SEC Filing | First Watch Restaurant Group, Inc

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fwrg-20220626

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 26, 2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission file number 001-40866

https://cdn.kscope.io/f18ec1351068423793503b843591e18f-fwrg-20220626_g1.jpg

First Watch Restaurant Group, Inc.

(Exact name of registrant as specified in its charter)


Delaware		82-4271369
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
	8725 Pendery Place, Suite 201, Bradenton, FL 34201
	(Address of Principal Executive Offices) (Zip Code)

(941) 907-9800

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	FWRG	The Nasdaq Stock Market LLC (Nasdaq Global Select Market)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

The registrant had outstanding 59,080,348 shares of common stock as of August 5, 2022.

TABLE OF CONTENTS


		Page
Cautionary Note Regarding Forward-Looking Statements		3
Part I. Financial Information
Item 1.	Financial Statements (Unaudited)	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	33

Part II. Other Information
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3.	Defaults Upon Senior Securities	35
Item 4.	Mine Safety Disclosures	35
Item 5.	Other Information	35
Item 6.	Exhibits	36
Signatures		36

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q (“Form 10-Q”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”), which are subject to known and unknown risks, uncertainties and other important factors that may cause actual results to be materially different from the statements made herein. All statements other than statements of historical fact are forward-looking statements. Forward-looking statements discuss our current expectations and projections relating to our financial position, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to any historical or current facts. These statements may include words such as “aim,” “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “future,” “intend,” “outlook,” “potential,” “project,” “projection,” “plan,” “seek,” “may,” “could,” “would,” “will,” “should,” “can,” “can have,” “likely,” the negatives thereof and other similar expressions. You should evaluate all forward-looking statements made in this Form 10-Q in the context of the risks and uncertainties disclosed herein, including under Part I. Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II. Item 1A. “Risk Factors,” and in our other filings with the Securities and Exchange Commission (“SEC”), including under Part I. Item 1A. “Risk Factors” in our Annual Report on Form 10-K as of and for the year ended December 26, 2021 (“2021 Form 10-K”) and in Part II. Item 1A. “Risk Factors” in our Quarterly Report on Form 10-Q as of and for the quarter ended March 27, 2022. The forward-looking statements included in this Form 10-Q are made only as of the date hereof and are expressly qualified in their entirety by these cautionary statements. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law. All information presented herein is based on our fiscal calendar. Unless otherwise stated, references to particular years, quarters, months or periods refer to our fiscal years and the associated quarters, months and periods of those fiscal years.

Table of Contents

Part I - Financial Information

Item 1. Financial Statements (Unaudited)

FIRST WATCH RESTAURANT GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

(Unaudited)


	JUNE 26, 2022		DECEMBER 26, 2021
Assets
Current assets:
Cash and cash equivalents	$	53,566	$	51,864
Restricted cash	251		251
Accounts receivable	3,869		4,450
Inventory	3,966		4,023
Prepaid expenses	5,542		5,677
Other current assets	2,837		1,432
Total current assets	70,031		67,697
Goodwill	345,219		345,219
Intangible assets, net	142,894		143,000
Operating lease right-of-use assets	343,797		324,995
Property, fixtures and equipment, net of accumulated depreciation of $130,380 and $115,582, respectively	177,025		164,695
Other long-term assets	1,282		1,311
Total assets	$	1,080,248	$	1,046,917
Liabilities and Equity
Current liabilities:
Accounts payable	$	6,986	$	11,060
Accrued liabilities	21,348		15,889
Accrued compensation and deferred payroll taxes	18,973		21,196
Deferred revenues	3,066		4,654
Current portion of operating lease liabilities	37,591		38,186
Current portion of long-term debt	4,395		3,186
Note payable	523		2,352
Total current liabilities	92,882		96,523
Operating lease liabilities	353,777		330,495
Long-term debt, net	97,180		99,753
Deferred income taxes	15,655		12,489
Other long-term liabilities	3,632		3,228
Total liabilities	563,126		542,488
Commitments and contingencies (Note 9)
Equity:
Preferred stock; $0.01 par value; 10,000,000 shares authorized; none issued and outstanding	—		—
Common stock; $0.01 par value; 300,000,000 shares authorized; 59,075,562 and 59,048,446 shares issued and outstanding at June 26, 2022 and December 26, 2021, respectively	591		590
Additional paid-in capital	614,223		608,878
Accumulated deficit	(97,692)		(105,039)
Total equity	517,122		504,429
Total liabilities and equity	$	1,080,248	$	1,046,917

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

FIRST WATCH RESTAURANT GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(Unaudited)


	THIRTEEN WEEKS ENDED				TWENTY-SIX WEEKS ENDED
	JUNE 26, 2022		JUNE 27, 2021		JUNE 26, 2022		JUNE 27, 2021
Revenues:
Restaurant sales	$	181,682	$	151,688	$	352,351	$	277,054
Franchise revenues	2,771		2,275		5,214		4,078
Total revenues	184,453		153,963		357,565		281,132
Operating costs and expenses:
Restaurant operating expenses (exclusive of depreciation and amortization shown below):
Food and beverage costs	45,219		33,596		84,622		60,512
Labor and other related expenses	58,687		45,950		113,829		85,999
Other restaurant operating expenses	28,759		23,423		56,076		45,443
Occupancy expenses	14,844		13,765		29,227		27,066
Pre-opening expenses	1,094		899		2,079		2,063
General and administrative expenses	21,942		15,388		41,505		27,341
Depreciation and amortization	8,400		7,976		16,623		15,762
Impairments and loss on disposal of assets	155		39		234		163
Transaction expenses, net	300		615		557		626
Total operating costs and expenses	179,400		141,651		344,752		264,975
Income from operations	5,053		12,312		12,813		16,157
Interest expense	(1,126)		(6,289)		(2,132)		(12,605)
Other income, net	116		67		279		321
Income before income taxes	4,043		6,090		10,960		3,873
Income tax expense	(1,336)		(2,285)		(3,613)		(2,110)
Net income and total comprehensive income	$	2,707	$	3,805	$	7,347	$	1,763

Net income per common share - basic	$	0.05	$	0.08	$	0.12	$	0.04
Net income per common share - diluted	$	0.05	$	0.08	$	0.12	$	0.04
Weighted average number of common shares outstanding - basic	59,057,991		45,013,784		59,053,219		45,013,784
Weighted average number of common shares outstanding - diluted	59,888,029		45,562,703		59,933,003		45,560,575

The accompanying notes are an integral part of these consolidated financial statements.

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FIRST WATCH RESTAURANT GROUP, INC.

CONSOLIDATED STATEMENTS OF EQUITY

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

(Unaudited)


	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Total Equity
	Shares	Amount
Balance at March 27, 2022	59,048,446	$	590	$	611,172	$	(100,399)	$	511,363
Net income	—	—		—		2,707		2,707
Stock-based compensation	—	—		2,808		—		2,808
Common stock issued upon exercise of stock options, net	27,116	1		243		—		244
Balance at June 26, 2022	59,075,562	$	591	$	614,223	$	(97,692)	$	517,122


	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Total Equity
	Shares	Amount
Balance at December 26, 2021	59,048,446	$	590	$	608,878	$	(105,039)	$	504,429
Net income	—	—		—		7,347		7,347
Stock-based compensation	—	—		5,102		—		5,102
Common stock issued upon exercise of stock options, net	27,116	1		243		—		244
Balance at June 26, 2022	59,075,562	$	591	$	614,223	$	(97,692)	$	517,122


	Preferred Stock			Common Stock			Additional Paid-in Capital		Accumulated Deficit		Total Equity
	Shares	Amount		Shares	Amount
Balance at March 28, 2021	266,667	$	3	45,013,784	$	450	$	423,474	$	(104,974)	$	318,953
Net income	—	—		—	—		—		3,805		3,805
Stock-based compensation	—	—		—	—		187		—		187
Balance at June 27, 2021	266,667	$	3	45,013,784	$	450	$	423,661	$	(101,169)	$	322,945


	Preferred Stock			Common Stock			Additional Paid-in Capital		Accumulated Deficit		Total Equity
	Shares	Amount		Shares	Amount
Balance at December 27, 2020	266,667	$	3	45,013,784	$	450	$	423,345	$	(102,932)	$	320,866
Net income	—	—		—	—		—		1,763		1,763
Stock-based compensation	—	—		—	—		316		—		316
Balance at June 27, 2021	266,667	$	3	45,013,784	$	450	$	423,661	$	(101,169)	$	322,945

The accompanying notes are an integral part of these consolidated financial statements.

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FIRST WATCH RESTAURANT GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(Unaudited)


	TWENTY-SIX WEEKS ENDED
	JUNE 26, 2022		JUNE 27, 2021
Cash flows from operating activities:
Net income	$	7,347	$	1,763
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	16,623		15,762
Stock-based compensation	5,102		316
Non-cash operating lease costs	7,730		6,285
Non-cash portion of gain on lease modifications	(62)		(13)
Deferred income taxes	3,166		2,033
Amortization of debt discount and deferred issuance costs	223		639
Impairments and loss on disposal of assets	234		163
Changes in assets and liabilities:
Accounts receivable	581		965
Inventory	57		(332)
Prepaid expenses	135		(1,374)
Deferred offering costs	—		(1,049)
Other assets, current and long-term	(1,376)		(366)
Accounts payable	(4,074)		2,147
Accrued liabilities and other long-term liabilities	3,636		5,567
Accrued compensation and deferred payroll taxes, current and long-term	(2,223)		5,347
Deferred revenues, current and long-term	(1,504)		(1,410)
Operating lease liabilities	(3,783)		(6,015)
Net cash provided by operating activities	31,812		30,428
Cash flows from investing activities:
Capital expenditures	(26,566)		(19,165)
Purchase of intangible assets	(379)		(359)
Net cash used in investing activities	(26,945)		(19,524)
Cash flows from financing activities:
Repayments of note payable	(1,829)		—
Repayments of long-term debt, including finance lease liabilities	(1,502)		(1,717)
Proceeds from exercise of stock options, net of employee taxes paid	244		—
Contingent consideration payment	(78)		—
Net cash used in financing activities	(3,165)		(1,717)
Net increase in cash and cash equivalents and restricted cash	1,702		9,187
Cash and cash equivalents and restricted cash:
Beginning of period	52,115		39,097
End of period	$	53,817	$	48,284
Supplemental cash flow information:
Cash paid for interest	$	1,996	$	9,866
Cash paid for income taxes, net of refunds	$	593	$	31

The accompanying notes are an integral part of these consolidated financial statements.

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FIRST WATCH RESTAURANT GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS - continued

(IN THOUSANDS)

(Unaudited)


	TWENTY-SIX WEEKS ENDED
	JUNE 26, 2022		JUNE 27, 2021
Supplemental disclosures of non-cash investing and financing activities:
Interest converted to long-term debt	$	—	$	2,198
Leased assets obtained in exchange for new operating lease liabilities	$	27,216	$	19,355
Leased assets obtained in exchange for new finance lease liabilities	$	50	$	143
Remeasurements of operating lease assets and lease liabilities	$	(746)	$	(1,476)
Remeasurements of finance lease assets and lease liabilities	$	(135)	$	7
Increase (Decrease) in liabilities from acquisition of property, fixtures and equipment	$	2,221	$	(475)

The accompanying notes are an integral part of these consolidated financial statements.

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FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of Business and Organization

First Watch Restaurant Group, Inc. (collectively with its wholly-owned subsidiaries, “the Company,” or “Management”) is a Delaware holding company. The Company operates and franchises restaurants in 28 states operating under the “First Watch” trade name, which are focused on made-to-order breakfast, brunch and lunch. The Company does not operate outside of the United States and all of its assets are located in the United States. As of June 26, 2022 and December 26, 2021, the Company operated 350 company-owned restaurants and 341 company-owned restaurants, respectively, and had 99 franchise-owned restaurants and 94 franchise-owned restaurants, respectively.

2. Summary of Significant Accounting Policies

Basis of Presentation

The Company reports financial information on a 52- or 53-week fiscal year ending on the last Sunday of each calendar year. The Company’s 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). The quarters ended June 26, 2022 and June 27, 2021 were both 13-week periods. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K as of and for the year ended December 26, 2021 (“2021 Form 10-K”).

The accompanying unaudited interim consolidated financial statements have been prepared by the Company in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all the information and notes required by GAAP for complete financial statements. The unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements included in the 2021 Form 10-K and include all adjustments necessary for the fair statement of the consolidated financial statements for the interim periods presented. The results of operations for interim periods are not necessarily indicative of the results to be expected for other interim periods or the entire fiscal year.

Reclassifications

The Company reclassified certain items in the accompanying unaudited interim consolidated financial statements for the prior periods to be comparable with the classification for the current period. These reclassifications are related to the presentation of Pre-opening expenses on the Consolidated Statements of Operations and Comprehensive Income for the prior periods presented, which were previously included in Other restaurant operating expenses and Occupancy expenses. These reclassifications had no effect on previously reported net income and comprehensive income.

Use of Estimates

The preparation of the unaudited interim consolidated financial statements in accordance with GAAP requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited interim consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from the estimates and such differences could be material.

Fair Value of Financial Instruments

Certain assets and liabilities are carried at fair value. Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The carrying amounts of the Company’s financial instruments, including cash equivalents, accounts receivable, accounts payable, accrued expenses, note payable and other current liabilities, approximate their fair values due to their short-term maturities. At June 26, 2022, the Company’s outstanding debt under the new facilities pursuant to the new credit agreement executed in October 2021 had a fair value of $95.5 million and a carrying value of $98.8 million.

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FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Summary of Recently Issued Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). The new guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. ASU 2020-04 was effective beginning March 12, 2020 and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. Management is currently evaluating its contracts and the optional expedients provided by the new standard.

Recent accounting guidance not discussed herein is not applicable, did not have, or is not expected to have a material impact to the Company.

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FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

3. Revenues

The following tables include a detail of liabilities from contracts with customers:


(in thousands)	JUNE 26, 2022		DECEMBER 26, 2021
Deferred revenues:
Deferred gift card revenue	$	2,805	$	4,410
Deferred franchise fee revenue - current	261		244
Total current deferred revenues	$	3,066	$	4,654
Other long-term liabilities:
Deferred franchise fee revenue - non-current	$	2,376	$	2,292

Changes in deferred gift card contract liabilities were as follows:


	THIRTEEN WEEKS ENDED				TWENTY-SIX WEEKS ENDED
(in thousands)	JUNE 26, 2022		JUNE 27, 2021		JUNE 26, 2022		JUNE 27, 2021
Deferred gift card revenue:
Balance, beginning of period	$	2,752	$	2,670	$	4,410	$	4,024
Gift card sales	2,362		2,153		3,578		3,085
Gift card redemptions	(2,089)		(1,987)		(4,679)		(4,060)
Gift card breakage	(220)		(179)		(504)		(392)
Balance, end of period	$	2,805	$	2,657	$	2,805	$	2,657

Changes in deferred franchise fee contract liabilities were as follows:


	THIRTEEN WEEKS ENDED				TWENTY-SIX WEEKS ENDED
(in thousands)	JUNE 26, 2022		JUNE 27, 2021		JUNE 26, 2022		JUNE 27, 2021
Deferred franchise fee revenue:
Balance, beginning of period	$	2,592	$	2,288	$	2,536	$	2,274
Cash received	110		—		230		82
Franchise revenues recognized	(65)		(56)		(129)		(124)
Balance, end of period	$	2,637	$	2,232	$	2,637	$	2,232

Revenues recognized disaggregated by type were as follows:


	THIRTEEN WEEKS ENDED				TWENTY-SIX WEEKS ENDED
(in thousands)	JUNE 26, 2022		JUNE 27, 2021		JUNE 26, 2022		JUNE 27, 2021
Restaurant sales:
In-restaurant dining sales	$	144,839	$	116,705	$	277,731	$	203,836
Third-party delivery sales	19,829		16,598		40,855		37,352
Take-out sales	17,014		18,385		33,765		35,866
Total restaurant sales	$	181,682	$	151,688	$	352,351	$	277,054

Franchise revenues:
Royalty and system fund contributions	$	2,706	$	2,219	$	5,085	$	3,954
Initial fees	65		56		129		124
Total franchise revenues	$	2,771	$	2,275	$	5,214	$	4,078
Total revenues	$	184,453	$	153,963	$	357,565	$	281,132

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FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. Accounts Receivable

Accounts receivable consisted of the following:


(in thousands)	JUNE 26, 2022		DECEMBER 26, 2021
Receivables from third-party delivery providers	$	1,224	$	1,021
Receivables from franchisees	1,167		927
Receivables from vendors	805		428
Receivables related to gift card sales	617		1,453
Other receivables	56		621
Total accounts receivable	$	3,869	$	4,450

5. Accrued Liabilities

Accrued liabilities consisted of the following:


(in thousands)	JUNE 26, 2022		DECEMBER 26, 2021
Construction liabilities	$	6,666	$	4,445
Sales tax	3,833		3,337
Self-insurance and general liability reserves	1,548		1,353
Utilities	1,319		1,306
Credit card fees	1,040		940
Property tax	993		638
Contingent rent	687		628
Common area maintenance	592		482
Other	4,670		2,760
Total accrued liabilities	$	21,348	$	15,889

6. Leases

The following table includes a detail of lease assets and liabilities:


(in thousands)	Consolidated Balance Sheets Classification	JUNE 26, 2022		DECEMBER 26, 2021
Operating lease right-of-use assets	Operating lease right-of-use assets	$	343,797	$	324,995
Finance lease assets	Property, fixtures and equipment, net	1,561		1,892
Total lease assets		$	345,358	$	326,887

Operating lease liabilities (1) - current	Current portion of operating lease liabilities	37,591		38,186
Operating lease liabilities - non-current	Operating lease liabilities	353,777		330,495
Finance lease liabilities - current	Current portion of long-term debt	645		686
Finance lease liabilities - non-current	Long-term debt, net	1,034		1,331
Total lease liabilities		$	393,047	$	370,698

_____________

(1) Excludes all variable lease expense.

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FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The components of lease expense are as follows:


(in thousands)	Consolidated Statements of Operations and Comprehensive Income Classification	THIRTEEN WEEKS ENDED				TWENTY-SIX WEEKS ENDED
		JUNE 26, 2022		JUNE 27, 2021		JUNE 26, 2022		JUNE 27, 2021
Operating lease expense	Other restaurant operating expenses Occupancy expenses Pre-opening expenses General and administrative expenses	$	12,130	$	11,034	$	24,176	$	21,886
Variable lease expense	Food and beverage costs Occupancy expenses General and administrative expenses	3,594		3,146		6,993		6,092
Finance lease expense:
Amortization of leased assets	Depreciation and amortization	132		135		267		266
Interest on lease liabilities	Interest expense	39		44		76		90
Total lease expense (1)		$	15,895	$	14,359	$	31,512	$	28,334

_____________

(1) Includes contingent rent expense of $0.4 million and $0.3 million during the thirteen weeks ended June 26, 2022 and June 27, 2021, respectively, and $0.8 million and $0.4 million during the twenty-six weeks ended June 26, 2022 and June 27, 2021, respectively.

Supplemental cash flow information related to leases was as follows:


	TWENTY-SIX WEEKS ENDED
(in thousands)	JUNE 26, 2022		JUNE 27, 2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows - operating leases	$	20,229	$	21,617
Operating cash flows - finance leases	$	76	$	90
Financing cash flows - finance leases	$	252	$	244

Supplemental information related to leases was as follows:


	TWENTY-SIX WEEKS ENDED
	JUNE 26, 2022		JUNE 27, 2021
Weighted-average remaining lease term (in years)
Operating leases	15.0		15.8
Finance leases	3.1		3.9
Weighted-average discount rate (1)
Operating leases	8.7	%	9.1	%
Finance leases	7.8	%	8.0	%

____________

(1) Based on the Company’s incremental borrowing rate.

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FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

As of June 26, 2022, future minimum lease payments for operating and finance leases consisted of the following:


(in thousands)	OPERATING LEASES		FINANCE LEASES
Fiscal year
2022	$	20,948	$	358
2023	42,053		626
2024	47,979		626
2025	47,872		221
2026	47,772		31
Thereafter	525,270		27
Total future minimum lease payments (1)	731,894		1,889
Less: imputed interest	(340,526)		(210)
Total present value of lease liabilities	$	391,368	$	1,679

_____________

(1) Excludes approximately $40.9 million of executed operating leases that have not commenced as of June 26, 2022.

7. Stock-Based Compensation

Stock-based awards are granted to employees and non-employee directors. The Company has two compensation plans that provide for the granting of stock options and other share-based awards to key employees and non-employee members of the board of directors. The 2017 Omnibus Equity Incentive Plan (the “2017 Equity Plan”) and the 2021 Equity Incentive Plan (the “2021 Equity Plan”) provide for the grant of incentive stock options, non-qualified stock options, restricted stock awards, restricted stock units, stock appreciation rights and stock-based awards. No awards were granted under the 2017 Equity Plan during the thirteen and twenty-six weeks ended June 26, 2022 and the Company does not intend to grant any further awards under the 2017 Equity Plan. At June 26, 2022, a total of 3,002,180 common shares were available to grant under the 2021 Equity Plan.

Stock option awards

A total of 1,002,239 time-based stock option awards were granted under the 2021 Equity Plan during the twenty-six weeks ended June 26, 2022 which vest over a three-year requisite service period from the date of grant and expire 10 years after the grant date.

A summary of stock option activity during the twenty-six weeks ended June 26, 2022 is as follows:


	NUMBER OF OPTIONS	WEIGHTED AVERAGE EXERCISE PRICE		AGGREGATE INTRINSIC VALUE (in thousands)
Outstanding, December 26, 2021	4,409,331	$	9.48	$	28,598
Granted	1,002,239	$	12.58
Forfeited	(71,020)	$	11.95
Exercised	(30,274)	$	9.34
Outstanding, June 26, 2022	5,310,276	$	10.04	$	23,703

Exercisable, June 26, 2022	1,816,706	$	9.10	$	9,806

The aggregate intrinsic value is based on the difference between the exercise price of the stock option and the closing price of the Company’s common stock on the Nasdaq Global Select Market.

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FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

A summary of the non-vested stock option activity during the twenty-six weeks ended June 26, 2022 is as follows:


	NUMBER OF OPTIONS	WEIGHTED AVERAGE GRANT DATE FAIR VALUE
Nonvested, December 26, 2021	2,633,391	$	7.03
Granted	1,002,239	$	12.58
Vested	(71,040)	$	2.07
Forfeited	(71,020)	$	3.05
Nonvested, June 26, 2022	3,493,570	$	8.80

Fair value of Stock Options

The fair value of stock option awards is estimated on the date of grant using the Black-Scholes valuation model. The assumptions utilized to estimate the grant date fair value of the stock option awards granted during the twenty-six weeks ended June 26, 2022 were as follows:


Expected term (years)	6.5
Expected volatility	52.4	%
Risk-free interest rate	2.6	%
Expected dividend yield	—

The Company does not have sufficient historical stock option exercise activity and therefore Management estimated the expected term of stock options granted using the simplified method, which represents the mid-point between the vesting period and the contractual term for each grant. The expected volatility of stock options is based on the historical volatilities of a set of publicly traded peer companies in a similar industry. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve for time periods approximately equal to the expected term of the stock option award. The expected dividend yield is based on the fact that the Company has never paid cash dividends and does not have intentions of paying dividends in the foreseeable future.

Restricted Stock Units

During the thirteen and twenty-six weeks ended June 26, 2022, a total of 38,311 restricted stock units were granted under the 2021 Equity Plan at the weighted average grant date fair value of $14.36. The restricted stock units will vest over a one-year requisite service period from the date of grant.

Stock-Based Compensation Expense

Stock-based compensation expense was $2.8 million and $5.1 million during the thirteen and twenty-six weeks ended June 26, 2022, respectively. Stock based compensation expense was $0.2 million and $0.3 million during the thirteen and twenty-six weeks ended June 27, 2021, respectively.

Unrecognized Stock-Based Compensation Expense

The following represents unrecognized stock-based compensation expense and the remaining weighted average vesting period as of June 26, 2022:


	UNRECOGNIZED STOCK-BASED COMPENSATION EXPENSE (in thousands)		REMAINING WEIGHTED AVERAGE VESTING PERIOD (in years)
Stock options	$	14,309	1.5
Restricted stock units	$	508	0.9

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FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

8. Income Taxes


	THIRTEEN WEEKS ENDED						TWENTY-SIX WEEKS ENDED
(in thousands)	JUNE 26, 2022			JUNE 27, 2021			JUNE 26, 2022			JUNE 27, 2021
Income before income taxes	$	4,043		$	6,090		$	10,960		$	3,873
Income tax expense	$	(1,336)		$	(2,285)		$	(3,613)		$	(2,110)
Effective income tax rate	33.0		%	37.5		%	33.0		%	54.5		%

The change in the effective income tax rates for the thirteen and twenty-six weeks ended June 26, 2022 as compared to the thirteen and twenty-six weeks ended June 27, 2021 was primarily due to (i) the change in the valuation allowance for federal and state deferred tax assets, (ii) the benefit of tax credits for FICA taxes on certain employees’ tips and (iii) permanent items including limitations on deductions of certain compensation.

The Company has a blended federal and state statutory rate of approximately 25.0%. The effective income tax rates for the thirteen and twenty-six weeks ended June 26, 2022 as compared to the thirteen and twenty-six weeks ended June 27, 2021 was primarily due to (i) the change in the valuation allowance for federal and state deferred tax assets, (ii) the benefit of tax credits for FICA taxes on certain employees’ tips and (iii) permanent items including limitations on deductions of certain compensation.

9. Commitments and Contingencies

Legal Proceedings

The Company is subject to legal proceedings, claims and liabilities that arise in the ordinary course of business. The amount of the ultimate liability with respect to these matters was not material as of June 26, 2022. In the event any litigation losses become probable and estimable, the Company will recognize any anticipated losses.

Unclaimed Property

The Company is subject to unclaimed or abandoned property (escheat) laws which require it to turn over to state governmental authorities the property of others held by the Company that has been unclaimed for specified periods of time. Property subject to escheat laws generally relates to uncashed checks, trade accounts receivable credits and unredeemed gift card balances. During the first quarter of 2022, the Company received a letter from the Delaware Secretary of State inviting the Company to participate in the Delaware Secretary of State’s Abandoned or Unclaimed Property Voluntary Disclosure Agreement Program to avoid being sent an audit notice by the Delaware Department of Finance. On April 22, 2022, the Company entered into Delaware’s Voluntary Disclosure Agreement Program in order to voluntarily comply with Delaware’s abandoned property law in exchange for certain protections and benefits. The Company intends to work in good faith to complete a review of its books and records related to unclaimed or abandoned property during the periods required under the program. The Company will continue to examine its options regarding the escheat laws of Delaware including completing Delaware’s Voluntary Disclosure Agreement Program or proceeding to audit. Any potential loss, or range of loss, that may result from this matter is not currently reasonably estimable.

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FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

10. Net Income Per Common Share

The following table sets forth the computations of basic and diluted net income per common share:


	THIRTEEN WEEKS ENDED				TWENTY-SIX WEEKS ENDED
(in thousands, except share and per share data)	JUNE 26, 2022		JUNE 27, 2021		JUNE 26, 2022		JUNE 27, 2021
Numerator:
Net income	$	2,707	$	3,805	$	7,347	$	1,763
Denominator:
Weighted average common shares outstanding - basic	59,057,991		45,013,784		59,053,219		45,013,784
Weighted average common shares outstanding - diluted	59,888,029		45,562,703		59,933,003		45,560,575
Net income per common share - basic	$	0.05	$	0.08	$	0.12	$	0.04
Net income per common share - diluted	$	0.05	$	0.08	$	0.12	$	0.04
Stock options outstanding not included in diluted net income per common share as their effect is anti-dilutive	2,213,408		630,195		1,567,102		630,195
Restricted stock units outstanding not included in diluted net income per share as their effect is anti-dilutive	11,185		—		—		—

Diluted net income per common share is calculated by adjusting the weighted average shares outstanding for the theoretical effect of potential common shares that would be issued for preferred stock using the two-class method, as well as for stock options and restricted stock units outstanding and unvested as of the respective periods using the treasury method.

During the thirteen and twenty-six weeks ended June 27, 2021, the performance-based stock options that were granted under the 2017 Equity Plan, certain of which were converted into time-based stock options upon the Company’s IPO, were excluded from the diluted net income per common share calculation as the performance condition was not considered probable of being met.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited interim consolidated financial statements and notes thereto included in Part I, Item 1 of this Form 10-Q and our audited consolidated financial statements as of and for the fiscal year ended December 26, 2021 and notes included in our 2021 Form 10-K. As discussed in “Cautionary Note Regarding Forward-Looking Statements,” the following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may materially differ from those discussed in such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified below and those discussed in “Risk Factors” under Part II, Item 1A in this Form 10-Q, the Form 10-Q for the quarterly period ended March 27, 2022 and in our 2021 Form 10-K, including under “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Overview

First Watch is an award-winning Daytime Dining concept serving made-to-order breakfast, brunch and lunch using fresh ingredients. A recipient of hundreds of local “Best Breakfast” and “Best Brunch” accolades, First Watch’s award winning chef-driven menu includes elevated executions of classic favorites for breakfast, brunch and lunch. In March 2022, First Watch was awarded ADP’s prestigious Culture at Work award. The Company is majority owned by Advent International Corporation, one of the world’s largest private-equity firms. On October 1, 2021, the Company’s common stock began trading on Nasdaq under the ticker symbol “FWRG.”

The Company does not operate outside of the United States. The Company operates and franchises restaurants in 28 states under the “First Watch” trade name and as of June 26, 2022, the Company had 350 company-owned restaurants and 99 franchise-owned restaurants.

Recent Developments

Financial highlights for the thirteen weeks ended June 26, 2022 (“second quarter of 2022”) as compared to the thirteen weeks ended June 27, 2021 (“second quarter of 2021”) reflect continued success and sustained growth despite a challenging macro environment and include the following:

•System-wide sales increased 20.0% to $231.2 million in the second quarter of 2022 from $192.6 million in the second quarter of 2021

•Total revenues increased 19.8% to $184.5 million in the second quarter of 2022 from $154.0 million in the second quarter of 2021

•Same-restaurant sales growth of 13.4% (30.2% relative to the second quarter of 2019*)

•Same-restaurant traffic growth of 8.1% (7.4% relative to the second quarter of 2019*)

•Income from operations margin of 2.8% during the second quarter of 2022 compared to 8.1% in the second quarter of 2021

•Restaurant level operating profit margin** of 18.2% in the second quarter of 2022 as compared to 22.5% in the second quarter of 2021

•Net income of $2.7 million, or $0.05 per diluted share, in the second quarter of 2022 compared to $3.8 million, or $0.08 per diluted share, in the second quarter of 2021

•Adjusted EBITDA** of $17.8 million in the second quarter of 2022 as compared to $22.2 million in the second quarter of 2021

•Opened 9 system-wide restaurants (5 company-owned and 4 franchise-owned) across 7 states resulting in a total of 449 system-wide restaurants (350 company-owned and 99 franchise-owned) across 28 states

___________________

* Comparison to the thirteen weeks ended June 30, 2019 (“second quarter of 2019”) is presented for enhanced comparability due to the economic impact of COVID-19.

** See Non-GAAP Financial Measures section below.

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Key Performance Indicators

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

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

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

Same-Restaurant Sales Growth: the percentage change in year-over-year restaurant sales (excluding gift card breakage) for the comparable restaurant base, which we define as the number of company-owned First Watch branded restaurants open for 18 months or longer as of the beginning of the fiscal year (“Comparable Restaurant Base”). For the thirteen and twenty-six weeks ended June 26, 2022, there were 304 restaurants in our Comparable Restaurant Base. For the thirteen and twenty-six weeks ended June 27, 2021, there were 270 restaurants in our Comparable Restaurant Base. Measuring our same-restaurant sales growth allows management to evaluate the performance of our existing restaurant base. We believe this measure is useful for investors to provide a consistent comparison of restaurant sales results and trends across periods within our core, established restaurant base, unaffected by results of store openings, closings, and other transitional changes.

Same-Restaurant Traffic Growth: the percentage change in traffic counts as compared to the same period in the prior year using the 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.

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

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

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Non-GAAP Financial Measures

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

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

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 and to make decisions regarding future spending and other operational decisions.

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), the most directly comparable measure in accordance with GAAP, to Adjusted EBITDA, included in the section Non-GAAP Financial Measures below.

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

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

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

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Selected Operating Data


	THIRTEEN WEEKS ENDED						TWENTY-SIX WEEKS ENDED
	JUNE 26, 2022			JUNE 27, 2021			JUNE 26, 2022			JUNE 27, 2021
System-wide sales (in thousands)	$	231,236		$	192,632		$	445,357		$	350,596
System-wide restaurants	449			423			449			423
Company-owned	350			335			350			335
Franchise-owned	99			88			99			88
Same-restaurant sales growth	13.4		%	403.5		%	19.7		%	95.9		%
Same-restaurant traffic growth	8.1		%	360.9		%	14.4		%	76.3		%
Income from operations (in thousands)	$	5,053		$	12,312		$	12,813		$	16,157
Income from operations margin	2.8		%	8.1		%	3.6		%	5.8		%
Restaurant level operating profit (in thousands) (1)	$	33,079		$	34,066		$	66,518		$	55,990
Restaurant level operating profit margin (1)	18.2		%	22.5		%	18.9		%	20.2		%
Net income (in thousands)	$	2,707		$	3,805		$	7,347		$	1,763
Net income margin	1.5		%	2.5		%	2.1		%	0.6		%
Adjusted EBITDA (in thousands) (2)	$	17,789		$	22,200		$	37,153		$	35,182
Adjusted EBITDA margin (2)	9.6		%	14.4		%	10.4		%	12.5		%

________________

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

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

Same-Restaurant Sales Growth and Same-Restaurant Traffic Growth


THIRTEEN WEEKS ENDED	SAME-RESTAURANT SALES GROWTH		SAME-RESTAURANT TRAFFIC GROWTH		COMPARABLE RESTAURANT BASE
June 26, 2022	13.4	%	8.1	%	304
June 27, 2021	403.5	%	360.9	%	270
June 28, 2020	(75.9)	%	(77.2)	%	212
June 30, 2019	6.2	%	2.4	%	168

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Results of Operations

Thirteen and Twenty-Six Weeks Ended June 26, 2022 Compared to Thirteen and Twenty-Six Weeks Ended June 27, 2021

The following table summarizes our results of operations and the percentages of certain items in relation to Total revenues or, where indicated, Restaurant sales for the thirteen and twenty-six weeks ended June 26, 2022 and June 27, 2021:

THIRTEEN WEEKS ENDED

TWENTY-SIX WEEKS ENDED

(in thousands)

JUNE 26, 2022

JUNE 27, 2021

JUNE 26, 2022

JUNE 27, 2021

Revenues