First Watch Restaurant Group, Inc. 10-K

Item 8. Financial Statements and Supplementary Data INDEX TO FINANCIAL INFORMATION Report of Independent Registered Public Accounting Firm (PCAOB ID 238 ) 62 Consolidated Balance Sheets - December 26, 2021 and December 27, 2020 63 Consolidated Statements of Operations and Comprehensive Loss - For Fiscal Years 2021, 2020 and 2019 64 Consolidated Statements of Equity - For Fiscal Years 2021, 2020 and 2019 65 Consolidated Statements of Cash Flows - For Fiscal Years 2021, 2020 and 2019 66 Notes to Consolidated Financial Statements 68 61 Table of Contents Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of First Watch Restaurant Group, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of First Watch Restaurant Group, Inc. and its subsidiaries (the “Company”) as of December 26, 2021 and December 27, 2020, and the related consolidated statements of operations and comprehensive loss, of equity and of cash flows for each of the three years in the period ended December 26, 2021, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 26, 2021 and December 27, 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 26, 2021 in conformity with accounting principles generally accepted in the United States of America. Change in Accounting Principle As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP Tampa, Florida March 23, 2022 We have served as the Company's auditor since 1999. 62 Table of Contents FIRST WATCH RESTAURANT GROUP, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) DECEMBER 26, 2021 DECEMBER 27, 2020 Assets Current assets: Cash and cash equivalents $ 51,864 $ 38,846 Restricted cash 251 251 Accounts receivable 4,450 3,915 Inventory 4,023 2,915 Prepaid expenses 5,677 2,490 Other current assets 1,432 621 Total current assets 67,697 49,038 Goodwill 345,219 345,219 Intangible assets, net 143,000 143,662 Operating lease right-of-use assets 324,995 307,558 Property, fixtures and equipment, net of accumulated depreciation of $ 115,582 and $ 86,250 , respectively 164,695 160,744 Other long-term assets 1,311 1,291 Total assets $ 1,046,917 $ 1,007,512 Liabilities and Equity Current liabilities: Accounts payable $ 11,060 $ 4,220 Accrued liabilities 15,889 13,482 Accrued compensation and deferred payroll taxes 21,196 10,856 Deferred revenues 4,654 4,273 Current portion of operating lease liabilities 38,186 40,111 Current portion of long-term debt 3,186 3,590 Note payable 2,352 — Total current liabilities 96,523 76,532 Operating lease liabilities 330,495 307,802 Long-term debt, net 99,753 286,400 Deferred income taxes 12,489 10,313 Deferred payroll taxes — 3,333 Other long-term liabilities 3,228 2,266 Total liabilities 542,488 686,646 Commitments and contingencies (Note 17) Equity: Preferred stock; $ 0.01 par value; 10,000,000 shares authorized and none outstanding at December 26, 2021; 266,667 shares authorized, issued and outstanding at December 27, 2020 — 3 Common stock; $ 0.01 par value; 300,000,000 shares authorized; 59,048,446 and 45,013,784 shares issued and outstanding at December 26, 2021 and December 27, 2020, respectively 590 450 Additional paid-in capital 608,878 423,345 Accumulated deficit ( 105,039 ) ( 102,932 ) Total equity 504,429 320,866 Total liabilities and equity $ 1,046,917 $ 1,007,512 The accompanying notes are an integral part of these consolidated financial statements. 63 Table of Contents FIRST WATCH RESTAURANT GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) FISCAL YEAR 2021 2020 2019 Revenues Restaurant sales $ 592,343 $ 337,433 $ 429,309 Franchise revenues 8,850 4,955 7,064 Total revenues 601,193 342,388 436,373 Operating costs and expenses Restaurant operating expenses (exclusive of depreciation and amortization shown below): Food and beverage costs 134,201 76,975 100,689 Labor and other related expenses 189,167 120,380 148,537 Other restaurant operating expenses 94,847 61,821 55,573 Occupancy expenses 55,433 49,450 44,165 Pre-opening expenses 3,310 3,880 5,815 General and administrative expenses 70,388 46,322 55,818 Depreciation and amortization 32,379 30,725 28,027 Impairments and loss on disposal of assets 381 315 33,596 Transaction (income) expenses, net ( 1,156 ) ( 258 ) 1,709 Total operating costs and expenses 578,950 389,610 473,929 Income (Loss) from operations 22,243 ( 47,222 ) ( 37,556 ) Interest expense ( 20,099 ) ( 22,815 ) ( 20,080 ) Other (expense) income, net ( 1,774 ) 483 ( 255 ) Income (Loss) before income taxes 370 ( 69,554 ) ( 57,891 ) Income tax (expense) benefit ( 2,477 ) 19,873 12,419 Net loss and total comprehensive loss ( 2,107 ) ( 49,681 ) ( 45,472 ) Less: Net loss attributable to non-controlling interest — — ( 33 ) Net loss and comprehensive loss attributable to First Watch Restaurant Group, Inc. $ ( 2,107 ) $ ( 49,681 ) $ ( 45,439 ) Net loss per common share attributable to First Watch Restaurant Group, Inc. - basic and diluted $ ( 0.04 ) $ ( 1.10 ) $ ( 1.01 ) Weighted average number of common shares outstanding - basic and diluted 48,213,995 45,013,784 45,013,784 The accompanying notes are an integral part of these consolidated financial statements. 64 Table of Contents FIRST WATCH RESTAURANT GROUP, INC. CONSOLIDATED STATEMENTS OF EQUITY (IN THOUSANDS, EXCEPT SHARE AMOUNTS) Preferred Stock Common Stock Additional Paid-in Capital Accumulated Deficit Total Equity Attributable to First Watch Restaurant Group, Inc. Non-controlling Interest Total Equity Shares Amount Shares Amount Balance at December 30, 2018 — $ — 45,013,784 $ 450 $ 381,665 $ ( 7,691 ) $ 374,424 $ 250 $ 374,674 Net loss — — — — — ( 45,439 ) ( 45,439 ) ( 33 ) ( 45,472 ) Stock-based compensation — — — — 1,160 — 1,160 — 1,160 Acquisition of non-controlling interest — — — — ( 227 ) — ( 227 ) ( 217 ) ( 444 ) Adoption of lease standard (ASC 842) — — — — — ( 121 ) ( 121 ) — ( 121 ) Balance at December 29, 2019 — $ — 45,013,784 $ 450 $ 382,598 $ ( 53,251 ) $ 329,797 $ — $ 329,797 Share issuance 266,667 3 — — 39,997 — 40,000 — 40,000 Net loss — — — — — ( 49,681 ) ( 49,681 ) — ( 49,681 ) Stock-based compensation — — — — 750 — 750 — 750 Balance at December 27, 2020 266,667 $ 3 45,013,784 $ 450 $ 423,345 $ ( 102,932 ) $ 320,866 $ — $ 320,866 Common stock issuance — — 10,877,850 109 176,965 — 177,074 — 177,074 Conversion of preferred shares ( 266,667 ) ( 3 ) 3,156,812 31 ( 28 ) — — — — Net loss — — — — — ( 2,107 ) ( 2,107 ) — ( 2,107 ) Stock-based compensation — — — — 8,596 — 8,596 — 8,596 Balance at December 26, 2021 — $ — 59,048,446 $ 590 $ 608,878 $ ( 105,039 ) $ 504,429 $ — $ 504,429 The accompanying notes are an integral part of these consolidated financial statements. 65 Table of Contents FIRST WATCH RESTAURANT GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) FISCAL YEAR 2021 2020 2019 Cash flows from operating activities: Net loss $ ( 2,107 ) $ ( 49,681 ) $ ( 45,472 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 32,379 30,725 28,027 Stock-based compensation 8,596 750 1,160 Deferred income taxes 2,176 ( 19,991 ) ( 12,558 ) Non-cash operating lease costs 13,052 11,727 10,772 Non-cash portion of gain on lease modification ( 961 ) — — Amortization of debt discount and deferred issuance costs 1,088 1,282 1,128 Loss on extinguishment of debt 2,403 — — Settlement gains from acquisitions — — ( 160 ) Impairments and loss on disposal of assets 381 315 33,596 Changes in assets and liabilities, net of acquisitions: Accounts receivable ( 535 ) 1,826 ( 3,192 ) Inventory ( 1,108 ) ( 203 ) ( 439 ) Prepaid expenses ( 3,187 ) 619 ( 439 ) Deferred offering costs — 1,307 — Other assets, current and long-term 169 ( 446 ) ( 1,094 ) Accounts payable 6,700 ( 866 ) ( 740 ) Accrued liabilities 5,335 ( 3,670 ) 5,566 Accrued compensation and deferred payroll taxes, current and long-term 7,007 2,929 643 Deferred revenues, current and long-term 648 ( 3,060 ) 2,024 Operating lease liabilities ( 9,760 ) 8,073 3,101 Other liabilities 695 — ( 458 ) Net cash provided by (used in) operating activities 62,971 ( 18,364 ) 21,465 Cash flows from investing activities: Capital expenditures ( 35,311 ) ( 26,749 ) ( 59,169 ) Purchase of intangible assets ( 371 ) ( 225 ) — Acquisitions, net of cash acquired — — ( 22,770 ) Acquisition of non-controlling interest — — ( 450 ) Net cash used in investing activities $ ( 35,682 ) $ ( 26,974 ) $ ( 82,389 ) The accompanying notes are an integral part of these consolidated financial statements. 66 Table of Contents FIRST WATCH RESTAURANT GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS - continued (IN THOUSANDS) Cash flows from financing activities: Proceeds from common stock issuance, net of underwriting discounts and commissions $ 182,095 $ — $ — Proceeds from preferred stock issuance — 40,000 — Proceeds from issuance of long-term debt 100,000 54,600 50,000 Repayments of long-term debt, including finance lease liabilities ( 291,602 ) ( 4,286 ) ( 2,599 ) Payment of initial public offering costs ( 4,881 ) — — Proceeds from borrowings on revolving credit facility — 22,000 42,000 Repayments of borrowings on revolving credit facility — ( 39,000 ) ( 32,500 ) Note payable borrowing 2,874 — — Repayments of note payable ( 522 ) — — Payment of debt discount and deferred issuance costs ( 2,226 ) — ( 915 ) Contingent consideration payment ( 9 ) — ( 225 ) Net cash (used in) provided by financing activities ( 14,271 ) 73,314 55,761 Net increase (decrease) in cash and cash equivalents and restricted cash 13,018 27,976 ( 5,163 ) Cash and cash equivalents and restricted cash: Beginning of year 39,097 11,121 16,284 End of year $ 52,115 $ 39,097 $ 11,121 Supplemental cash flow information: Cash paid for interest $ 16,152 $ 19,821 $ 18,929 Cash paid for income taxes, net of refunds $ 79 $ 163 $ 152 Supplemental disclosures of non-cash investing and financing activities: Interest converted to long-term debt $ 3,063 $ 1,583 $ — Leased assets obtained in exchange for new operating lease liabilities $ 33,857 $ 21,333 $ 70,355 Remeasurements of operating lease assets and lease liabilities $ ( 3,029 ) $ ( 3,850 ) $ 134 Terminations of operating lease liabilities $ ( 41 ) $ ( 711 ) $ ( 3,293 ) Leased assets obtained in exchange for new finance lease liabilities $ 217 $ 277 $ 2,666 Remeasurements of finance leased assets and lease liabilities $ 6 $ 164 $ — Change in liabilities from acquisition of property, fixtures and equipment $ 144 $ ( 860 ) $ 210 The accompanying notes are an integral part of these consolidated financial statements. 67 Table of Contents FIRST WATCH RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of Business and Organization First Watch Restaurant Group, Inc. (collectively with its wholly-owned subsidiaries, “the Company,” or “Management”) is a Delaware holding company. The Company operates and franchises restaurants in 28 sta tes operating under the “First Watch” trade name which are focused on made-to-order breakfast, brunch and lunch. The Company does not operate outside of the United States and all of its assets are located in the United States. The Company’s outstanding stock was purchased by funds affiliated with or managed by Advent International Corporation on August 21, 2017 (the “Advent Acquisition”). The Company operates restaurants through its wholly owned subsidiary, First Watch Restaurants, Inc., and is a franchisor through its wholly owned subsidiary, First Watch Franchise Development Co. As of December 26, 2021, the Company had 341 company-owned restaurants and 94 franchise-owned restaurants. 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 consolidated financial statements and notes thereto have been adjusted retroactively 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 (“Nasdaq”) 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 and received aggregate net proceeds of $ 182.1 million after deducting underwriting discounts and commissions of $ 13.7 million. The shar es 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. 2. Summary of Significant Accounting Policies Basis of Presentation The Company reports financial information on a 52- or 53-week fiscal year ending on the last Sunday of each calendar year. The fiscal years ended December 26, 2021 (“Fiscal 2021”), December 27, 2020 (“Fiscal 2020”) and December 29, 2019 (“Fiscal 2019”) contained 52 weeks. The accompanying consolidated financial statements of the Company have been prepared in U.S. dollars and in accordance with generally accepted accounting principles in the United States of America (“GAAP”). Comprehensive income (loss) is a measure of net income (loss) and all other changes in equity that result from transactions other than with equity holders, and would normally be recorded in the Consolidated Statements of Equity and the Consolidated Statements of Comprehensive Income (Loss). The Company does not have any components of other comprehensive income (loss) recorded within its consolidated financial statements. Accordingly, there is no difference between net loss and comprehensive loss. Reclassifications The Company reclassified certain items in the accompanying consolidated financial statements for the prior periods to be comparable with the classification for the current period. These reclassifications are related to the presentation of Pre-opening expenses on the Consolidated Statements of Operations and Comprehensive Loss for all periods presented, which were previously included in Other restaurant operating expenses and Occupancy expenses. These reclassifications had no effect on previously reported net loss and comprehensive loss. 68 Table of Contents FIRST WATCH RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) COVID-19 Global Pandemic In March 2020, the World Health Organization declared the novel strain of coronavirus (“COVID-19”) a global pandemic and recommended containment and mitigation measures worldwide. The Company experienced a significant reduction in guest traffic at its restaurants due to changes in consumer behavior as public health officials encouraged social distancing and state and local governments mandated restrictions including suspension of dine-in operations, reduced restaurant seating capacity, table spacing requirements and additional physical barriers. On April 13, 2020, to help ensure the safety of its employees, Management temporarily suspended all operations at the company-owned restaurants. In June 2020, substantially all of the company-owned restaurants were reopened in compliance with state and local capacity restrictions and by March 2021, nearly all our restaurants had reopened to full dining-room capacity. The COVID-19 pandemic is not eradicated and the extent to which COVID-19 may continue to impact the Company ’ s business and its customers is uncertain. The consolidated financial statements include estimates and judgments and there may be changes to those estimates in future periods as a result of the COVID-19 pandemic (see Note 4, COVID-19 Charges , for additional information). Principles of Consolidation The Company ’ s consolidated financial statements include the accounts of its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. In Fiscal 2019, the Company’s consolidated financial statements included the accounts of its majority-owned subsidiary, TFW-NC, LLC, (“TFW”), in which the Company owned 75 % of the voting shares and had a controlling financial interest. On December 24, 2019, the Company acquired the remaining 25 % interest in TFW for $ 0.45 million. The acquisition was accounted for as an equity transaction with the difference between the cash paid and the carrying amount of the non-controlling interest recognized as a decrease to equity attributable to First Watch Restaurant Group, Inc. The Company does not hold ownership interests in any franchisee and does not provide financial support to franchisees. As a result, the Company ’ s franchise relationships are not variable interest entities and are not consolidated. Use of Estimates The preparation of the 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and such differences could be material. Segment Reporting Management determined the Company ’ s single operating segment on the basis that the Company ’ s Chief Operating Decision Maker (the “CODM”), the Chief Executive Officer, assesses performance and allocates resources at the Company's consolidated level. The Company does not have any customer that represents more than 10 % of total revenues for the periods presented . Business Combinations The Company ’ s business combinations are accounted for using the purchase method of accounting . The consideration transferred in a business combination, identifiable assets acquired and liabilities assumed are measured at their estimated fair value as of the date of the acquisition. Goodwill is recognized for the amount by which the purchase consideration exceeds the fair values of the net assets acquired. Costs incurred in connection with business combinations are expensed as incurred. On December 31, 2018, four restaurants were acquired from a franchisee for approximately $ 7.0 million in cash and the acquisition was accounted for as a business combination. On January 28, 2019, five operating restaurants and rights for two additional restaurant sites were acquired from a franchisee for approximately $ 9.9 million in cash and the acquisition was accounted for as a business combination. During the months June 2019 through December 2019, a series of acquisitions of nine individual restaurants from unrelated franchisees were completed for total cash consideration of approximately $ 6.2 million. The acquisitions were individually accounted for as business combinations. The Company incurred transaction costs totaling $ 0.9 million during Fiscal 2019 for all acquisitions, which were expensed as incurred. 69 Table of Contents FIRST WATCH RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Fair Value of Financial Instruments Certain assets and liabilities are carried at fair value. Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable inputs and the last is considered unobservable. The classification of a financial asset or liability within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. Level 1 Quoted prices (unadjusted) in active markets for identical assets or liabilities Level 2 Observable inputs available other than quoted prices included in Level 1 Level 3 Unobservable inputs based on assumptions that cannot be determined by observable market data The carrying amounts of the Company ’ s financial instruments, including cash equivalents, accounts receivable, accounts payable, accrued expenses, note payable and other current liabilities, approximate their fair values due to their short-term maturities. Cash and Cash Equivalents and Restricted Cash Cash and cash equivalents include all cash balances and highly liquid investments with an original maturity of three months or less. Amounts receivable from credit card processors are considered cash equivalents because they are highly liquid and are typically converted to cash within three business days. Amounts included in restricted cash represent those required to be set aside by a contractual agreement for the settlement of insurance claims. Concentrations of Credit Risk Financial instruments, which potentially subject the Company to concentrations of market and credit risk, are cash and cash equivalents and restricted cash. At times, cash balances may be in excess of the Federal Deposit Insurance Corporation insurance limits. The Company has not experienced any losses to date as a result of these risks. Management periodically assesses the quality of the financial institutions and believes that the risk related to these deposits is minimal. Accounts Receivable Accounts receivable consist primarily of receivables from franchisees, receivables from third-party delivery providers, receivables from gift card sales and vendor rebates. The Company believes all amounts to be collectible based on a variety of factors it evaluates, including historical experience, current economic conditions, and other factors. Accordingly, no allowance for credit losses or doubtful accounts has been recorded as of December 26, 2021 and December 27, 2020. Inventory Inventory consists primarily of food and beverage costs and is stated at the lower of cost (determined by the first-in, first-out method) or net realizable value. Adjustments are not deemed necessary to reduce inventory to net realizable value due to the rapid turnover and utilization of inventory. 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. The Company incurred $ 5.0 million of costs in connection with the IPO in Fiscal 2021, which were recorded in equity as a reduction of additional paid in capital. The Company incurred $ 2.0 million in deferred offering costs in Fiscal 2020, which were expensed in General and administrative expenses as a result of halting the Company ’ s public registration of equity in Fiscal 2020. 70 Table of Contents FIRST WATCH RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Leases The Company ’ s restaurant facilities, corporate offices and certain restaurant equipment are leased under various agreements having initial terms expiring between 2022 and 2036. Restaurant facility leases generally have renewal periods of five to 20 years, exercisable at the option of the Company. At the commencement of each lease, an evaluation is performed to determine whether (i) the contract involves the use of property or equipment, (ii) the Company controls the use of the asset and (iii) the Company has the right to direct the use of the asset. Management determines the classification of lease contracts as operating or finance leases. The majority of the Company ’ s real estate leases are classified as operating leases and the majority of the Company ’ s equipment leases are classified as finance leases. For operating leases with lease terms greater than twelve months, a lease liability is recognized for future fixed lease payments and a corresponding right-of-use asset is recognized representing the Company ’ s right to use the underlying asset during the lease term. The lease liability is initially measured as the present value of the future fixed lease payments that will be made over the lease term using the Company ’ s incremental borrowing rate as there are no implicit rates provided in the lease contracts. The Company ’ s incremental borrowing rate is based on a market yield implied by the Company ’ s outstanding secured term loans interpolated for various maturities using the Company ’ s synthetic credit rating, which was determined using a regression analysis of rated publicly-traded comparable companies and their financial data. Lease expense, which includes the effects of free rent periods and rent escalation clauses within certain of the Company ’ s leases, is recognized on a straight-line basis over the lease term. Tenant improvement allowances are amortized on a straight-line basis over the term of the lease as a reduction of lease expense. The lease term, which commences on the date the Company has the right to control the use of the property, includes the Company ’ s options to extend the lease to the extent it is reasonably certain that the extension options will be exercised. Leases with indexed rent escalation clauses are recorded using the index that existed at lease commencement or upon the latest modification requiring remeasurement. Subsequent changes in the index are recorded as variable lease expense. Contingent rent payments, which are based on a percentage of sales for certain restaurant facilities, are recorded as variable lease expense when the Company determines that such sales levels will be achieved. In addition to fixed lease payments, certain of the Company ’ s real estate leases also require payment of a proportionate share of property taxes, insurance and maintenance costs, which are expensed as incurred in the Consolidated Statements of Operations and Comprehensive Loss and future variable rent obligations are not included within the lease liabilities on the Consolidated Balance Sheets. The operating lease right-of-use asset is measured at the amount of the lease liability with adjustments for (i) rent prepayments made prior to or at lease commencement, (ii) landlord incentives and (iii) favorable and unfavorable leasehold positions. The depreciable life of an operating lease right-of-use asset is limited by the expected lease term. The Company’s leases do not contain any material residual value guarantees or material restrictive covenants. Fixed lease and non-lease components of the Company’s restaurant facility leases are accounted for as a single lease component. Leases with an initial term of 12 months or less are not recorded on the Consolidated Balance Sheets, however, they are recognized on a straight-line basis over the lease term in the Consolidated Statements of Operations and Comprehensive Loss. In Fiscal 2020, Management renegotiated numerous lease agreements that primarily resulted in rent abatements or rent deferrals during the period of the closures of the company-owned restaurants as a result of the COVID-19 pandemic. Management elected the practical expedient for COVID-19 related rent concessions pursuant to the question and answer document issued by the Financial Accounting Standards Board (the “FASB”) in April 2020 and remeasured the lease liabilities using the original discount rate with a corresponding adjustment to the right-of-use assets. Rent deferrals increased the lease liabilities and right-of use assets until amounts are paid with no impact to lease expense. Rent abatements were recognized on a straight-line basis over the respective remaining lease term. Finance lease liabilities and corresponding finance lease assets are recognized at an amount equal to the present value of the minimum lease payments over the expected lease term. The amortization of finance lease assets is recognized over the shorter of the lease term or useful life of the underlying asset within Depreciation and amortization. The interest expense related to finance leases, including any variable lease payments, is recognized in Interest expense. Finance lease assets are classified in Property, fixtures and equipment, net and current maturities and long-term portions of finance lease liabilities are classified within Current portion of long-term debt and Long-term debt, net, respectively, on the Consolidated Balance Sheets. 71 Table of Contents FIRST WATCH RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Property, Fixtures and Equipment Property, fixtures and equipment, including capitalized software, are stated at cost less accumulated depreciation. Refurbishments and improvements that increase the productive capacity or extend the useful life of assets are capitalized and depreciated over their estimated useful lives. Repair and maintenance costs are expensed as incurred. Leasehold improvements are depreciated over the shorter of their useful life or the expected lease term. The carrying amount of assets sold, replaced or retired and the related accumulated depreciation are eliminated at the time of disposal and any resulting gains and losses on disposal are recognized in the Consolidated Statements of Operations and Comprehensive Loss. Direct internal costs associated with the acquisition, development, design and construction of company-owned restaurants are capitalized as these costs have a future benefit to the Company. Once a restaurant opens, these costs are depreciated and recorded in Depreciation and amortization. Direct internal costs of $ 0.5 million and $ 0.4 million were capitalized in Fiscal 2021 and Fiscal 2020, respectively. Depreciation is computed using the straight-line method over the following estimated useful lives: Building and land improvements 30 to 40 years Leasehold improvements 3 to 20 years Furniture and fixtures 2 to 10 years Equipment (including capitalized software) 2 to 15 years Vehicles 3 to 10 years Goodwill and Indefinite-lived Intangible Assets Goodwill and indefinite-lived intangible assets are evaluated for impairment annually on the first day of the fourth quarter of the fiscal year, or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company has one reporting unit for goodwill impairment testing purposes. Management may elect to perform a qualitative assessment to determine whether it is more likely than not that the reporting unit and/or asset group is impaired. If the qualitative assessment is not performed, or if it is not more likely than not that the estimated fair value of the reporting unit and indefinite-lived intangible assets exceeds the respective carrying value, a quantitative analysis is required. Prior to the IPO, Management ’ s quantitative assessment for determining the fair value of the reporting unit used a blend of the market capitalization approach and the income approach. The market capitalization approach used Management ’ s selection of peer companies to estimate fair value. The income approach used the discounted cash flow method estimating future cash flow, sales and traffic growth rates, operating margins, and new restaurant openings, each of which are inputs that fall within Level 3 of the fair value hierarchy. The fair value of the indefinite-lived intangibles is determined through a relief from royalty method using certain unobservable inputs that fall within Level 3 of the fair value hierarchy. The respective carrying values are compared to the related estimated fair values and an impairment loss is recognized in an amount equal to the excess of the carrying value over estimated fair values. 72 Table of Contents FIRST WATCH RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Definite-lived Intangible Assets Intangible assets with definite lives consist of franchise rights which arose from the purchase price allocation in connection with the Advent Acquisition and also include reacquired rights from the Company ’ s acquisitions of franchised restaurants. Definite-lived intangible assets are amortized over their estimated useful lives and are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. When evaluating the carrying amount for recoverability, the total future undiscounted net cash flows expected to be generated by the asset are compared to the carrying amount. If the total future undiscounted net cash flows are less than the carrying amount, this may be an indicator of impairment. An impairment loss is recognized when the asset’s carrying value exceeds its estimated fair value. Fair value is generally estimated using a discounted cash flow model using unobservable inputs that fall within Level 3 of the fair value hierarchy. Impairment Assessment of Long-lived Assets Long-lived assets deployed at company-owned restaurants include (i) property, fixtures and equipment, (ii) operating lease right-of-use asset, net of the related operating lease liability and (iii) reacquired rights to the extent the restaurant had been previously acquired by the Company. When circumstances indicate that the carrying value may not be recoverable, an evaluation for impairment is performed at the lowest level of identifiable cash flows, which is at the individual restaurant level. If the total future undiscounted net cash flows are less than the carrying value of the long-lived assets at the individual restaurant level, the fair value is determined based on discounted future net cash flows expected to result from the use and eventual disposition of the assets, which are unobservable inputs that fall within Level 3 of the fair value hierarchy. An impairment loss is recognized in an amount equal to the excess of the carrying value over the estimated fair value. Self-Insurance Reserves The Company is self-insured primarily for employee group healt h claims and for workers’ compensation in Ohio. The Company holds stop-loss insurance which funds individual health claims in excess of $ 125,000 per occurrence and workers’ compensation claims in Ohio in excess of $ 500,000 per occurrence annually. The Consolidated Statements of Operations and Comprehensive Loss include expenses related to the costs of claims reported and an estimate of claims incurred but not reported. A liability of $ 1.4 million and $ 1.3 million for e stimated unpaid claims and other insurance liabilities is recorded within Accrued liabilities as of December 26, 2021 and December 27, 2020, respectively. Revenue Recognition Revenues from food and beverage sales are reported, net of discounts and taxes. For in-restaurant dining and take-out sales, revenues are recognized when payment is tendered. For delivery sales made through the Company’s mobile application and website, the Company controls the delivery services and recognizes revenue, including delivery fees, when the delivery partner transfers the food and beverage to the customer. With respect to sales made through the delivery partner’s mobile application or website, the Company recognizes revenue, excluding delivery fees collected by the delivery partner, when control of the food and beverage is transferred to the delivery partner. Payment is received from the delivery partner subsequent to the transfer of food and beverage and the payment terms are short-term. Franchise revenues include initial franchise fees and ongoing sales-based royalty and system fund contributions, which are used for advertising, marketing and public relations programs and materials. The license granted to develop and operate a restaurant is the distinct performance obligation that is transferred to the franchisee. Ancillary promised services, such as training, which are not considered distinct within the context of the franchise agreement, are combined with the franchise license and are considered one distinct performance obligation. Payments for initial franchise fees are received either upon execution of the franchise agreement and/or upon opening of the restaurant. These payments are deferred and recognized as revenue throughout the contractual term of the related franchise agreement. Unamortized deferred franchise fees are recognized as revenue upon the termination of franchise agreements with franchisees. The short-term and long-term unamortized portion of these liabilities are included in Deferred revenues and in Other long-term liabilities, respectively. 73 Table of Contents FIRST WATCH RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Royalty and system fund contributions from franchisees are based on a percentage of sales and are recognized as revenue in the period the sales occurred. Gift cards are sold at restaurants and certain retail venues. Deferred revenues include liabilities established for the value of the gift cards when sold. Revenue is recognized from gift card sales upon redemption by the customer. Management estimates the amount of gift cards for which the likelihood of redemption is remote, referred to as the “breakage factor, ” using historical gift card redemption patterns. The estimated breakage, less an administrative fee, is recognized over the expected period of redemption as the remaining gift card values are redeemed, which is generally over a period of two years. Utilizing this method, Management estimates both the breakage and the time period of redemption. If actual redemption patterns vary from these estimates, actual gift card breakage income may differ from the amounts recorded. Estimates of the redemption period and breakage rate applied are updated periodically. Gift card liabilities are included in Deferred revenues. Food and Beverage Costs The components of food and beverage costs at company-owned restaurants fluctuate directly with sales volumes and are impacted by changes in commodity prices or promotional activities. Pre-opening Expenses Pre-opening expenses are costs incurred to open new company-owned restaurants. Pre-opening expenses include pre-opening rent expense, which is recognized during the period between the date of possession of the restaurant facility and the restaurant opening date. In addition, pre-opening expenses include manager salaries, recruiting expenses, employee payroll and training costs, which are recognized in the period in which the expense was incurred. Pre-opening expenses can fluctuate from period to period, based on the number and timing of new company-owned restaurant openings. Consideration Received from Vendors The Company receives consideration from certain vendors for volume rebates and advertising allowances. The Company accounts for consideration from a vendor as a reduction of the purchase price of the goods or services acquired from the vendor. Advertising Costs Advertising costs are recognized as incurred or, in the case of advertisements, when the advertisement occurs. Advertising costs we re $ 4.8 million, $ 3.3 million and $ 4.4 million during Fiscal 2021, Fiscal 2020, and Fiscal 2019, respectively, and are included in General and administrative expenses and in Other restaurant operating expenses. Debt Discount and Deferred Issuance Costs Debt discount and deferred issuance costs incurred in connection with the issuance of long-term debt are recorded as reductions of long-term debt and are amortized over the term of the related debt. Amortization expense of debt discount and deferred issuance costs is included in Interest expense. Income Taxes Income taxes are accounted for under the asset and liability method of accounting. Under this method, deferred tax assets or liabilities are recognized for the estimated future tax effects attributable to temporary differences between the carrying value and the tax basis of assets and liabilities as well as tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applicable in the years in which the differences are expected to be recovered or settled. Changes in deferred tax assets or liabilities are recognized in Income tax (expense) benefit. Deferred tax assets are recognized for all deductible temporary differences to the extent that it is probable that taxable income will be available against which the deductible temporary differences can be utilized. Realization of deferred tax assets is dependent upon the availability of taxable income and a valuation allowance for deferred tax assets is provided when it is more likely than not that a portion of the deferred tax assets will not be realized. In the assessment for realization of deferred tax assets, Management considers all sources of taxable income including (i) taxable income in any available carry back period, (ii) scheduling of anticipated reversal of taxable temporary differences, (iii) tax-planning strategies and (iv) taxable income expected to be generated in the future other than from reversing temporary differences and 74 Table of Contents FIRST WATCH RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) carryforwards. Management continues to evaluate the rationale for recording a valuation allowance on its deferred tax assets and as the Company increases earnings and utilizes deferred tax assets, it is possible the valuation allowance could be reduced or eliminated. The Company has no uncertain tax positions requiring recognition or disclosure in the consolidated financial statements in Fiscal 2021, Fiscal 2020 and Fiscal 2019. Interest and penalties, when incurred, are recognized in Other (expense) income, net. Stock-Based Compensation Stock-based compensation expense is recognized for stock option awards granted and is based on the fair value of the options on the date of grant. The fair value of stock option awards is determined using the Black-Scholes option pricing model. In Fiscal 2021, prior to the IPO, the Company’s equity value was determined using the probability weighted expected return method (“PWERM”), or the hybrid method. Under the hybrid method, multiple valuation approaches are used and then combined into a single probability weighted valuation using a PWERM, which considers the probability of an initial public offering and sale scenarios. The results of the valuation approaches were weighted based on a variety of factors, including the current macroeconomic environment, current industry conditions and length of time since arms-length market transaction events. Additionally, a discount for lack of marketability was applied to account for the lack of access to an active public market. The resulting value was then allocated to outstanding equity using an option-pricing model. This process involved the use of estimates, judgments, and assumptions that are highly complex and subjective, such as those regarding our expected future revenue, expenses and future cash flows, discount rates, market multiples, the selection of comparable companies, and the probability of possible future events. The assumptions underlying these valuations represented Management’s best estimate, which involved inherent uncertainties and the application of Management’s judgment. As a result, if Management had used significantly different assumptions or estimates, the fair value of our common stock and our stock-based compensation expense could have been materially different. Stock-based compensation expense related to time-based stock option awards is recognized on an accelerated recognition method over the requisite service period. The fair value of performance-based stock option awards is recognized as expense when the performance condition is probable of being achieved. Forfeitures of stock option awards are recognized as they occur. Determining the fair value of stock option awards at the grant date requires judgment, including estimating the expected term that the stock options will be outstanding prior to exercise, volatility, dividend yield and risk-free interest rate. Stock-based compensation expense is included in General and administrative expenses. Stock option exercises are settled with authorized but unissued shares of the Company’s common stock. Recently Adopted Financial Accounting Standards On December 28, 2020, we adopted ASU 2019-12, “ Simplifying the Accounting for Income Taxes (Topic 740) ,” which simplified and clarifying certain technical guidelines for accounting for income taxes. The adoption of ASU 2019-12 did not result in a material change to our consolidated financial statements. On December 31, 2018, the Company adopted ASC 842 using the modified retrospective transition method included in ASU 2018-11, “ Leases (Topic 842), Targeted Improvements, ” (“ASU 2018-11”). Management elected the package of practical expedients permitted under the transition guidance and also elected the accounting policy election to combine lease and non-lease components for restaurant facility leases. In addition, the Company adopted the short-term lease recognition exemption and did not recognize operating lease right-of-use assets and operating lease liabilities for leases with terms of twelve months or less. Management used the Company’s incremental borrowing rate to discount the future fixed lease payments for all leases. The Company’s incremental borrowing rate was determined based on a market yield implied by the outstanding secured term loans (see Note 10, Debt , for additional information), which was interpolated for various maturities based on the shape of the corresponding market yield curve. The corresponding market yield curve was selected based on the Company’s synthetic credit rating, which was determined using a regression analysis of rated publicly-traded comparable companies and their financial data. On December 31, 2018, operating lease right-of-use assets of $ 246.0 million, operating lease liabilities of $ 252.8 million and a debit to the beginning balance of accumulated deficit for $ 0.1 million were recorded in conjunction with the adoption 75 Table of Contents FIRST WATCH RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) of ASU 2018-11. In addition, the land lease asset and related financing obligation of $ 1.5 million which related to one restaurant facility that was sold and leased back from a third party in 2014 and which did not previously qualify for sale accounting was derecognized. The lease related to this transaction is accounted for as an operating lease. Financing obligations are classified within Long-term debt, net. The adoption of ASC 842 did not have a material impact on the Consolidated Statements of Operations and Comprehensive Loss and the Consolidated Statement of Cash Flows in Fiscal 2019. Summary of Recently Issued Accounting Pronouncements 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 was effective beginning March 12, 2020 and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. Management is currently evaluating its contracts and the optional expedients provided by the new standard. 3. Revenues The following tables include a detail of liabilities from contracts with customers: (in thousands) DECEMBER 26, 2021 DECEMBER 27, 2020 Deferred revenues: Deferred gift card revenue $ 4,410 $ 4,024 Deferred franchise fee revenue - current 244 249 Total current deferred revenues $ 4,654 $ 4,273 Other long-term liabilities: Deferred franchise fee revenue - non-current $ 2,292 $ 2,025 Changes in deferred gift card liabilities were as follows: FISCAL YEAR (in thousands) 2021 2020 2019 Deferred gift card revenue: Balance, beginning of period $ 4,024 $ 6,902 $ 4,982 Gift card sales 8,286 5,197 15,898 Gift card redemptions ( 7,152 ) ( 6,924 ) ( 12,689 ) Gift card breakage ( 748 ) ( 1,151 ) ( 1,435 ) Gift card liabilities assumed through acquisitions — — 146 Balance, end of period $ 4,410 $ 4,024 $ 6,902 Gift cards are combined in one homogeneous pool and are not separately identifiable. As such, the revenue recognized consists of gift cards that were part of the deferred revenue balance at the beginning of the period as well as gift cards that were issued during the period. 76 Table of Contents FIRST WATCH RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Changes in deferred franchise fee liabilities were as follows: FISCAL YEAR (in thousands) 2021 2020 2019 Deferred franchise fee revenue: Balance, beginning of period $ 2,274 $ 2,456 $ 2,331 Cash received 537 158 687 Franchise revenues recognized ( 275 ) ( 340 ) ( 436 ) Business combinations — — $ ( 126 ) Balance, end of period $ 2,536 $ 2,274 $ 2,456 Revenues recognized disaggregated by type were as follows: FISCAL YEAR (in thousands) 2021 2020 2019 Restaurant sales: In-restaurant dining sales $ 452,989 $ 257,029 $ 400,345 Third-party delivery sales 70,486 38,524 2,648 Take-out sales 68,868 41,880 26,316 Total restaurant sales $ 592,343 $ 337,433 $ 429,309 Franchise revenues: Royalty and system fund contributions 8,575 4,615 6,628 Initial fees 275 340 436 Total franchise revenues $ 8,850 $ 4,955 $ 7,064 Total revenues $ 601,193 $ 342,388 $ 436,373 Deferred revenues as of December 26, 2021 are expected to be recognized as follows: Fiscal year (in thousands) 2022 $ 4,654 2023 $ 318 2024 $ 305 2025 $ 308 2026 $ 299 Thereafter $ 1,062 77 Table of Contents FIRST WATCH RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 4. COVID-19 Charges Charges recorded in connection with the COVID-19 pandemic were as follows for Fiscal 2021 and Fiscal 2020: FISCAL YEAR (in thousands) Consolidated Statements of Operations and Comprehensive Loss 2021 2020 Inventory obsolescence and spoilage Food and beverage costs $ — $ 562 Compensation for employees upon furlough and return from furlough Labor and other related expenses 3 1,065 Health insurance costs paid for furloughed employees, net of employee retention credit of zero and $ 0.9 million, respectively Labor and other related expenses — 746 Other expenses Other restaurant operating expenses 16 936 Compensation for employees upon furlough and return from furlough General and administrative expenses 128 360 Other expenses General and administrative expenses 64 1,080 Total COVID-19 charges $ 211 $ 4,749 5. Accounts Receivable Accounts receivable consists of the following: (in thousands) DECEMBER 26, 2021 DECEMBER 27, 2020 Receivables related to gift card sales $ 1,453 $ 1,028 Receivables from third-party delivery providers 1,021 1,742 Receivables from franchisees 927 591 Rebate receivables 428 514 Other receivables 621 40 Total accounts receivable $ 4,450 $ 3,915 6. Goodwill As of December 26, 2021 and December 27, 2020, the Company had goodwill of $ 345.2 million. Management performed a qualitative annual impairment assessment for goodwill as of the first day of the fourth quarter of Fiscal 2021 and concluded that impairment of goodwill was not more likely than not. As a result, a quantitative assessment was not required. Management performed a quantitative impairment assessment of goodwill in April 2020 as the effect of the COVID-19 pandemic was considered a triggering event indicating that the carrying value of goodwill may not be recoverable. Management determined there was no impairment loss to be recognized. Management also performed the annual impairment test of goodwill as of the first day of the fourth quarter of Fiscal 2020 and determined there was no impairment loss to be recognized. 78 Table of Contents FIRST WATCH RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 7. Intangible Assets, Net Intangible assets, net consists of the following: DECEMBER 26, 2021 (in thousands) Weighted Average Useful Lives Gross Carrying Value Accumulated Amortization Net Carrying Value Registered trademarks, trade names, domains, liquor licenses Indefinite $ 138,143 $ ( 316 ) $ 137,827 Franchise rights 9 years 9,404 ( 4,231 ) 5,173 $ 147,547 $ ( 4,547 ) $ 143,000 DECEMBER 27, 2020 (in thousands) Weighted Average Useful Lives Gross Carrying Value Accumulated Amortization Net Carrying Value Registered trademarks, trade names, domains, liquor licenses Indefinite $ 137,776 $ ( 316 ) $ 137,460 Franchise rights 9 years 9,404 ( 3,202 ) 6,202 $ 147,180 $ ( 3,518 ) $ 143,662 Management performed a qualitative annual impairment assessment of substantially all of the indefinite-lived intangible assets on the first day of the fourth quarter of Fiscal 2021 and concluded that impairment of the indefinite-lived intangible assets was not more likely than not. As a result, a quantitative assessment was not required. The indefinite-lived liquor licenses and definite-lived reacquired rights from the Company’s acquisitions were tested at the individual restaurant level in the asset group which includes long-lived assets of the individual restaurants (see Note 8, Property, Fixtures and Equipment, Net , for additional information). Management performed a quantitative impairment assessment of the indefinite-lived intangible assets in April 2020 as the effect of the COVID-19 pandemic was considered a triggering event indicating that the carrying value of the intangible assets may not be recoverable. Management determined there was no impairment loss to be recognized. Management also performed an annual impairment test for the intangible assets on the first day of the fourth quarter of Fiscal 2020 and determined there was no impairment loss to be recognized. In Fiscal 2019, a total non-cash impairment charge of $ 32.2 million was recognized related to The Egg & I trade name and franchise rights following Management’s identification of a triggering event resulting from a strategic review of its operations. All restaurants that operated under The Egg & I trade name had either closed, disenfranchised or were strategically acquired by the Company and converted to restaurants operating under the First Watch trade name as of December 29, 2019. Total amortization expense related to definite-lived intangible assets was $ 1.0 million, $ 1.1 million, and $ 2.1 million in Fiscal 2021, Fiscal 2020 and Fiscal 2019, respectively. Estimated future amortization of definite-lived intangible assets as of December 26, 2021 is as follows: Fiscal year (in thousands) 2022 $ 960 2023 $ 809 2024 $ 809 2025 $ 809 2026 $ 635 Thereafter $ 1,151 79 Table of Contents FIRST WATCH RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 8. Property, Fixtures and Equipment, Net Property, fixtures and equipment, net consists of the following: (in thousands) DECEMBER 26, 2021 DECEMBER 27, 2020 Building and land improvements $ 1,354 $ 1,354 Leased land asset 1,190 1,190 Leasehold improvements 146,583 128,252 Furniture, fixtures and equipment (including capitalized software) 118,734 105,520 Financing lease assets 3,320 3,137 Vehicles 455 455 Total property, fixtures and equipment 271,636 239,908 Accumulated depreciation ( 115,582 ) ( 86,250 ) Construction-in-progress 8,641 7,086 Total property, fixtures and equipment, net $ 164,695 $ 160,744 Depreciation expense was $ 31.3 million, $ 29.6 million and $ 25.9 million during Fiscal 2021, Fiscal 2020 and Fiscal 2019, respectively. The Company did not recognize an impairment loss in Fiscal 2021. The Company’s long-lived assets at company-owned restaurants were evaluated for impairment in April 2020 as a result of the effects of the COVID-19 pandemic using future undiscounted net cash flows over the respective lease terms. As the estimated future undiscounted net cash flows were greater than the net book value of the respective asset groups, no impairment loss was recognized in Fiscal 2020. In Fiscal 2019, a non-cash impairment charge of $ 0.3 million was recognized primarily related to one under-performing restaurant, which was recorded in Impairments and loss on disposal of assets. The impairment was determined as the amount by which the carrying value of the restaurant’s asset group exceeded its fair value. Fair value was determined based on estimates of discounted future cash flows. Loss on disposals of assets recognized of $ 0.4 million and $ 0.3 million during Fiscal 2021 and Fiscal 2020, respectively related to retirements, replacements and disposals of fixed assets in the ordinary course of business. In Fiscal 2019, a loss on disposal of assets of $ 1.1 million was recognized associated with restaurants that were remodeled, relocated or closed. As of December 26, 2021 and December 27, 2020, Property, fixtures and equipment, net included $ 1.2 million in land related to sale and leaseback transactions accounted for as financing obligations. 9. Accrued Liabilities Accrued liabilities consists of the following: (in thousands) DECEMBER 26, 2021 DECEMBER 27, 2020 Construction liabilities $ 4,445 $ 4,301 Sales tax 3,337 2,159 Self-insurance and general liability reserves 1,353 1,297 Utilities 1,306 1,016 Credit card fees 940 520 Property tax 638 424 Contingent rent 628 234 Common area maintenance 482 700 Other 2,760 2,831 Total accrued liabilities $ 15,889 $ 13,482 80 Table of Contents FIRST WATCH RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 10. Debt Long-term debt, net consists of the following: DECEMBER 26, 2021 DECEMBER 27, 2020 (in thousands) Balance Interest Rate Balance Interest Rate New Facilities: New Term Facility $ 100,000 2.71 % $ — — Senior Credit Facilities (1): Initial Term Loan — — 150,214 8.00 % Initial Delayed Draw Term Loan — — 48,992 8.00 % First Amendment Delayed Draw Term Facility — — 49,458 8.00 % Second Amendment Delayed Draw Term Facility — — 39,369 8.00 % Finance lease liabilities 2,017 2,300 Financing obligation 3,050 3,050 Less: Unamortized debt discount and deferred issuance costs ( 2,128 ) ( 3,393 ) Total Debt, net 102,939 289,990 Less: Current portion of long-term debt ( 3,186 ) ( 3,590 ) Long-term debt, net $ 99,753 $ 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 one-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 ranged from 0.25 % to 1.50 % of the outstanding balances, depending on the leverage ratio. New Facilities FWR Holding Corporation, (“FWR”), an indirect subsidiary of the Company, is the borrower under a new credit agreement, dated as of October 6, 2021, (the “New Credit Agreement”), which provides for (i) a $ 100.0 million term loan A facility (the “New Term Facility”) and (ii) a $ 75.0 million revolving credit facility (the “New Revolving Credit Facility” and, together with the New Term Facility, collectively, the “New Facilities”). The New Facilities mature on October 6, 2026. The New Revolving Credit Facility was undrawn at December 26, 2021. 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 27, 2022, equal to (i) 2.50 % of the original principal amount of the term loans in fiscal year ended December 25, 2022, (ii) 5.00 % of the original principal amount of the term loans in fiscal year ended December 31, 2023, (iii) 5.00 % of the original principal amount of the term loans in fiscal year ended December 29, 2024, (iv) 7.50 % of the original principal amount of the term loans in fiscal year ended December 28, 2025 and (v) 10.00 % of the original principal amount of the term loans in fiscal year ended December 27, 2026. 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. Borrowings under the New Facilities bear interest, at the option of FWR at 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”) or (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. In addition, an unused commitment fee of between 25 and 50 basis points will be paid on the undrawn commitments under the New Revolving Credit Facility, also depending on the Total Rent Adjusted Net Leverage Ratio. The New Credit Agreement has LIBOR fallback language and may be amended 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. Senior Credit Facilities 81 Table of Contents FIRST WATCH RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Through October 6, 2021, FWR was the borrower under a credit agreement, dated as of August 21, 2017 (as amended by the First Amendment to Credit Agreement dated as of February 28, 2019 (the “First Amendment”), the Second Amendment to Credit Agreement dated as of December 20, 2019 (the “Second Amendment”), the Third Amendment and Waiver to Credit Agreement dated as of April 27, 2020 (the “Third Amendment”) and the Fourth Amendment to Credit Agreement dated as of August 14, 2020 (the “Fourth Amendment”), the “Credit Agreement”), which consisted of an initial term loan facility ($ 155.0 million), an initial delayed draw term facility ($ 50.0 million) and a revolving credit facility (available commitment of $ 20.0 million, including a $ 5.0 million sub-limit for letters of credit) for an initial total available borrowing commitment of $ 225.0 million. Pursuant to the First Amendment, an aggregate principal amount of $ 50.0 million was made available (the “first amendment delayed draw term facility”) and had been drawn in Fiscal 2019. Pursuant to the Second Amendment, an aggregate principal amount of $ 40.0 million was made available (the “second amendment delayed draw term facility”) and a total of $ 39.6 million had been drawn in Fiscal 2020. The Credit Agreement was set to mature on August 21, 2023. The Senior Credit Facilities were subject to amortization of principal, payable in quarterly installments on the last business day of each fiscal quarter, equal to 0.25 % of the original principal amounts borrowed. The remaining aggregate principal amounts outstanding (together with accrued and unpaid interest on the principal amount) under the Senior Credit Facilities were payable upon maturity. The First Amendment and Second Amendment were accounted for as debt modifications and a total of $ 1.5 million in costs was incurred, of which $ 0.9 million was recognized and amortized as debt discount and deferred issuance costs and $ 0.6 million was recognized in Other (expense) income, net during Fiscal 2019. The Third Amendment, which was a condition to borrowing under each delayed draw term facility and the revolving credit facility, (i) required that the aggregate cash balance of FWR and its subsidiaries would not exceed $ 15.0 million at the time of and immediately after giving effect to any such borrowing, (ii) modified certain affirmative and negative covenants under the Credit Agreement, (iii) added new affirmative covenants that required monthly financial and cash flow reporting through December 31, 2020 and (iv) waived a specific event of default relating to an over-borrowing. The Third Amendment was accounted for as a debt modification and all costs incurred were third-party costs that were recognized in Other (expense) income, net in Fiscal 2020. Prior to the execution of the Fourth Amendment in August 2020, the Company received proceeds from an offering of preferred shares totaling $ 40.0 million (see Note 14, Stockholders ’ Equity , for additional information). A portion of these proceeds were subsequently used to repay the outstanding balance of $ 10.5 million on the revolving credit facility. Pursuant to the Fourth Amendment, which superseded the Third Amendment, additional interest was charged on outstanding amounts drawn that were to be paid in kind by being added to the outstanding principal amounts. The Fourth Amendment also provided for: (i) the suspension of debt covenant compliance from April 1, 2020 through March 28, 2021, (ii) additional reporting requirements, (iii) restrictions on payments, additional indebtedness and capital expenditures and (iv) additional financial and liquidity covenants. The Fourth Amendment was accounted for as a debt modification and all costs incurred were third-party costs that were recognized in Other (expense) income, net in Fiscal 2020. The proceeds from the IPO, the proceeds from the New Term Facility and cash on hand were used to repay in full the outstanding indebtedness of the Senior Credit Facilities in October 2021. This repayment was accounted for as a debt extinguishment for accounting purposes and a loss on debt extinguishment of $ 2.4 million was recorded in the fourth fiscal quarter of 2021 in Other (expense) income, net. Fair Value of Debt 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. At December 26, 2021, the estimated fair value of the outstanding debt under the New Facilities was $ 100.0 million. Principal payments due on the outstanding debt, excluding finance lease liabilities and financing obligations, as of December 26, 2021 are as follows: 82 Table of Contents FIRST WATCH RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Fiscal Year (in thousands) 2022 $ 2,500 2023 5,000 2024 5,000 2025 7,500 2026 80,000 $ 100,000 Letter of Credit The Company utilizes a standby letter of credit to satisfy workers’ compensation requirements, as discussed in Note 2, Summary of Significant Accounting Policies . The contract amount of the letter of credit approximates its fair value. As of December 26, 2021 and December 27, 2020, the open letter of credit was approximately $ 0.4 million and there were no draws against the letter of credit. The Company pays participation fees for the letter of credit based on a varying percentage of the amount not drawn. Debt Covenants The New Facilities are guaranteed by all of FWR’s wholly-owned domestic restricted subsidiaries, subject to customary exceptions, and by AI Fresh Parent, Inc., a Delaware corporation and the direct parent company of FWR, (“Holdings”), and are secured by associated collateral agreements that pledge a lien on substantially all of FWR’s and each guarantor’s assets, including fixed assets and intangibles, in each case, subject to customary exceptions. Under the New Credit Agreement, FWR (and in certain circumstances, Holdings) and its restricted subsidiaries are subject to customary affirmative, negative and financial covenants, maintenance of certain ratios, restrictions on additional indebtedness and events of default for facilities of this type (with customary grace periods, as applicable, and lender remedies). FWR was in compliance with covenants under the New Credit Agreement as of December 26, 2021. FWR was in compliance with the covenants under the Credit Agreement as of December 27, 2020. Note Payable In October 2021, the Company entered into a financing agreement for the financing of insurance premiums in a total amount of approximately $ 3.0 million that bears interest of 2.41 % and is payable in monthly installments of $ 0.3 million through August 30, 2022. As of December 26, 2021, the balance on the note payable was approximately $ 2.4 million. 11. Leases The following table includes a detail of lease assets and liabilities: (in thousands) Consolidated Balance Sheets Classification DECEMBER 26, 2021 DECEMBER 27, 2020 Operating lease right-of-use assets Operating lease right-of-use assets $ 324,995 $ 307,558 Finance lease assets Property, fixtures and equipment, net 1,892 2,212 Total lease assets $ 326,887 $ 309,770 Operating lease liabilities (1) - current Current portion of operating lease liabilities $ 38,186 $ 40,111 Operating lease liabilities - non-current Operating lease liabilities 330,495 307,802 Finance lease liabilities - current Current portion of long-term debt 686 645 Finance lease liabilities - non-current Long-term debt, net 1,331 1,655 Total lease liabilities $ 370,698 $ 350,213 __________________________________________ (1) Excludes all variable lease expense 83 Table of Contents FIRST WATCH RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The components of lease expense are as follows: FISCAL YEAR (in thousands) Consolidated Statements of Operations and Comprehensive Loss Classification 2021 2020 2019 Operating lease expense Other restaurant operating expenses Occupancy expenses Pre-opening expenses General and administrative expenses $ 44,906 $ 41,813 $ 37,075 Variable lease expense Food and beverage costs Occupancy expenses General and administrative expenses 12,811 9,692 9,788 Finance lease expense: Amortization of leased assets Depreciation and amortization 543 501 425 Interest on lease liabilities Interest expense 174 184 163 Total lease expense (1) $ 58,434 $ 52,190 $ 47,451 __________________________________________ (1) Includes contingent rent of $ 1.1 million, $ 0.1 million and $ 0.7 million during Fiscal 2021, Fiscal 2020 and Fiscal 2019, respectively Supplemental cash flow information related to leases is as follows: FISCAL YEAR (in thousands) 2021 2020 2019 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows - operating leases $ 40,601 $ 22,011 $ 23,195 Operating cash flows - finance leases $ 174 $ 184 $ 163 Financing cash flows - finance leases $ 507 $ 339 $ 500 Supplemental information related to leases was as follows: FISCAL YEAR 2021 2020 Weighted-average remaining lease term (in years) Operating leases 15.4 16.3 Finance leases 3.5 4.4 Weighted-average discount rate (1) Operating leases 9.0 % 9.1 % Finance leases 7.9 % 8.0 % __________________________________ (1) Based on the Company’s incremental borrowing rate 84 Table of Contents FIRST WATCH RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Future minimum lease payments on lease liabilities as of December 26, 2021 are as follows: (in thousands) Operating Leases Finance Leases Fiscal year 2022 $ 39,751 $ 709 2023 44,663 674 2024 45,086 674 2025 45,116 215 2026 45,015 24 Thereafter 492,004 13 Total future minimum lease payments (1) 711,635 2,309 Less: imputed interest ( 342,954 ) ( 292 ) Total present value of lease liabilities $ 368,681 $ 2,017 __________________________________ (1) Excludes approximately $ 30.2 million of executed operating leases that have not commenced as of December 26, 2021 Sale-Leaseback Transactions In 2015, Management entered into an agreement relating to the sale and leaseback of the land for use in restaurant operations and received cash proceeds of $ 3.1 million. As the Company had continuing involvement with the property, the sale of the land did not qualify for sale accounting. As a result, the cash proceeds were recorded as a financing obligation. The balance of the financing obligation was $ 3.1 million as of December 26, 2021 and December 27, 2020. 12. Transaction (Income) Expenses, Net Transaction (income) expenses, net consists of the following: FISCAL YEAR (in thousands) 2021 2020 2019 Gain on lease modification $ ( 1,961 ) $ — $ — Contingent consideration liability revaluation 801 ( 293 ) ( 362 ) Conversion costs 2 71 1,596 Loss (Gain) on restaurant closures/relocations 2 ( 36 ) 488 Gain on lease termination, net — — ( 885 ) Acquisition - related costs — — 872 Total transaction (income) expenses, net $ ( 1,156 ) $ ( 258 ) $ 1,709 On September 27, 2021, an agreement was executed to terminate the lease for one company-owned restaurant. Pursuant to the agreement, the Company received $ 1.0 million in December 2021 and an additional $ 1.0 million will be paid to the Company upon vacating the leased restaurant facility by December 31, 2022, which is recorded within Other current assets. A gain on lease modification of $ 2.0 million was recognized in Fiscal 2021 as a result of this agreement. The Company revalued the contingent consideration liability initially recognized in connection with the Advent Acquisition (see Note 13, Income Taxes , for additional information) and recorded a loss of $ 0.8 million in Fiscal 2021, a gain of $ 0.3 million in Fiscal 2020 and a gain of $ 0.4 million in Fiscal 2019. In Fiscal 2019, a gain on lease termination of $ 0.9 million, net of closure costs, was recognized pursuant to an executed agreement to terminate the lease for one restaurant facility. In addition, a total of $ 1.6 million of costs were incurred in Fiscal 2019 in connection with the conversion of certain restaurants to company-owned restaurants operating under the First Watch trade name and a total of $ 0.9 million of costs were incurred in connection with the acquisitions of certain restaurants from franchisees. 85 Table of Contents FIRST WATCH RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 13. Income Taxes Income tax (expense) benefit consists of the following: FISCAL YEAR (in thousands) 2021 2020 2019 Current provision: Federal $ — $ — $ — State ( 301 ) ( 118 ) ( 139 ) Total current provision ( 301 ) ( 118 ) ( 139 ) Deferred (provision) benefit: Federal ( 1,825 ) 18,458 10,438 State ( 351 ) 1,533 2,120 Total deferred (provision) benefit ( 2,176 ) 19,991 12,558 Income tax (expense) benefit $ ( 2,477 ) $ 19,873 $ 12,419 A reconciliation of the federal statutory income tax rate to the Company’s effective income tax rate is as follows: FISCAL YEAR 2021 2020 2019 Income taxes at federal statutory rate 21.0 % 21.0 % 21.0 % State income taxes, net of federal tax effect 2.4 4.1 2.9 FICA tip credit ( 1,200.2 ) 4.7 6.9 Valuation allowance for federal and state 1,528.2 ( 1.8 ) ( 10.2 ) Stock-based compensation 275.9 — — — Other permanent items 57.6 — — Rate change ( 17.3 ) 0.1 0.9 Other 1.9 0.5 — Total 669.5 % 28.6 % 21.5 % The Company has a blended federal and state statutory rate of approximately 25.0 %. The effective income tax rate for Fiscal 2021, Fiscal 2020 and Fiscal 2019 was different than the blended federal and state statutory rate mainly due to (i) the change in the valuation allowance and (ii) the benefit of the tax credits for FICA taxes on certain employee tips. The effective income tax rate for Fiscal 2021 was also different than the blended federal and state statutory rate as a result of the pre-vesting forfeiture of performance-based stock option awards for which the market condition was not satisfied upon the Company’s IPO (see Note 16, Stock Based Compensation, for additional information). 86 Table of Contents FIRST WATCH RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The components of deferred tax assets and liabilities are as follows: (in thousands) DECEMBER 26, 2021 DECEMBER 27, 2020 Deferred income tax assets FICA tip credit $ 34,266 $ 28,324 Net operating loss 34,619 37,365 Operating lease liabilities 91,768 86,615 Organizational costs 673 914 Interest limitation 596 1,500 Accrued compensation 2,903 2,032 Deferred revenues 618 561 Stock-based compensation 1,843 918 Other 919 1,094 Valuation allowance ( 35,863 ) ( 30,214 ) Total deferred income tax assets 132,342 129,109 Deferred income tax liabilities Operating lease right-of-use assets ( 80,401 ) ( 76,190 ) Depreciation ( 28,479 ) ( 27,873 ) Intangible assets ( 35,951 ) ( 35,359 ) Total deferred income tax liabilities ( 144,831 ) ( 139,422 ) Net deferred income tax liabilities $ ( 12,489 ) $ ( 10,313 ) Based upon an evaluation of the Company's deferred tax assets, Management has recognized a valuation allowance of $ 35.9 million and $ 30.2 million as of December 26, 2021 and December 27, 2020, respectively. The valuation allowance primarily relates to the Company’s federal tax credit carryforwards that are not expected to be realized prior to the statutory expiration of the carryforward. The valuation allowance will be maintained until sufficient positive evidence exists to support its reversal, including but not limited to, the magnitude and duration of the Company’s historical losses as compared to potential future profits within taxing jurisdictions to overcome such negative evidence. Tax Carryforwards The amount and expiration dates of federal tax loss carryforwards as of December 26, 2021 are as follows: (in thousands) Expiration Date Amount Federal net operating loss carryforwards Indefinite $ 119,348 Federal net operating loss carryforwards 2033 - 2037 $ 29,976 The Company also has state net operating loss carryforwards of $ 65.7 million at December 26, 2021. In addition, the Company has general business tax credits of $ 34.4 million at December 26, 2021, which can be carried forward twenty years and will expire between 2027 and 2041. As of December 26, 2021, approximately $ 28.9 million, $ 19.0 million and $ 14.7 million of the federal loss carryforwards, state loss carryforwards and general business credits, respectively, were accumulated from operations prior to the Advent Acquisition in August 2017. To the extent these federal and state loss carryforwards and general business credits are utilized to reduce taxes payable, the Company is required to pay the previous stockholders an amount equal to tax savings. 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. In connection with the accounting for the Advent Acquisition, a contingent consideration liability of $ 1.2 million was initially recognized, of which approximately $ 0.2 million was paid in Fiscal 2019. As a result of revaluing the contingent consideration liability using actual results, expected projections and state tax law changes in Fiscal 2021, the contingent consideration liability for expected payments to be made to the previous stockholders was $ 1.1 million as of December 26, 2021, of which $ 0.2 million was recorded within Accrued liabilities and $ 0.9 million was 87 Table of Contents FIRST WATCH RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) recorded within Other long-term liabilities. 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 within Other long-term liabilities. Changes in the deferred tax asset valuation allowance are as follows: (in thousands) Balance as of December 30, 2018 $ ( 24,654 ) Increase ( 4,321 ) Balance as of December 29, 2019 ( 28,975 ) Increase ( 1,239 ) Balance as of December 27, 2020 ( 30,214 ) Increase ( 5,649 ) Balance as of December 26, 2021 $ ( 35,863 ) The Company is subject to examination by federal, state and local jurisdictions, where applicable. As of December 26, 2021, the tax years that remain subject to examination by major tax jurisdictions under the statute of limitations are from the year 2013 and forward. On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) to provide certain relief as a result of COVID-19. The CARES Act provides tax relief, along with other stimulus measures, including a retroactive technical correction of prior tax legislation for tax depreciation of certain qualified improvement property, among other changes. A total of $ 59.3 million of accelerated tax depreciation deductions was recognized related to qualified assets placed in service in Fiscal 2020, Fiscal 2019 and Fiscal 2018. Furthermore, the CARES Act made favorable changes to the Section 163(j) interest limitation and as a result, the Company was able to deduct additional interest totaling $ 18.9 million and $ 8.6 million for Fiscal 2020 and Fiscal 2019, respectively. In addition, Management began deferring the employer-paid portion of social security taxes as permitted by the CARES Act in the second quarter of Fiscal 2020. A total of $ 6.7 million was deferred, of which $ 3.3 million was paid in Fiscal 2021. The remaining balance is recorded within Accrued compensation and deferred payroll taxes at December 26, 2021. Furthermore, the CARES Act provided for refundable employee retention tax credits, which can be used to offset payroll tax liabilities. As a result, a credit of $ 0.9 million was recorded as an offset to payroll tax expense in Fiscal 2020. 14. Stockholders’ Equity In Fiscal 2020, the Company had issued 266,667 preferred stock shares having a par value of $ 0.01 per share to existing stockholders, including Advent International Corporation, directors and executive officers. The proceeds from the issuance of the preferred shares were used to repay the outstanding balance of $ 10.5 million on the revolving credit facility and for working capital and general corporate purposes in Fiscal 2020. The preferred stock was automatically converted into 3,156,812 shares of common stock immediately prior to and in connection with the consummation of the Company’s IPO in October 2021. Pursuant to the amendment to the Company’s Amended and Restated Certificate of Incorporation, the Company is authorized to issue 300,000,000 common stock shares with a par value of $ 0.01 per share and 10,000,000 preferred shares with a par value of $ 0.01 per share. Each share of common stock entitles the holder to one vote for each share of common stock held and common stockholders will not have cumulative voting rights. Common stockholders are entitled to receive dividends, as and if declared by the board of directors. In addition, all common stockholders are entitled to share equally on a share-for-share basis in any assets available for distribution to common stockholders upon liquidation, dissolution, or winding up of the Company after payment is made to the preferred stockholders. No cash dividends were declared or paid in Fiscal 2021, Fiscal 2020 and Fiscal 2019. 88 Table of Contents FIRST WATCH RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 15. Defined Contribution Plan The Company sponsors a defined contribution 401(k) savings plan (“401(k) Plan”) which requires the Company to match contributions for participants with at least one year of service 25 % of the first 6 % of the employees’ wages deferred into the 401(k) Plan. The 401(k) Plan also allows for additional profit-sharing contributions by the Company at the sole discretion of Management. All Company contributions vest over a five -year period. Total expense for the Company’s contributions to the 401(k) Plan was $ 0.5 million, $ 0.3 million and $ 0.5 million in Fiscal 2021, Fiscal 2020 and Fiscal 2019, respectively. 16. Stock Based Compensation Stock-based awards are granted to employees and non-employee directors. The Company has two compensation plans that provide for the granting of stock options and other share-based awards to key employees and non-employee members of the board of directors. The 2017 Omnibus Equity Incentive Plan (the “2017 Equity Plan”) and the 2021 Equity Incentive Plan (the “2021 Equity Plan”) provide for the grant of incentive stock options, non-qualified stock options, restricted stock awards, restricted stock units, stock appreciation rights and stock-based awards. 2017 Equity Plan The 2017 Equity Plan authorizes stock-based 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 (the “time-based option awards”), as well as upon the occurrence of certain events and if certain market conditions were achieved, the (“performance-based option awards”). Stock options have an exercisable life of no more than ten years from the date of grant. The exercise price for any stock option award must be at least equal to the fair value of the common stock on the grant date. A total of 4,409,331 shares of common stock are subject to outstanding option awards under the 2017 Equity Plan as of December 26, 2021. The Company does not intend to grant any further awards under the 2017 Equity Plan. Modification of Performance-Based Option Awards- 2017 Equity Plan 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 option awards upon an initial public offering no longer vest over a period of three years , but instead vest one-third (1/3rd) on each of the first two anniversaries of an initial public offering and one-third (1/3rd) on the 273rd day following the second anniversary of an initial public offering. This was accounted for as a modification for accounting purposes, resulting in a new fair value for all the performance-based option awards using an option-pricing model as of the modification date. As of the modification date, the unrecognized compensation expense of all outstanding performance-based option awards was $ 15.6 million. 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 were amended to waive the market condition. Accordingly, upon the Company’s IPO, such tranche converted into time-based option awards and vest one-third (1/3rd) on each of the first two anniversaries of the Company’s IPO and one-third (1/3rd) on the 273rd day following the second anniversary of the Company’s IPO. This was accounted for as a modification for accounting purposes resulting in a new fair value using the option-pricing model for such performance-based option awards as of the modification date. As of the modification date, the unrecognized compensation expense of this outstanding tranche was approximately $ 10.4 million. 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 option 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. 89 Table of Contents FIRST WATCH RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Performance-Based Option Awards - 2017 Equity Plan Upon the consummation of the Company’s IPO in October 2021, certain performance-based option awards converted into time-based option awards and stock compensation expense of $ 2.4 million was recognized in the fourth quarter of Fiscal 2021. The remaining expense will be recognized on an accelerated recognition method over the remaining service period. An immediate one-time charge of $ 5.6 million was recognized upon closing of the IPO, which included (i) the expense from the date of the modifications through the IPO date and (ii) the expense related to performance-based option awards for which the market condition was not satisfied upon the Company’s IPO. A summary of stock option activity under the 2017 Equity Plan for Fiscal 2021 is as follows: Number of Options Weighted-Average Exercise Price Aggregate Intrinsic Value Outstanding, December 27, 2020 5,143,229 $ 10.08 $ — Granted 147,961 $ 12.68 Forfeited ( 881,859 ) $ 9.48 Outstanding, December 26, 2021 4,409,331 $ 9.48 $ 28,598 Exercisable, December 26, 2021 1,775,940 $ 8.96 $ 12,455 A summary of the non-vested stock options under the 2017 Equity Plan is as follows: Number of Options Weighted-Average Grant Date Fair Value Nonvested, December 30, 2018 3,984,303 $ 1.84 Granted 829,807 $ 1.33 Vested ( 429,979 ) $ 1.86 Forfeited ( 53,271 ) $ 1.68 Nonvested, December 29, 2019 4,330,860 $ 1.74 Granted 272,410 $ 1.02 Vested ( 487,086 ) $ 1.80 Forfeited ( 234,569 ) $ 1.72 Nonvested, December 27, 2020 3,881,615 $ 1.68 Granted (1) 147,961 $ 6.35 Vested (1) ( 514,326 ) $ 1.76 Forfeited (1) ( 881,859 ) $ 4.26 Nonvested, December 26, 2021 (1) 2,633,391 $ 7.03 ______________________________ (1) Weighted-average grant date fair value includes the fair value of the performance-based option awards as of the modification dates, as described above The aggregate intrinsic value is based on the difference between the exercise price of the stock option and the estimated fair value of the Company’s common stock, or after the IPO, based on the closing price of the Company’s common stock on the Nasdaq. The fair value of vested stock options was $ 0.9 million, $ 0.9 million and $ 0.8 million during Fiscal 2021, Fiscal 2020 and Fiscal 2019, respectively. Stock-based compensation expense was $ 8.6 million, $ 0.8 million and $ 1.2 million in Fiscal 2021, Fiscal 2020 and Fiscal 2019, respectively. 90 Table of Contents FIRST WATCH RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) As of December 26, 2021, the amount of stock-based compensation expense not yet recognized on non-vested stock option awards was approximately $ 13.4 million and will be recognized over a weighted-average period of approximately 1.4 years. T he remaining contractual life for stock option awards granted was approximately 6.2 years at December 26, 2021. Fair value of Stock Options The assumptions utilized to determine the fair value of the stock option awards were as follows for the following periods: FISCAL YEAR 2021 2020 2019 Weighted average risk-free interest rate 1.0 % 0.6 % 2.0 % Weighted average expected volatility 50.3 % 41.2 % 34.1 % Expected term (years) 4.6 4.5 4.5 Expected dividend yield — — — The risk-free interest rate is determined by reference to the U.S. Treasury yield curve for time periods approximately equal to the expected term of the stock option award. The expected term of stock option awards has been determined based on data from publicly traded companies as the Company lacks company-specific historical or implied volatility information. Therefore, Management also estimated its expected volatility based on historical volatilities of a publicly traded set of peer companies in the restaurant industry. The expected dividend yield is based on the fact that the Company has never paid cash dividends and does not have intentions of paying dividends in the foreseeable future. 2021 Equity Plan On September 19, 2021, the Company’s board of directors adopted, and on September 19, 2021 its stockholders approved, the 2021 Equity Plan, which became effective immediately prior to the effectiveness of the registration statement for the Company’s initial public offering on September 30, 2021. 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. There were no issuances under the 2021 Equity Plan as of December 26, 2021. 17. Commitments and Contingencies Purchase Commitments Purchase obligations include agreements related to the construction or remodeling of restaurant facilities, the purchase of food, beverages, paper goods and other supplies, equipment purchases, marketing-related contracts and software license commitments and service contracts in the normal course of business. These obligations are generally pursuant to short-term purchase orders at prevailing market prices and are recorded as liabilities when the related goods are received or services 91 Table of Contents FIRST WATCH RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) rendered. These commitments are cancellable and there are no material financial penalties associated with these commitments in the event of early termination. Legal Proceedings The Company is subject to legal proceedings, claims and liabilities that arise in the ordinary course of business. The amount of the ultimate liability with respect to these matters was not material as of December 26, 2021. In the event any litigation losses become probable and estimable, the Company will recognize any anticipated losses. 18. Net Loss Per Common Share The following table sets forth the computations of basic and diluted net loss per common share attributable to First Watch Restaurant Group, Inc.: FISCAL YEAR (in thousands, except share and per share data) 2021 2020 2019 Numerator: Net loss attributable to First Watch Restaurant Group, Inc. $ ( 2,107 ) $ ( 49,681 ) $ ( 45,439 ) Denominator: Weighted average common shares outstanding - basic and diluted 48,213,995 45,013,784 45,013,784 Net loss per common share attributable to First Watch Restaurant Group, Inc. - basic and diluted $ ( 0.04 ) $ ( 1.10 ) $ ( 1.01 ) Diluted net 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 at the end of the reporting period using the two-class method and treasury method, respectively. All stock option awards outstanding were excluded from the calculation of diluted net loss per common share because of their anti-dilutive impact for Fiscal 2021, Fiscal 2020 and Fiscal 2019. All preferred stock shares were excluded from the calculation of diluted net loss per common share because of their anti-dilutive impact for Fiscal 2021 and Fiscal 2020. As a result, there was no difference between basic and diluted net loss per common share attributable to First Watch Restaurant Group, Inc. during Fiscal 2021, Fiscal 2020 and Fiscal 2019. 19. Condensed Financial Information of Registrant (Parent Company Only) FIRST WATCH RESTAURANT GROUP, INC. (PARENT COMPANY ONLY) CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) DECEMBER 26, 2021 DECEMBER 27, 2020 Assets Investment in subsidiaries $ 504,429 $ 320,866 Equity Preferred stock; $ 0.01 par value; 10,000,000 shares authorized and none outstanding at December 26, 2021; 266,667 shares authorized, issued and outstanding at December 27, 2020 $ — $ 3 Common stock; $ 0.01 par value; 300,000,000 shares authorized; 59,048,446 and 45,013,784 shares issued and outstanding at December 26, 2021 and December 27, 2020, respectively 590 450 Additional paid-in capital 608,878 423,345 Accumulated deficit ( 105,039 ) ( 102,932 ) Total equity attributable to First Watch Restaurant Group, Inc. $ 504,429 $ 320,866 92 Table of Contents FIRST WATCH RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) FIRST WATCH RESTAURANT GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) FISCAL YEAR 2021 2020 2019 Equity in net loss of subsidiaries Net loss and comprehensive loss $ ( 2,107 ) $ ( 49,681 ) $ ( 45,472 ) Net loss per common share attributable to First Watch Restaurant Group, Inc. - basic and diluted $ ( 0.04 ) $ ( 1.10 ) $ ( 1.01 ) Weighted average number of common shares outstanding - basic and diluted 48,213,995 45,013,784 45,013,784 Statements of cash flows have not been presented as First Watch Restaurant Group, Inc. did not have any cash as of, or for Fiscal 2021, Fiscal 2020 and Fiscal 2019. Basis of Presentation The Company is a holding company without any operations of its own (the “Parent Company”). Pursuant to the terms of the New Credit Agreement discussed in Note 10, Debt, the Company and certain subsidiaries of the Company have restrictions on their ability to, among other things, (i) incur additional indebtedness, pay dividends or make certain intercompany loans and advances, and (ii) exceed a maximum total rent adjusted net leverage ratio or fall below a minimum fixed charge coverage ratio. As a result of these restrictions, these parent company financial statements have been prepared in accordance with Rule 12-04 of Regulation S-X, as restricted net assets of the Company’s subsidiaries (as defined in Rule 4-08(e)(3) of Regulation S-X) exceed 25 % of the Company’s consolidated net assets as of December 26, 2021 and December 27, 2020. These condensed financial statements have been prepared on a “parent-only” basis. These condensed parent company financial statements have been prepared using the same accounting principles and policies described in the notes to the Company’s consolidated financial statements, with the only exception being that the parent company accounts for its subsidiaries using the equity method. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. The accompanying financial information should be read in conjunction with the accompanying Company’s consolidated financial statements and related notes thereto. 93 Table of Contents Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None.