First Watch Restaurant Group, Inc. 10-Q

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 Quarterly Report on Form 10-Q (“Form 10-Q ” ) and our audited consolidated financial statements as of and for the year ended December 27, 2020 and notes included in our final prospectus dated September 30, 2021 and filed with the Securities and Exchange Commission on October 4, 2021 (the “IPO Prospectus”). This section and other parts of this Form 10-Q contain 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. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. You should evaluate all forward-looking statements made in this Form 10-Q in the context of the risks and uncertainties disclosed in our IPO Prospectus. The forward-looking statements included in this Form 10-Q are made only as of the date hereof. 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. Overview First Watch is an award-winning daytime restaurant concept serving made-to-order breakfast, brunch and lunch using fresh ingredients. We incorporate fresh, quality ingredients into elevated executions of classic dishes during our limited hours of 7:00 a.m. until 2:30 p.m. As of September 26, 2021, we had 428 system-wide restaurants across 28 states, 337 of our restaurants were company-owned and 91 were franchise-owned. Recent Developments During the thirteen weeks ended September 26, 2021, we continued to experience the momentum of the recovery of our in-restaurant dining sales. Financial highlights for the thirteen weeks ended September 26, 2021 as compared to the thirteen weeks ended September 27, 2020 include the following: • Total revenues increased 57.8% to $157.4 million • Same-restaurant sales growth of 46.2% (19.7% compared to 2019 (*) ) • Same-restaurant traffic growth of 40.1% (4.8% growth compared to 2019 (*) ) • Income from operations margin of 4.6% compared to (8.8)% ((3.4)% in 2019 (*) ) • Restaurant level operating profit margin (**) increased to 19.5% from 9.9% (16.0% in 2019 (*) ) • Net income of $0.8 million, or $0.02 per diluted share, compared to Net loss of $11.1 million, or $(0.25) per diluted share (Net loss of $7.0 million, or $(0.16) per diluted share in 2019 (*) ) • Adjusted EBITDA (**) increased to $17.0 million from $2.6 million ($7.7 million in 2019 (*) ) • Five system-wide new restaurant openings during the thirteen weeks ended September 26, 2021 resulting in a total of 428 system-wide restaurants (337 company-owned and 91 franchise-owned) across 28 states ___________________ * Comparison to the thirteen weeks ended September 29, 2019 is provided for improved comparability ** See “ Non-GAAP Financial Measures, ” herein 18 Table of Contents 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. 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 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 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 “ Liquidity and Capital Resources - Debt Refinancing ”) . Key Performance Indicators To evaluate the performance of our business, we utilize a variety of financial and performance measures. These key measures include new restaurant development, same-restaurant sales growth, same-restaurant traffic growth, average unit volume, system-wide restaurants and system-wide sales. In addition, we use the following non-GAAP metrics: Restaurant level operating profit, Restaurant level operating profit margin, Adjusted EBITDA and Adjusted EBITDA Margin. New Restaurant Development New restaurant development is central to growing our footprint and executing our growth strategy. New restaurant development has historically included both new restaurant openings and conversion of acquired restaurants. Potential new restaurant sites are typically identified and evaluated at least 18 months prior to opening. New restaurant opening dates trigger advance staff recruiting and training, in addition to the relocation of experienced general managers from existing restaurants and other pre-opening expenses. We intend to open more than 130 company-owned restaurants from 2022 through 2024, which is expected to be the primary driver of our expected restaurant sales growth, but which may impact operating profit margins in the interim, as our restaurant level operating profit margins are generally lower through the first 12 months of operation. The total number of new restaurants per year and the timing of new restaurant openings has, and will continue to have, an impact on our results of operations. New Restaurant Openings New restaurant openings (“NROs”) are the number of new company-owned First Watch restaurants commencing operations during the period. Management reviews the number of new restaurants to assess new restaurant growth and company-owned restaurant sales. Franchise-owned New Restaurant Openings Franchise-owned new restaurant openings (“Franchise-owned NROs”) are the number of new franchise-owned First Watch restaurants commencing operations during the period. 19 Table of Contents Same-Restaurant Sales Growth Same-restaurant sales growth is the percentage change in year-over-year restaurant sales (excluding gift card breakage) for the comparable restaurant base, 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 26, 2021, there were 270 restaurants in our Comparable Restaurant Base. For the thirteen and thirty-nine weeks ended September 27, 2020, there were 212 restaurants in our Comparable Restaurant Base. An increase in same-restaurant sales growth is the result of increased restaurant traffic, increased average customer check or a combination of the two. We gather daily sales data and regularly analyze the customer traffic counts and the mix of menu items sold to aid in developing menu pricing, product offerings and promotional strategies designed to produce sustainable same-restaurant sales growth. Measuring our same-restaurant sales growth allows management to evaluate the performance of our existing restaurant base. We believe this measure is useful for investors to provide a consistent comparison of restaurant sales results and trends across periods within our core, established restaurant base, unaffected by results of store openings, closings, and other transitional changes. Same-Restaurant Traffic Growth Same-restaurant traffic growth is the percentage change in traffic counts as compared to the same period in the prior year using the Comparable Restaurant Base. 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. Average Unit Volume Average Unit Volume (“AUV”) is the total restaurant sales (excluding gift card breakage) recognized in the Comparable Restaurant Base, divided by the number of restaurants in the Comparable Restaurant Base during the period. This measurement allows management to assess changes in consumer spending patterns at our restaurants and the overall performance of our restaurant base. System-wide restaurants System-wide restaurants is the total number of restaurants, including all company-owned and franchise-owned restaurants. System-wide sales System-wide sales consist 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. See Note 2, Summary of Significant Accounting Policies, in the notes to the audited consolidated financial statements included in the IPO Prospectus for a description of our revenue recognition policy. Adjusted EBITDA and Adjusted EBITDA Margin Adjusted EBITDA represents Net income (loss) before depreciation and amortization, interest expense and income taxes, and items that we do not consider in our evaluation of ongoing core operating performance as identified in the reconciliation of Net income (loss), the most directly comparable GAAP measure, to Adjusted EBITDA, included in “ Non-GAAP Financial Measures, ” herein . Adjusted EBITDA margin represents Adjusted EBITDA as a percentage of total revenues. We use Adjusted EBITDA and Adjusted EBITDA margin (i) as factors in evaluating management’s performance when determining incentive compensation, (ii) to evaluate our operating results and the effectiveness of our business strategies and (iii) internally as benchmarks to compare our performance to that of our competitors. We believe that Adjusted EBITDA and Adjusted EBITDA margin are important measures of operating performance because they eliminate the impact of expenses that do not relate to our core operating performance. Adjusted EBITDA and Adjusted EBITDA margin have important limitations as analytical tools and should not be considered in isolation as substitutes for analysis of our results as reported under GAAP. Such non-GAAP measures may not provide a complete understanding of our results of operations as a whole and should be reviewed in conjunction with our GAAP financial results. 20 Table of Contents Restaurant Level Operating Profit and Restaurant Level Operating Profit Margin Restaurant level operating profit is defined as restaurant sales, less restaurant operating expenses, which include food and beverage costs, labor and other related expenses, other restaurant operating expenses and occupancy expenses. Restaurant level operating profit excludes corporate-level expenses and other items that we do not consider in the evaluation of the ongoing core operating performance of our restaurants as identified in the reconciliation of Net income (loss) from operations, the most directly comparable GAAP measure, to Restaurant level operating profit, included in “ Non-GAAP Financial Measures, ” herein. Restaurant level operating profit margin represents Restaurant level operating profit as a percentage of restaurant sales. Restaurant level operating profit and Restaurant level operating profit margin are not required by, nor presented in accordance with GAAP. Rather, Restaurant level operating profit and Restaurant level operating profit margin are supplemental measures of operating performance of our restaurants and our calculations thereof may not be comparable to similar measures reported by other companies. We believe that Restaurant level operating profit and Restaurant level operating profit margin are important measures to evaluate the performance and profitability of each restaurant, individually and in the aggregate. Restaurant level operating profit and Restaurant level operating profit margin are not indicative of our overall results, and because they exclude corporate-level expenses, do not accrue directly to the benefit of our stockholders. Restaurant level operating profit and Restaurant level operating profit margin have limitations as analytical tools and should not be considered in isolation as a substitute for analysis of our results as reported under GAAP. Such non-GAAP measures may not provide a complete understanding of the results of our operations as a whole and should be reviewed in conjunction with our GAAP financial results. Selected Operating Data THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 System-wide sales (in thousands) $ 197,409 $ 124,718 $ 548,005 $ 291,008 Same-restaurant sales growth 46.2 % (17.2) % 75.0 % (34.8) % Same-restaurant traffic growth 40.1 % (24.3) % 61.6 % (38.7) % AUV (in thousands) $ 462 $ 321 $ 1,315 $ 771 System-wide restaurants 428 402 428 402 Company-owned 337 319 337 319 Franchise-owned 91 83 91 83 Income (Loss) from operations (in thousands) $ 7,153 $ (8,616) $ 23,310 $ (42,493) Income (Loss) from operations margin 4.6 % (8.8) % 5.4 % (18.5) % Net income (loss) and total comprehensive income (loss) (in thousands) $ 783 $ (11,141) $ 2,546 $ (42,563) Net income (loss) and total comprehensive income (loss) margin 0.5 % (11.2) % 0.6 % (18.3) % Restaurant level operating profit (in thousands) (1) $ 30,240 $ 9,762 $ 86,230 $ 14,202 Restaurant level operating profit margin (1) 19.5 % 9.9 % 20.0 % 6.2 % Adjusted EBITDA (in thousands) (2) $ 16,952 $ 2,582 $ 52,134 $ (9,221) Adjusted EBITDA margin (2) 10.8 % 2.6 % 11.9 % (4.0) % Pre-opening expenses (3) (in thousands) $ 510 $ 1,108 $ 2,573 $ 3,184 Deferred rent (income) expense (4) (in thousands) $ (156) $ 1,187 $ (1,963) $ 9,939 ____________ (1) Reconciliations from Income (Loss) from operations and Income (Loss) 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 “ Non-GAAP Financial Measures ,” herein. (2) Reconciliations from Net income (loss) and Net income (loss) margin, the most comparable GAAP measures to Adjusted EBITDA and Adjusted EBITDA margin, are set forth in the schedules within “ Non-GAAP Financial Measures, ” herein. (3) Represents expenses directly incurred to open new restaurants, including pre-opening rent, manager salaries, recruiting expenses, employee payroll, training and marketing costs. These expenses are recorded in Other restaurant operating expenses and Occupancy expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss). (4) Consists of the non-cash portion of straight-line rent expense primarily included in Occupancy expenses and General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss). This amount represents the extent to which our straight-line rent expense exceeds or is less than our cash rent payments and varies depending on the average age of our lease portfolio. For newer leases, straight-line rent expense typically exceeds cash rent payments. For more mature leases, straight-line rent expense is typically less than cash rent payments. 21 Table of Contents Results of Operations Thirteen and Thirty-Nine Weeks Ended September 26, 2021 Compared to Thirteen and Thirty-Nine Weeks Ended September 27, 2020 The following table summarizes our results of operations and the percentages of certain items in relation to total revenues or restaurant sales for the thirteen and thirty-nine weeks ended September 26, 2021 and the thirteen and thirty-nine weeks ended September 27, 2020: THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 (in thousands) Revenues: Restaurant sales $ 155,082 98.5 % $ 98,353 98.6 % $ 432,136 98.5 % $ 229,546 98.5 % Franchise revenues 2,359 1.5 % 1,396 1.4 % 6,437 1.5 % 3,449 1.5 % Total revenues $ 157,441 100.0 % $ 99,749 100.0 % $ 438,573 100.0 % $ 232,995 100.0 % Operating costs and expenses: Restaurant operating expenses: (exclusive of depreciation and amortization shown below) Food and beverage costs (1) 35,871 23.1 % 22,053 22.4 % 96,383 22.3 % 53,040 23.1 % Labor and other related expenses (1) 50,587 32.6 % 34,115 34.7 % 136,586 31.6 % 84,127 36.6 % Other restaurant operating expenses (1) 24,185 15.6 % 19,881 20.2 % 71,000 16.4 % 43,163 18.8 % Occupancy expenses (1) 14,199 9.2 % 13,127 13.3 % 41,956 9.7 % 38,309 16.7 % General and administrative expenses 17,019 10.8 % 11,347 11.4 % 44,360 10.1 % 33,625 14.4 % Depreciation and amortization 8,203 5.2 % 7,849 7.9 % 23,965 5.5 % 22,877 9.8 % Impairments and loss on disposal of assets 98 0.1 % 27 — % 261 0.1 % 282 0.1 % Transaction expenses (income), net 126 0.1 % (34) — % 752 0.2 % 65 — % Total operating costs and expenses 150,288 95.5 % 108,365 108.6 % 415,263 94.7 % 275,488 118.2 % Income (Loss) from operations (1) 7,153 4.6 % (8,616) (8.8) % 23,310 5.4 % (42,493) (18.5) % Interest expense (6,051) (3.8) % (5,832) (5.8) % (18,656) (4.3) % (16,499) (7.1) % Other income, net 215 0.1 % 45 — % 536 0.1 % 405 0.2 % Income (Loss) before income tax expense (benefit) 1,317 0.8 % (14,403) (14.4) % 5,190 1.2 % (58,587) (25.1) % Income tax expense (benefit) 534 0.3 % (3,262) (3.3) % 2,644 0.6 % (16,024) (6.9) % Net income (loss) and total comprehensive income (loss) $ 783 0.5 % $ (11,141) (11.2) % $ 2,546 0.6 % $ (42,563) (18.3) % _____________ (1) As a percentage of restaurant sales. 22 Table of Contents Restaurant Sales Restaurant sales represent the aggregate sales of food and beverages, net of discounts, at company-owned restaurants. Restaurant sales in any period are directly influenced by the number of operating weeks in the period, the number of open restaurants, customer traffic and average check. Average check growth is driven by our menu price increases and changes to our menu mix. THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Change SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Change (in thousands) (in thousands) Restaurant sales: In-restaurant dining sales $ 123,311 $ 68,853 79.1 % $ 327,147 $ 182,814 79.0 % Third-party delivery sales 15,232 15,141 0.6 % 52,584 19,947 n/m (1) Take-out sales 16,539 14,359 15.2 % 52,405 26,785 95.7 % Total Restaurant sales $ 155,082 $ 98,353 57.7 % $ 432,136 $ 229,546 88.3 % _____________ (1) Not meaningful. The increase in total restaurant sales during the thirteen weeks ended September 26, 2021 as compared to the same period in the prior year was primarily as a result of (i) same-restaurant sales growth of 46.2%, which was driven by same-restaurant traffic growth of 40.1%, relative to depressed levels in fiscal 2020 due to effects of the COVID-19 pandemic, (ii) $9.3 million from sales recognized from 19 NROs that have opened since September 27, 2020 and (iii) menu price increases. For further comparability, same-restaurant sales growth and traffic growth during the thirteen weeks ended September 26, 2021 was 19.7% and 4.8%, respectively, when compared to the thirteen weeks ended September 29, 2019. Comparison of the thirty-nine weeks ended September 26, 2021 to the thirty-nine weeks ended September 27, 2020 is impacted by the effects of the COVID-19 pandemic in 2020 including the temporary suspension of all our company-owned restaurant operations starting April 13, 2020. We reopened substantially all of our company-owned restaurants in four phases by the end of June 2020. The increase in total restaurant sales during the thirty-nine weeks ended September 26, 2021 as compared to the same period in the prior year was also driven by $18.6 million of sales recognized from 19 NROs that have opened since September 27, 2020, as well as menu price increases. For further comparability, same-restaurant sales growth during the thirty-nine weeks ended September 26, 2021 was 12.1% when compared to the thirty-nine weeks ended September 29, 2019. During fiscal 2020, we enabled off-premises sales occasions (third-party delivery and take-out) with new availability and access to online ordering. Off-premises occasions increased immediately and for the thirty-nine weeks ended September 26, 2021, our sales from those channels were $105.0 million compared to $46.7 million recognized in the same period in 2020. Off-premises sales increased to $31.8 million during the thirteen weeks ended September 26, 2021 as compared to $29.5 million in the same period in 2020, even as our in-restaurant dining traffic has rebounded to nearly 90% of pre-pandemic levels. Given that this volume of off-premises sales emerged during the COVID-19 pandemic, and the fact that our in-restaurant dining room occasions have not fully returned to pre-pandemic levels, we cannot be certain similar volumes of off-premises occasions will continue. Menu price increases were implemented to compensate for third-party delivery fees in connection with the off-premises sales resulting in a relatively neutral margin on off-premises sales as compared to in-restaurant dining sales. 23 Table of Contents Franchise Revenues Franchise revenues are comprised of sales-based royalty fees, system fund contributions and the amortization of upfront initial franchise fees, which are recognized as revenue on a straight-line basis over the term of the franchise agreement. Franchise revenues in any period are directly influenced by the number of open franchise-owned restaurants. THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Change SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Change (in thousands) (in thousands) Franchise revenues: Royalty and system fund contributions $ 2,300 $ 1,342 71.4 % $ 6,254 $ 3,167 97.5 % Initial fees 59 54 9.3 % 183 282 (35.1) % Total Franchise revenues $ 2,359 $ 1,396 69.0 % $ 6,437 $ 3,449 86.6 % The increase in franchise revenues during the thirteen and thirty-nine weeks ended September 26, 2021 as compared to the same periods in the prior year was primarily driven by (i) the rapid and steady sales recovery of sales, which had declined in 2020 as a result of the COVID-19 pandemic and (ii) $0.2 million and $0.4 million of franchise revenues recognized during the thirteen and thirty-nine weeks ended September 26, 2021, respectively, from 11 Franchise-owned NROs that have opened since September 27, 2020. Food and Beverage Costs The components of food and beverage costs at company-owned restaurants are variable by nature, change with sales volume, are impacted by product mix and are subject to increases or decreases in commodity costs. THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Change SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Change (in thousands) (in thousands) Food and beverage costs $ 35,871 $ 22,053 62.7 % $ 96,383 $ 53,040 81.7 % As a percentage of restaurant sales 23.1 % 22.4 % 0.7 % 22.3 % 23.1 % (0.8) % At 23.1% of restaurant sales during the thirteen weeks ended September 26, 2021, food and beverage costs was 70 basis points higher than the same period in the prior year. The increase was primarily due to (i) the increased cost of pork, partially offset by (ii) menu price increases and (iii) COVID-19-related inventory write-offs of $0.2 million recognized during the thirteen weeks ended September 27, 2020. For further comparability, food and beverage costs as a percentage of restaurant sales was 23.8% during the thirteen weeks ended September 29, 2019. Food and beverage costs increased during the thirteen weeks ended September 26, 2021 as compared to the same period in the prior year primarily due to (i) the increase in same-restaurant sales growth of 46.2% that was driven by our same-restaurant traffic growth of 40.1% due to the rapid and steady sales and traffic recovery from the COVID-19 pandemic and (i i) $2.2 mi llion of food and beverage costs from the 19 NROs that have opened since September 27, 2020 . For the thirty-nine weeks ended September 26, 2021 and September 27, 2020, food and beverage costs as a percentage of restaurant sales was 22.3% and 23.1%, respectively. The lower percentage cost was primarily due to (i) COVID-19-related inventory write-offs of $0.6 million recognized during the thirty-nine weeks ended September 27, 2020 and (ii) menu price increases, including a surcharge on third-party delivery sales. For further comparability, food and beverage costs as a percentage of restaurant sales was 23.5% during the thirty-nine weeks ended September 29, 2019. Food and beverage costs increased during the thirty-nine weeks ended September 26, 2021 as compared to the same period in the prior year primarily as a result of (i) increased restaurant sales relative to depressed levels in fiscal 2020 due to effects of the COVID-19 pandemic and (ii) $4.4 million of food and beverage costs from the 19 NROs that have opened since September 27, 2020. 24 Table of Contents Labor and Other Related Expenses Labor and other related expenses include hourly and management wages, bonuses, payroll taxes, workers’ compensation expense and employee benefits. Factors that influence labor costs include minimum wage and payroll tax legislation, health care costs, the performance of our company-owned restaurants and increased competition for qualified staff. THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Change SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Change (in thousands) (in thousands) Labor and other related expenses $ 50,587 $ 34,115 48.3 % $ 136,586 $ 84,127 62.4 % As a percentage of restaurant sales 32.6 % 34.7 % (2.1) % 31.6 % 36.6 % (5.0) % The decrease in labor and other related expenses as a percentage of restaurant sales to 32.6% during the thirteen weeks ended September 26, 2021 from 34.7% during the same period in the prior year and to 31.6% during the thirty-nine weeks ended September 26, 2021 from 36.6% during the same period in the prior year was primarily due to leveraging of labor and other related expenses as restaurants sales and traffic have grown rapidly, combined with a challenging labor environment. For further comparability, labor and other related expenses as a percentage of restaurant sales during the thirteen and thirty-nine weeks ended September 29, 2019 was 35.2% and 34.7%, respectively. The increase in labor and other related expenses during the thirteen weeks ended September 26, 2021 as compared to the same period in the prior year was primarily due to (i) same-restaurant sales growth of 46.2%, which was driven by same-restaurant traffic growth of 40.1%, (ii) $3.2 million from the 19 NROs that have opened since September 27, 2020 and (iii) reduced labor hours in fiscal 2020 as a result of the COVID-19 pandemic. The increase in labor and other related expenses during the thirty-nine weeks ended September 26, 2021 as compared to the same period in the prior year is primarily due to (i) same-restaurant sales growth of 75.0%, which was driven by our same-restaurant traffic growth of 61.6%, (ii) $6.6 million due to the additional costs incurred in 19 NROs that have opened since September 27, 2020 and (iii) normal performance-related bonuses, partially offset by (iv) $1.9 million in compensation expense and health insurance costs for furloughed employees, net of employee retention credits, incurred during the thirty-nine weeks ended September 27, 2020. Other Restaurant Operating Expenses Other restaurant operating expenses consist of marketing and advertising expenses, utilities and other operating expenses incidental to operating company-owned restaurants, such as operating supplies (including paper products, menus and to-go supplies), credit card fees, repairs and maintenance, third-party delivery services fees and certain pre-opening expenses for new company-owned restaurants. Pre-opening expenses primarily consist of manager salaries, recruiting expenses, employee payroll and training costs. Pre-opening expenses are recognized in the period in which the expense was incurred, and can fluctuate from period to period, based on the number and timing of new restaurant openings. Additionally, new restaurant openings in new geographic market areas may initially experience higher pre-opening expenses than our established geographic market areas where we have greater economies of scale and incur lower travel costs for our training team. THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Change SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Change (in thousands) (in thousands) Other restaurant operating expenses $ 24,185 $ 19,881 21.6 % $ 71,000 $ 43,163 64.5 % As a percentage of restaurant sales 15.6 % 20.2 % (4.6) % 16.4 % 18.8 % (2.4) % At 15.6% of restaurant sales during the thirteen weeks ended September 26, 2021, other restaurant operating expenses was 460 basis points lower than the same period in the prior year primarily due to leveraging increased in-restaurant dining sales. The increase in other restaurant operating expenses during the thirteen weeks ended September 26, 2021 as compared to the same period in the prior year was primarily due to (i) the increase in credit card fees, supplies, utilities, repairs and maintenance and insurance expense totaling approximate ly $4.5 million, partially offset by (ii) the decrease in pre-opening expenses of $0.4 million. 25 Table of Contents The decrease in other restaurant operating expenses as a percentage of restaurant sales to 16.4% during the thirty-nine weeks ended September 26, 2021 from 18.8% during the same period in the prior year was primarily due to leveraging increased restaurant sales that have recovered from depressed levels due to effects of the COVID-19 pandemic. The increase in other restaurant operating expenses during the thirty-nine weeks ended September 26, 2021 as compared to the same period in the prior year was primarily due to (i) the increase in credit card fees, supplies, utilities, repairs and maintenance and insurance expense totaling approximat ely $19.2 million as the operations at company-owned restaurants were temporarily suspended and government-mandated dining room restrictions imposed due to the COVID-19 pandemic in 2020 and (ii) an increase in third-party delivery services fees of $7.7 m illion as a result of off-premises sales. For further comparability, the increase in other restaurant operating expenses as a percentage of restaurant sales from 14.1% and 13.8% during the thirteen and thirty-nine weeks ended September 29, 2019, respectively, was primarily driven by off-premises packaging costs, personal protective equipment, supplies and third-party delivery services fees. Occupancy Expenses Occupancy expenses primarily consist of rent expense, property insurance, common area expenses and property taxes. Rent expense also includes pre-opening rent expense recognized during the period between the date of possession of the restaurant facility and the restaurant opening date. THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Change SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Change (in thousands) (in thousands) Occupancy expenses $ 14,199 $ 13,127 8.2 % $ 41,956 $ 38,309 9.5 % As a percentage of restaurant sales 9.2 % 13.3 % (4.1) % 9.7 % 16.7 % (7.0) % The increase in occupancy expenses during the thirteen and thirty-nine weeks ended September 26, 2021 as compared to the same periods in the prior year was primarily due to the increase in the number of company-owned restaurants and the number of leases that had commenced during the respective periods. Pre-opening rent expense during the thirteen and thirty-nine weeks ended September 26, 2021 was $0.2 million and $0.9 million, respectively, as compared to $0.4 million and $1.5 million during the thirteen and thirty-nine weeks ended September 27, 2020, respectively. General and Administrative Expenses General and administrative expenses primarily consist of costs associated with our corporate and administrative functions that support restaurant development and operations including marketing and advertising costs incurred as well as legal fees, professional fees and stock-based compensation expense. General and administrative expenses are impacted by changes in our employee headcount and costs related to strategic and growth initiatives. In preparation for and after the consummation of the IPO, we have incurred and we expect to incur in the future significant additional legal, accounting and other expenses associated with being a public company, including costs associated with our compliance with the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”). THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Change SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Change (in thousands) (in thousands) General and administrative expenses $ 17,019 $ 11,347 50.0 % $ 44,360 $ 33,625 31.9 % The increase in general and administrative expenses during the thirteen weeks ended September 26, 2021 as compared to the same period in the prior year was primarily due to (i) the increase in compensation of $4.9 million resulting from additional employee headcount to support growth and performance-related bonuses, (ii) the increase of $1.0 m illion in marketing spend and (iii) the increase of $1.2 million for recruiting, relocation, travel and strategic efforts, partially offset by the (iv) the write off of $2.0 million of deferred offering costs during the thirteen weeks ended September 27, 2020 as a result of halting our public registration of equity in 2020. 26 Table of Contents The increase in general and administrative expenses during the thirty-nine weeks ended September 26, 2021 as compared to the same period in the prior year was primarily due to (i) the increase in compensati on of $10.7 million resulting from additional employee headcount and performance-related bonuses as compared to 2020 when there were furloughs and the reduction in bonuses and (ii) the increase of $1.7 million in marketing spend, partially offset by (iii) the reduction o f $1.4 million i n consulting, accounting and other expenses incurred in connection with public-company readiness efforts during fiscal 2020 and (iv) the write off o f $2.0 million of def erred offering costs during the thirty-nine weeks ended September 27, 2020 as a result of halting our public registration of equity in 2020. Depreciati on and Amortization Depreciation and amortization consists of the depreciation of fixed assets, including leasehold improvements, fixtures and equipment and the amortization of definite-lived intangible assets, which are primarily comprised of franchise rights. Franchise rights includes rights which arose from the purchase price allocation in connection with the merger agreement through which the Company was acquired by funds affiliated with or managed by Advent International Corporation in August 2017 as well as reacquired rights from our acquisitions of franchise-owned restaurants. THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Change SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Change (in thousands) (in thousands) Depreciation and amortization $ 8,203 $ 7,849 4.5 % $ 23,965 $ 22,877 4.8 % The increase in depreciation and amortization recognized during the thirteen and thirty-nine weeks ended September 26, 2021 as compared to the same periods in the prior year was primarily due to incremental depreciation expense associated with NROs. Impairments and Loss on Disposal of Assets Impairments and loss on disposal of assets include (i) the impairment of long-lived assets and intangible assets where the carrying amount of the asset is not recoverable and exceeds the fair value of the asset, (ii) the write-off of the net book value of assets that have been retired or replaced in the normal course of business and (iii) the write-off of the net book value of assets in connection with restaurant closures. THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Change SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Change (in thousands) (in thousands) Impairments and loss on disposal of assets $ 98 $ 27 n/m (1) $ 261 $ 282 (7.4) % _____________ (1) Not meaningful. There were no impairment losses recognized on intangible assets or fixed assets during the thirteen and thirty-nine weeks ended September 26, 2021 and September 27, 2020. Loss on disposal of assets recognized during the periods indicated were related to retirements, replacements and disposals of fixed assets. 27 Table of Contents Transaction Expenses (Income), Net Transaction expenses (income), net primarily include (i) costs incurred in connection with the acquisition of franchise-owned restaurants, (ii) costs incurred in connection with the conversion of certain restaurants to company-owned restaurants operating under the First Watch trade name, (iii) costs related to restaurant closures and (iv) revaluations of contingent consideration payable to previous stockholders for tax savings generated through use of federal and state loss carryforwards and general business credits that had been accumulated from operations prior to August 2017. THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Change SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Change (in thousands) (in thousands) Transaction expenses (income), net $ 126 $ (34) n/m (1) $ 752 $ 65 n/m (1) ____________ (1) Not meaningful. Transaction expenses (income), net primarily represents the revaluation of the contingent consideration payable to previous stockholders for tax savings generated through use of federal and state loss carryforwards and general business credits that had been accumulated from operations prior to August 2017. See Note 10, Income Taxes , in the accompanying notes to the unaudited interim consolidated financial statements. Income (Loss) from Operations THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Change SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Change (in thousands) (in thousands) Income (Loss) from operations $ 7,153 $ (8,616) n/m (1) $ 23,310 $ (42,493) n/m (1) As a percentage of restaurant sales 4.6 % (8.8) % n/m (1) 5.4 % (18.5) % n/m (1) _____________ (1) Not meaningful. Income from operations for the thirteen and thirty-nine weeks ended September 26, 2021 as compared to Loss from operations for the same periods in the prior year was primarily due to (i) the increase in same-restaurant sales growth, driven by same-restaurant traffic growth, which had declined in 2020 due to the effects of the COVID-19 pandemic and (ii) operations of 19 NROs that have opened since September 27, 2020, partially offset by (iii) the increase in food and beverage costs, labor and other related expenses and other restaurant operating expenses as restaurant sales and traffic increased and (iv) the increase in general and administrative expenses primarily as a result of additional employee headcount and performance-related bonuses. Interest Expense Interest expense primarily consists of interest and fees on our Senior Credit Facilities and the amortization expense for debt discount and deferred issuance costs. THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Change SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Change (in thousands) (in thousands) Interest expense $ 6,051 $ 5,832 3.8 % $ 18,656 $ 16,499 13.1 % The increase in interest expense during the thirteen and thirty-nine weeks ended September 26, 2021 as compared to the same periods in the prior year was primarily due to the additional interest incurred pursuant to the fourth amendment of our Senior Credit Facilities in August 2020 o f $0.3 million and $2.5 mill ion, respectively. See Note 7, Debt , in the accompanying notes to the unaudited interim consolidated financial statements. 28 Table of Contents Other Income, Net Other income, net includes items deemed to be non-operating based on management’s assessment of the nature of the item in relation to our core operations. THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Change SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Change (in thousands) (in thousands) Other income, net $ 215 $ 45 n/m (1) $ 536 $ 405 32.3 % _____________ (1) Not meaningful. Income Tax Expense (Benefit) Income tax expense (benefit) primarily consists of various federal and state taxes. THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Change SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Change (in thousands) (in thousands) Income tax expense (benefit) $ 534 $ (3,262) n/m (1) $ 2,644 $ (16,024) n/m (1) ___________ (1) Not meaningful. The effective income tax rate for the thirteen and thirty-nine weeks ended September 26, 2021 was 40.5% and 50.9%, respectively, as compared to 22.6% and 27.4% for the thirteen and thirty-nine weeks ended September 27, 2020, respectively. 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) forecasted 2021 pre-tax book income as compared to forecasted 2020 pre-tax book loss. The Company has a blended federal and state statutory rate of approximately 25.0%. The effective income tax rates for the 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. Net Income (Loss) THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Change SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Change (in thousands) (in thousands) Net income (loss) $ 783 $ (11,141) n/m (1) $ 2,546 $ (42,563) n/m (1) As a percentage of total revenues 0.5 % (11.2) % n/m (1) 0.6 % (18.3) % n/m (1) ___________ (1) Not meaningful. Net income for the thirteen and thirty-nine weeks ended September 26, 2021 as compared to Net loss for the same periods in the prior year was primarily due to (i) the increase in income from operations mainly driven by the rapid and steady recovery of our in-restaurant dining sales and traffic, partially offset by (ii) income tax expense. 29 Table of Contents Restaurant level Operating Profit and Restaurant level Operating Profit Margin THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Change SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Change (in thousands) (in thousands) Restaurant level operating profit $ 30,240 $ 9,762 n/m (1) $ 86,230 $ 14,202 n/m (1) Restaurant level operating profit margin 19.5 % 9.9 % 9.4 % 20.0 % 6.2 % 13.7 % ___________ (1) Not meaningful. The increase in Restaurant level operating profit for the thirteen and thirty-nine weeks ended September 26, 2021 as compared to the same periods in the prior year was primarily due to (i) the rapid and steady recovery of our in-restaurant dining sales and traffic, which had declined in 2020 as a result of the COVID-19 pandemic and (ii) the operations of 19 NROs that have opened since September 27, 2020, partially offset by (iii) the increase in food and beverage costs, labor and other related expenses and other restaurant operating expenses as restaurant sales and traffic increased. Adjusted EBITDA and Adjusted EBITDA Margin THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Change SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 Change (in thousands) (in thousands) Adjusted EBITDA $ 16,952 $ 2,582 n/m (1) $ 52,134 $ (9,221) n/m (1) Adjusted EBITDA margin 10.8 % 2.6 % 8.2 % 11.9 % (4.0) % n/m (1) ___________ (1) Not meaningful. The increase in Adjusted EBITDA for the thirteen and thirty-nine weeks ended September 26, 2021 as compared to the same periods in the prior year was primarily due to (i) the rapid and steady recovery of our in-restaurant dining sales and traffic, which had declined in 2020 due to the COVID-19 pandemic and (ii) the operations of 19 NROs that have opened since September 27, 2020, partially offset by (iii) the increase in general and administrative expenses mainly due to the increase in employee headcount and performance-related bonuses. 30 Table of Contents Non-GAAP Financial Measures Adjusted EBITDA and Adjusted EBITDA margin - The following table reconciles Net income (loss) and Net income (loss) margin, the most directly comparable GAAP measures to Adjusted EBITDA and Adjusted EBITDA margin for the periods indicated: . THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 (in thousands) Net income (loss) $ 783 $ (11,141) $ 2,546 $ (42,563) Depreciation and amortization 8,203 7,849 23,965 22,877 Interest expense 6,051 5,832 18,656 16,499 Income tax expense (benefit) 534 (3,262) 2,644 (16,024) EBITDA 15,571 (722) 47,811 (19,211) IPO-readiness and strategic transition costs (1) 576 2,156 1,755 3,811 Stock-based compensation (2) 430 192 746 571 Recruiting and relocation costs (3) 151 — 333 172 Impairments and loss on disposal of assets (4) 98 27 261 282 Transaction expenses (income), net (5) 126 (34) 752 65 COVID-19 related charges (6) — 963 211 4,845 Severance costs (7) — — 265 244 Adjusted EBITDA $ 16,952 $ 2,582 $ 52,134 $ (9,221) Total revenues $ 157,441 $ 99,749 $ 438,573 $ 232,995 Net income (loss) margin 0.5 % (11.2) % 0.6 % (18.3) % Adjusted EBITDA margin 10.8 % 2.6 % 11.9 % (4.0) % Additional information Pre-opening expenses (8) $ 510 $ 1,108 $ 2,573 $ 3,184 Deferred rent (income) expense (9) $ (156) $ 1,187 $ (1,963) $ 9,939 _____________________________ (1) Represents costs related to information technology support and external professional service costs incurred in connection with IPO-readiness efforts as well as the assessment and redesign of our systems and processes. These costs are recorded within General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss). (2) Represents non-cash, stock-based compensation expense which is recorded within General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss). (3) Represents costs incurred for hiring qualified individuals as we assessed the redesign of our systems and processes. These costs are recorded within General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss). (4) Includes impairments recognized on intangible assets and fixed assets as well as costs related to the disposal of assets due to retirements, replacements or certain restaurant closures. (5) The amounts primarily represent the revaluation of the contingent consideration payable to previous stockholders for tax savings generated through use of federal and state loss carryforwards and general business credits that had been accumulated from operations prior to August 2017. See Note 10, Income Taxes , in the accompanying notes to the unaudited interim consolidated financial statements. In addition, the amounts include costs incurred in connection with the acquisition of certain franchise-owned restaurants, costs incurred in connection with the conversion of certain restaurants to company-owned restaurants operating under the First Watch trade name and costs related to restaurant closures. (6) Consists of costs incurred in connection with the economic impact of the COVID-19 pandemic, which primarily includes inventory obsolescence and spoilage, compensation for employees upon furlough and return from furlough, health insurance costs paid for furloughed employees, net of employee retention credits and costs incurred to amend certain financial commitments. See Note 4, COVID-19 Charges , in the accompanying notes to the unaudited interim consolidated financial statements. (7) Severance costs are recorded in General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss). (8) Represents expenses directly incurred to open new restaurants, including pre-opening rent, manager salaries, recruiting expenses, employee payroll, training, and marketing costs. These costs are recorded within Other restaurant operating expenses and Occupancy expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss). (9) Consists of the non-cash portion of straight-line rent expense recorded within both Occupancy expenses and General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss). 31 Table of Contents For further comparability, the reconciliation of Net loss and Net loss margin, the most directly comparable GAAP measures, to Adjusted EBITDA and Adjusted EBITDA margin for the thirteen and thirty-nine weeks ended September 29, 2019 is as follows: THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED SEPTEMBER 29, 2019 SEPTEMBER 29, 2019 (in thousands) Net loss $ (7,030) $ (39,696) Depreciation and amortization 7,545 20,579 Interest expense 4,743 14,988 Income tax benefit (1,294) (10,342) EBITDA 3,964 (14,471) IPO-readiness and strategic transition costs (1) 2,394 6,403 Impairments and loss on disposal of assets (2) 206 33,086 Transaction expenses, net (3) 441 1,548 Stock-based compensation (4) 308 864 Recruiting and relocation costs (5) 338 773 Severance costs (6) 97 289 Adjusted EBITDA 7,748 28,492 Total revenues $ 109,646 $ 322,160 Net loss margin (6.4) % (12.3) % Adjusted EBITDA margin 7.1 % 8.8 % Additional information Pre-opening expenses (7) $ 1,380 $ 4,525 Deferred rent expense (8) $ 1,072 $ 3,292 _____________________________ (1) Represents costs related to information technology support and external professional service costs incurred in connection with IPO-readiness efforts as well as the assessment and redesign of our systems and processes. These costs are recorded within General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss). (2) Includes impairments recognized on intangible assets and fixed assets as well as costs related to the disposal of assets due to retirements, replacements or certain restaurant closures. (3) Primarily represents costs incurred in connection with the acquisition of certain franchise-owned restaurants, costs incurred in connection with the conversion of certain restaurants to company-owned restaurants operating under the First Watch trade name and costs related to restaurant closures. In addition, the amount also includes costs associated with the revaluation of the contingent consideration payable to previous stockholders for tax savings generated through use of federal and state loss carryforwards and general business credits that had been accumulated from operations prior to August 2017. See Note 10, Income Taxes , in the accompanying notes to the unaudited interim consolidated financial statements. (4) Represents non-cash, stock-based compensation expense which is recorded within General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss). (5) Represents costs incurred for hiring qualified individuals as we assessed the redesign of our systems and processes. These costs are recorded within General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss). (6) Severance costs are recorded within General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss). (7) Represents expenses directly incurred to open new restaurants, including pre-opening rent, manager salaries, recruiting expenses, employee payroll, training, and marketing costs. These costs are recorded within Other restaurant operating expenses and Occupancy expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss). (8) Consists of the non-cash portion of straight-line rent expense recorded within both Occupancy expenses and General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss). 32 Table of Contents Restaurant level operating margin - The following table reconciles Income (Loss) from operations and Income (Loss) from operations margin, the most comparable GAAP measures to Restaurant level operating income and Restaurant level operating profit margin for the periods indicated: THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 (in thousands) Income (Loss) from operations $ 7,153 $ (8,616) $ 23,310 $ (42,493) Less: Franchise revenues (2,359) (1,396) (6,437) (3,449) Add: 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 (1) 98 27 261 282 Transaction expenses (income), net (2) 126 (34) 752 65 COVID-19 related charges (3) — 585 19 3,295 Restaurant level operating profit $ 30,240 $ 9,762 $ 86,230 $ 14,202 Restaurant sales $ 155,082 $ 98,353 $ 432,136 $ 229,546 Income (Loss) from operations margin 4.6 % (8.8) % 5.4 % (18.5) % Restaurant level operating profit margin 19.5 % 9.9 % 20.0 % 6.2 % Additional information Pre-opening expenses (4) $ 510 $ 1,108 $ 2,573 $ 3,184 Deferred rent (income) expense (5) $ (244) $ 1,202 $ (1,978) $ 9,866 _____________________________ (1) Includes impairments recognized on intangible assets and fixed assets as well as costs related to the disposal of assets due to retirements, replacements or certain restaurant closures. (2) The amount primarily represents the revaluation of the contingent consideration payable to previous stockholders for tax savings generated through use of federal and state loss carryforwards and general business credits that had been accumulated from operations prior to August 2017. See Note 10, Income Taxes , in the accompanying notes to the unaudited interim consolidated financial statements. In addition, the amounts include costs incurred in connection with the acquisition of certain franchise-owned restaurants, costs incurred in connection with the conversion of certain restaurants to company-owned restaurants operating under the First Watch trade name and costs related to restaurant closures. (3) Consists of costs incurred in connection with the economic impact of the COVID-19 pandemic, which primarily includes inventory obsolescence and spoilage, compensation for employees upon furlough and return from furlough, health insurance costs paid for furloughed employees, net of employee retention credits. See Note 4, COVID-19 Charges , in the accompanying notes to the unaudited interim consolidated financial statements. (4) Represents expenses directly incurred to open new restaurants, including pre-opening rent, manager salaries, recruiting expenses, employee payroll, training, and marketing costs. These costs are recorded within Other restaurant operating expenses and Occupancy expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss). (5) Consists of the non-cash portion of straight-line rent expense recorded within Occupancy expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss). 33 Table of Contents For further comparability, the reconciliation of Loss from operations and Loss from operations margin, the most directly comparable GAAP financial measures, to Restaurant level operating profit and Restaurant level operating profit margin for the thirteen and thirty-nine weeks ended September 29, 2019 is as follows: THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED SEPTEMBER 29, 2019 SEPTEMBER 29, 2019 (in thousands) Loss from operations $ (3,678) $ (35,028) Less: Franchise revenues (1,905) (5,597) Add: General and administrative expenses 14,578 40,480 Depreciation and amortization 7,545 20,580 Impairments and loss on disposal of assets (1) 206 33,086 Transaction expenses, net (2) 441 1,548 Restaurant level operating profit $ 17,187 $ 55,069 Restaurant sales $ 107,742 $ 316,564 Loss from operations margin (3.4) % (11.1) % Restaurant level operating profit margin 16.0 % 17.4 % Additional information Pre-opening expenses (3) $ 1,380 $ 4,525 Deferred rent expense (4) $ 1,061 $ 3,256 _____________________________ (1) Includes impairments recognized on intangible assets and fixed assets as well as costs related to the disposal of assets due to retirements, replacements or certain restaurant closures. (2) Primarily represents costs incurred in connection with the acquisition of certain franchise-owned restaurants, costs incurred in connection with the conversion of certain restaurants to company-owned restaurants operating under the First Watch trade name and costs related to restaurant closures. In addition, the amount also includes the revaluation of the contingent consideration payable to previous stockholders for tax savings generated through use of federal and state loss carryforwards and general business credits that had been accumulated from operations prior to August 2017. See Note 10, Income Taxes , in the accompanying notes to the unaudited interim consolidated financial statements. (3) Represents expenses directly incurred to open new restaurants, including pre-opening rent, manager salaries, recruiting expenses, employee payroll, training, and marketing costs. These costs are recorded within Other restaurant operating expenses and Occupancy expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss). (4) Consists of the non-cash portion of straight-line rent expense recorded within Occupancy expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss). Liquidity and Capital Resources Liquidity Our primary sources of liquidity are cash flow from operations, cash and cash equivalents, credit capacity under our new facilities, as described in “ Debt Refinancing ,” herein, and proceeds from equity offerings, including our IPO. On October 5, 2021, the Company completed its IPO, pursuant to which we sold 10,877,850 shares of common stock at the IPO price of $18.00 per share, which included the full exercise by the underwriters of their option to purchase up to an additional 1,418,850 shares of common stock. We received aggregate net proceeds of $182.1 million. On October 6, 2021, we used the net proceeds of $182.1 million from the IPO, the proceeds received from the new facilities, as described in “ Debt Refinancing ,” herein, and cash on hand to repay all outstanding indebtedness under the Senior Credit Facilities. 34 Table of Contents As of September 26, 2021, we had cash and cash equivalents of $51.9 million, $288.9 million in outstanding borrowings, excluding unamortized debt issuance costs and deferred issuance costs, under our Senior Credit Facilities . As of September 26, 2021, w e had availability under our Senior Credit Facilities of $21.1 million. Our principal uses of cash include capital expenditures for the development, acquisition or remodeling of restaurants, lease obligations, debt service payments and strategic infrastructure investments. Our requirements for working capital are not significant because our customers pay for their food and beverage purchases in cash or on debit or credit cards at the time of the sale and we are able to sell many of our inventory items before payment is due to the supplier of such items. We estimate that our capital expenditures will total approximately $30.0 million to $35.0 million in fiscal 2021, which we plan to fund primarily with cash generated from our operating activities. We believe that our cash flow from operations, availability under our new facilities, as described in “ Debt Refinancing ,” herein, and available cash and cash equivalents will be sufficient to meet our liquidity needs for at least the next 12 months. We anticipate that to the extent that we require additional liquidity, it will be funded through additional indebtedness, the issuance of equity, or a combination thereof. Although we believe that our current level of total available liquidity is sufficient to meet our short-term and long-term liquidity requirements, we regularly evaluate opportunities to improve our liquidity position in order to enhance financial flexibility. Although we have no specific current plans to do so, if we decide to pursue one or more significant acquisitions, we may incur additional debt or sell additional equity to finance such acquisitions, which would result in additional expenses or dilution. Senior Credit Facilities and Unused Borrowing Capacity Our Senior Credit Facilities were due to mature on August 21, 2023. We pledged substantially all our assets under our Senior Credit Facilities. For our Senior Credit Facilities excluding the Revolving Facility, principal payments at a rate of 0.25% of the original principal amounts were due quarterly with the remainder of principal (including paid-in-kind interest) and unpaid interest due at maturity, and had a commitment fee payable quarterly in arrears at 1% per annum, applicable to unused commitments. Our Revolving Facility included a commitment fee at a rate of 0.50% per annum of the initial revolving credit commitment. The Senior Credit Facilities contained covenants that provided for, among other things, maintenance of certain ratios and restrictions on additional indebtedness. We were in compliance with the covenants as of September 26, 2021 and December 27, 2020. The following table summarizes our unused borrowing capacity as of September 26, 2021 and December 27, 2020: SEPTEMBER 26, 2021 DECEMBER 27, 2020 (in thousands) Undrawn revolving credit facility $ 19,620 $ 19,620 Undrawn second amendment delayed draw term facility 1,500 1,500 Total unused borrowing capacity $ 21,120 $ 21,120 35 Table of Contents Debt Refinancing On October 6, 2021, FWR Holding Corporation (“FWR”), one of our indirect subsidiaries, entered into a credit agreement (the “FWR Credit Agreement”), with Bank of America, N.A., as administrative agent (the “Administrative Agent”), the lenders party thereto and the 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. The New Facilities are guaranteed, subject to customary exceptions, by all of FWR’s wholly-owned domestic restricted subsidiaries and by AI Fresh Parent, Inc., the direct parent company of FWR, and are secured by associated collateral agreements that pledge a lien on substantially all of FWR’s assets, including fixed assets and intangibles, and the assets of the guarantors, in each case, subject to customary exceptions. The New Term Facility is subject to amortization of principal, payable in quarterly installments on the last business day of each fiscal quarter, commencing on March 28, 2022 (the “Initial Amortization Date”), equal to approximately 2.50% of the principal amount of the term loans in the first fiscal year after the Initial Amortization Date, 5.00% of the principal amount of the term loans in the second fiscal year after the Initial Amortization Date, 5.00% of the principal amount of the term loans in the third fiscal year after the Initial Amortization Date, 7.50% of the principal amount of the term loans in the fourth fiscal year after the Initial Amortization Date and 10.00% of the principal amount of the term loans in the fifth fiscal year after the Initial Amortization Date. The remaining aggregate principal amount outstanding (together with accrued and unpaid interest on the principal amount) under the New Term Facility is payable at the maturity of the New Term Facility. The loans under the New Facilities bear interest at rates based upon, at the option of FWR, either (i) the base rate plus a margin of between 125 and 200 basis points depending on the total rent adjusted net leverage ratio of FWR and its restricted subsidiaries on a consolidated basis (the “Total Rent Adjusted Net Leverage Ratio”) and (ii) the London interbank offer rate (“LIBOR”) plus a margin of between 225 and 300 basis points depending on the Total Rent Adjusted Net Leverage Ratio. Until the delivery under the FWR Credit Agreement of the financial statements for the first full fiscal quarter ending after the Closing Date, the New Facilities bear interest, at the option of FWR, at either (i) the base rate plus a margin of 150 basis points or (ii) the LIBOR plus a margin of 250 basis points. In addition, FWR will pay an unused commitment fee of between 25 and 50 basis points on the undrawn commitments under the New Revolving Credit Facility, also depending on the Total Rent Adjusted Net Leverage Ratio. The FWR Credit Agreement contains LIBOR fallback language, pursuant to which the Administrative Agent and FWR may amend the FWR Credit Agreement to replace the LIBOR with a secured overnight financing rate or another alternate benchmark rate upon reference rate reform and the occurrence of certain LIBOR cessation events. Summary of Cash Flows The following table presents a summary of our cash provided by (used in) operating, investing and financing activities for the thirty-nine weeks ended September 26, 2021 and September 27, 2020: THIRTY-NINE WEEKS ENDED SEPTEMBER 26, 2021 SEPTEMBER 27, 2020 (in thousands) Cash provided by (used in) operating activities $ 44,265 $ (20,393) Cash used in investing activities (27,424) (22,328) 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 provided by operating during the thirty-nine weeks ended September 26, 2021 as compared to cash used in operating activities during the thirty-nine weeks ended September 27, 2020 was primarily driven by (i) the increase in net income of $45.1 million as a result of the recovery in restaurant sales and traffic, which had declined in 2020 as a result of the COVID-19 pandemic, (ii) the timing of operational receipts and payments and (iii) higher accrued wages, partially offset by (iv) the payments for rent deferrals and (v) the payment of deferred offering costs in connection with our IPO. Cash used in investing activities increased during the thirty-nine weeks ended September 26, 2021 as compared to the same period in the prior year primarily as a result of curtailing new restaurant construction during the first half of fiscal 2020 due to the COVID-19 pandemic. 36 Table of Contents Cash flows used in financing activities during the thirty-nine weeks ended September 26, 2021 comprised of repayments on our Senior Credit Facilities and payments of deferred offering costs, as compared to proceeds from an offering of preferred shares totaling $40.0 million and the issuance of long-term debt, net of repayments made on our Senior Credit Facilities during the thirty-nine weeks ended September 27, 2020. Contractual Obligations As of September 26, 2021, there have been no material changes to the contractual obligations as of December 27, 2020, included in the IPO Prospectus. See “ Debt Refinancing ” above for a discussion on the new credit agreement entered into on October 6, 2021. Off-Balance Sheet Arrangements Except for certain letters of credit entered into as security under the terms of several of our leases entered into in the normal course of business, we did not have any off-balance sheet arrangements as of September 26, 2021 and December 27, 2020. Critical Accounting Estimates Our discussion and analysis of our financial condition and results of operations is based upon the accompanying unaudited interim consolidated financial statements and notes thereto, which have been prepared in accordance with GAAP. The preparation of these interim consolidated financial statements and related notes requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, terms of existing contracts, our evaluation of trends in the industry and information available from other outside sources, as appropriate. We evaluate our estimates and judgments on an on-going basis. Our actual results may differ from these estimates. Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions. There have been no significant changes to our critical accounting policies as disclosed in “ Critical Accounting Estimates ” in the IPO Prospectus. Recently Issued Accounting Pronouncements For a discussion of recently issued accounting pronouncements, see Note 2, Summary of Significant Accounting Policies , in the accompanying notes to the unaudited interim consolidated financial statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes to our exposure to market risks as disclosed in the IPO Prospectus.