First Watch Restaurant Group, Inc. 10-Q

Item 1. Financial Statements (Unaudited) FIRST WATCH RESTAURANT GROUP, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (Unaudited) SEPTEMBER 26, 2021 DECEMBER 27, 2020 Assets Current assets: Cash and cash equivalents $ 51,851 $ 38,846 Restricted cash 251 251 Accounts receivable 2,901 3,915 Inventory 3,473 2,915 Prepaid expenses 3,304 2,490 Deferred offering costs 3,709 — Other current assets 1,232 621 Total current assets 66,721 49,038 Goodwill 345,219 345,219 Intangible assets, net 143,241 143,662 Operating lease right-of-use assets 318,931 307,558 Property, fixtures and equipment, net of accumulated depreciation of $ 107,994 and $ 86,250 , respectively 163,404 160,744 Other long-term assets 1,319 1,291 Total assets $ 1,038,835 $ 1,007,512 Liabilities and Equity Current liabilities: Accounts payable $ 6,977 $ 4,220 Accrued liabilities 17,281 13,482 Accrued compensation and deferred payroll taxes 15,256 10,856 Deferred revenues 2,251 4,273 Current portion of operating lease liabilities 39,633 40,111 Current portion of long-term debt 3,626 3,590 Total current liabilities 85,024 76,532 Operating lease liabilities 322,516 307,802 Long-term debt, net 287,660 286,400 Deferred income taxes 12,839 10,313 Deferred payroll taxes 3,333 3,333 Other long-term liabilities 3,305 2,266 Total liabilities 714,677 686,646 Commitments and contingencies (Note 11) Equity: Preferred stock; $ 0.01 par value; 266,667 shares authorized, issued and outstanding 3 3 Common stock; $ 0.01 par value; 300,000,000 shares authorized; 45,013,784 shares issued and outstanding 450 450 Additional paid-in capital 424,091 423,345 Accumulated deficit ( 100,386 ) ( 102,932 ) Total equity 324,158 320,866 Total liabilities and equity $ 1,038,835 $ 1,007,512 The accompanying notes are an integral part of these consolidated financial statements. 3 Table of Contents FIRST WATCH RESTAURANT GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (Unaudited) THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Revenues: Restaurant sales $ 155,082 $ 98,353 $ 432,136 $ 229,546 Franchise revenues 2,359 1,396 6,437 3,449 Total revenues 157,441 99,749 438,573 232,995 Operating costs and expenses: Restaurant operating expenses (exclusive of depreciation and amortization shown below): Food and beverage costs 35,871 22,053 96,383 53,040 Labor and other related expenses 50,587 34,115 136,586 84,127 Other restaurant operating expenses 24,185 19,881 71,000 43,163 Occupancy expenses 14,199 13,127 41,956 38,309 General and administrative expenses 17,019 11,347 44,360 33,625 Depreciation and amortization 8,203 7,849 23,965 22,877 Impairments and loss on disposal of assets 98 27 261 282 Transaction expenses (income), net 126 ( 34 ) 752 65 Total operating costs and expenses 150,288 108,365 415,263 275,488 Income (Loss) from operations 7,153 ( 8,616 ) 23,310 ( 42,493 ) Interest expense ( 6,051 ) ( 5,832 ) ( 18,656 ) ( 16,499 ) Other income, net 215 45 536 405 Income (Loss) before income tax expense (benefit) 1,317 ( 14,403 ) 5,190 ( 58,587 ) Income tax expense (benefit) 534 ( 3,262 ) 2,644 ( 16,024 ) Net income (loss) and total comprehensive income (loss) $ 783 $ ( 11,141 ) $ 2,546 $ ( 42,563 ) Net income (loss) per common share - basic $ 0.02 $ ( 0.25 ) $ 0.06 $ ( 0.95 ) Net income (loss) per common share - diluted $ 0.02 $ ( 0.25 ) $ 0.06 $ ( 0.95 ) Weighted average number of common shares outstanding - basic 45,013,784 45,013,784 45,013,784 45,013,784 Weighted average number of common shares outstanding - diluted 46,085,650 45,013,784 46,077,196 45,013,784 The accompanying notes are an integral part of these consolidated financial statements. 4 Table of Contents FIRST WATCH RESTAURANT GROUP, INC. CONSOLIDATED STATEMENTS OF EQUITY (IN THOUSANDS, EXCEPT SHARE AMOUNTS) (Unaudited) Preferred Stock Common Stock Additional Paid-in Capital Accumulated Deficit Total Equity Shares Amount Shares Amount Balance at June 27, 2021 266,667 $ 3 45,013,784 $ 450 $ 423,661 $ ( 101,169 ) $ 322,945 Net income — — — — — 783 783 Stock-based compensation — — — — 430 — 430 Balance at September 26, 2021 266,667 $ 3 45,013,784 $ 450 $ 424,091 $ ( 100,386 ) $ 324,158 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 — — — — — 2,546 2,546 Stock-based compensation — — — — 746 — 746 Balance at September 26, 2021 266,667 $ 3 45,013,784 $ 450 $ 424,091 $ ( 100,386 ) $ 324,158 Preferred Stock Common Stock Additional Paid-in Capital Accumulated Deficit Total Equity Shares Amount Shares Amount Balance at June 28, 2020 — $ — 45,013,784 $ 450 $ 382,977 $ ( 84,673 ) $ 298,754 Share issuance 266,667 3 — — 39,997 — 40,000 Net loss — — — — — ( 11,141 ) ( 11,141 ) Stock-based compensation — — — — 192 — 192 Balance at September 27, 2020 266,667 $ 3 45,013,784 $ 450 $ 423,166 $ ( 95,814 ) $ 327,805 Preferred Stock Common Stock Additional Paid-in Capital Accumulated Deficit Total Equity Shares Amount Shares Amount Balance at December 29, 2019 — $ — 45,013,784 $ 450 $ 382,598 $ ( 53,251 ) $ 329,797 Share issuance 266,667 3 — — 39,997 — 40,000 Net loss — — — — — ( 42,563 ) ( 42,563 ) Stock-based compensation — — — — 571 — 571 Balance at September 27, 2020 266,667 $ 3 45,013,784 $ 450 $ 423,166 $ ( 95,814 ) $ 327,805 The accompanying notes are an integral part of these consolidated financial statements. 5 Table of Contents FIRST WATCH RESTAURANT GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (Unaudited) THIRTY-NINE WEEKS ENDED SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Cash flows from operating activities: Net income (loss) $ 2,546 $ ( 42,563 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 23,965 22,877 Amortization of debt discount and deferred issuance costs 958 901 Non-cash operating lease costs 9,582 8,757 Deferred income taxes 2,526 ( 16,112 ) Impairments and loss on disposal of assets 261 282 Stock-based compensation 746 571 Changes in assets and liabilities: Accounts receivable 1,014 3,438 Inventory ( 558 ) 53 Prepaid expenses ( 814 ) 291 Deferred offering costs ( 2,454 ) 1,307 Other assets, current and long-term ( 639 ) ( 517 ) Accounts payable 2,757 768 Accrued liabilities 8,406 ( 2,346 ) Accrued compensation and deferred payroll taxes, current and long-term 4,399 ( 3,188 ) Deferred revenues, current and long-term ( 1,714 ) ( 4,069 ) Operating lease liabilities ( 6,716 ) 9,157 Net cash provided by (used in) operating activities 44,265 ( 20,393 ) Cash flows from investing activities: Capital expenditures ( 27,065 ) ( 22,179 ) Purchase of intangible assets ( 359 ) ( 149 ) Net cash used in investing activities ( 27,424 ) ( 22,328 ) Cash flows from financing activities: Proceeds from preferred stock issuance — 40,000 Proceeds from issuance of long-term debt — 54,600 Repayments of long-term debt ( 2,210 ) ( 3,210 ) Proceeds from borrowings on revolving credit facility — 22,000 Repayments of borrowings on revolving credit facility — ( 39,000 ) Payment of deferred offering costs ( 1,255 ) — Finance lease payments ( 371 ) ( 223 ) Net cash (used in) provided by financing activities ( 3,836 ) 74,167 Net increase in cash and cash equivalents and restricted cash 13,005 31,446 Cash and cash equivalents and restricted cash: Beginning of period 39,097 11,121 End of period $ 52,102 $ 42,567 Supplemental cash flow information: Cash paid for interest $ 14,763 $ 14,606 Cash paid for income taxes, net of refunds $ 55 $ 155 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 - continued (IN THOUSANDS) (Unaudited) THIRTY-NINE WEEKS ENDED SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Supplemental disclosures of non-cash investing and financing activities: Interest converted to long-term debt $ 3,062 $ 566 Leased assets obtained in exchange for new operating lease liabilities $ 23,391 $ 14,313 Leased assets obtained in exchange for new finance lease liabilities $ 185 $ 248 Remeasurements of operating lease assets and lease liabilities $ ( 2,396 ) $ ( 3,355 ) Terminations of operating lease liabilities $ — $ ( 705 ) Remeasurements of finance lease assets and lease liabilities $ 9 $ 164 Change in liabilities from acquisition of property, fixtures and equipment $ ( 1,153 ) $ ( 3,036 ) The accompanying notes are an integral part of these consolidated financial statements. 7 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”) 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. As of September 26, 2021 and December 27, 2020, the Company operated 337 company-owned restaurants and 321 company-owned restaurants, respectively, and had 91 franchise-owned restaurants and 88 franchise-owned restaurants, respectively. Initial Public Offering On September 20, 2021, the Company’s board of directors and its stockholders approved an amendment to the Company’s Certificate of Incorporation. Such amendment (i) effected a 11.838 -for-1 stock split of its issued and outstanding shares of common stock and a proportional adjustment to the existing conversion ratio of the preferred stock and (ii) authorized an increase to the number of shares of common stock of the Company to 300,000,000 and an increase to the number of shares of preferred stock to 10,000,000 . The par value of the Company’s common and preferred stock was not adjusted in connection with the stock split. All common share and per share amounts for all periods presented in the accompanying unaudited interim consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect this stock split. On September 30, 2021, the Company’s registration statement on Form S-1 related to its initial public offering (“IPO”) was declared effective and the Company’s common stock began trading on the Nasdaq Global Select Market on October 1, 2021. On October 5, 2021, the Company completed its IPO, in which the Company sold 10,877,850 shares of common stock at the initial public offering price of $ 18.00 per share. The shares sold included th e underwriters’ full exercise of their option to purchase up to an additional 1,418,850 shares of common stock at the initial public offering price of $ 18.00 per share. All of the Company ’ s outstanding shares of preferred stock were adjusted in connection with the aforementioned stock split and were automatically converted into 3,156,812 shares of common stock immediately prior to and in connection with the consummation of the IPO. On October 5, 2021, the Company received aggregate net proceeds of $ 182.1 million after deducting underwriting discounts and commissions of $ 13.7 million. The aggregate net proceeds received were used to repay $ 182.1 million of borrowings outstanding under the Company ’ s senior credit facilities, which are comprised of the Initial Term Loan Facility, Initial Delayed Draw Term Loan Facility, First Amendment Delayed Draw Term Facility, Second Amendment Delayed Draw Term Facility and Revolving Credit Facility (collectively, “Senior Credit Facilities”). On October 6, 2021, the Company entered into a new credit agreement that provides for (i) a $ 100 million term loan A facility and (ii) a $ 75 million revolving credit facility (See Note 13, Subsequent Events ). 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. Our fiscal quarters are comprised of 13 weeks each, except for fiscal years consisting of 53 weeks for which the fourth quarter will consist of 14 weeks, and end on the 13th Sunday of each quarter (14th Sunday of the fourth quarter, when applicable). The quarters ended September 26, 2021 and September 27, 2020 were both 13-week periods. 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 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. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of and for the year ended December 27, 2020 included in the Company’s final prospectus dated September 30, 2021 filed with the SEC in accordance with Rule 424(b) of the Securities Act on October 4, 2021 (the “IPO Prospectus”). 8 Table of Contents FIRST WATCH RESTAURANT GROUP, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued) 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. Deferred Offering Costs Certain legal, professional accounting, and other third-party fees that are directly associated with in-process equity financings are capitalized as deferred offering costs until such financings are consummated. After consummation of the equity financing, these costs are recorded in equity as a reduction of additional paid-in capital generated as a result of the offering. As of September 26, 2021, there was a total of $ 3.7 million of deferred offering costs related to the Company’s IPO. There were no deferred offering costs as of December 27, 2020. Newly Issued Accounting Standards Not Yet Adopted In March 2020, the 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 may be adopted 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 and exceptions provided by the new standard. 3. Revenues The following tables include a detail of contract liabilities with customers: (in thousands) SEPTEMBER 26, 2021 DECEMBER 27, 2020 Deferred revenues: Deferred gift card revenue $ 2,012 $ 4,024 Deferred franchise fee revenue - current 239 249 Total current deferred revenues $ 2,251 $ 4,273 Other long-term liabilities: Deferred franchise fee revenue - non-current $ 2,334 $ 2,025 Changes in deferred gift card contract liabilities were as follows: THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED (in thousands) SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Deferred gift card revenue: Balance, beginning of period $ 2,657 $ 3,993 $ 4,024 $ 6,902 Gift card sales 1,003 577 4,088 2,365 Gift card redemptions ( 1,483 ) ( 1,437 ) ( 5,543 ) ( 5,455 ) Gift card breakage ( 165 ) ( 131 ) ( 557 ) ( 810 ) Balance, end of period $ 2,012 $ 3,002 $ 2,012 $ 3,002 9 Table of Contents FIRST WATCH RESTAURANT GROUP, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued) Changes in deferred franchise fee contract liabilities were as follows: THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED (in thousands) SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Deferred franchise fee revenue: Balance, beginning of period $ 2,232 $ 2,266 $ 2,274 $ 2,456 Cash received 400 75 482 113 Franchise revenues recognized ( 59 ) ( 54 ) ( 183 ) ( 282 ) Balance, end of period $ 2,573 $ 2,287 $ 2,573 $ 2,287 Revenues recognized disaggregated by type were as follows: THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED (in thousands) SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Restaurant sales: In-restaurant dining sales $ 123,311 $ 68,853 $ 327,147 $ 182,814 Third-party delivery sales 15,232 15,141 52,584 19,947 Take-out sales 16,539 14,359 52,405 26,785 Total restaurant sales $ 155,082 $ 98,353 $ 432,136 $ 229,546 Franchise revenues: Royalty and system fund contributions $ 2,300 $ 1,342 $ 6,254 $ 3,167 Initial fees 59 54 183 282 Total franchise revenues $ 2,359 $ 1,396 $ 6,437 $ 3,449 Total revenues $ 157,441 $ 99,749 $ 438,573 $ 232,995 4. COVID-19 Charges Following is a summary of the charges recorded in connection with the COVID-19 pandemic during the thirteen and thirty-nine weeks ended September 26, 2021 and September 27, 2020: THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED (in thousands) Consolidated Statements of Operations and Comprehensive Income (Loss) SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Inventory obsolescence and spoilage Food and beverage costs $ — $ 156 $ — $ 556 Compensation for employees upon furlough and return from furlough Labor and other related expenses — 38 3 1,085 Health insurance premiums paid for furloughed employees, net of employee retention credits Labor and other related expenses — 68 — 852 Other expenses Other restaurant operating expenses — 323 16 802 Compensation for employees upon furlough and return from furlough General and administrative expenses — ( 56 ) 128 277 Other expenses General and administrative expenses — 434 64 1,273 Total COVID-19 charges $ — $ 963 $ 211 $ 4,845 10 Table of Contents FIRST WATCH RESTAURANT GROUP, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued) 5. Accounts Receivable Accounts receivable consisted of the following: (in thousands) SEPTEMBER 26, 2021 DECEMBER 27, 2020 Receivables from third-party delivery providers $ 984 $ 1,742 Receivables from franchisees 876 591 Rebate receivables 635 514 Receivables related to gift card sales 318 1,028 Other receivables 88 40 Total accounts receivable $ 2,901 $ 3,915 6. Accrued Liabilities Accrued liabilities consisted of the following: (in thousands) SEPTEMBER 26, 2021 DECEMBER 27, 2020 Sales tax $ 3,277 $ 2,159 Construction liabilities 3,148 4,301 Legal services and contingencies 1,602 126 Self-insurance and general liability reserves 1,386 1,297 Utilities 1,284 1,016 Property tax 1,213 424 Credit card fees 929 520 Accounting and consulting 718 251 Common area maintenance 411 700 Contingent rent 593 234 Other 2,720 2,454 Total accrued liabilities $ 17,281 $ 13,482 11 Table of Contents FIRST WATCH RESTAURANT GROUP, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued) 7. Debt Long-term debt, net consisted of the following: SEPTEMBER 26, 2021 DECEMBER 27, 2020 (in thousands) Balance Interest rate (1) Balance Interest rate (1) Senior Credit Facilities: Initial Term Loan Repayment in quarterly installments of 0.25 %; outstanding balance paid at maturity $ 150,649 6.75 % $ 150,214 8.00 % Initial Delayed Draw Term Loan Repayment in quarterly installments of 0.25 %; outstanding balance paid at maturity 49,138 6.75 % 48,992 8.00 % First Amendment Delayed Draw Term Facility Repayment in quarterly installments of 0.25 %; outstanding balance paid at maturity 49,609 6.75 % 49,458 8.00 % Second Amendment Delayed Draw Term Facility Repayment in quarterly installments of 0.25 %; outstanding balance paid at maturity 39,491 6.75 % 39,369 8.00 % Revolving credit facility — — Finance lease liabilities 2,120 2,300 Financing obligations 3,050 3,050 Less: Unamortized debt discount and deferred issuance costs ( 2,771 ) ( 3,393 ) Total debt, net 291,286 289,990 Less: Current portion of long-term debt ( 3,626 ) ( 3,590 ) Long-term debt, net $ 287,660 $ 286,400 _____________ (1) Borrowings under the Senior Credit Facilities bore interest, at the Company’s option, at a rate per annum equal to either (a) (i) the greater of an adjusted London Interbank Offered Rate (the “Adjusted Eurocurrency Rate”) and 1.00 %, plus (ii) the applicable Adjusted Eurocurrency Rate spread, or (b) (i) the alternate base rate (“ABR”) plus (ii) the applicable ABR spread. ABR is a floating rate per annum equal to the highest of (i) the federal funds effective rate plus 0.50 %, (ii) to the extent ascertainable, the London interbank offered rate for a 1-month interest period on such day plus 1.00 %, (iii) the rate of interest last quoted by The Wall Street Journal as the “prime rate” in the U.S. and (iv) 1.00 %. Borrowings under the Senior Credit Facilities also bore an additional interest pursuant to the Fourth Amendment that is paid in kind. The applicable rate for the additional interest ranges from 0.25 % to 1.5 % of the outstanding balances, depending on the leverage ratio. The estimated fair value of the outstanding debt, excluding finance lease obligations and financing obligations, is classified as Level 3 in the fair value hierarchy and was estimated using discounted cash flow models using market yield and yield volatility. The estimated fair value of the outstanding debt, excluding finance lease liabilities and financing obligations, is as follows: (in thousands) SEPTEMBER 26, 2021 DECEMBER 27, 2020 Initial term loan $ 150,652 $ 150,239 Initial delayed draw term loan 49,139 49,000 First amendment delayed draw term facility 49,610 49,466 Second amendment delayed draw term facility 39,491 39,376 Total $ 288,892 $ 288,081 The Company was in compliance with all financial covenants as of September 26, 2021 and December 27, 2020. 12 Table of Contents FIRST WATCH RESTAURANT GROUP, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued) 8. Leases The following table includes a detail of lease assets and liabilities: (in thousands) Consolidated Balance Sheets Classification SEPTEMBER 26, 2021 DECEMBER 27, 2020 Operating lease right-of-use assets Operating lease right-of-use assets $ 318,931 $ 307,558 Finance lease assets Property, fixtures and equipment, net 2,001 2,212 Total lease assets $ 320,932 $ 309,770 Operating lease liabilities (1) - current Current portion of operating lease liabilities 39,633 40,111 Operating lease liabilities - non-current Operating lease liabilities 322,516 307,802 Finance lease liabilities - current Current portion of long-term debt 679 645 Finance lease liabilities - non-current Long-term debt, net 1,441 1,655 Total lease liabilities $ 364,269 $ 350,213 _____________ (1) Excludes all variable lease expense. The components of lease expense were as follows: (in thousands) Consolidated Statements of Operations and Comprehensive Income (Loss) Classification THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Operating lease expense Occupancy expenses General and administrative expenses Other restaurant operating expenses $ 11,377 $ 10,505 $ 33,263 $ 31,144 Variable lease expense Occupancy expenses General and administrative expenses Food and beverage costs 3,202 2,677 9,294 7,254 Finance lease expense: Amortization of leased assets Depreciation and amortization 139 125 405 373 Interest on lease liabilities Interest expense 43 48 133 137 Total lease expense (1) $ 14,761 $ 13,355 $ 43,095 $ 38,908 _____________ (1) Includes conting ent rent of $ 0.3 million and $ 0.7 million during the thirteen and thirty-nine weeks ended September 26, 2021, respectively. There was no contingent rent during the thirteen and thirty-nine weeks ended September 27, 2020. Supplemental cash flow information related to leases was as follows: THIRTY-NINE WEEKS ENDED (in thousands) SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows - operating leases $ 30,388 $ 13,255 Operating cash flows - finance leases $ 133 $ 137 Financing cash flows - finance leases $ 371 $ 223 13 Table of Contents FIRST WATCH RESTAURANT GROUP, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued) Supplemental information related to leases was as follows: THIRTY-NINE WEEKS ENDED SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Weighted-average remaining lease term (in years) Operating leases 15.6 16.5 Finance leases 3.7 4.6 Weighted-average discount rate (1) Operating leases 9.1 % 9.1 % Finance leases 8.0 % 8.1 % _____________ (1) Based on the Company’s incremental borrowing rate. As of September 26, 2021, future minimum lease payments for operating and finance leases consisted of the following: (in thousands) Operating Leases Finance Leases Fiscal year 2021 $ 10,944 $ 204 2022 40,879 667 2023 43,637 667 2024 44,081 667 2025 44,153 212 Thereafter 523,322 32 Total future minimum lease payments (1) 707,016 2,449 Less: imputed interest ( 344,867 ) ( 329 ) Total present value of lease liabilities $ 362,149 $ 2,120 _____________ (1) Excludes approxim ately $ 28.0 million of exec uted operating leases that have not commenced as of September 26, 2021 . 9. Stock-Based Compensation The 2017 Omnibus Equity Incentive Plan (the “2017 Equity Plan”) authorizes stock-based option awards to be granted for up to 6,138,240 shares of common stock. The awards granted under the 2017 Equity Plan consist of non-qualified stock options that generally vest based over a five-year requisite service period from the date of grant, as well as upon the occurrence of certain events and market conditions. Stock-based compensation expense associated with awards granted under the 2017 Equity Plan was $ 0.4 million and $ 0.7 million during the thirteen and thirty-nine weeks ended September 26, 2021, respectively. Stock-based compensation expense was $ 0.2 million and $ 0.6 million during the thirteen and thirty-nine weeks ended September 27, 2020, respectively. Modification of Stock-Based Awards On August 31, 2021, the Company’s board of directors amended the 2017 Equity Plan such that the performance-based option awards that convert into time-based options upon an initial public offering no longer vest over a period of three years , but instead one-third (1/3rd) on each of the first two anniversaries of an initial public offering and one-third (1/3rd) on the 273rd day following the second anniversary of an initial public offering. This was accounted for as a modification for accounting purposes, resulting in a new fair value for all the performance-based option awards as of the modification date. 14 Table of Contents FIRST WATCH RESTAURANT GROUP, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued) On September 19, 2021, the Company’s board of directors modified performance-based option awards that contained a market condition granted under the 2017 Equity Plan, such that the vesting terms for one such tranche of the performance-based option awards that contain a market condition were amended to waive the market condition. Accordingly, upon an initial public offering, such tranche will convert into time-based option awards and will vest one-third (1/3rd) on each of the first two anniversaries of an initial public offering and one-third (1/3rd) on the 273rd day following the second anniversary of an initial public offering. This was accounted for as a modification for accounting purposes resulting in a new fair value for such tranche as of the modification date. On September 19, 2021, the Company’s board of directors modified the terms of performance-based option awards granted under the 2017 Equity Plan to the Company’s Chairman Emeritus. The modification accelerated the vesting period of the performance-based option awards that convert into time-based option awards upon an initial public offering such that they no longer vest one-third (1/3rd) on each of the first two anniversaries of an initial public offering and one-third (1/3rd) on the 273rd day following the second anniversary of an initial public offering, but instead will vest on August 1, 2022. Additionally, the exercise period of these time-based and performance-based vested awards was modified such that any vested option may be exercised at any time prior to the 10th anniversary of the original grant date. These actions were accounted for as modifications for accounting purposes and resulted in an increase of $ 0.3 million to the fair value of these awards. Unrecognized stock-based compensation expense As of September 26, 2021, the amount of stock-based compensation expense not yet recognized on time-based option awards was approximately $ 0.7 million, and will be recognized over a weighted-average period of approximately 1.3 years. After consideration of the above modifications to the performance-based option awards, the amount of stock-based compensation expense not yet recognized on performance-based option awards as of September 26, 2021 was approximately $ 20.5 million and will be expensed over a weighted-average period of approximately 2.8 years. A total of approximately $ 3.8 million of stock compensation expense will be recognized in the fourth fiscal quarter of 2021 related to non-vested performance-based option awards for which the market condition was not satisfied upon the Company’s IPO. 2021 Equity Incentive Plan On September 19, 2021, the Company’s board of directors adopted, and on September 19, 2021 its stockholders approved, the First Watch Restaurant Group, Inc. 2021 Equity Incentive Plan (the “2021 Equity Plan”), which became effective on September 30, 2021. The 2021 Equity Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock awards, restricted stock units, and stock-based awards. The number of shares of common stock to be reserved for issuance under the 2021 Equity Plan is 4,034,072 common shares (“Share Reserve”). The number of shares of common stock that may be issued under the 2021 Equity Plan will automatically increase on the first day of each fiscal year, commencing on January 1, 2023 and continuing for each fiscal year until, and including, the fiscal year ending on (and including) January 1, 2032, equal to the least of (i) 2 % of the total number of shares of common stock actually issued and outstanding on the last day of the preceding fiscal year, (ii) a number of shares of common stock determined by the board of directors; and (iii) the number of shares of common stock equal to the Share Reserve. If any award granted under the 2021 Equity Plan is cancelled, expired, forfeited, or surrendered without consideration or otherwise terminated without delivery of the shares to the participant, then such unissued shares will be returned to the 2021 Equity Plan and be available for future awards under the 2021 Equity Plan. Shares that are withheld from any award in payment of the exercise, base or purchase price or taxes related to such an award, not issued or delivered as a result of the net settlement of any award, or repurchased by the Company on the open market with the proceeds of a stock option will be deemed to have been delivered under the 2021 Equity Plan and will not be returned to the 2021 Equity Plan nor be available for future awards under the 2021 Equity Plan. 15 Table of Contents FIRST WATCH RESTAURANT GROUP, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued) 10 . Income Taxes THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED (in thousands) SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Income (Loss) before income tax expense (benefit) $ 1,317 $ ( 14,403 ) $ 5,190 $ ( 58,587 ) Income tax expense (benefit) $ 534 $ ( 3,262 ) $ 2,644 $ ( 16,024 ) Effective tax rate 40.5 % 22.6 % 50.9 % 27.4 % The effective income tax rate for the thirteen weeks ended September 26, 2021 was 40.5 % as compared to 22.6 % for the thirteen weeks ended September 27, 2020 and the effective income tax rate for the thirty-nine weeks ended September 26, 2021 was 50.9 % as compared to 27.4 % for the thirty-nine weeks ended September 27, 2020. The change in the effective income tax rates 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) the forecasted 2021 pre-tax book income as compared to the forecasted 2020 pre-tax book loss. 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 26, 2021 and September 27, 2020 were different from the blended federal and state statutory rate primarily due to the change in the valuation allowance for federal and state deferred tax assets and the benefit of tax credits for FICA taxes on certain employees’ tips. Pursuant to the merger agreement through which the Company was acquired by funds affiliated with or managed by Advent International Corporation in August 2017, the Company is required to pay the previous stockholders an amount equal to tax savings to the extent federal and state loss carryforwards and general business credits that had been accumulated from operations prior to August 2017 are utilized to reduce tax liabilities. This requirement lapses with respect to any tax year, or portion thereof, beginning after December 31, 2024, or if a change in control event occurs. A contingent consideration liability of $ 1.2 million was initially recognized, of which approximately $ 0.2 million was paid in the fiscal year ended December 29, 2019. As a result of revaluing the contingent consideration liability using actual results and forecasted projections, an additional $ 0.7 million for expected payments to be made to the previous stockholders was recognized within Transaction expenses (income), net on the consolidated statements of operations and comprehensive income (loss) during the thirty-nine weeks ended September 26, 2021. As of September 26, 2021 the contingent consideration liability was $ 1.0 million, of which $ 0.1 million was recorded within Accrued liabilities and $ 0.9 million was recorded within Other long-term liabilities on the consolidated balance sheets. As of December 27, 2020, the contingent consideration liability was $ 0.3 million, of which $ 0.1 million was recorded within Accrued liabilities and $ 0.2 million was recorded within Other long-term liabilities on the consolidated balance sheets. 11. Commitments and Contingencies Legal Proceedings The Company is subject to legal proceedings, claims and liabilities that arise in the ordinary course of business. In the event any litigation losses become probable and estimable, the Company will recognize any anticipated losses. In the opinion of Management, the amount of the liability with respect to these matters was not material as of September 26, 2021. 16 Table of Contents FIRST WATCH RESTAURANT GROUP, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued) 12. Net Income (Loss) Per Common Share The following table sets forth the computations of basic and diluted net income (loss) per common share: THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED (in thousands, except share and per share data) SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Numerator: Net income (loss) $ 783 $ ( 11,141 ) $ 2,546 $ ( 42,563 ) Denominator: Weighted average common shares outstanding - basic 45,013,784 45,013,784 45,013,784 45,013,784 Weighted average common shares outstanding - diluted 46,085,650 45,013,784 46,077,196 45,013,784 Net income (loss) per common share - basic $ 0.02 $ ( 0.25 ) $ 0.06 $ ( 0.95 ) Net income (loss) per common share - diluted $ 0.02 $ ( 0.25 ) $ 0.06 $ ( 0.95 ) Time-based option awards outstanding not included in diluted net income (loss) per common share as their effect is anti-dilutive 90,045 2,616,724 90,045 2,616,724 Diluted net income (loss) 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 and stock option awards outstanding and unvested as of the respective periods using the two-class method and treasury method, respectively. All performance-based option awards have been excluded from the diluted net income (loss) per common share calculation for all periods presented as the performance condition was not considered probable of being met. During the thirteen and thirty-nine weeks ended September 27, 2020, all time-based option awards outstanding were excluded from the calculation of diluted net loss per common share because of their anti-dilutive impact. 13. Subsequent Events On October 6, 2021, FWR Holding Corporation (“FWR”), an indirect subsidiary of the Company entered into a credit agreement (the “FWR Credit Agreement”) with Bank of America, N.A., and other parties specified therein. The FWR Credit Agreement provides for (i) a $ 100 million term loan A facility (the “New Term Facility”) and (ii) a $ 75 million revolving credit facility (the “New Revolving Credit Facility” and, together with the New Term Facility, collectively, the “New Facilities”). The loans under the New Facilities mature on October 6, 2026. Substantially all of FWR’s assets, including fixed assets and intangibles, are pledged as collateral, subject to customary exceptions, under the New Facilities. The New Facilities contain covenants that provide for, among other things, maintenance of certain financial ratios and restrictions on (i) payment of dividends or other distributions; (ii) granting liens; (iii) making investments, including acquisitions, loans, and advances; (iv) incurring additional indebtedness; (v) selling, transferring, or otherwise disposing of assets; (vi) liquidating or dissolving subsidiaries of the Company; (vii) materially altering the Company’s business; (viii) engaging in transactions with affiliates; and (ix) entering into burdensome agreements, each subject to certain exceptions. The proceeds from the IPO, the proceeds of the loans under the New Facilities and cash on hand were used to repay in full the outstanding indebtedness of the Senior Credit Facilities. This repayment was accounted for as a debt extinguishment for accounting purposes and a loss on debt extinguishment of approximately $ 2.4 million will be recorded in the fourth fiscal quarter of 2021. In October 2021, the Company entered into a financing agreement for approximately $ 3.0 million that bears interest of 2.41 % and is payable in monthly installments of $ 0.3 million through August 30, 2022. 17 Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS