financial results.

Revenues and Expenses

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.

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 franchised restaurants.

Food and Beverage Costs

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

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 performance of our company-owned restaurants and increased competition for qualified staff.

 

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Other Restaurant Operating Expenses

Other restaurant operating expenses consist of marketing and advertising expenses, utilities and other operating 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, third party delivery services fees and certain pre-opening expenses for new company-owned restaurants.

Pre-opening expenses primarily consist of manager salaries, recruiting expenses, employee payroll and training costs. Pre-opening expenses are recognized in the period in which the expense was incurred, and can fluctuate from period to period, based on the number and timing of new restaurant openings. Additionally, new restaurant openings in new geographic market areas may initially experience higher pre-opening expenses than our established geographic market areas where we have greater economies of scale and incur lower travel costs for our training team.

Occupancy Expenses

Occupancy expenses primarily consist of rent, property insurance, common area expenses and property taxes. Rent expense also includes pre-opening rent expense recognized during the period between the date of possession of the restaurant facility and the restaurant opening date.

General and Administrative Expenses

General and administrative expenses primarily consist of costs associated with our Home Office and administrative functions that support restaurant development and operations including marketing and advertising costs incurred as well as legal fees, professional fees and stock-based compensation expense. General and administrative expenses are impacted by changes in our employee count and costs related to strategic and growth initiatives. In preparation for and after the consummation of this offering, we have incurred and we expect to incur in the future significant additional legal, accounting and other expenses associated with being a public company, including costs associated with our compliance with the Sarbanes-Oxley Act.

Certain employees, officers and non-employee directors have been granted performance-based stock options, for which we have not recognized any compensation expense to date, as the performance condition has not been deemed probable of being achieved. Certain of these awards may convert, if certain market conditions are met at the time of the offering, from performance-based options to service-based options that would vest equally over a three-year period. We will recognize compensation expense on the date of the offering for services provided prior to the offering and recognize the remaining compensation expense for services to be provided over a three year period commencing on the date of the offering.

On August 31, 2021, the Company’s Board amended the 2017 Omnibus Equity Incentive Plan such that the performance-based options that convert into time-based options upon an initial public offering no longer vest over a period of three years, but instead shall vest one-third (1/3rd) on each of the first two anniversaries of an initial public offering and one-third (1/3rd) on the 273rd day following the second anniversary of an initial public offering. This was accounted for as a modification for accounting purposes, resulting in a new fair value for all the performance-based options as of the modification date. On September 19, 2021, the Company modified performance-based awards that contained a market condition granted under the 2017 Omnibus Equity Incentive Plan, such that the vesting terms for one such tranche of its performance-based option awards that contain a market condition were amended to waive the market condition. On September 19, 2021, the Company modified the terms of its performance-based option awards granted under the 2017 Omnibus Equity Incentive Plan to its Chairman Emeritus to provide that all of the options that convert to time-based options upon an initial public offering will vest on August 1, 2022. After consideration of all of the above modifications to the performance-based awards, the unrecognized compensation expense of all outstanding performance-based options was $20.9 million. See Note 12, Subsequent Events in the notes to the interim unaudited consolidated financial statements included elsewhere in this prospectus for a more detailed description of the Company’s modifications to performance-based awards. Following consummation of this offering, if certain performance-based options to

 

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purchase shares of our common stock would have vested based on certain multiples of invested capital, then those options will convert to time-based awards and we will record a portion of the compensation expense on the date of the IPO and the remainder over the remaining service period. All other performance-based options that would not have converted into time-based options upon the consummation of the offering would be forfeited. If any performance-based options are forfeited, the unrecognized compensation expense for those awards will be recorded on the date of an initial public offering.

Depreciation and Amortization

Depreciation and amortization consists of the depreciation of fixed assets, including leasehold improvements, fixtures and equipment and the amortization of definite-lived intangible assets, which are primarily comprised of franchise rights. Franchise rights includes rights which arose from the purchase price allocation in connection with the Advent Acquisition as well as reacquired rights from our acquisitions of franchised restaurants.

Impairments and Loss on Disposal of Assets

Impairments and loss on disposal of assets include (i) the impairment of long-lived assets and intangible assets where the carrying amount of the asset is not recoverable and exceeds the fair value of the asset, (ii) the write-off of the net book value of assets that have been retired or replaced in the normal course of business and (iii) the write-off of the net book value of assets in connection with restaurant closures.

Transaction (Income) Expenses, Net

Transaction (income) expenses, net primarily include (i) costs incurred in connection with the acquisition of franchised restaurants, (ii) costs incurred in connection with the conversion of certain restaurants to company-owned restaurants operating under the First Watch trade name, (iii) costs related to restaurant closures and (iv) revaluations of contingent consideration.

Interest Expense

Interest expense primarily consists of interest and fees on our Senior Credit Facilities and the amortization expense for debt discount and deferred issuance costs. We expect to pay down a portion of our outstanding debt using the proceeds of this offering. We expect our interest expense for the new senior credit facilities that we may enter into in connection with any debt refinancing to be lower than the interest expense under our Senior Credit Facilities in future periods as a result of the reduction in the principal amount of our indebtedness and our ability to obtain more favorable terms, including lower interest rates, under the new senior credit facilities. See “Prospectus Summary - Debt Refinancing,” “Use of Proceeds” and “Description of Material Indebtedness.”

Other Income (Expense), Net

Other income (expense), 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.

Income Tax Expense (Benefit)

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

 

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Fiscal 2020 Compared to Fiscal 2019

Results of Operations

The following table summarizes our results of operations and the percentages of certain items in relation to total revenues or restaurant sales for fiscal 2020 and fiscal 2019:

 

     Fiscal  
     2020     2019  
     (in thousands)  

Revenues:

        

Restaurant sales

   $ 337,433       98.6   $ 429,309       98.4

Franchise revenues

     4,955       1.4     7,064       1.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     342,388       100.0     436,373       100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating costs and expenses:

        

Restaurant operating expenses:(1)(exclusive of depreciation and amortization shown below)

        

Food and beverage costs

     76,975       22.8     100,689       23.5

Labor and other related expenses

     120,380       35.7     148,537       34.6

Other restaurant operating expenses

     63,776       18.9     59,402       13.8

Occupancy expenses

     51,375       15.2     46,151       10.8

General and administrative expenses

     46,322       13.5     55,818       12.8

Depreciation and amortization

     30,725       9.0     28,027       6.4

Impairments and loss on disposal of assets

     315       0.1     33,596       7.7

Transaction (income) expenses, net

     (258     (0.1 )%      1,709       0.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     389,610       113.8     473,929       108.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

   $ (47,222     (13.8 )%    $ (37,556     (8.6 )% 

Interest expense

     (22,815     (6.7 )%      (20,080     (4.6 )% 

Other income (expense), net

     483       0.1     (255     (0.1 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax benefit

     (69,554     (20.3 )%      (57,891     (13.3 )% 

Income tax benefit

     19,873       5.8     12,419       2.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss and total comprehensive loss

     (49,681     (14.5 )%      (45,472     (10.4 )% 

Less: Net loss attributable to non-controlling interest

     —         —       (33     n/m (2) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss and comprehensive loss attributable to First Watch Restaurant Group, Inc.

   $ (49,681     (14.5 )%    $ (45,439     (10.4 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

As a percentage of restaurant sales.

(2)

Not meaningful.

 

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Selected Operating Data

 

     Fiscal  
     2020     2019  

System-wide sales (in thousands)

   $   426,303     $   558,397  

Same-restaurant sales growth

     (29.0 )%      5.6

Same-restaurant traffic growth

     (33.9 )%      1.6

AUV (in thousands)

   $ 1,119     $ 1,594  

System-wide restaurants

     409       368  

Company-owned

     321       299  

Franchise operated

     88       69  

Loss from operations

   $ (47,222   $ (37,556

Loss from operations margin

     (14.0 )%      (8.7 )% 

Net loss and total comprehensive loss

   $ (49,681   $ (45,472

Net loss and total comprehensive loss margin

     (14.5 )%      (10.4 )% 

Adjusted EBITDA (in thousands)(1)

   $ (5,744   $ 38,099  

Adjusted EBITDA margin(1)

     (1.7 )%      8.7

Restaurant level operating profit (in thousands)(2)

   $ 28,236     $ 74,530  

Restaurant level operating profit margin(2)

     8.4     17.4

Pre-opening expenses(3)

   $ 3,880     $ 5,815  

Deferred rent expense(4)

   $ 10,087     $ 4,272  

 

(1)

For a discussion of Adjusted EBITDA and Adjusted EBITDA Margin and a reconciliation from Net loss and total comprehensive loss and margin, the most comparable GAAP measure to Adjusted EBITDA and margin, see “Prospectus Summary – Summary Historical Consolidated Financial and Other Data.”

(2)

For a discussion of restaurant level operating profit and restaurant level operating profit margin and a reconciliation from Loss from operations and margin, the most comparable GAAP measure to restaurant level operating profit and margin, see “Prospectus Summary – Summary Historical Consolidated Financial and Other Data.”

(3)

Represents expenses directly incurred to open new restaurants, including pre-opening rent, manager salaries, recruiting expenses, employee payroll, training and marketing costs. These expenses are recorded in other restaurant operating expenses and occupancy expenses on the Consolidated Statements of Operations and Comprehensive Loss.

(4)

Consists of the non-cash portion of straight-line rent expense primarily included in occupancy expenses and general and administrative expenses on the Consolidated Statements of Operations and Comprehensive Loss. This amount represents the extent to which our straight-line rent expense exceeds or is less than our cash rent payments and varies depending on the average age of our lease portfolio. For newer leases, straight-line rent expense typically exceeds cash rent payments. For more mature leases, straight-line rent expense is typically less than cash rent payments.

Restaurant Sales

 

     Fiscal               
     2020      2019      Change  
     (in thousands)  

Restaurant sales:

          

In-restaurant dining sales

   $ 257,029      $ 400,345      $ (143,316     (35.8 )% 

Third-party delivery sales

     38,524        2,648        35,876       n/m (1) 

Take-out sales

     41,880        26,316             15,564       59.1
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Restaurant sales

   $   337,433      $   429,309      $ (91,876     (21.4 )% 

 

(1)

Not meaningful.

Our restaurant dining sales in 2020 were negatively impacted by government mandated restrictions, customer caution and our decision to protect employees and customers from the spread of the COVID-19

 

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pandemic by temporarily closing our restaurants. Our closures took effect on April 13, 2020, with reopenings occurring throughout May and June of 2020. Upon reopening our restaurants, the volume of third-party delivery sales and take-out sales increased as a result of customers’ growing preference for at-home dining. The decline in total restaurant sales was partially offset by $15.5 million in sales recognized in 23 new company-owned restaurants as well as menu price increases.

Franchise Revenues

     Fiscal         
     2020      2019      Change  
     (in thousands)  

Franchise revenues:

          

Royalty and system fund contributions

   $ 4,615      $ 6,628      $ (2,013     (30.4 )% 

Initial fees

     340        436        (96     (22.0 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Franchise revenues

   $   4,955      $   7,064      $ (2,109     (29.9 )% 

The decrease in franchise revenues during fiscal 2020 as compared to fiscal 2019 was primarily due to the COVID-19 pandemic and dining room restrictions imposed pursuant to state and local goverment mandates, partially offset by the opening of 19 Franchise-owned NROs.

Food and Beverage Costs

 

     Fiscal        
     2020     2019     Change  
     (in thousands)  

Food and beverage costs

   $ 76,975     $ 100,689     $ (23,714     (23.6 )% 

As a percentage of restaurant sales

     22.8     23.5     (0.7 )%   

Food and beverage costs decreased in fiscal 2020 as compared to fiscal 2019 primarily due to the decline in same-restaurant sales of (29.0%) and traffic of (33.9%) as a result of the COVID-19 pandemic, partially offset by (i) $3.8 million of costs incurred from the 23 new company-owned restaurants in fiscal 2020 and (ii) inventory obsolescence and spoilage due to the COVID-19 pandemic of approximately $0.6 million.

As a percentage of sales, food and beverage costs decreased from 23.5% in fiscal 2019 to 22.8% in fiscal 2020 primarily due to the impact of menu price increases, including a surcharge on third-party delivery sales.

Labor and Other Related Expenses

 

     Fiscal        
     2020     2019     Change  
     (in thousands)  

Labor and other related expenses

   $ 120,380     $ 148,537     $ (28,157     (19.0 )% 

As a percentage of restaurant sales

     35.7     34.6     1.1  

The decrease in labor and other related expenses in fiscal 2020 as compared to fiscal 2019 was primarily due to (i) the reduction in labor hours as a result of lower same-restaurant sales and traffic due to the COVID-19 pandemic, partially offset by (ii) $5.8 million of costs incurred from the 23 new company-owned restaurants in fiscal 2020, (iii) compensation paid to employees upon furlough and return from furlough of $1.1 million and (iv) $0.7 million for health insurance costs paid for furloughed employees, net of employee retention credits.

As a percentage of restaurant sales, the increase in labor and related expenses of 35.7% for fiscal 2020 as compared to 34.6% for fiscal 2019 was primarily due to (i) sales deleveraging related to the impact of the COVID-19 pandemic and (ii) increases in wage rates, partially offset by (iii) the reduction of labor hours.

 

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Other Restaurant Operating Expenses

 

     Fiscal         
     2020      2019      Change  
     (in thousands)  

Other restaurant operating expenses

   $ 63,776      $ 59,402      $ 4,374        7.4

The increase in other restaurant operating expenses for fiscal 2020 as compared to fiscal 2019 was primarily due to (i) third-party delivery services fees as a result of the expansion of our off-premises sales of approximately $8.7 million and (ii) an increase in supplies, such as personal protection equipment, in response to the COVID-19 pandemic of approximately $2.1 million, partially offset by (iii) the reduction in pre-opening expenses recorded in other restaurant opening expenses of $1.9 million due to the curtailment of new restaurant construction as a result of the COVID-19 pandemic, (iv) reduced advertising, marketing, utilities, and repairs and maintenance totaling approximately $2.8 million and (v) reduced credit card fees of approximately $2.5 million due to reduced restaurant sales as a result of the COVID-19 pandemic.

Occupancy Expenses

 

     Fiscal         
     2020      2019      Change  
     (in thousands)  

Occupancy expenses

   $ 51,375      $ 46,151      $ 5,224        11.3

The increase in occupancy expenses for fiscal 2020 as compared to fiscal 2019 was primarily due to the opening of 23 new company-owned restaurants as well as new company-owned restaurants opened during fiscal 2019 that had a full year of expense in fiscal 2020. Pre-opening rent expense recorded within occupancy expenses was $1.9 million and $2.0 million for fiscal 2020 and fiscal 2019, respectively.

General and Administrative Expenses

 

     Fiscal         
     2020      2019      Change  
     (in thousands)  

General and administrative expenses

   $ 46,322      $ 55,818      $ (9,496     (17.0 )% 

The decrease in general and administrative expenses in fiscal 2020 as compared to fiscal 2019 was principally the result of (i) $6.0 million of consulting, accounting and other expenses incurred in connection with our public-company readiness and other strategic efforts incurred in fiscal 2019, (ii) a $4.4 million decline in discretionary costs including recruiting, travel and bonuses and (iii) a $0.6 million pre-litigation settlement recognized in fiscal 2019. These reduced expenses from fiscal 2019 were partially offset in fiscal 2020 by (i) the $2.0 million write-off of deferred offering costs as a result of halting our public registration of equity, (ii) $1.1 million of costs incurred in connection with the COVID-19 pandemic and (iii) compensation totaling $0.4 million paid to corporate employees upon furlough and return from furlough.

Depreciation and Amortization

 

     Fiscal         
     2020      2019      Change  
     (in thousands)  

Depreciation and amortization

   $ 30,725      $ 28,027      $ 2,698        9.6

 

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The increase in depreciation and amortization for fiscal 2020 as compared to fiscal 2019 was primarily due to (i) incremental depreciation expense related to new company-owned restaurant openings, partially offset by (ii) the reduction in amortization expense of $0.7 million related to The Egg and I tradename and franchise rights resulting from the impairment recognized in fiscal 2019 (See Note 7, Intangible Assets, Net, in the notes to the audited consolidated financial statements included elsewhere in this prospectus for additional information).

Impairments and Loss on Disposal of Assets

 

     Fiscal         
     2020      2019      Change  
     (in thousands)  

Impairments and loss on disposal of assets

   $ 315      $ 33,596      $ (33,281     n/m (1) 

 

(1)

Not meaningful.

The decrease in impairments and loss on disposal of assets in fiscal 2020 as compared to fiscal 2019 primarily related to the impairment of The Egg & I tradename and franchise rights totaling $32.2 million resulting from the Company’s strategic review of its operations in fiscal 2019. The remaining net book value for The Egg & I trade name and franchise rights, respectively, were amortized through the end of fiscal 2019. For additional information, see Note 7, Intangible Assets, Net, in the notes to the audited consolidated financial statements included elsewhere in this prospectus for additional information.

Transaction (Income) Expenses, Net

 

     Fiscal         
     2020     2019      Change  
     (in thousands)  

Transaction (income) expenses, net

   $ (258   $ 1,709      $ (1,967     n/m (1) 

 

(1)

Not meaningful.

In fiscal 2020, transaction income, net primarily related to the revaluation of the contingent consideration payable to previous stockholders for tax savings generated through use of federal and state loss carryforwards. See Note 14, Income Taxes, in the notes to the audited consolidated financial statements included elsewhere in this prospectus for additional information.

In fiscal 2019, transaction expenses, net primarily related to (i) costs incurred in connection with acquisitions of franchised restaurants, (ii) costs incurred associated with conversions of restaurants to the First Watch trade name and (iii) lease termination and other related costs for closures of restaurants operating under The Egg & I trade name, partially offset by (iv) the gain, net of closure costs, recognized for terminating the lease for one restaurant facility.

Loss from Operations

 

     Fiscal        
     2020     2019     Change  
     (in thousands)  

Loss from operations

   $ (47,222   $ (37,556   $ (9,666     n/m (1) 

 

(1)

Not meaningful.

 

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The increase in loss from operations in fiscal 2020 as compared to fiscal 2019 was primarily due to lower restaurant sales, traffic and additional costs as a result of the COVID-19 pandemic, including incremental delivery-related costs and compensation and benefits paid for furloughed employees (net of tax credits). These losses were partially offset by reduced food and beverage costs, labor expenses, IPO-readiness expenses and impairment expenses.

Interest Expense

 

     Fiscal         
     2020      2019      Change  
     (in thousands)  

Interest expense

   $ 22,815      $ 20,080      $ 2,735        13.6

The increase in interest expense in fiscal 2020 as compared to fiscal 2019 was primarily due to $1.6 million of additional interest incurred pursuant to the fourth amendment of our credit agreement. See Note 10, Debt, in the notes to the audited consolidated financial statements included elsewhere in this prospectus for additional information.

Other Income (Expense), Net

 

     Fiscal        
     2020      2019     Change  
     (in thousands)  

Other income (expense), net

   $ 483      $ (255   $ 738        n/m (1) 

 

(1)

Not meaningful.

In fiscal 2020, other income, net primarily related to the receipt of an insurance claim related to one restaurant facility. In fiscal 2019, other expense, net primarily related to (i) $0.6 million of costs incurred in connection with the two amendments of our Senior Credit Facilities (See Note 10, Debt, in the notes to the audited consolidated financial statements included elsewhere in this prospectus for additional information), partially offset by (ii) $0.2 million of gains on settlements of pre-existing agreements recognized in connection with acquisitions of franchised restaurants.

Income Tax Benefit

 

     Fiscal         
     2020      2019      Change  
     (in thousands)  

Income tax benefit

   $ 19,873      $ 12,419      $ 7,454        60.0

The effective income tax rates for fiscal 2020 and fiscal 2019 were 28.6% and 21.5%, respectively. The change in the effective income tax rate in fiscal 2020 as compared to fiscal 2019 was primarily due to the change in the valuation allowance for federal and state deferred tax assets and the benefit of tax credits for FICA taxes on certain employees’ tips.

The Company has a blended federal and state statutory rate of approximately 25.0%. The effective income tax rate for fiscal 2020 and fiscal 2019 was different from the blended federal and state statutory rate primarily due to the change in the valuation allowance and the benefit of the tax credits for FICA taxes on certain employee tips.

 

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Twenty-Six Weeks Ended June 27, 2021 Compared to Twenty-Six Weeks Ended June 28, 2020

Results of Operations

The following table summarizes our results of operations and the percentages of certain items in relation to total revenues or restaurant sales for the twenty-six weeks ended June 27, 2021 and June 28, 2020:

 

     Twenty-Six Weeks Ended  
     June 27, 2021     June 28, 2020  
     (in thousands)  

Revenues:

  

Restaurant sales

   $ 277,054        98.5   $ 131,193        98.5

Franchise revenues

     4,078        1.5     2,053        1.5
  

 

 

    

 

 

   

 

 

    

 

 

 

Total revenues

     281,132        100.0     133,246        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 
Operating costs and expenses:           

Restaurant operating expenses:(1)

(exclusive of depreciation and amortization shown below)

          

Food and beverage costs

     60,512        21.8     30,987        23.6

Labor and other related expenses

     85,999        31.0     50,012        38.1

Other restaurant operating expenses

     46,815        16.9     23,282        17.7

Occupancy expenses

     27,757        10.0     25,182        19.2

General and administrative expenses

     27,341        9.7     22,278        16.7

Depreciation and amortization

     15,762        5.6     15,028        11.3

Impairments and loss on disposal of assets

     163        0.1     255        0.2

Transaction expenses, net

     626        0.2     99        0.1
  

 

 

    

 

 

   

 

 

    

 

 

 

Total operating costs and expenses

     264,975        94.3     167,123        125.4
  

 

 

    

 

 

   

 

 

    

 

 

 

Income (Loss) from operations

     16,157        5.7     (33,877      (25.4 )% 

Interest expense

     (12,605      (4.5 )%      (10,667      (8.0 )% 

Other income, net

     321        0.1     360        0.3
  

 

 

    

 

 

   

 

 

    

 

 

 

Income (Loss) before income tax expense (benefit)

     3,873        1.4     (44,184      (33.2 )% 

Income tax expense (benefit)

     2,110        0.8     (12,762      (9.6 )% 
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income (loss) and total comprehensive income (loss)

   $ 1,763        0.6   $ (31,422      (23.6 )% 
  

 

 

    

 

 

   

 

 

    

 

 

 

 

 

(1)

As a percentage of restaurant sales.

 

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Selected Operating Data

 

     Twenty-Six Weeks Ended  
     June 27, 2021     June 28, 2020  

System-wide sales (in thousands)

   $ 350,596   $ 166,290  

Same-restaurant sales growth

     95.9     (43.4 )% 

Same-restaurant traffic growth

     76.3     (45.7 )% 

AUV (in thousands)

   $ 829   $ 430  

System-wide restaurants

     423       387  

Company-owned

     335     309  

Franchise operated

     88     78  

Income (Loss) from operations

   $ 16,157     $ (33,877

Income (Loss) from operations margin

     5.8     (25.8 )% 

Net income (loss) and total comprehensive income (loss)

   $ 1,763     $ (31,422

Net income (loss) and total comprehensive income (loss) margin

     0.6     (23.6 )% 

Adjusted EBITDA (in thousands) (1)

   $ 35,182     $ (11,803

Adjusted EBITDA margin (1)

     12.5     (8.9 )% 

Restaurant level operating profit (in thousands) (2)

   $ 55,990     $ 4,440  

Restaurant level operating profit margin (2)

     20.2     3.4

Pre-opening expenses(3)

   $ 2,063     $ 2,076  

Deferred rent (income) expense(4)

   $ (1,807   $ 8,752  

 

(1)

For a discussion of Adjusted EBITDA and Adjusted EBITDA Margin and a reconciliation from Net income (loss) and total comprehensive income (loss) and margin, the most comparable GAAP measure to Adjusted EBITDA and margin, see “Prospectus Summary – Summary Historical Consolidated Financial and Other Data.”

(2)

For a discussion of restaurant level operating profit and restaurant level operating profit margin and a reconciliation from Income (Loss) from operations and margin, the most comparable GAAP measure to restaurant level operating profit and margin, see “Prospectus Summary – Summary Historical Consolidated Financial and Other Data.”

(3)

Represents expenses directly incurred to open new restaurants, including pre-opening rent, manager salaries, recruiting expenses, employee payroll, training and marketing costs. These expenses are recorded in other restaurant operating expenses and occupancy expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss).

(4)

Consists of the non-cash portion of straight-line rent expense primarily included in occupancy expenses and general and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss). This amount represents the extent to which our straight-line rent expense exceeds or is less than our cash rent payments and varies depending on the average age of our lease portfolio. For newer leases, straight-line rent expense typically exceeds cash rent payments. For more mature leases, straight-line rent expense is typically less than cash rent payments.

Restaurant Sales

 

     Twenty-Six Weeks Ended  
     June 27, 2021      June 28, 2020      Change  
     (in thousands)         

Restaurant sales:

        

In-restaurant dining sales

   $ 203,836    $ 113,961      78.9

Third-party delivery sales

     37,352      4,806      n/m (1) 

Take-out sales

     35,866      12,426      n/m (1) 
  

 

 

    

 

 

    

 

 

 

Total Restaurant sales

   $ 277,054    $ 131,193      n/m (1) 

 

(1)

Not meaningful.

 

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Comparison of the twenty-six weeks ended June 27, 2021 to the twenty-six weeks ended June 28, 2020 is impacted by government-mandated dining room restrictions during 2020 and the temporary suspension of all company-owned restaurant operations starting April 13, 2020 as result of the COVID-19 pandemic. We reopened substantially all our company-owned restaurants in four phases by the end of June 2020. The increase in total restaurant sales during the twenty-six weeks ended June 27, 2021 as compared to the twenty-six weeks ended June 28, 2020 was also driven by $17.3 million of sales recognized from 27 NROs in the third fiscal quarter of 2020 through June 27, 2021.

For improved comparability due to the impact of the COVID-19 pandemic on fiscal 2020, same-restaurant sales growth during the twenty-six weeks ended June 27, 2021 was 8.4% when compared to the twenty-six weeks ended June 30, 2019.

The volume of off-premises sales, which includes both third-party delivery and take-out sales, increased as a result of customers’ growing preference for at-home dining due to the COVID-19 pandemic. During the twenty-six weeks ended June 28, 2020, off-premises sales were 13.1% of $131.2 million of total restaurant sales. Even as total restaurant sales have increased to $277.1 million for the twenty-six weeks ended June 27, 2021, the percentage of off-premises sales has also increased to 26.4%. Menu price increases were implemented to compensate for third-party delivery fees in connection with the off-premises sales resulting in a relatively neutral margin on off-premises sales as compared to in-restaurant dining sales. Given that this sales volume of off-premises business emerged as a result of the COVID-19 pandemic, we cannot be certain a similar sales volume will continue in the future.

Franchise Revenues

 

     Twenty-Six Weeks Ended  
     June 27, 2021      June 28, 2020      Change  
     (in thousands)         

Franchise revenues:

        

Royalty and system fund contributions

   $ 3,954      $ 1,825        116.7

Initial fees

     124        228        (45.6 )% 
  

 

 

    

 

 

    

 

 

 

Total Franchise revenues

   $ 4,078    $ 2,053      98.6

The increase in franchise revenues during the twenty-six weeks ended June 27, 2021 as compared to the same period in the prior year was primarily driven by significantly lower sales during fiscal 2020 due to the COVID-19 pandemic, partially offset by $0.4 million of franchise revenues recognized during the twenty-six weeks ended June 27, 2021 for 13 franchise-owned NROs, net of franchise-owned restaurant closures, in the third fiscal quarter of 2020 through June 27, 2021.

Food and Beverage Costs

 

     Twenty-Six Weeks Ended  
     June 27, 2021     June 28, 2020     Change  
     (in thousands)        

Food and beverage costs

   $ 60,512   $ 30,987     95.3

As a percentage of restaurant sales

     21.8     23.6     (1.8 )% 

As a percentage of restaurant sales, food and beverage costs decreased from 23.6% during the twenty-six weeks ended June 28, 2020 to 21.8% during the twenty-six weeks ended June 27, 2021 primarily due to (i) inventory obsolescence and spoilage totaling $0.4 million resulting from the COVID-19 pandemic during the twenty-six weeks ended June 28, 2020 and (ii) the surcharge on third-party delivery sales. For improved comparability due to the impact of the COVID-19 pandemic on fiscal 2020, food and beverage costs as a percentage of restaurant sales was approximately 23.5% during the twenty-six weeks ended June 30, 2019.

 

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Food and beverage costs increased during the twenty-six weeks ended June 27, 2021 as compared to the twenty-six weeks ended June 28, 2020 primarily as a result of (i) reduced restaurant sales in fiscal 2020 due to the COVID-19 pandemic, partially offset by (ii) $4.0 million of food and beverage costs from the 27 NROs in the third fiscal quarter of 2020 through June 27, 2021.

Labor and Other Related Expenses

 

     Twenty-Six Weeks Ended  
     June 27, 2021     June 28, 2020     Change  
     (in thousands)        

Labor and other related expenses

   $ 85,999   $ 50,012     72.0

As a percentage of restaurant sales

     31.0     38.1     (7.1 )% 

As a percentage of restaurant sales, the decrease in labor and other related expenses from 38.1% during the twenty-six weeks ended June 28, 2020 to 31.0% during the twenty-six weeks ended June 27, 2021 was primarily due to leveraging of labor and other related expenses as restaurants sales have grown rapidly combined with limited availability of in-restaurant labor and staff shortages resulting from the COVID-19 pandemic.

As a percentage of restaurant sales, labor and other related expenses during the twenty-six weeks ended June 27, 2021 was 31.0% as compared to approximately 34.5% during the twenty-six weeks ended June 30, 2019, for improved comparability due to the impact of the COVID-19 pandemic on fiscal 2020. The decrease was due to limited availability of hourly labor and staff shortages resulting from the COVID-19 pandemic.

The increase in labor and other related expenses during the twenty-six weeks ended June 27, 2021 as compared to the twenty-six weeks ended June 28, 2020 is primarily due to (i) government-mandated dining room restrictions during 2020, the temporary suspension of all company-owned restaurant operations and other effects resulting from the COVD-19 pandemic, (ii) $5.9 million due to the additional costs incurred in 27 NROs in the third fiscal quarter of 2020 through June 27, 2021 and (iii) normal performance-related bonuses, partially offset by (iv) $1.8 million in compensation expense and health insurance costs for furloughed employees, net of employee retention credits, incurred during the twenty-six weeks ended June 28, 2020.

Other Restaurant Operating Expenses

 

    Twenty-Six Weeks Ended  
    June 27, 2021     June 28, 2020     Change  
    (in thousands)        

Other restaurant operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .

  $ 46,815   $ 23,282     101.1

As a percentage of restaurant sales

    16.9     17.7     (0.8 )% 

As a percentage of restaurant sales, the decrease in other restaurant operating expenses from 17.7% during the twenty-six weeks ended June 28, 2020 to 16.9% during the twenty-six weeks ended June 27, 2021 was primarily due to (i) leveraging increased restaurant sales that have recovered from depressed levels due to effects of the COVID-19 pandemic, partially offset by (ii) the increase in credit card fees, supplies, utilities and repairs and maintenance totaling approximately $13.9 million as the operations at company-owned restaurants were temporarily suspended and government-mandated dining room restrictions imposed due to the COVID-19 pandemic during the twenty-six weeks ended June 28, 2020, (iii) an increase in third-party delivery services fees of $7.7 million as a result of continued off-premises sales and (iv) the increase in pre-opening expenses of $0.4 million.

For improved comparability due to the impact of the COVID-19 pandemic on fiscal 2020, the increase in other restaurant operating expenses as a percentage of restaurant sales of 13.7% during the twenty-six weeks ended June 30, 2019 to 16.9% during the twenty-six weeks ended June 27, 2021 was primarily driven by off-premises packaging costs, personal protective equipment, supplies and third-party delivery service fees.

 

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Occupancy Expenses

 

     Twenty-Six Weeks Ended  
     June 27, 2021     June 28, 2020     Change  
     (in thousands)        

Occupancy expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..

   $ 27,757   $ 25,182     10.2

As a percentage of restaurant sales

     10.0     19.2     (9.2 )% 

The increase in occupancy expenses during the twenty-six weeks ended June 27, 2021 as compared to the twenty-six weeks ended June 28, 2020 was primarily due to the increase in the number of company-owned restaurants and the number of leases that had commenced during the respective periods. Pre-opening rent expense was $0.7 million during the twenty-six weeks ended June 27, 2021 as compared to $1.1 million during the twenty-six weeks ended June 28, 2020.

General and Administrative Expenses

 

     Twenty-Six Weeks Ended  
     June 27, 2021      June 28, 2020      Change  
     (in thousands)         

General and administrative expenses

   $ 27,341    $ 22,278      22.7

The increase in general and administrative expenses during the twenty-six weeks ended June 27, 2021 as compared to the twenty-six weeks ended June 28, 2020 was primarily due to (i) the increase in compensation of $5.7 million resulting from additional headcount and performance-related bonuses as compared to 2020 when there were furloughs and the reduction in bonuses, (ii) the increase of $0.7 million in marketing spend, partially offset by (iii) the reduction of $1.7 million in consulting, accounting and other expenses incurred in connection with public-company readiness efforts during fiscal 2020.

Depreciation and Amortization

 

     Twenty-Six Weeks Ended  
     June 27, 2021      June 28, 2020      Change  
     (in thousands)         

Depreciation and amortization

   $ 15,762    $ 15,028      4.9

The increase in depreciation and amortization recognized during the twenty-six weeks ended June 27, 2021 as compared to the twenty-six weeks ended June 28, 2020 was primarily due to incremental depreciation expense associated with NROs.

Impairments and Loss on Disposal of Assets

 

     Twenty-Six Weeks Ended  
     June 27, 2021      June 28, 2020      Change  
     (in thousands)         

Impairments and loss on disposal of assets

   $ 163    $ 255      (36.1 )% 

There were no impairment losses recognized on intangible assets or fixed assets during the twenty-six weeks ended June 27, 2021 and June 28, 2020.

Loss on disposal of assets recognized during the periods indicated were related to retirements and replacements of fixed assets as well as disposals of assets.

 

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Transaction Expenses, Net

 

     Twenty-Six Weeks Ended  
     June 27, 2021      June 28, 2020      Change  
     (in thousands)         

Transaction expenses, net

   $ 626    $ 99      n/m (1) 

 

(1)

Not meaningful.

Transaction expenses, net primarily represents the revaluation of the contingent consideration payable to

previous stockholders for tax savings generated through use of federal and state loss carryforwards. See Note 9, Income Taxes, in the notes to the interim unaudited consolidated financials statements and Note 14, Income Taxes, in the notes to the audited consolidated financial statements included elsewhere in this prospectus for additional information.

Income (Loss) from Operations

 

     Twenty-Six Weeks Ended  
     June 27, 2021      June 28, 2020     Change  
     (in thousands)        

Income (Loss) from operations

   $ 16,157    $ (33,877     n/m (1) 

 

(1) Not meaningful.

Income from operations for the twenty-six weeks ended June 27, 2021 as compared to Loss from operations for the twenty-six weeks ended June 28, 2020 was primarily due to (i) the temporary suspension of operations at company-owned restaurants and seating capacity restrictions due to the COVID-19 pandemic in fiscal 2020 and (ii) the impact of the operating results of 27 NROs in the third fiscal quarter of 2020 through June 27, 2021, partially offset by (iii) the increase in food and beverage costs, labor and other related expenses and third-party delivery fees as restaurant sales and traffic increased during the twenty-six weeks ended June 27, 2021.

Interest Expense

 

     Twenty-Six Weeks Ended  
     June 27, 2021      June 28, 2020      Change  
     (in thousands)         

Interest expense

   $ 12,605    $ 10,667      18.2

The increase in interest expense during the twenty-six weeks ended June 27, 2021 as compared to the twenty-six weeks ended June 28, 2020 was primarily due to the additional interest incurred pursuant to the fourth amendment of our credit agreement in August 2020 of $2.2 million. See Note 7, Debt, in the notes to the interim unaudited consolidated financial statements included elsewhere in this prospectus for additional information.

Other Income, Net

 

     Twenty-Six Weeks Ended
     June 27, 2021      June 28, 2020      Change
     (in thousands)       

Other income, net

   $ 321    $ 360    (10.8)%

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.

 

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Income Tax Expense (Benefit)

 

     Twenty-Six Weeks Ended  
     June 27, 2021      June 28, 2020     Change  
     (in thousands)        

Income tax expense (benefit)

   $ 2,110    $ (12,762     n/m (1) 

 

(1)

Not meaningful.

The effective income tax rate for the twenty-six weeks ended June 27, 2021 was 54.5% as compared to 28.9% for the twenty-six weeks ended June 28, 2020. The change in the effective income tax rate was primarily due to the change in the valuation allowance for federal and state deferred tax assets, the benefit of tax credits for FICA taxes on certain employees’ tips and the forecasted 2021 pre-tax book income as compared to forecasted 2020 pre-tax book loss.

The Company has a blended federal and state statutory rate of approximately 25.0%. The effective income tax rate for the twenty-six weeks ended June 27, 2021 and June 28, 2020 were different from the blended federal and state statutory rate primarily due to the change in the valuation allowance for federal and state deferred tax assets and the benefit of tax credits for FICA taxes on certain employees’ tips.

Quarterly Results of Operations

The following table sets forth statements of operations data for the first and second fiscal quarters of 2021 and each quarter in fiscal 2020 and fiscal 2019. We have prepared the unaudited quarterly information on a basis consistent with the audited consolidated financial statements included elsewhere in this prospectus. In the opinion of management, the financial information reflects all adjustments which we consider necessary for a fair presentation of this data. This information should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this prospectus. The results of interim historical periods are not necessarily indicative of the results for any future period.

 

    Quarter ended  
    June 27,
2021
    March 28,
2021
    December 27,
2020
    Sept. 27,
2020
    June 28,
2020
    March 29,
2020
    December 29,
2019
    Sept. 29,
2019
    June 30,
2019
    March 31,
2019
 
    (in thousands, except per share data)  

Total revenues

  $ 153,962   $ 127,170   $ 109,393   $ 99,749   $ 28,283   $ 104,963   $ 114,213   $ 109,646   $ 109,223   $ 103,291

Income (Loss) from operations

  $ 12,312   $ 3,845   $ (4,728   $ (8,617   $ (27,669   $ (6,208   $ (2,528   $ (3,678   $ (32,715   $ 1,365

Net income (loss) and total comprehensive income (loss) *

  $ 3,804   $ (2,041   $ (7,117   $ (11,142   $ (25,490   $ (5,932   $ (5,775   $ (7,030   $ (29,543   $ (3,124

Net income (loss) per common share - basic

  $ 0.08     $ (0.05   $ (0.16   $ (0.25   $ (0.57   $ (0.13   $ (0.13   $ (0.16   $ (0.66   $ (0.07

Net income (loss) per common share - diluted

  $ 0.08     $ (0.05   $ (0.16   $ (0.25   $ (0.57   $ (0.13   $ (0.13   $ (0.16   $ (0.66   $ (0.07

 

*

The results of the fourth fiscal quarter of 2019 include the impact of an out of period correction of an error that resulted in a $1.4 million increase in the income tax benefit. See Note 2, Summary of Significant Accounting Policies, in the notes to the audited consolidated financial statements included elsewhere in this prospectus for additional information.

Non-GAAP Metrics

For a description of Adjusted EBITDA and Adjusted EBITDA Margin and restaurant level operating profit and restaurant level operating profit margin and reconciliations to the most directly comparable GAAP measures, please see the “Summary Historical Consolidated Financial and Other Data” starting on page 21. For

 

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improved comparability due to the impact of the COVID-19 pandemic on fiscal 2020, the reconciliation of Net loss and total comprehensive loss and margin, the most directly comparable GAAP measure, to Adjusted EBITDA and margin for the twenty-six weeks ended June 30, 2019 is as follows:

 

    Twenty-Six
Weeks Ended
June 30, 2019
 
    (in thousands)  

Net loss and total comprehensive loss

    $  (32,666

Depreciation and amortization

    13,034  

Interest expense

    10,245  

Income tax benefit

    (9,048
 

 

 

 

EBITDA

    (18,435

Initial public offering (“IPO”)-readiness and strategic transition costs(1)

    4,009  

Impairments and loss on disposal of assets(2)

    32,880  

Transaction expenses, net(3)

    1,107  

Stock-based compensation(4)

    556  

Recruiting and relocation costs(5)

    435  

Severance costs(6)

    192  
 

 

 

 

Adjusted EBITDA

  $ 20,744
 

 

 

 

Total revenues

  $ 212,514

Net loss and comprehensive loss margin

    (15.4 )% 

Adjusted EBITDA Margin

    9.8

 

(1)

Represents costs related to information technology support and external professional service costs incurred in connection with IPO- readiness efforts as well as the assessment and redesign of our systems and processes. These costs are recorded within general and administrative expenses on the Consolidated Statements of Operations and Comprehensive Loss.

(2)

Includes impairments recognized on intangible assets and fixed assets as well as costs related to the disposal of assets due to retirements, replacements or certain restaurant closures.

(3)

Primarily represents costs incurred in connection with the acquisition of certain franchised restaurants, costs incurred in connection with the conversion of certain restaurants to company-owned restaurants operating under the First Watch trade name and costs related to restaurant closures. In addition, the amount also includes costs associated with the revaluation of the contingent consideration payable to previous stockholders for tax savings generated through use of federal and state loss carryforwards. See Note 14, Income Taxes, in the notes to the audited financial statements and Note 9, Income Taxes, in the notes to the interim unaudited consolidated financial statements included elsewhere in this prospectus for additional information.

(4)

Represents non-cash, stock-based compensation expense which is recorded in general and administrative expenses on the Consolidated Statements of Operations and Comprehensive Loss.

(5)

Represents costs incurred for hiring qualified individuals as we assessed the redesign of our systems and processes. These costs are recorded within general and administrative expenses on the Consolidated Statements of Operations and Comprehensive Loss.

(6)

Severance costs are recorded in general and administrative expenses on the Consolidated Statements of Operations and Comprehensive Loss.

 

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For improved comparability due to the impact of the COVID-19 pandemic on fiscal 2020, the reconciliation of Loss from operations and margin, the most directly comparable GAAP financial measure, to Restaurant level operating profit and margin for the twenty-six weeks ended June 30, 2019 is as follows:

 

     Twenty-Six
Weeks Ended
June 30, 2019
 
     (in thousands)  

Loss from operations

     $  (31,350

Less: Franchise revenues

     (3,692

Add:

  

General and administrative expenses

     25,902

Depreciation and amortization

     13,035

Impairments and loss on disposal of assets(1)

     32,880

Transaction expenses, net(2)

     1,107
  

 

 

 

Restaurant level operating profit

   $ 37,882
  

 

 

 

Restaurant sales

   $ 208,822

Loss from operations margin

     (15.0 )% 

Restaurant level operating profit margin

     18.1 %

 

(1)

Includes impairments recognized on intangible assets and fixed assets as well as costs related to the disposal of assets due to retirements, replacements or certain restaurant closures.

(2)

Primarily represents costs incurred in connection with the acquisition of certain franchised restaurants, costs incurred in connection with the conversion of certain restaurants to company-owned restaurants operating under the First Watch trade name and costs related to restaurant closures. In addition, the amount also includes costs associated with the revaluation of the contingent consideration payable to previous stockholders for tax savings generated through use of federal and state loss carryforwards. See Note 14, Income Taxes, in the notes to the audited consolidated financial statements included elsewhere in this prospectus for additional information.

Liquidity and Capital Resources

Liquidity

Our primary sources of liquidity are cash flow from operations, cash and cash equivalents, credit capacity under our Senior Credit Facilities, and proceeds from equity offerings, including this offering. As of June 27, 2021, we had cash and cash equivalents of $48.0 million and availability under our Senior Credit Facilities of $21.1 million.

As of June 27, 2021, we had $288.8 million in outstanding borrowings under our Senior Credit Facilities, which excludes unamortized debt issuance costs and deferred issuance costs. Our total indebtedness as of June 27, 2021 was $294.0 million. See “Description of Material Indebtedness.” After giving effect to the application of the net proceeds from this offering, our total indebtedness will be $140.8 million. See “Use of Proceeds.” 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 requirements for working capital are not significant because our customers pay for their food and beverage purchases in cash or on debit or credit cards at the time of the sale and we are able to sell many of our inventory items before payment is due to the supplier of such items.

During fiscal 2020, the temporary closure of our dining rooms and the limitations on seating capacity due to the COVID-19 pandemic resulted in significantly reduced traffic in our restaurants which has negatively impacted our operating cash flows. In response, we took immediate steps to preserve liquidity including curtailing new restaurant construction and elective project spending, deferring rent payments and furloughing employees. Together with our lenders, we entered into two amendments to our Credit Agreement on April 27, 2020 and on August 14,

 

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2020, the principal effects of which incorporated paid-in-kind interest to be added to the outstanding amounts drawn and suspended debt covenant compliance from April 1, 2020 through March 28, 2021. See Note 10, Debt, in the notes to the audited consolidated financial statements and Note 7, Debt, in the notes to the interim unaudited consolidated financial statements included elsewhere in this prospectus for additional information.

In conjunction with the August 14, 2020 amendment to our Credit Agreement, we issued preferred shares to our owners in exchange for proceeds of $40.0 million, of which a portion was subsequently used to repay the outstanding balance of $10.5 million on the revolving credit facility.

We estimate that our capital expenditures will total approximately $30.0 million to $35.0 million in fiscal 2021, which we plan to fund primarily with cash generated from our operating activities as well as with borrowings under our Senior Credit Facilities.

We believe that our cash flow from operations, availability under our Senior Credit Facilities and available cash and cash equivalents will be sufficient to meet our liquidity needs for at least the next 12 months. We anticipate that to the extent that we require additional liquidity, it will be funded through additional indebtedness, the issuance of equity, or a combination thereof. 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. Although we have no specific current plans to do so, if we decide to pursue one or more significant acquisitions, we may incur additional debt or sell additional equity to finance such acquisitions, which would result in additional expenses or dilution.

Senior Credit Facilities and Unused Borrowing Capacity

Our Senior Credit Facilities mature on August 21, 2023. We have pledged substantially all our assets under our Senior Credit Facilities. For our Senior Credit Facilities excluding the Revolving Facility, principal payments at a rate of 0.25% of the original principal amounts are due quarterly with the remainder of principal (including paid-in-kind interest) and unpaid interest due at maturity, and have a commitment fee payable quarterly in arrears at 1% per annum, applicable to unused commitments. Our Revolving Facility includes a commitment fee at a rate of 0.50% per annum of the initial revolving credit commitment. The Senior Credit Facilities contain covenants that provide for, among other things, maintenance of certain ratios and restrictions on additional indebtedness. We were in compliance with the covenants as of June 27, 2021, December 27, 2020 and December 29, 2019.

The following table summarizes our unused borrowing capacity as of June 27, 2021, December 27, 2020 and December 29, 2019:

 

     June 27, 2021      December 27, 2020      December 29, 2019  
    

(in thousands)

 

Undrawn revolving credit facility

   $ 19,620      $ 19,620      $ 2,620  

Undrawn initial delayed draw term facility

     —          —          15,000  

Undrawn second amendment delayed draw term facility

     1,500        1,500        40,000  
  

 

 

    

 

 

    

 

 

 

Total unused borrowing capacity

   $ 21,120      $ 21,120      $ 57,620  
  

 

 

    

 

 

    

 

 

 

 

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Summary of Cash Flows

The following table presents a summary of our cash provided by (used in) operating, investing and financing activities for the twenty-six weeks ended June 27, 2021 and June 28, 2020 and for fiscal 2020 and fiscal 2019:

 

     Twenty-Six Weeks Ended     Fiscal  
     June 27, 2021     June 28, 2020     2020     2019  
     (in thousands)  

Cash provided by (used in) operating activities

   $ 30,428     $ (19,908   $ (18,364   $ 21,465  

Cash used in investing activities

     (19,524     (19,352     (26,974     (82,389

Cash (used in) provided by financing activities

     (1,717     40,474       73,314       55,761  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents and restricted cash

   $ 9,187     $ 1,214     $ 27,976     $ (5,163
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash provided by operating activities during the twenty-six weeks ended June 27, 2021 as compared to cash used in operating activities during the twenty-six weeks ended June 28, 2020 was primarily driven by (i) the increase in restaurant sales and traffic, (ii) the increase in sales of gift cards and (iii) the timing of operational receipts and payments, partially offset by (iv) payments for rent deferrals.

Cash used in investing activities increased during the twenty-six weeks ended June 27, 2021 as compared to the twenty-six weeks ended June 28, 2020 primarily as a result of curtailing new restaurant construction during the first half of fiscal 2020 due to the COVID-19 pandemic.

Cash flows used in financing activities during the twenty-six weeks ended June 27, 2021 comprised of repayments on our Senior Credit Facilities as compared to proceeds from the issuance of long-term debt received, net of repayments made on our Senior Credit Facilities during the twenty-six weeks ended June 28, 2020.

Cash from operating activities decreased during fiscal 2020 as compared to fiscal 2019 primarily due to impacts of the COVID-19 pandemic which reduced in-restaurant dining room traffic and sales of gift cards. Further decreases to cash from operating activities were the result of compensation paid to furloughed employees and the Company’s funding of the employee portion of health insurance premiums on behalf of furloughed participants. These uses of cash from operating activities are partially offset by employee retention credits of $0.9 million and the deferral of payroll tax payments totaling $6.7 million provided for under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) as well as rent deferrals and abatements.

The decrease in cash used in investing activities during fiscal 2020 as compared to fiscal 2019 was primarily due to lower capital expenditures and cash outflows related to acquisitions.

The increase in cash provided by financing activities during fiscal 2020 as compared to fiscal 2019 was primarily due to proceeds from the issuance of preferred shares, partially offset by lower net borrowings on the Senior Credit Facilities.

Contractual Obligations

The following table sets forth certain contractual obligations, debt obligations and commitments as of
December 27, 2020:

 

     Total      Less than 1 year      1-3 years      4-5 years      More than 5 years  
     (in thousands)  

Long-term debt(1)

   $ 290,761      $ 3,609      $ 286,323      $ 819      $ 10  

Operating lease obligations(2)

   $ 695,858      $ 41,695      $ 80,327      $ 82,530      $ 491,306  

Purchase obligations(3)

   $ 2,500      $ 2,500      $ —        $ —        $ —    

Interest(4)

   $ 63,213      $ 19,297      $ 43,865      $ 51      $ —    

 

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(1)

Amount includes Senior Credit Facilities and finance lease liabilities. Amount is not reduced by unamortized debt discount and deferred issuance costs and finance lease interest expense.

(2)

Amounts represent undiscounted future minimum rental commitments under non-cancelable operating leases and includes option renewal periods only to the extent it is reasonably certain that the extension options will be exercised.

(3)

Purchase obligations include agreements to purchase goods or services that are enforceable, legally binding and specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction.

(4)

Projected future interest payments on long-term debt are based on interest rates in effect as of December 27, 2020 and assume only scheduled principal payments.

The above table excludes short-term, exclusive contracts we enter into with certain vendors, primarily of inventory, restaurant-level service contracts, advertising and technology, to supply us with food, beverages and paper goods, obligating us to purchase specified quantities, products and/or services at fixed prices. These commitments are cancellable and there are no material financial penalties associated with these agreements in the event of early termination. We also enter into purchase commitments related to construction, marketing and other service-related arrangements that occur in the normal course of business. Such commitments are excluded from the above table, as they are typically short-term in nature.

In addition, other unrecorded obligations that have been excluded from the contractual obligations table include contingent rent payments, property taxes, insurance payments and common area maintenance costs.

Off-Balance Sheet Arrangements

Except for certain letters of credit entered into as security under the terms of several of our leases and the unrecorded contractual obligations set forth above, we did not have any off-balance sheet arrangements as of June 27, 2021, December 27, 2020 and December 29, 2019.

Critical Accounting 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 prospectus, 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, 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 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.

Goodwill and Indefinite-Lived Intangibles

Goodwill and indefinite-lived intangibles, which include our registered trade names, trademarks, domains and liquor licenses, are tested for impairment annually, on the first day of the fourth quarter of the fiscal year, or whenever 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,

 

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significant competition or changes in our business strategy. Any adverse change 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. If we determine that it is more likely than not that the carrying value of our reporting unit exceeds the fair value, a quantitative analysis is performed. We estimate the fair value of our reporting unit using the best information available, including market information (also referred to as the market capitalization or 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 the reporting unit’s projection of estimated operating results and cash flows 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.

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 trademarks exceed the estimated fair value.

The effect of the COVID-19 pandemic was considered an indicator of impairment in April 2020 indicating that the carrying value of goodwill and indefinite-lived intangible assets may not be recoverable. We performed a quantitative impairment assessment in April 2020 and determined there was no impairment loss to be recognized. The fair value of the reporting unit exceeded its carrying value by 9% while all other indefinite lived intangible assets significantly exceeded their carrying value, which we define as being greater than 20%. We also performed our annual impairment test of goodwill and indefinite-lived intangibles as of the first day of the fourth quarter of fiscal 2020 and determined there was no impairment loss to be recognized. The fair value of the reporting unit in the annual impairment test in fiscal 2020 exceeded its carrying value by 8% (the decrease from 9% in April 2020 was primarily due to a change in the weighted average cost of capital) and the fair value of all other indefinite-lived intangible assets significantly exceeded their carrying values. We performed a qualitative annual impairment assessment for goodwill and indefinite-lived assets as of the first day of the fourth quarter of fiscal 2019 and determined there was no indication of impairment. See Note 6, Goodwill, and Note 7, Intangible Assets, Net, in the notes to the audited consolidated financial statements included in this prospectus for additional information.

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 asset, net of the related operating lease liability and (iii) reacquired rights to the extent the restaurant had been previously 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 judgement is used to determine the expected useful lives of long-lived assets and the estimated future cash flows, including projected sales growth and operating margins. 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 franchise rights which arose from the purchase price allocation in connection with the Advent Acquisition and also include reacquired rights from the Company’s acquisitions of franchised restaurants. Definite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives and are also reviewed for impairment whenever events or change in circumstances indicate that the carrying amount of an asset may not be recoverable. Significant judgments are used to determine if an indicator of

 

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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. Any adverse change in these factors could have a significant impact on the recoverability of these assets and the resulting impairment charge could have a material impact on 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 indicator 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.

Long-lived assets and definite-lived intangible assets were evaluated for impairment in April 2020 as the effect of the COVID-19 pandemic was considered a triggering event indicating that the carrying amounts of our long-lived assets and definite-lived intangibles may not be recoverable. We performed a quantitative impairment assessment and we did not record any impairment charges during fiscal 2020. See Note 7, Intangible Assets, Net, and Note 8 – Property, Fixtures and Equipment, Net, in the notes to the audited consolidated financial statements included in this prospectus for additional information.

Leases

We lease our restaurant facilities and corporate offices, as well as certain restaurant equipment under various non-cancelable agreements. We evaluate our leases at contract inception to determine whether we have the right to control use of the identified asset for a period of time in exchange for consideration. If we determine that we have the right to obtain substantially all the economic benefit from use of the identified asset and the right to direct the use of the identified asset, we recognize a right-of-use asset and lease liability. At contract inception, we also evaluate our leases to estimate their expected term which includes reasonably certain renewal options, and their classification as either operating leases or finance leases. Lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent our right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments, accrued lease payments or lease incentives. 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 an implicit rate. 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 publicly-traded comparable 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 these assumptions and management judgments may produce materially different amounts in the recognition of the right-of-use assets and lease liabilities.

In fiscal 2020, we renegotiated numerous lease agreements that primarily resulted in rent abatements or rent deferrals due to the effects of the COVID-19 pandemic. See Note 2, Summary of Significant Accounting Policies, in the notes to the audited consolidated financial statements included in this prospectus for additional information as to our accounting for these lease modifications in connection with the lease accounting guidance issued by the FASB in April 2020.

Income Taxes

We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets or liabilities are recognized for the estimated future tax effects attributable to temporary differences between the carrying value and the tax basis of assets and liabilities as well as tax credit carryforwards. The estimates we make under this method include, among other items, depreciation and amortization expense allowable for tax

 

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purposes, credits for items such as taxes paid on reported employee tip income, effective rates for state and local income taxes and the deductibility of certain items. In addition, our annual effective income tax rate is adjusted as additional information becomes available during the reporting period.

We recognized deferred tax assets for all deductible temporary differences to the extent that it is probable that taxable income will be available against which the deductible temporary differences can be utilized. A valuation allowance for deferred tax assets is provided when it is more likely than not that a portion of the deferred tax assets will not be realized. Potential for recovery of deferred tax assets is evaluated by estimating the future taxable profits expected, scheduling of anticipated reversal of taxable temporary differences, and considering prudent and feasible tax planning strategies. We continue to monitor and evaluate the rationale for recording a valuation allowance against deferred tax assets. As we increase earnings and utilize deferred tax assets, it is possible the valuation allowance could be reduced or eliminated.

We assess liabilities for uncertain tax positions and recognize a liability when a position taken or expected to be taken in a tax return is more likely than not, or more than a 50% likelihood, to be sustained upon examination by tax authorities based on its technical merits. A recognized tax position is then measured at the largest amount of benefit that is more likely than not of being realized upon ultimate settlement. We determined that there were no material uncertain tax positions which were required to be recorded or disclosed in the financial statements for fiscal 2020 and fiscal 2019.

Interest and penalties, when incurred, are recognized in other income (expense), net on the consolidated statements of operations and comprehensive loss.

Fair Value of Common Stock and Stock-Based Compensation

Stock-based compensation expense is measured based on the award’s grant date fair value. Stock-based compensation expense related to time-based stock options is recognized as stock-based compensation expense on an accelerated recognition method over the requisite service period. The fair value of performance-based stock option awards is recognized as stock-based compensation expense when the condition is deemed probable of being achieved. We account for forfeitures as they occur.

During the periods presented, our common stock was not publicly traded. As there has been no public market, the estimated fair value has been determined with input from management, considering as one of the factors the most recently available third-party valuations of common stock and an assessment of additional objective and subjective factors that were relevant at the date of the grant. We estimate the fair value of our common stock using a combination of the income approach (discounted cash flows of internal projected future cash flows) and the market approach (comparing comparable publicly-traded peer group in the restaurant industry), which are equally weighted.

Beginning in the first fiscal quarter of 2021, we determined the Company’s equity value using the probability weighted expected return method (“PWERM”), or the hybrid method. Under the hybrid method, multiple valuation approaches are used and then combined into a single probability weighted valuation using a PWERM, which considers the probability of an initial public offering and sale scenarios. The results of the valuation approaches were weighted based on a variety of factors, including: the current macroeconomic environment, current industry conditions and length of time since arms-length market transaction events. Additionally, a discount for lack of marketability was applied to account for the lack of access to an active public market. The resulting value was then allocated to outstanding equity using an option-pricing model.

We estimate the fair value of stock options using the Black-Scholes valuation model. Calculating the fair value of stock-based awards requires certain assumptions and judgments. We based our volatility assumption of 41.2% and 34.1% for fiscal 2020 and fiscal 2019, respectively, on the historical volatility of the selected peer group and we based our expected term of 4.5 years for both fiscal 2020 and fiscal 2019 using the historical

 

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information of the selected peer group. The assumptions underlying these valuations represented management’s best estimate, which involved inherent uncertainties and the application of management’s judgment. As a result, if we had used significantly different assumptions or estimates, the fair value of our common stock and our stock-based compensation expense could have been materially different.

Once a public trading market for our common stock has been established in connection with the closing of this offering, the fair value of our common stock will be determined based on the quoted market price of our common stock.

Gift Card Revenue Recognition

We sell gift cards to customers in our restaurants, through our website and through select third parties. A liability is initially established for the value of the gift card when sold. We recognize revenue from gift cards when the card is redeemed by the customer. There is uncertainty when calculating gift card breakage, the amount of gift cards which will not be redeemed, because management is required to make assumptions and to apply judgment regarding the effects of future events. We recognize gift card breakage revenue using estimates based on historical redemption patterns. If actual redemptions vary from the estimated breakage, gift card breakage revenue may differ from the amount recorded. We periodically update our estimates used for breakage and apply that rate to gift card redemptions.

Self-Insurance Reserves

We retain large deductibles or self-insured retentions for employee group health claims nationally, a portion of our general liability insurance and our employee workers’ compensation programs. We maintain coverage with a third- party insurer to limit our total exposure for these programs. The accrued liabilities associated with our self-insured programs are based on our estimate of the ultimate costs to settle known claims, as well as claims incurred but not yet reported to us (“IBNR”) as of the balance sheet date. Our estimated liabilities are based on information provided by our insurance broker and insurer, combined with our judgment regarding a number of assumptions and factors, including the frequency and severity of claims, claims development history, case jurisdiction, applicable legislation and our claims settlement practices. Significant judgment is required to estimate IBNR amounts, as parties have yet to assert such claims. If actual claims trends, including the severity or frequency of claims, differ from our estimates, our financial results could be impacted.

Business Combinations

We account for acquisitions using the purchase method of accounting. Accordingly, assets acquired and liabilities assumed are recorded at their estimated fair values at the acquisition date. Our purchase price allocation methodology contains uncertainties because it requires us to make certain assumptions and to apply judgment to estimate the fair value of acquired assets and liabilities, including, but not limited to, property and equipment, intangible assets, and goodwill. The excess of purchase price over fair value of net assets acquired, including the amount assigned to identifiable intangible assets, is recorded as goodwill. Given the time it takes to obtain pertinent information to finalize our purchase price allocation, it may be several quarters before we are able to finalize those initial fair value estimates. Accordingly, it is not uncommon for the initial estimates to be subsequently revised. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.

Qualitative and Quantitative Disclosure About Market Risk

Commodity and Food Price Risks

Our profitability is dependent on, among other things, our ability to anticipate and react to changes in the costs of key operating resources, including food and beverage, energy and other commodities. We have been able to partially offset cost increases resulting from a number of factors, including market conditions, shortages or interruptions in supply due to weather or other conditions beyond our control, governmental regulations and

 

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inflation, by increasing our menu prices, as well as making other operational adjustments that increase productivity. However, substantial increases in costs and expenses could impact our results of operations to the extent that such increases cannot be offset by menu price increases.

Interest Rate Risk

Our Senior Credit Facilities incur interest at a floating rate. We seek to manage exposure to adverse interest rate changes through our normal operating and financing activities. As of December 27, 2020, we had $288.0 million in outstanding borrowings under our Senior Credit Facilities, excluding unamortized debt discount and deferred issuance costs. Based on the amount outstanding under our Senior Credit Facilities as of December 27, 2020, a change of one hundred basis points in the applicable interest rate would cause an increase or decrease in interest expense of approximately $2.9 million on an annual basis.

Effects of Inflation

Inflation impacts all our restaurant operating expenses. While we have been able to partially offset inflation and other changes in operating expenses by gradually increasing menu prices, coupled with more efficient purchasing practices, productivity improvements and greater economies of scale, there can be no assurance that we will be able to continue to do so in the future. From time to time, competitive conditions could limit our menu pricing flexibility. In addition, macroeconomic conditions could make additional menu price increases imprudent. We anticipate cost pressure on several commodities for fiscal 2021. We are planning moderate price increases in fiscal 2021, which may or may not be enough to recover increased operating expenses. There can be no assurance that future cost increases can be offset by increased menu prices or that increased menu prices will be fully absorbed without any resulting change to their visit frequencies or purchasing patterns. In addition, there can be no assurance that we will generate same-restaurants sales growth in an amount sufficient to offset inflationary or other cost pressures. However, we anticipate our food and beverage costs as a percentage of restaurant sales will remain consistent with fiscal 2020 from a combination of price increases, product mix changes and recipe modifications.

Additionally, wages paid in our restaurants are impacted by changes in federal and state hourly minimum wage rates. Accordingly, changes in the federal and state hourly minimum wage rates directly affect our labor costs. Wages and benefits are also affected by supply and demand forces in specific regions. The restaurant industry and we typically attempt to offset the effect of inflation, at least in part, through periodic menu price increases and various cost reduction programs.

A portion of the leases for our company-owned restaurants provide for contingent rent obligations based on a percentage of sales. As a result, an increase in occupancy and related expenses will offset a proportionate share of any menu price increases at our company-owned restaurants.

Recently Issued Accounting Pronouncements

For a discussion of recently issued accounting pronouncements, see Note 2, Summary of Significant Accounting Policies, in the notes to the audited consolidated financial statements included elsewhere in this prospectus.

Jumpstart Our Business Startups Act of 2012

The JOBS Act permits us, as an emerging growth company, to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We are choosing to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

 

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BUSINESS

We Are First Watch

We are First Watch – an award-winning daytime restaurant concept serving made-to-order breakfast, brunch and lunch using fresh ingredients. Since our founding in 1983, we have built our brand on our commitment to operational excellence, our “You First” culture and our culinary mission centered around a fresh, innovative menu that is continuously evolving. These foundational brand pillars have established First Watch as the largest and fastest growing concept in Daytime Dining. Our one shift, from 7:00 a.m. to 2:30 p.m., and one main menu enable us to optimize restaurant operations and attract and retain employees who are passionate about hospitality and drawn to our “No Night Shifts Ever” approach. This differentiation has driven high employee satisfaction and retention, and strong consumer demand and operating performance as evidenced by our 28 consecutive quarters of same-restaurant sales growth from fiscal 2013 to fiscal 2019 and positive annual same-restaurant traffic growth from fiscal 2014 to fiscal 2019, prior to the emergence of the COVID-19 pandemic. In January 2020, we were recognized as “America’s Favorite Restaurant Brand” in Market Force’s annual consumer study and as one of three industry finalists for Black Box Intelligence’s 2020 Best Practices award.

Our unique one-shift and one-menu approach, coupled with our commitment to our employees and customers throughout the COVID-19 pandemic allowed us to retain and attract employees and reopen our restaurants with accelerating operating momentum in the second half of 2020 and into 2021, recording same-restaurant sales growth of 16.3% in the second fiscal quarter of 2021 relative to the second fiscal quarter of 2019. Importantly, our same-restaurant traffic growth in the second fiscal quarter of 2021 was ahead of the comparable quarter in 2019 by 1.0%. Throughout the COVID-19 pandemic, we invested in supplemental compensation and expanded health benefits for our people while at the same time we accelerated strategic investments in our business and continued to expand our footprint, opening 42 and 18 System-wide NROs in fiscal 2020 and during the twenty-six weeks ended June 27, 2021, respectively. As of June 27, 2021, we had 423 System-wide restaurants across 28 states, 335 of our restaurants were company-owned and 88 were operated by our franchisees.

Our Promise: Yeah, It’s Fresh!

At First Watch, we take a creative approach to Daytime Dining led by a focus on and commitment to freshness. Each item is made-to-order and prepared with care – you will not find microwave ovens, heat lamps or deep fryers in our kitchens. Every morning, we arrive at the crack of dawn to slice and juice fresh fruits and vegetables, bake muffins, brew our fresh coffee and whip up our French Toast batter from scratch. Our award-winning chef-driven menu includes elevated executions of classic favorites for breakfast, lunch and brunch, along with First Watch-specific specialties such as our protein-packed Quinoa Power Bowl®, Farmstand Breakfast Tacos, Avocado Toast, Morning Meditation (juiced in-house daily), our new Vodka Kale Tonic, Chickichangas and our famous Million Dollar Bacon. While our menu constantly evolves, our focus on – and commitment to – freshness never wavers.

Our Mission: You First

For more than 38 years, we have cultivated an organizational culture built on our mission of “You First,” which puts serving others above all else. As a company, we put our employees first and empower them to do whatever it takes to put our customers first. We give back in meaningful ways to the local communities in which we operate and also support national and international causes we care about, such as our Project Sunrise partnership that supports women-owned coffee farms in Colombia, which in turn empowers them to reinvest in their communities. Our “You First” mission, in addition to our quality of life advantage inherent in our single-shift operating model, has led us to be recognized as an employer of choice in our industry, according to a five-year longitudinal study of employee surveys on Glassdoor published in June 2019 by William Blair. We believe that our approach to our employees not only long before but also during the COVID-19 pandemic has enabled us to retain and attract employees to get our restaurants staffed up to meet the current consumer demand better than our peers.

 

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Proven Record of Sustained Growth

We have delivered almost four decades of sales and unit growth as a result of our broad brand appeal, compelling economic proposition and difficult-to-replicate business model. We have achieved consistent growth in total System-wide restaurants to 423 as of June 27, 2021, from 277 restaurants in fiscal 2015. Over the six-year period ended December 29, 2019 (prior to the emergence of the COVID-19 pandemic), we:

 

   

Consistently delivered same-restaurant sales growth, averaging 6.3% annually

 

   

Consistently achieved positive annual same-restaurant traffic growth, averaging 1.4% annually

Over the five-year period ended December 29, 2019 (prior to the emergence of the COVID-19 pandemic), we:

 

   

Consistently increased AUVs by 25.7%, from $1.3 million in fiscal 2015 to $1.6 million in fiscal 2019

 

   

Consistently opened new company-owned restaurants with an average Cash-on-Cash Return of 50.8%

 

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LOGO

Our COVID-19 Response and How We Emerged as a Stronger Company

Our strong momentum in fiscal 2019 continued into January 2020 and February 2020 with same-restaurant sales growth of 7.4% and 4.7%, respectively. However, as the COVID-19 pandemic emerged in March 2020, our management team devised a strategy not only to prioritize the health and safety of our employees and customers in keeping with our “You First” culture, but also to accelerate planned strategic initiatives that would position us

 

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to be more nimble in capturing sales. The following are some of the actions we took that enabled us to persevere during the pandemic and emerge as a stronger company in 2021:

 

   

Aligned with our sponsor, Advent, to commit capital both to our people as well as to our continued new restaurant development and real estate pipeline;

 

   

Began closing all dining rooms during the week of March 15, 2020 (regardless of state and local orders), transitioning to off-premises sales only and rapidly deploying our first phase of new hardware and software enhancements to enable this critical sales channel;

 

   

Furloughed most of our employees, but provided relief payments to help with immediate needs for those hourly employees with more than three years of service, while committing to make managers and corporate employees “whole” upon return for any financial shortfall between the state and federal benefits they received and their base salaries;

 

   

Paid both employer and employee portion of healthcare premiums for furloughed employees enrolled in our healthcare plans, covered 100% of out-of-pocket costs for insured employees and their families for medical visits related to the COVID-19 pandemic and secured telemedicine services for employees;

 

   

Temporarily suspended all operations at our company-owned restaurants on April 13, 2020 to prioritize the health and safety of our team members;

 

   

Established the “You First Fund,” which provides tax-free grants to in-need employees and which had distributed approximately $800,000 in such grants through June 2021;

 

   

Deployed new safety protocols and procedures as well as an employee wellness screening tool with COVID-19 contact tracing. Our efforts were recognized in a Technomic survey in the third quarter of 2020 that rated First Watch as best in its peer group with regard to customer safety and sanitation; and

 

   

Offered employees a payment in consideration for the time taken to receive their full schedule of immunization, once COVID-19 vaccines were available.

With respect to our operations, we rapidly addressed new consumer behaviors by accelerating previously planned initiatives to position ourselves for short-term recovery and long-term growth such as online ordering to enable third-party delivery services, the expansion of our carefully curated alcohol program and touchless payment technology:

 

   

Developed and launched a new mobile app to allow customers to order takeout and delivery and to join our dining room waitlist remotely;

 

   

Integrated technology into our waitlist management solution to gather customer data on consumer preferences;

 

   

Accelerated the rollout of our alcohol program, which has proven to be an incremental occasion for consumers, increasing overall beverage incidence by 230 basis points;

 

   

Maintained the entirety of our menu throughout the COVID-19 pandemic while also prioritizing culinary innovation through our seasonal menu program;

 

   

Expanded our patio and outdoor service areas and reduced and distanced our freestanding tables;

 

   

Proactively contacted our landlords to negotiate rent deferrals or abatements, postpone turnover dates for certain restaurants, secure waivers of alcohol sales restrictions and obtain dedicated curbside parking for off-premises order pick up; and

 

   

Continued to invest in new company-owned restaurants and develop our future NRO pipeline, leading to a 7.4% increase in our company-owned restaurants from 299 in fiscal 2019 to 321 in fiscal 2020.

A total of approximately $4.8 million of costs were incurred in fiscal 2020 in connection with the COVID-19 pandemic, and were comprised of the following: (i) inventory obsolescence and spoilage of approximately $0.6 million, (ii) compensation paid to employees upon furlough and return from furlough of $1.4 million, (iii) $0.7 million for health insurance costs paid for furloughed employees, net of employee retention credits and (iv) supplies, such as personal protection equipment, of approximately $2.1 million.

 

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Since beginning our phased reopening in May 2020, our restaurants have steadily grown sales and transactions despite the seating capacity of restaurant dining rooms remaining constrained by state and local government mandates as well as our own internal standards taken to protect employees and customers. In Florida, for example, where approximately 30% of our company-owned restaurants are located, despite the state lifting indoor dining distancing restrictions on September 25, 2020, we maintained six-foot distances between tables through the first fiscal quarter of 2021 for the safety of our customers and employees.

As a result of the new initiatives that we put in place, when our company-owned restaurants reopened, we were able to meet the new customer demand for off-premises dining while also serving the in-restaurant customer traffic as it continued to increase. Our off-premises sales channel had been a relatively small portion of our sales pre-pandemic; in the fourth fiscal quarter of 2019 our average weekly off-premises sales were $1,897 per restaurant. In fiscal 2020, our off-premises sales benefited significantly from our technology investments and initiatives to reduce customer friction when ordering off-premises as well as changes in consumer behavior; this resulted in average weekly off-premises sales increasing to $8,082 per restaurant during the fourth fiscal quarter of 2020. Moreover, even as we saw our dine-in traffic grow steadily in 2021, our off-premises business remained relatively consistent with average weekly sales of $8,079 per restaurant in the second fiscal quarter of 2021. To ensure that our third-party delivery business was positioned for long-term success, we introduced a surcharge for third-party orders. We believe that off-premises sales will remain an incremental channel for us that serves an additional use occasion for our customers and that it will be an important part of growing average unit volumes to higher than pre-pandemic levels.

According to Nation’s Restaurant News, in 2019, First Watch was the fastest-growing full-service restaurant concept in the United States, based on year-over-year System-wide sales growth metrics, and in 2020, FSR Magazine identified First Watch as the fastest-growing full-service restaurant chain based on unit growth. Despite the COVID-19 pandemic, we continued to build and open new restaurants in 2020 with 23 company-owned restaurants in fiscal 2020 and continued to develop our pipeline for fiscal 2021 and fiscal 2022 new restaurant growth. During the twenty-six weeks ended June 27, 2021, our NROs have performed exceptionally well, even when compared to the strong performance of our existing restaurants, and generated annualized average sales of $2.0 million, relative to our existing restaurants that generated annualized average sales of $1.7 million.

 

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Starting in March 2021, we began to consistently report positive same-restaurant sales growth measured against pre-COVID results, including 5.9%, 13.4%, 14.8% and 19.7% same-restaurant sales growth in March, April, May and June of 2021, respectively, relative to March, April, May and June of 2019, respectively. Our momentum has continued into the third quarter of fiscal 2021 with same-restaurant sales for the month of July up 64.9% over 2020 and up 20.2% over 2019 and the month of August was up 45.2% over 2020 and up 17.0% over 2019. Similarly, our traffic in those months was up 5.1% and up 2.0% in July and August over 2019, respectively.

Monthly Same-Restaurant Sales Growth Since January 2020

 

LOGO

Long-Term Consumer Trends in Our Favor

We believe that we are well-positioned to continue to benefit from the confluence of a number of long-term multi-generational consumer trends:

Increasing Morning Meal Occasions.

The morning meal (Breakfast and morning Snack) has been the only foodservice daypart with consistent year-over-year growth for the last several years, according to RKMA. The restaurant industry captured two additional breakfast visits per capita, from 2015 to 2018, and with 78% of breakfasts still being prepared at home during 2019 according to the NPD Group. With 102 billion breakfast occasions and 50 billion morning snack occasions in 2019, per a January 2020 NPD Breakfast Insights report, morning restaurant traffic provides a compelling long-term opportunity for future growth. We believe that the broad appeal of our menu and the quality of our ingredients gives us a competitive advantage over many alternatives that offer breakfast and lunch. We believe that migration from dense urban to suburban areas, where most of our restaurants are located, will result in increased traffic and brand awareness. Increased work-from-home routines have kept people in suburban areas for larger portions of the day, increasing First Watch exposure to an incremental customer base.

Demand for Fresh, Healthy Food.

According to RKMA, almost two thirds of consumers consider a healthy menu an important factor in their restaurant choice and according to the NPD Group, 60% of consumers say they want more protein in their diet. The COVID-19 pandemic has progressed trends globally towards wellness with consumers becoming more focused than ever on living and eating healthier. Our freshly made food, with simple, high-quality, protein-rich ingredients, such as cage-free eggs and quinoa, aligns well with these consumer trends. According to Market Force data in January 2020, First Watch scored 36 and 23 points higher than the second place breakfast brand in categories of healthy choices and food quality, respectively.

 

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Consumers Want “On-Demand” Dining.

Consumers want the ability to order what they want and when they want it without regard to traditional daypart conventions. Increasingly busy schedules, the rise of the “gig” economy, flexible job hours and growth of remote workers, trends magnified by the COVID-19 pandemic, are powering demand for convenient, fast and flexible Daytime Dining offerings from our all-day menu, for which traditional rigid breakfast and lunch dayparts were not designed. In the second fiscal quarter of 2021, our average weekly off-premises sales per restaurant were $8,079 compared to $1,897 in the fourth fiscal quarter of 2019 and $8,082 in the fourth fiscal quarter of 2020.

We Are Disrupting a Massive Category

As consumer needs have evolved, so have we. Our “Urban Farm” positioning provides a creative, farm-fresh breakfast, brunch and lunch menu in a warm and rustic yet contemporary atmosphere – creating an energizing Daytime Dining experience that resonates with consumers. We enjoy broad appeal to a customer base that includes the morning traditionalists as well as a growing segment of younger, healthier and more affluent customers. These digital-centric consumers care about food and quality, are willing to pay more, and report higher advocacy for and share of visits to First Watch. There is no other concept with an offering similar to ours at a comparable scale. Our operating hours encompass breakfast, brunch and lunch, which represent 63% of all restaurant sales in the U.S., according to RKMA. Our business model and our scale position us for continued growth within this massive category.

Unrelenting Commitment to Fresh Ingredients and Culinary Innovation

Our creative, on-trend menu and seasonal offerings define the culinary voice of our brand and highlight our commitment to quality and freshness. We believe this commitment is a key differentiator between First Watch and larger restaurant concepts that have failed to evolve. When we say, “Yeah, It’s Fresh,” we mean it. While many established restaurant concepts are outsourcing a large part of the preparation of their food, we still do much of it in-house in each restaurant every day.

That commitment to quality and freshness is further evidenced throughout our award-winning menu with ingredients such as cage-free eggs, organic mixed greens and all-natural chicken, just to name a few. Our highly-curated menu of approximately 60 entrée items – small relative to most in our industry – features a thoughtful balance of classic favorites prepared and presented in an elevated way using high-quality ingredients, along with innovative and interesting specialty dishes that take the consumer on a culinary exploration.