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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 September 25, 2022
OR
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/f425e2efb8b18d0be00c6fe6eb7f1e72-fwrg-20220925_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
(Registrants 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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par valueFWRG
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 59,199,619 shares of common stock as of November 3, 2022.



TABLE OF CONTENTS
Page

2



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.

3

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)
SEPTEMBER 25, 2022DECEMBER 26, 2021
Assets
Current assets:
Cash and cash equivalents$49,371 $51,864 
Restricted cash251 251 
Accounts receivable3,432 4,450 
Inventory4,116 4,023 
Prepaid expenses4,331 5,677 
Other current assets3,724 1,432 
Total current assets65,225 67,697 
Goodwill345,219 345,219 
Intangible assets, net142,988 143,000 
Operating lease right-of-use assets349,272 324,995 
Property, fixtures and equipment, net of accumulated depreciation of $138,124 and $115,582, respectively
186,579 164,695 
Other long-term assets1,195 1,311 
Total assets$1,090,478 $1,046,917 
Liabilities and Equity
Current liabilities:
Accounts payable$7,500 $11,060 
Accrued liabilities23,684 15,889 
Accrued compensation and deferred payroll taxes15,306 21,196 
Deferred revenues2,387 4,654 
Current portion of operating lease liabilities38,039 38,186 
Current portion of long-term debt5,628 3,186 
Note payable 2,352 
Total current liabilities92,544 96,523 
Operating lease liabilities361,172 330,495 
Long-term debt, net95,908 99,753 
Deferred income taxes16,842 12,489 
Other long-term liabilities3,741 3,228 
Total liabilities570,207 542,488 
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; 59,116,723 and 59,048,446 shares issued and outstanding at September 25, 2022 and December 26, 2021, respectively
591 590 
Additional paid-in capital617,326 608,878 
Accumulated deficit(97,646)(105,039)
Total equity520,271 504,429 
Total liabilities and equity$1,090,478 $1,046,917 
The accompanying notes are an integral part of these consolidated financial statements.
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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 ENDEDTHIRTY-NINE WEEKS ENDED
 SEPTEMBER 25, 2022SEPTEMBER 26, 2021SEPTEMBER 25, 2022SEPTEMBER 26, 2021
Revenues:
Restaurant sales$183,978 $155,082 $536,329 $432,136 
Franchise revenues2,874 2,359 8,088 6,437 
Total revenues186,852 157,441 544,417 438,573 
Operating costs and expenses:
Restaurant operating expenses (exclusive of depreciation and amortization shown below):
Food and beverage costs44,578 35,871 129,200 96,383 
Labor and other related expenses61,262 50,587 175,091 136,586 
Other restaurant operating expenses29,685 23,905 85,761 69,348 
Occupancy expenses15,091 13,969 44,318 41,035 
Pre-opening expenses1,490 510 3,569 2,573 
General and administrative expenses21,689 17,019 63,194 44,360 
Depreciation and amortization8,679 8,203 25,302 23,965 
Impairments and loss on disposal of assets338 98 572 261 
Transaction expenses, net1,419 126 1,976 752 
Total operating costs and expenses184,231 150,288 528,983 415,263 
Income from operations2,621 7,153 15,434 23,310 
Interest expense(1,362)(6,051)(3,494)(18,656)
Other income, net116 215 395 536 
Income before income taxes1,375 1,317 12,335 5,190 
Income tax expense(1,329)(534)(4,942)(2,644)
Net income and total comprehensive income $46 $783 $7,393 $2,546 
Net income per common share - basic$ $0.02 $0.13 $0.06 
Net income per common share - diluted$ $0.02 $0.12 $0.06 
Weighted average number of common shares outstanding - basic59,089,831 45,013,784 59,065,423 45,013,784 
Weighted average number of common shares outstanding - diluted60,464,062 46,085,650 60,088,622 46,077,196 

The accompanying notes are an integral part of these consolidated financial statements.
5

Table of Contents
FIRST WATCH RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(Unaudited)
 Common StockAdditional
Paid-in
Capital
Accumulated
Deficit
Total
Equity
 SharesAmount
Balance at June 26, 202259,075,562 $591 $614,223 $(97,692)$517,122 
Net income— — — 46 46 
Stock-based compensation— — 2,719 — 2,719 
Common stock issued upon exercise of stock options, net41,161  384 — 384 
Balance at September 25, 202259,116,723 $591 $617,326 $(97,646)$520,271 
 Common StockAdditional
Paid-in
Capital
Accumulated
Deficit
Total
Equity
 SharesAmount
Balance at December 26, 2021
59,048,446 $590 $608,878 $(105,039)$504,429 
Net income— — — 7,393 7,393 
Stock-based compensation— — 7,821 — 7,821 
Common stock issued upon exercise of stock options, net68,277 1 627 — 628 
Balance at September 25, 202259,116,723 $591 $617,326 $(97,646)$520,271 
 Preferred StockCommon StockAdditional
Paid-in
Capital
Accumulated
Deficit
Total
Equity
 SharesAmountSharesAmount
Balance at June 27, 2021266,667 $3 45,013,784 $450 $423,661 $(101,169)$322,945 
Net income— — — — — 783 783 
Stock-based compensation— — — — 430 — 430 
Balance at September 26, 2021266,667 $3 45,013,784 $450 $424,091 $(100,386)$324,158 
 Preferred StockCommon StockAdditional
Paid-in
Capital
Accumulated
Deficit
Total
Equity
 SharesAmountSharesAmount
Balance at December 27, 2020
266,667 $3 45,013,784 $450 $423,345 $(102,932)$320,866 
Net income— — — — — 2,546 2,546 
Stock-based compensation— — — — 746 — 746 
Balance at September 26, 2021266,667 $3 45,013,784 $450 $424,091 $(100,386)$324,158 


The accompanying notes are an integral part of these consolidated financial statements.
6

Table of Contents
FIRST WATCH RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
THIRTY-NINE WEEKS ENDED
SEPTEMBER 25, 2022SEPTEMBER 26, 2021
Cash flows from operating activities:
Net income $7,393 $2,546 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization25,302 23,965 
Stock-based compensation7,821 746 
Non-cash operating lease costs11,907 9,582 
Non-cash portion of gain on lease modifications(84) 
Deferred income taxes4,353 2,526 
Amortization of debt discount and deferred issuance costs334 958 
Impairments and loss on disposal of assets572 261 
Changes in assets and liabilities:
Accounts receivable1,018 1,014 
Inventory(93)(558)
Prepaid expenses1,346 (814)
Deferred offering costs (2,454)
Other assets, current and long-term(2,176)(639)
Accounts payable(3,560)2,757 
Accrued liabilities and other long-term liabilities6,032 8,406 
Accrued compensation and deferred payroll taxes, current and long-term(5,890)4,399 
Deferred revenues, current and long-term(2,061)(1,714)
Operating lease liabilities(5,570)(6,716)
Net cash provided by operating activities46,644 44,265 
Cash flows from investing activities:
Capital expenditures(44,985)(27,065)
Purchase of intangible assets(715)(359)
Net cash used in investing activities(45,700)(27,424)
Cash flows from financing activities:
Repayments of note payable(2,352) 
Repayments of long-term debt, including finance lease liabilities(1,635)(2,581)
Proceeds from exercise of stock options, net of employee taxes paid628  
Contingent consideration payment(78) 
Payment of deferred offering costs (1,255)
Net cash used in financing activities(3,437)(3,836)
Net (decrease) increase in cash and cash equivalents and restricted cash(2,493)13,005 
Cash and cash equivalents and restricted cash:
Beginning of period52,115 39,097 
End of period$49,622 $52,102 
Supplemental cash flow information:
Cash paid for interest$2,800 $14,763 
Cash paid for income taxes, net of refunds$777 $55 
The accompanying notes are an integral part of these consolidated financial statements.
7

Table of Contents
FIRST WATCH RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
(IN THOUSANDS)
(Unaudited)
 THIRTY-NINE WEEKS ENDED
 SEPTEMBER 25, 2022SEPTEMBER 26, 2021
Supplemental disclosures of non-cash investing and financing activities:
Interest converted to long-term debt$ $3,062 
Leased assets obtained in exchange for new operating lease liabilities$37,961 $23,391 
Leased assets obtained in exchange for new finance lease liabilities$89 $185 
Remeasurements and terminations of operating lease assets and lease liabilities$(1,861)$(2,396)
Remeasurements and terminations of finance lease assets and lease liabilities$(191)$9 
Increase (Decrease) in liabilities from acquisition of property, fixtures and equipment$2,148 $(1,153)



The accompanying notes are an integral part of these consolidated financial statements.
8

Table of Contents
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 29 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 September 25, 2022 and December 26, 2021, the Company operated 356 company-owned restaurants and 341 company-owned restaurants, respectively, and had 103 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 September 25, 2022 and September 26, 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 Companys 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 September 25, 2022, the Company’s outstanding debt under the facilities pursuant to the credit agreement executed in October 2021 had a fair value of $96.7 million and a carrying value of $98.8 million.

9

Table of Contents
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 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.
10

Table of Contents
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)SEPTEMBER 25, 2022DECEMBER 26, 2021
Deferred revenues:
Deferred gift card revenue$2,111 $4,410 
Deferred franchise fee revenue - current276 244 
Total current deferred revenues$2,387 $4,654 
Other long-term liabilities:
Deferred franchise fee revenue - non-current$2,498 $2,292 
Changes in deferred gift card contract liabilities were as follows:
 THIRTEEN WEEKS ENDEDTHIRTY-NINE WEEKS ENDED
(in thousands)SEPTEMBER 25, 2022SEPTEMBER 26, 2021SEPTEMBER 25, 2022SEPTEMBER 26, 2021
Deferred gift card revenue:
Balance, beginning of period$2,805 $2,657 $4,410 $4,024 
Gift card sales1,218 1,003 4,796 4,088 
Gift card redemptions(1,720)(1,483)(6,399)(5,543)
Gift card breakage(192)(165)(696)(557)
Balance, end of period$2,111 $2,012 $2,111 $2,012 

Changes in deferred franchise fee contract liabilities were as follows:
 THIRTEEN WEEKS ENDEDTHIRTY-NINE WEEKS ENDED
(in thousands)SEPTEMBER 25, 2022SEPTEMBER 26, 2021SEPTEMBER 25, 2022SEPTEMBER 26, 2021
Deferred franchise fee revenue:
Balance, beginning of period$2,637 $2,232 $2,536 $2,274 
Cash received204 400 434 482 
Franchise revenues recognized(67)(59)(196)(183)
Balance, end of period$2,774 $2,573 $2,774 $2,573 

Revenues recognized disaggregated by type were as follows:
 THIRTEEN WEEKS ENDEDTHIRTY-NINE WEEKS ENDED
(in thousands)SEPTEMBER 25, 2022SEPTEMBER 26, 2021SEPTEMBER 25, 2022SEPTEMBER 26, 2021
Restaurant sales:
In-restaurant dining sales$147,491 $123,311 $425,222 $327,147 
Third-party delivery sales20,105 15,232 60,960 52,584 
Take-out sales16,382 16,539 50,147 52,405 
Total restaurant sales$183,978 $155,082 $536,329 $432,136 
Franchise revenues:
Royalty and system fund contributions$2,807 $2,300 $7,892 $6,254 
Initial fees67 59 196 183 
Total franchise revenues$2,874 $2,359 $8,088 $6,437 
Total revenues$186,852 $157,441 $544,417 $438,573 
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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)SEPTEMBER 25, 2022DECEMBER 26, 2021
Receivables from third-party delivery providers$1,163 $1,021 
Receivables from franchisees1,230 927 
Receivables from vendors565 428 
Receivables related to gift card sales359 1,453 
Other receivables115 621 
Total accounts receivable$3,432 $4,450 
5.    Accrued Liabilities
Accrued liabilities consisted of the following:
(in thousands)SEPTEMBER 25, 2022DECEMBER 26, 2021
Construction liabilities$6,593 $4,445 
Sales tax3,884 3,337 
Self-insurance and general liability reserves1,223 1,353 
Utilities1,666 1,306 
Legal1,561 105 
Credit card fees1,049 940 
Property tax1,296 638 
Contingent rent911 628 
Common area maintenance624 482 
Other4,877 2,655 
Total accrued liabilities$23,684 $15,889 
6.    Leases
The following table includes a detail of lease assets and liabilities:
(in thousands)Consolidated Balance Sheets ClassificationSEPTEMBER 25, 2022DECEMBER 26, 2021
Operating lease right-of-use assetsOperating lease right-of-use assets$349,272 $324,995 
Finance lease assetsProperty, fixtures and equipment, net1,426 1,892 
Total lease assets$350,698 $326,887 
Operating lease liabilities (1) - current
Current portion of operating lease liabilities38,039 38,186 
Operating lease liabilities - non-currentOperating lease liabilities361,172 330,495 
Finance lease liabilities - currentCurrent portion of long-term debt628 686 
Finance lease liabilities - non-currentLong-term debt, net902 1,331 
Total lease liabilities$400,741 $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 ClassificationTHIRTEEN WEEKS ENDEDTHIRTY-NINE WEEKS ENDED
SEPTEMBER 25, 2022SEPTEMBER 26, 2021SEPTEMBER 25, 2022SEPTEMBER 26, 2021
Operating lease expenseOther restaurant operating expenses
Occupancy expenses
Pre-opening expenses
General and administrative expenses
$12,667 $11,377 $36,843 $33,263 
Variable lease expenseFood and beverage costs
Occupancy expenses
General and administrative expenses
3,676 3,202 10,669 9,294 
Finance lease expense:
Amortization of leased assetsDepreciation and amortization127 139 394 405 
Interest on lease liabilitiesInterest expense25 43 101 133 
Total lease expense (1)
$16,495 $14,761 $48,007 $43,095 
_____________
(1) Includes contingent rent expense of $0.4 million and $0.3 million during the thirteen weeks ended September 25, 2022 and September 26, 2021, respectively, and $1.2 million and $0.7 million during the thirty-nine weeks ended September 25, 2022 and September 26, 2021, respectively.

Supplemental cash flow information related to leases was as follows:
 THIRTY-NINE WEEKS ENDED
(in thousands)SEPTEMBER 25, 2022SEPTEMBER 26, 2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows - operating leases$30,506 $30,388 
Operating cash flows - finance leases$101 $133 
Financing cash flows - finance leases$385 $371 
Supplemental information related to leases was as follows:
 THIRTY-NINE WEEKS ENDED
 SEPTEMBER 25, 2022SEPTEMBER 26, 2021
Weighted-average remaining lease term (in years)
Operating leases14.815.6
Finance leases3.03.7
Weighted-average discount rate (1)
Operating leases8.6 %9.1 %
Finance leases7.7 %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 September 25, 2022, future minimum lease payments for operating and finance leases consisted of the following:
(in thousands)OPERATING LEASESFINANCE LEASES
Fiscal year
2022$10,454 $194 
202341,398 607 
202449,185 607 
202548,934 227 
202648,762 38 
Thereafter540,510 39 
Total future minimum lease payments (1)
739,243 1,712 
Less: imputed interest(340,032)(182)
Total present value of lease liabilities$399,211 $1,530 
_____________
(1) Excludes approximately $35.0 million of executed operating leases that have not commenced as of September 25, 2022.
7. Equity and Stock-Based Compensation
Equity Transactions
During the thirteen weeks ended September 25, 2022, funds managed by the Company’s majority owner, Advent International Corporation, sold 4,500,000 shares of the Company’s common stock through a secondary public offering that was completed on September 19, 2022 (the “Secondary Offering”). The selling stockholders sold an additional 675,000 shares of common stock on October 6, 2022 pursuant to the terms of the underwriters option associated with the Secondary Offering. All net proceeds from the sale of the shares of common stock were distributed to the selling stockholders. The Company incurred approximately $1.6 million of costs that were recorded within Transaction expenses, net on the Consolidated Statements of Operations and Comprehensive Income.
Stock Option Awards
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 thirty-nine weeks ended September 25, 2022 and the Company does not intend to grant any further awards under the 2017 Equity Plan. At September 25, 2022, a total of 2,987,536 common shares were available to grant under the 2021 Equity Plan.
A total of 1,018,975 time-based stock option awards were granted under the 2021 Equity Plan during the thirty-nine weeks ended September 25, 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 thirty-nine weeks ended September 25, 2022 is as follows:
NUMBER OF OPTIONSWEIGHTED AVERAGE
EXERCISE PRICE
AGGREGATE INTRINSIC VALUE
(in thousands)
Outstanding, December 26, 2021
4,409,331 $9.48 $28,598 
Granted1,018,975 $12.67 
Forfeited(150,059)$10.24 
Exercised(68,277)$9.19 
Outstanding, September 25, 2022
5,209,970 $10.09 $23,083 
Exercisable, September 25, 2022
2,355,416 $8.98 $13,037 
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 thirty-nine weeks ended September 25, 2022 is as follows:
NUMBER OF OPTIONSWEIGHTED AVERAGE GRANT DATE FAIR VALUE
Nonvested, December 26, 2021
2,633,391 $7.03 
Granted 1,018,975 $6.81 
Vested (647,753)$4.01 
Forfeited (150,059)$7.29 
Nonvested, September 25, 2022
2,854,554 $7.62 
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 thirty-nine weeks ended September 25, 2022 were as follows:
Expected term (years)6.5
Expected volatility52.4 %
Risk-free interest rate2.6 %
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 thirty-nine weeks ended September 25, 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 $2.7 million and $7.8 million during the thirteen and thirty-nine weeks ended September 25, 2022, respectively. Stock based compensation expense was $0.4 million and $0.7 million during the thirteen and thirty-nine weeks ended September 26, 2021, respectively.

Unrecognized Stock-Based Compensation Expense
The following represents unrecognized stock-based compensation expense and the remaining weighted average vesting period as of September 25, 2022:
UNRECOGNIZED STOCK-BASED COMPENSATION EXPENSE
(in thousands)
REMAINING WEIGHTED AVERAGE
VESTING PERIOD
(in years)
Stock options$11,267 1.5
Restricted stock units $371 0.7
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FIRST WATCH RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
8.    Income Taxes
 THIRTEEN WEEKS ENDEDTHIRTY-NINE WEEKS ENDED
(in thousands)SEPTEMBER 25, 2022SEPTEMBER 26, 2021SEPTEMBER 25, 2022SEPTEMBER 26, 2021
Income before income taxes$1,375 $1,317 $12,335 $5,190 
Income tax expense $(1,329)$(534)$(4,942)$(2,644)
Effective income tax rate96.7 %40.5 %40.1 %50.9 %

The change in the effective income tax rates for the thirteen and thirty-nine weeks ended September 25, 2022 as compared to the same periods in the prior year 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, (iii) limitations on deductions of certain compensation and (iv) non-deductible costs associated with the Secondary Offering.

The Company has a blended federal and state statutory rate of approximately 25.0%. The effective income tax rates for the thirteen and thirty-nine weeks ended September 25, 2022 are different than the blended federal and state statutory rate 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, (iii) limitations on deductions of certain compensation and (iv) non-deductible costs associated with the Secondary Offering.
9.    Commitments and Contingencies

Purchase Commitments
In July 2022, Management entered into an agreement with a vendor to purchase product. The agreement will remain in effect through the later of (i) the purchase of 585,940 gallons of product or (ii) 5 years from the effective date of the agreement. The remaining minimum purchase commitment as of September 25, 2022 was approximately $9.5 million.

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 September 25, 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 August 31, 2022, the Company was accepted into Delaware’s Voluntary Disclosure Agreement Program, entitling it to certain benefits and protections offered to participants in the program. 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 ENDEDTHIRTY-NINE WEEKS ENDED
(in thousands, except share and per share data)SEPTEMBER 25, 2022SEPTEMBER 26, 2021SEPTEMBER 25, 2022SEPTEMBER 26, 2021
Numerator:
Net income $46 $783 $7,393 $2,546 
Denominator:
Weighted average common shares outstanding - basic59,089,831 45,013,784 59,065,423 45,013,784 
Weighted average common shares outstanding - diluted60,464,062 46,085,650 60,088,622 46,077,196 
Net income per common share - basic$ $0.02 $0.13 $0.06 
Net income per common share - diluted$ $0.02 $0.12 $0.06 
Stock options outstanding not included in diluted net income per common share as their effect is anti-dilutive1,255,089 90,045 1,708,602 90,045 
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 thirty-nine weeks ended September 26, 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 initial public offering, 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 2022, First Watch was recognized with ADP’s coveted Culture at Work Award and named a Top 100 Most Loved Workplace® by Newsweek and the Best Practice Institute. 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 29 states under the “First Watch” trade name and as of September 25, 2022, the Company had 356 company-owned restaurants and 103 franchise-owned restaurants.
Recent Developments

Financial highlights for the thirteen weeks ended September 25, 2022 (“third quarter of 2022”) as compared to the thirteen weeks ended September 26, 2021 (“third quarter of 2021”) include the following:

System-wide sales increased 19.2% to $235.2 million in the third quarter of 2022 from $197.4 million in the third quarter of 2021
Total revenues increased 18.7% to $186.9 million in the third quarter of 2022 from $157.4 million in the third quarter of 2021
Same-restaurant sales growth of 12.0% (32.7% relative to the third quarter of 2019*)
Same-restaurant traffic growth of 3.7% (7.0% relative to the third quarter of 2019*)
Income from operations margin of 1.4% during the third quarter of 2022 compared to 4.6% in the third quarter of 2021
Restaurant level operating profit margin** of 17.3% in the third quarter of 2022 as compared to 19.5% in the third quarter of 2021
Net income of $46.0 thousand in the third quarter of 2022 compared to $0.8 million in the third quarter of 2021
Adjusted EBITDA** of $17.0 million in the third quarter of 2022 was flat compared to the third quarter of 2021
Opened 11 system-wide restaurants (7 company-owned and 4 franchise-owned) across 9 states resulting in a total of 459 system-wide restaurants (356 company-owned and 103 franchise-owned) across 29 states
___________________
* Comparison to the thirteen weeks ended September 29, 2019 (“third 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 that 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 thirty-nine weeks ended September 25, 2022, there were 303 restaurants in our Comparable Restaurant Base. For the thirteen and thirty-nine weeks ended September 26, 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 the following non-GAAP measures, which present operating results on an adjusted basis: (i) Adjusted EBITDA, (ii) Adjusted EBITDA margin, (iii) Restaurant level operating profit and (iv) Restaurant level operating profit margin. Our presentation of these non-GAAP measures includes isolating the effects of some items that are either nonrecurring in nature or vary from period to period without any correlation to our ongoing core operating performance. These supplemental measures of performance are not required by or presented in accordance with GAAP. 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.

We use Restaurant level operating profit and Restaurant level operating profit margin (i) to evaluate the performance and profitability of each operating restaurant, individually and in the aggregate and (ii) to make decisions regarding future spending and other operational decisions.

Adjusted EBITDA: represents Net income before depreciation and amortization, interest expense, income taxes, and items that we do not consider in our evaluation of ongoing core operating performance as identified in the reconciliation of Net income, the most directly comparable measure in accordance with GAAP, to Adjusted EBITDA, included in the section Non-GAAP Financial Measure Reconciliations below.

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

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

Restaurant Level Operating Profit Margin: represents Restaurant level operating profit as a percentage of restaurant sales. See Non-GAAP Financial Measure Reconciliations below for a reconciliation to Income from operations margin, the most directly comparable GAAP measure.
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Selected Operating Data
THIRTEEN WEEKS ENDEDTHIRTY-NINE WEEKS ENDED
SEPTEMBER 25, 2022SEPTEMBER 26, 2021SEPTEMBER 25, 2022SEPTEMBER 26, 2021
System-wide sales
(in thousands)
$235,231 $197,409 $680,588 $548,005 
System-wide restaurants459 428 459428 
Company-owned356 337 356337 
Franchise-owned103 91 10391 
Same-restaurant sales growth12.0 %46.2 %17.0 %75.0 %
Same-restaurant traffic growth3.7 %40.1 %10.6 %61.6 %
Income from operations
(in thousands)
$2,621 $7,153 $15,434 $23,310 
Income from operations margin1.4 %4.6 %2.9 %5.4 %
Restaurant level operating profit (in thousands) (1)
$31,872 $30,240 $98,390 $86,230 
Restaurant level operating profit margin (1)
17.3 %19.5 %18.3 %20.0 %
Net income (in thousands)$46 $783 $7,393 $2,546 
Net income margin— %0.5 %1.4 %0.6 %
Adjusted EBITDA
(in thousands) (2)
$17,023 $16,952 $54,176 $52,134 
Adjusted EBITDA margin (2)
9.1 %10.8 %10.0 %11.9 %
________________
(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 Measure Reconciliations 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 Measure Reconciliations section below.


Same-Restaurant Sales Growth and Same-Restaurant Traffic Growth

THIRTEEN WEEKS ENDEDSAME-RESTAURANT SALES GROWTHSAME-RESTAURANT TRAFFIC GROWTHCOMPARABLE RESTAURANT BASE
September 25, 202212.0 %3.7 %303 
September 26, 2021