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Item 7. Management’s Discussion and Analysis

2023-03-07 compared with 2022-03-23 · 251 added, 259 removed, 258 unchanged (66% of the section changed)

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First Watch is an award-winning Daytime Dining concept serving made-to-order breakfast, brunch and lunch using fresh ingredients.

A recipient of hundreds of local “Best Breakfast” and “Best Brunch” accolades, First Watch’s award winning chef-driven menu includes elevated executions of classic favorites for breakfast, lunch and brunch.

In 2021, First Watch was recognized as FSR Magazine’s Best Menu and as the fastest-growing full-service restaurant company based on unit growth.

The Company is majority owned by Advent, one of the world’s largest private-equity firms.

The Company does not operate outside of the United States.

In 2022, First Watch was recognized with ADP’s coveted Culture at Work Award and named a Top 100 Most Loved Workplace® by Newsweek and the Best Practice Institute.

The Company is majority owned by Advent International Corporation, one of the world’s largest private-equity firms.

The Company’s common stock trades on Nasdaq under the ticker symbol “FWRG.”

The Company operates and franchises restaurants in 29 states under the “First Watch” trade name and as of December 25, 2022, the Company had 366 company-owned restaurants and 108 franchise-owned restaurants.

On October 1, 2021, the Company’s common stock began trading on Nasdaq under the ticker symbol “FWRG.”

We use a 52- or 53-week fiscal year ending on the last Sunday of each calendar year.

Our fiscal quarters are comprised of 13 weeks each, except for fiscal years consisting of 53 weeks for which the fourth quarter will consist of 14 weeks, and end on the 13th Sunday of each quarter (14th Sunday of the fourth quarter, when applicable).

The Company does not operate outside of the United States.

The Company’s 52- or 53-week fiscal years end on the last Sunday of each calendar year.

Its fiscal quarters are comprised of 13 weeks each and end on the 13th Sunday of each quarter, save for 53-week years during which the fourth quarter ends on the 14th Sunday of the fourth quarter.

All references to 2022, 2021 and 2020 reflect the results of the 52-week fiscal years ended December 25, 2022, December 26, 2021 and December 27, 2020, respectively.

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Key Performance Indicators

Throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations” we commonly discuss the following key operating metrics which we believe will drive our financial results and long-term growth model.

Throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations” we commonly discuss the following key operating metrics that we believe will drive our financial results and long-term growth model.

We believe these metrics are useful to investors because management uses these metrics to evaluate performance and assess the growth of our business as well as the effectiveness of our marketing and operational strategies.

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Same-Restaurant Sales Growth :

open for 18 months or longer as of the beginning of the fiscal year (“Comparable Restaurant Base”).

For the fiscal years ended December 26, 2021, December 27, 2020 and December 29, 2019 there were 269, 212 and 168 restaurants in our Comparable Restaurant Base, respectively.

There were 210 restaurants in the two-year Comparable Restaurant Base.

An increase in same-restaurant sales growth is the result of increased restaurant traffic, increased average customer check or a combination of the two.

We gather daily sales data and regularly analyze the customer traffic counts and the mix of menu items sold to aid in developing menu pricing, product offerings and promotional strategies designed to produce sustainable same-restaurant sales growth.

the percentage change in year-over-year restaurant sales (excluding gift card breakage) for the comparable restaurant base, which we define as the number of company-owned First Watch branded restaurants open for 18 months or longer as of the beginning of the fiscal year (“Comparable Restaurant Base”).

There were 301 restaurants and 269 restaurants in our Comparable Restaurant Base in 2022 and in 2021, respectively.

There were 207 restaurants in the three-year Comparable Restaurant Base.

Measuring our same-restaurant sales growth allows management to evaluate the performance of our existing restaurant base.

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We do not recognize the restaurant sales from our franchise-owned restaurants as revenue.

See Note 2, Summary of Significant Accounting Policies, in the accompanying notes to the consolidated financial statements for a description of our revenue recognition policy.

Non-GAAP Financial Measures

To supplement the consolidated financial statements, which are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), we use the following non-GAAP measures, which present operating results on an adjusted basis:

(i) Adjusted EBITDA, (ii) Adjusted EBITDA margin, (iii) Restaurant level operating profit and (iv) Restaurant level operating profit margin.

Our presentation of these non-GAAP measures includes isolating the effects of some items that are either nonrecurring in nature or vary from period to period without any correlation to our ongoing core operating performance.

These supplemental measures of performance are not required by or presented in accordance with GAAP.

Management believes these non-GAAP measures provide investors with additional visibility into our operations, facilitate analysis and comparisons of our ongoing business operations because they exclude items that may not be indicative of our ongoing operating performance, help to identify operational trends and allow for greater transparency with respect to key metrics used by management in our financial and operational decision making.

Our non-GAAP measures may not be comparable to similarly titled measures used by other companies and have important limitations as analytical tools.

These non-GAAP measures should not be considered in isolation or as substitutes for analysis of our results as reported under GAAP as they may not provide a complete understanding of our performance.

These non-GAAP measures should be reviewed in conjunction with our consolidated financial statements prepared in accordance with GAAP.

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

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

Adjusted EBITDA :

represents Net income (loss) before depreciation and amortization, interest expense and income taxes, and items that we do not consider in our evaluation of ongoing core operating performance as identified in the reconciliation of Net income (loss), the most directly comparable measure in accordance with accounting principles generally accepted in the United States of America (“GAAP”) measure, to Adjusted EBITDA, included in the section Non-GAAP Financial Measures, herein .

represents Net income (loss) before depreciation and amortization, interest expense, income taxes, and items that we do not consider in our evaluation of ongoing core operating performance as identified in the reconciliation of

Net income (loss), the most directly comparable measure in accordance with GAAP, to Adjusted EBITDA, included in the section Non-GAAP Financial Measure Reconciliations below .

Adjusted EBITDA Margin :

represents Adjusted EBITDA as a percentage of total revenues.

See Non-GAAP Financial Measure Reconciliations below for a reconciliation to Net income (loss) margin, the most directly comparable GAAP measure.

Restaurant Level Operating Profit :

represents restaurant sales, less restaurant operating expenses, which include food and beverage costs, labor and other related expenses, other restaurant operating expenses, pre-opening expenses and occupancy expenses.

Restaurant level operating profit excludes corporate-level expenses and other items that we do not consider in the evaluation of the ongoing core operating performance of our restaurants as identified in the reconciliation of Income (Loss) from operations, the most directly comparable GAAP measure, to Restaurant level operating profit, included in the section Non-GAAP Financial Measures, herein.

Restaurant Level Operating Profit Margin :

represents Restaurant level operating profit as a percentage of restaurant sales.

See Non-GAAP Financial Measure Reconciliations below for a reconciliation to Income (Loss) from operations margin, the most directly comparable GAAP measure.

Financial Highlights

During 2021, we experienced recovery of our in-restaurant dining sales and continued to build on the strength of our operating performance generating an increase in same-restaurant sales growth driven primarily by same-restaurant traffic growth.

In 2022, the Company continued to capture strong consumer demand and same-restaurant traffic growth as the dining rooms in the Comparable Restaurant Base returned to more than 90% of 2019 usage levels, while the off-premises channel proved to be a growth vehicle with sales increasing 6.3% from 2021.

Our AUV increased 13.8% to $2.0 million in 2022, from $1.8 million in 2021.

Despite the inflationary environment, customer demand allowed management to offset much of the inflationary pressure with modest menu price increases while continuing to drive same-restaurant traffic growth.

Additionally, the Company’s development team continued to accelerate new restaurant openings and populate the pipeline of prospective restaurant projects.

The 29 NROs opened with warm customer response and generated an annualized average unit volume of $2.2 million, which exceeded our AUV.

Financial highlights for 2022 include the following:

• Total revenues grew to $601.2 million in 2021 from $342.4 million in 2020 ($436.4 million in 2019)

• System-wide sales increased 76.1% to $750.7 million in 2021 from $426.3 million in 2020 ($558.4 million in 2019)

• Same-restaurant sales growth of 63.0% relative to 2020 (14.3% relative to 2019)

• Same-restaurant traffic growth of 52.6% relative to 2020 ((0.5)% relative to 2019)

• Income from operations margin of 3.8% in 2021 compared to Loss from operations margin of (14.0)% in 2020 (Loss from operations margin of (8.7)% in 2019)

• Restaurant level operating profit margin (*) increased to 19.5% in 2021 from 8.4% in 2020 (17.4% in 2019)

• Net loss improved to $(2.1) million in 2021 compared to $(49.7) million in 2020 ($(45.5) million in 2019)

• Adjusted EBITDA (*) increased to $66.3 million in 2021 from $(5.7) million in 2020 ($38.1 million in 2019)

• Opened 31 system-wide restaurants in 2021, resulting in a year-end count of 435 system-wide restaurants (341 company-owned and 94 franchise-owned) across 28 states

• Total revenues increased 21.5% to $730.2 million from $601.2 million in 2021

• System-wide sales increased 21.9% to $914.8 million from $750.7 million in 2021

• Same-restaurant sales growth of 14.5% (29.6% relative to 2019*)

• Same-restaurant traffic growth of 7.7% (6.5% relative to 2019*)

• Income from operations of $16.9 million and Income from operations margin of 2.4% compared to Income from operations of $22.2 million and Income from operations margin of 3.8% in 2021

• Restaurant level operating profit ** of $128.9 million and Restaurant level operating profit margin ** of 17.9% compared to Restaurant level operating profit ** of $115.4 million and Restaurant level operating profit margin ** of 19.5% in 2021

• Net income of $6.9 million compared to Net loss of $(2.1) million in 2021

• Adjusted EBITDA ** increased to $69.3 million from $66.3 million in 2021

• Opened 43 system-wide restaurants (29 company-owned and 14 franchise-owned) across 16 states resulting in a total of 474 system-wide restaurants (366 company-owned and 108 franchise-owned) across 29 states

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* See “ Non-GAAP Financial Measures, ” herein

Customer and Supply Chain Developments

Total revenues in 2021 reflect the rapid pace at which customers returned to our restaurants.

The year began with dining rooms that were approximately 62% utilized in January 2021, relative to 2019 levels.

By the fourth quarter of 2021, our dining rooms were frequented by customers at a rate of nearly 90% of 2019 levels alongside increased off-premises sales.

Furthermore, we generated average annual sales volumes of $1.8 million per restaurant as compared to $1.1 million in 2020 and $1.6 million in 2019.

The result was same-restaurant sales growth of 63.0%, which was driven by same-restaurant traffic growth of 52.6%, Restaurant level operating profit of $115.4 million and Adjusted EBITDA of $66.3 million in 2021.

During 2021, we also opened 31 new system-wide restaurants in 12 states.

The uneven recovery of the nation’s supply chain has, at times, threatened to interrupt the scheduled deliveries to our restaurants and the costs of certain of our raw materials experienced inflation.

The Company is working closely with our suppliers and distribution partners to secure inventory and ensure these conditions do not materially impact our operations.

During 2021, as a result of these measures, we were successful in offering our full menu throughout the year.

Additionally, the hourly labor market has become increasingly competitive.

First Watch continues to see the strength of our “You First” culture and the great appeal of our single-shift operating hours for employees.

Business Trends

First Watch’s operating model and distinctive menu offerings position the Company to capitalize on attractive long-term consumer trends, including:

• Increasing demand for fresh and healthy food – Our freshly made food, with high-quality, protein-rich ingredients, such as cage-free eggs and quinoa, aligns well with consumer trends towards healthier menus factoring into consumer restaurant choices.

• The rise of “on-demand” dining – The rise of the “gig” economy, flexible work hours and the growth of remote work, trends magnified by the COVID-19 pandemic, are enhancing demand for fast and flexible Daytime Dining for which traditional rigid breakfast and lunch dayparts were not designed.

• Increasing morning meal occasions – We believe that migration from dense urban to suburban areas, where most of our restaurants are located, and continued work-from-home routines will provide enhanced opportunities for increased traffic and brand awareness.

Our restaurant operations have been affected by COVID-19 related employee absences, as well as changes in the availability and cost of labor.

In addition, we remain in regular contact with our key suppliers and to date we have not experienced significant disruptions in our supply chain;

however, inflationary pressures and temporary shortages in equipment and other goods could increase and/or spread to more categories as the impacts of COVID-19, the Russia-Ukraine conflict, global unrest, and other factors continue to impact the global supply chain.

Looking forward to 2022, we believe benefits from pricing actions and operating leverage from revenue growth and technology initiatives should offset, to some extent, inflationary pressures and potential increased costs.

* Comparison to the fiscal year ended December 29, 2019 (“2019”) is presented for enhanced comparability due to the economic impact of COVID-19.

** See Non-GAAP Financial Measure Reconciliations section below.

Business Trends, Customer and Supply Chain

Despite surging inflation impacting consumers in 2022, we saw a return of in-restaurant dining levels similar to 2019 levels while our off-premises sales remained strong, indicating continued customer demand.

The unusually high commodity inflation impacted costs throughout 2022 with some deceleration in the third and fourth quarters as the Company began to lap prior year inflation-impacted periods.

The Company’s market basket experienced cost inflation of approximately 13.0% in 2022.

Notably, egg prices and the supply of cage-free shell eggs used in our recipes were under pressure most of the year due to multiple occurrences of Avian Influenza in the United States.

Management solved for shortages by expanding sourcing but at higher than planned prices.

In 2023, we expect continued cost inflation for our entire market basket in the range of 4.0% 6.0%.

During 2022, there was an increase in the volume of job applications and an overall easing of staffing constraints and labor shortages that developed in 2020 and 2021.

Restaurant staffing in both hourly and manager level positions enabled us to serve our increased in-restaurant dining and off-premises demand and sets us up to execute on our strategic development plan and open new restaurants.

We experienced restaurant-level hourly labor inflation of approximately 11.0% in 2022, which combined with the increase in staffing levels, contributed to increased labor and other related expenses at the restaurant level.

In 2023, we expect restaurant-level hourly labor inflation of 9.0% to 11.0% and we intend to focus on optimizing our staffing as our restaurants have returned to a more normal seasonality.

Costs and timing of new restaurant construction were similarly challenged in 2022 due to the elevated inflation, uneven equipment delivery and supply chain interruptions.

As a result, our development team often negotiated with landlords for early entry into new restaurant facilities so we could better control the pace of interior build out and installation of equipment, dining room packages and First Watch trade dress.

We have largely mitigated the inflationary impacts through pricing actions and we will continue to price to offset inflation while remaining focused on maximizing traffic in our restaurants.

In late January 2023, we increased in-restaurant menu prices 4.1% to continue to offset the negative effects of inflationary costs.

Development Highlights

During 2021, the Company had a total of 31 new system-wide restaurants in 12 states.

In addition, we relocated a company-owned restaurant and in the fourth quarter of 2021, we accelerated a planned closure of a company-owned restaurant which was nearing the end of the lease term.

Furthermore, Management elected to terminate an agreement with a franchisee that owned three restaurants.

At December 26, 2021, the Company had a total of 435 restaurants, which included both company-owned and franchise-owned restaurants.

During 2022, the Company had a total of 43 new system-wide restaurants in 16 states and we closed 4 company-owned restaurants.

At December 25, 2022, the Company had a total of 474 system-wide restaurants.

Restaurant closures generally result from lease expirations where management is optimizing the Company’s overall market development strategy.

FISCAL YEAR 2022

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New restaurants

Relocations (1) — (1)

Closures/Disenfranchised

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We expect to open 38 to 42 company-owned restaurants and 10 to 12 franchise-owned restaurants during the fiscal year ending December 31, 2023 (“2023”).

Results of Operations

The discussion that follows includes a comparison of our results of operations and liquidity and capital resources for 2021 and 2020.

For a comparison of our results of operations and financial condition for 2020 and 2019, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our final prospectus for our IPO filed on September 30, 2021.

The following table summarizes our results of operations and the percentages of items in our Consolidated Statements of Operations and Comprehensive Loss in relation to Total revenues or Restaurant sales for 2021 and 2020:

(in thousands) 2021 2020

Restaurant sales $ 592,343 98.5 % $ 337,433 98.6 %

Franchise revenues 8,850 1.5 % 4,955 1.4 %

Total revenues 601,193 100.0 % 342,388 100.0 %

Operating costs and expenses

Restaurant operating expenses (1) (exclusive of depreciation and amortization shown below):

Food and beverage costs 134,201 22.7 % 76,975 22.8 %

Labor and other related expenses 189,167 31.9 % 120,380 35.7 %

Other restaurant operating expenses 94,847 16.0 % 61,821 18.3 %

Occupancy expenses 55,433 9.4 % 49,450 14.7 %

Pre-opening expenses 3,310 0.6 % 3,880 1.1 %

General and administrative expenses 70,388 11.7 % 46,322 13.5 %

Depreciation and amortization 32,379 5.4 % 30,725 9.0 %

Impairments and loss on disposal of assets 381 0.1 % 315 0.1 %

Transaction income, net (1,156) (0.2) % (258) (0.1) %

Total operating costs and expenses 578,950 96.3 % 389,610 113.8 %

Income (Loss) from operations 22,243 3.7 % (47,222) (13.8) %

Interest expense (20,099) (3.3) % (22,815) (6.7) %

Other (expense) income, net (1,774) (0.3) % 483 0.1 %

Income (Loss) before income taxes 370 0.1 % (69,554) (20.3) %

Income tax (expense) benefit (2,477) (0.4) % 19,873 5.8 %

Net loss and total comprehensive loss $ (2,107) (0.4) % $ (49,681) (14.5) %

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(1) As a percentage of Restaurant sales

We also plan on closing 3 company-owned restaurants, resulting in a total of 45-51, net new system-wide restaurants in 2023.

Selected Operating Data

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17.9 % 19.5 % 8.4 %

Net loss (in thousands) $ (2,107) $ (49,681) $ (45,472)

Net loss margin (0.4) % (14.5) % (10.4) %

Net income (loss) (in thousands) $ 6,907 $ (2,107) $ (49,681)

Net income (loss) margin 0.9 % (0.4) % (14.5) %

Adjusted EBITDA (in thousands) (2)

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

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

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

Results of Operations

The discussion that follows includes a comparison of our results of operations for 2022 and 2021.

The following table summarizes our results of operations and the percentages of items in our Consolidated Statements of Operations and Comprehensive Income (Loss) in relation to Total revenues or, where indicated, Restaurant sales for 2022 and 2021:

(in thousands) 2022 2021

Restaurant sales $ 719,181 98.5 % $ 592,343 98.5 %

Franchise revenues 10,981 1.5 % 8,850 1.5 %

Total revenues 730,162 100.0 % 601,193 100.0 %

Operating costs and expenses

Restaurant operating expenses (1) (exclusive of depreciation and amortization shown below):

Food and beverage costs 172,561 24.0 % 134,201 22.7 %

Labor and other related expenses 238,257 33.1 % 189,167 31.9 %

Other restaurant operating expenses 114,476 15.9 % 94,847 16.0 %

Occupancy expenses 59,919 8.3 % 55,433 9.4 %

Pre-opening expenses 5,414 0.8 % 3,310 0.6 %

General and administrative expenses 84,959 11.6 % 70,388 11.7 %

Depreciation and amortization 34,230 4.7 % 32,379 5.4 %

Impairments and loss on disposal of assets 920 0.1 % 381 0.1 %

Transaction expenses (income), net 2,513 0.3 % (1,156) (0.2) %

Total operating costs and expenses 713,249 97.7 % 578,950 96.3 %

Income from operations (1)

16,913 2.4 % 22,243 3.8 %

Interest expense (5,232) (0.7) % (20,099) (3.3) %

Other income (expense), net 910 0.1 % (1,774) (0.3) %

Income before income taxes 12,591 1.7 % 370 0.1 %

Income tax expense (5,684) (0.8) % (2,477) (0.4) %

Net income (loss) and total comprehensive income (loss) $ 6,907 0.9 % $ (2,107) (0.4) %

(1) Percentages are calculated as a percentage of restaurant sales.

Restaurant Sales

Restaurant sales represent the aggregate sales of food and beverages, net of discounts, at company-owned restaurants.

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Total Restaurant sales $ 719,181 $ 592,343 126,838 21.4 %

The increase in restaurant sales during 2021 as compared to 2020 was mainly due to (i) $185.7 million of sales from the Comparable Restaurant Base, driven by same-restaurant traffic growth of 52.6% and an increase in average check per person, (ii) $69.6 million of sales from restaurants that are not in the Comparable Restaurant Base, of which $27.0 million was from our 22 NROs, (iii) menu price increases on third-party delivery sales.

During 2020, we enabled off-premises sales occasions (third-party delivery and take-out) with new availability and access to online ordering.

Off-premises sales increased from $80.4 million 2020 to $139.4 million in 2021.

Our off-premises sales of $34.4 million during the fourth quarter of 2021 was higher than our off-premises sales of $33.7 million during the same period in 2020, even as our in-restaurant dining traffic increased 49.1% compared to the same period in 2020 and rebounded to nearly 90% of pre-pandemic levels.

Given that this volume of off-premises sales emerged during the COVID-19 pandemic, and the fact that our in-restaurant dining room occasions have not fully returned to pre-pandemic levels, we cannot be certain that similar volumes of off-premises occasions will continue.

Menu price increases were

implemented on third-party delivery sales to compensate for third-party delivery fees resulting in a relatively neutral margin on these sales as compared to in-restaurant dining sales.

Management did not raise menu prices for in-restaurant dining during 2021.

However, we increased in-restaurant menu prices 3.9% in the first quarter of 2022 to partially offset the negative effects of inflationary costs.

The increase in total restaurant sales during 2022 as compared to 2021 was primarily due to (i) same-restaurant sales growth of 14.5%, driven by same-restaurant traffic growth of 7.7%, the increase in average check per person and the increase in third-party delivery sales, in addition to (ii) $26.8 million from 29 NROs.

Franchise Revenues

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Total Franchise revenues $ 10,981 $ 8,850 $ 2,131 24.1 %

The increase in franchise revenues during 2021 as compared to 2020 was primarily due to the increase in sales as we continued to recover from the COVID-19 pandemic.

Franchise revenues in 2021 includes $0.3 million recognized from nine Franchise-owned NROs.

The increase in franchise revenues during 2022 as compared to 2021 was primarily driven by (i) the increase in sales from franchise-owned restaurants and (ii) $0.4 million from 14 franchise-owned NROs.

Food and Beverage Costs

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As a percentage of restaurant sales 24.0 % 22.7 % 1.3%

Food and beverage costs increased during 2021 as compared to the prior year primarily as a result of (i) increased restaurant sales and traffic as we continued to recover from the COVID-19 pandemic and (ii) $6.4 million of food and beverage costs from our 22 NROs, partially offset by (iii) COVID-19-related inventory write-offs of $0.6 million recognized in 2020.

Our commodity costs were relatively stable through the third quarter of 2021.

However, late in the fourth quarter of 2021, we experienced increasing inflation in our market basket by more than 11.0%.

In 2022, we anticipate inflation of 10.0% to 13.0% primarily driven by the increase in fuel costs as well as a few key items in our market basket, including bread, bacon and avocado.

Food and beverage costs as a percent of restaurant sales increased during 2022 as compared to 2021 primarily due to inflation across the market basket, partially offset by menu price increases.

Food and beverage costs increased during 2022 as compared to 2021 primarily as a result of (i) the increase in restaurant sales, (ii) inflation across the market basket and (iii) $6.8 million from 29 NROs.

Labor and Other Related Expenses

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As a percentage of restaurant sales 33.1 % 31.9 % 1.2%

As a percentage of restaurant sales, the decrease in labor and other related expenses during 2021 to 31.9% from 35.7% during 2020 was primarily due to (i) leveraging of labor and other related expenses as restaurant sales and traffic increased,

combined with COVID-19 related employee absences and changes in the availability of labor and (ii) health insurance costs for furloughed employees, net of employee retention credits, incurred in 2020, partially offset by (iii) restaurant wage rate increases.

The significant factors contributing to the increase in labor and other related expenses in 2021 as compared to 2020 were (i) the increase in restaurant sales and traffic, (ii) $9.7 million from our 22 NROs , (iii) $2.7 million from performance-related and discretionary bonuses and (iv) restaurant wage rate increases, partially offse t by (v) $1.8 million in compensation expense and health insurance costs for furloughed employees, net of employee retention credits, incurred in 2020.

In 2022, we anticipate inflation of 8.0% to 10.0% for our restaurant labor cost.

Labor and other related expenses as a percentage of restaurant sales increased during 2022 as compared to 2021 primarily as a result of the increase in wages and staffing levels.

This increase was partially offset by (i) retention bonuses recognized in 2021 and (ii) a decrease in health insurance costs, which includes rebates from our group health plan.

The increase in labor and other related expenses during 2022 as compared to 2021 was primarily due to (i) the increase in wages and staffing levels and (ii) $11.0 million from 29 NROs.

This increase was partially offset by (i) retention bonuses recognized during 2021 and (ii) a decrease in health insurance costs, which includes rebates from our group health plan.

Other Restaurant Operating Expenses

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As a percentage of restaurant sales 15.9 % 16.0 % (0.1)%

Other restaurant operating expenses as a percentage of restaurant sales was 2.3% lower than the prior year primarily due to leveraging increased restaurant sales.

The increase in other restaurant operating expenses during 2021 as compared to 2020 was primarily due to (i) the increase in credit card fees, supplies (including take-out packaging), utilities, repairs and maintenance and insurance expense totaling approximately $24.5 million driven by the increase in restaurant sales and traffic, as well as (ii) the increase in third-party delivery services fees of $7.7 million as a result of increased off-premises sales.

Other restaurant operating expenses as a percentage of restaurant sales during 2022 was slightly lower as compared to 2021 primarily due to leveraging in-restaurant dining sales, which was partially offset by the increase in the cost of to-go supplies and repairs and maintenance costs.

The increase in other restaurant operating expenses during 2022 as compared to 2021 was mainly due to (i) $9.6 million related to credit card fees, utilities, repairs and maintenance and insurance primarily driven by the increase in restaurant sales and restaurant growth, (ii) $7.2 million in operating supplies expense primarily driven by inflation and the increase in restaurant sales and restaurant growth, as well as (iii) $1.2 million in third-party delivery services fees.

Occupancy Expenses

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As a percentage of restaurant sales 8.3 % 9.4 % (1.1)%

The increase in occupancy expenses during 2021 as compared to 2020 was primarily due to the increase in the number of company-owned restaurants and the number of leases that had commenced during the respective periods.

The decrease in occupancy expenses as a percentage of restaurant sales during 2022 as compared to 2021 was primarily due to sales leverage driven by increased restaurant sales.

The increase in occupancy expenses during 2022 as compared to 2021 was primarily due to the increase in the number of company-owned restaurants.

Pre-opening Expenses

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Pre-opening expenses $ 5,414 $ 3,310 $ 2,104 63.6 %

The decrease in pre-opening expenses in 2021 as compared to 2020 was primarily due to additional pre-opening rent expense resulting from the curtailment of new restaurant construction and delayed restaurant openings in 2020 in response to the COVID -19 pandemic.

Pre-opening expenses have continued to increase over the last few years, in part due to management’s decision to gain early access to facilities during the build-out phase.

Early access improves the Company’s influence over the pace and timing of completion of new restaurants.

The increase in pre-opening expenses during 2022 as compared to 2021 was primarily due to (i) the higher number of restaurants opened, in addition to (ii) the higher number of restaurants expected to open and the related increase in pre-opening rent.

General and Administrative Expenses

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General and administrative expenses are impacted by changes in our employee headcount and costs related to strategic and growth initiatives.

In preparation for and after the consummation of the IPO, we have incurred and we expect to incur in the future significant additional legal, accounting and other expenses associated with being a public company, including costs associated with our compliance with the Sarbanes-Oxley Act.

In preparation for and after the consummation of the Company’s initial public offering (“IPO”) in October 2021, we have incurred and we expect to incur in the future significant additional legal, accounting and other expenses associated with being a public company, including costs associated with our compliance with the Sarbanes-Oxley Act.

(in thousands) 2022 2021 Change

General and administrative expenses $ 84,959 $ 70,388 $ 14,571 20.7 %

The increase in general and administrative expenses during 2021 as compared to 2020 was primarily driven by (i) the increase of $10.5 million in compensation expense resulting from the increase in employee headcount and discretionary performance-related bonuses as compared to 2020 when there were furloughs, (ii) $8.0 million of stock-based compensation expense, of which $2.4 million resulted from certain performance-based option awards that converted into time-based option awards and $5.6 million of one-time expense that was recognized upon closing of the IPO (see Note 16, Stock Based Compensation , in the accompanying notes to the consolidated financial statements for additional information), (iii) additional marketing spend of $3.3 million, (iv) an additional $2.5 million in recruiting, training and travel expenses and (v) an increase of $1.1 million related to insurance expense, partially offset by (vi) the write off of $2.0 million of deferred offering costs as a result of halting our public registration of equity in 2020 and (vi i) $1.4 million costs incurred i n connection with the COVID-19 pandemic in 2020.

Depreciati on and Amortization

The increase in general and administrative expenses during 2022 as compared to 2021 was mainly due to (i) $7.3 million of stock-based compensation expense primarily from certain stock option awards that converted into time-based stock option awards upon the Company’s IPO, in addition to stock option awards and restricted stock units granted under the 2021 Equity Plan, (ii) $2.8 million related to health insurance costs and insurance expense associated with being a public company, (iii) $2.5 million related to legal, accounting and consulting services associated with being a public company, (iv) $1.7 million of expenses associated with investments in technology initiatives and the redesign of our systems and processes, as well as (v) $1.3 million in marketing expenses.

This increase was partially offset by the one-time expense of $5.6 million that was recognized in 2021 in connection with the modifications of certain stock option awards.

Depreciation and Amortization

Depreciation and amortization consists of the depreciation of fixed assets, including leasehold improvements, fixtures and equipment and the amortization of definite-lived intangible assets, which are primarily comprised of franchise rights.

Franchise rights include rights which arose from the purchase price allocation in connection with the merger agreement through which the Company was acquired by funds affiliated with or managed by Advent in August 2017 as well as reacquired rights from our acquisitions of franchise-owned restaurants.

Franchise rights includes rights which arose from the purchase price allocation in connection with the merger agreement through which the Company was acquired by funds affiliated with or managed by Advent International Corporation in August 2017 as well as reacquired rights from our acquisitions of franchise-owned restaurants.

(in thousands) 2022 2021 Change

2 unchanged sentences

Impairments and Loss on Disposal of Assets

Impairments and loss on disposal of assets include (i) the impairment of long-lived assets and intangible assets where the carrying amount of the asset is not recoverable and exceeds the fair value of the asset, (ii) the write-off of the net book value of assets that have been retired or replaced in the normal course of business and (iii) the write-off of the net book value of assets in connection with restaurant closures.

(in thousands) 2021 2020 Change

Impairments and loss on disposal of assets $ 381 $ 315 $ 66 21.0 %

There were no impairment losses recognized on intangible assets or fixed assets in 2021 and 2020.

Loss on disposals of assets recognized during the periods indicated were related to retirements, replacements and disposals of fixed assets.

Transaction Income, Net

Transaction income, net includes (i) revaluations of contingent consideration payable to previous stockholders for tax savings generated through use of federal and state loss carryforwards and general business credits that had been accumulated from operations prior to August 2017, (ii) gains or losses associated with lease terminations, (iii) costs incurred in connection with the acquisition of franchise-owned restaurants, (iv) costs incurred in connection with the conversion of certain restaurants to company-owned restaurants operating under the First Watch trade name and (v) costs related to restaurant closures.

FISCAL YEAR `

(in thousands) 2022 2021 Change

Transaction income, net $ (1,156) $ (258) $ (898) n/m (1)

Impairments and loss on disposal of assets $ 920 $ 381 $ 539 n/m (1)

(1) Not meaningful.

The increase in transaction income, net during 2021 as compared to 2020 was primarily due to (i) the gain of $2.0 million recognized related to an executed agreement to terminate the lease for one company-owned restaurant (see Note 12, Transaction (Income) Expenses, Net , in the accompanying notes to the consolidated financial statements for additional information), partially offset by (ii) the change of $1.1 million related to the revaluation of the contingent consideration payable to previous stockholders for tax savings generated through use of federal and state loss carryforwards and general business credits that had been accumulated from operations prior to August 2017 (s ee Note 13, Income Taxes , in the accompanying notes to the consolidated financial statements for additional information).

Income (Loss) from Operations

In 2022 and 2021, the amounts represent write-off of assets retired as a result of restaurant closures or replacements of assets.

Transaction Expenses (Income), Net

Transaction expenses (income), net include (i) revaluations of contingent consideration payable to previous stockholders for tax savings generated through the use of federal and state loss carryforwards and general business credits that had been accumulated from operations prior to August 2017, (ii) gains or losses associated with lease or contract terminations, (iii) costs incurred in connection with the acquisition of franchise-owned restaurants, (iv) costs related to restaurant closures and (v) costs related to certain equity offerings.

(in thousands) 2022 2021 Change

Income (Loss) from operations $ 22,243 $ (47,222) $ 69,465 n/m (1)

Transaction expenses (income), net $ 2,513 $ (1,156) $ 3,669 n/m (1)

(1) Not meaningful.

Income from operations during 2021 as compared to Loss from operations during 2020 was primarily due to (i) the increase in restaurant sales, driven by the increase in traffic, as well as the increase in off-premises sales and (ii) the operations of our 22 NROs, partially offset by (iii) the increase in general and administrative expenses mainly due to the increase in employee headcount, performance-related and discretionary bonuses , additional stock compensation expense as a result of the Company’s IPO and increased marketing, insurance, recruiting, training and travel expenses.

Transaction expenses, net during 2022 was primarily due to $2.0 million of costs incurred in connection with the secondary public offering of the Company’s common stock by entities affiliated with our majority owner, Advent International Corporation (the “Secondary Offering”) and the Registration Statement on Form S-3.

Transaction income, net in 2021 was primarily due to recognizing a gain of $2.0 million related to a lease termination for the redevelopment of a restaurant facility by a landlord, partially offset by the $0.8 million loss recognized related to the revaluation of the contingent consideration payable to previous stockholders for tax savings generated through use of loss carryforwards and general business credits arising from Company operations prior to August 2017.

Income from Operations and Income from Operations Margin

(in thousands) 2022 2021 Change

Income from operations $ 16,913 $ 22,243 $ (5,330) (24.0) %

Income from operations margin 2.4 % 3.8 % (1.4)%

Income from operations margin decreased during 2022 as compared to 2021 primar ily due to (i) inflation across commodities and supplies, (ii) the increase in restaurant-level wages and staffing, (iii) higher general and administrative expenses mainly due to stock-based compensation expense, public company costs and costs for strategic initiatives, as well as (iv) the increase in transaction costs.

This decrease was partially offset by menu price increases.

Income from operations decreased during 2022 as compared to 2021 primarily due to (i) inflation across commodities and supplies, (ii) the increase in restaurant-level wages and staffing, (iii) higher operating costs and expenses driven by the increase in restaurant sales and restaurant growth, (iv) higher general and administrative expenses mainly due to stock-based compensation expense, public company costs and costs for strategic initiatives, as well as (v) the increase in transaction costs.

This decrease was partially offset by the increase in restaurant sales and franchise revenues.

Interest Expense

2 unchanged sentences

Interest expense $ (5,232) $ (20,099) $ 14,867 (74.0) %

The decrease in interest expense in 2021 as compared to 2020 was primarily due to the extinguishment of our Senior Credit Facilities, which were replaced by lower outstanding debt and reduced interest rates from our New Facilities (see Note 10, Debt , in the accompanying notes to the consolidated financial statements for additional information).

Other (Expense) Income, Net

Other (expense) income, net includes items deemed to be non-operating based on management’s assessment of the nature of the item in relation to our core operations.

The decrease in interest expense during 2022 as compared to 2021 was primarily due to the full repayment of our borrowings under our previous senior credit facilities in October 2021, which were replaced by lower outstanding debt and reduced interest rates from the Term Facility pursuant to our Credit Agreement.

Other Income (Expense), Net

Other income (expense), net includes items deemed to be non-operating based on management’s assessment of the nature of the item in relation to our core operations.

(in thousands) 2022 2021 Change

Other (expense) income, net $ (1,774) $ 483 $ (2,257) n/m (1)

Other income (expense), net $ 910 $ (1,774) $ 2,684 n/m (1)

(1) Not meaningful.

The change in Other (expense) income, net in 2021 as compared to 2020 was primarily related to the $2.4 million loss on extinguishment of debt recognized in connection with the full repayment of the Senior Credit Facilities.

Income Tax (Expense) Benefit

Income tax (expense) benefit primarily consists of various federal and state taxes.

The change in Other income (expense), net in 2022 as compared to 2021 primarily related to (i) the loss on extinguishment of debt recognized in connection with the full repayment of our borrowings under our previous senior credit facilities in 2021 and (ii) approximately $0.4 million of insurance recoveries recognized in connection with Hurricane Ian.

Income Tax Expense

Income tax expense primarily consists of various federal and state taxes.

(in thousands) 2022 2021 Change

Income tax (expense) benefit $ (2,477) $ 19,873 $ (22,350) n/m (1)

Income tax expense $ (5,684) $ (2,477) $ (3,207) n/m (1)

Effective income tax rate 45.1 % 669.5 % n/m (1)

(1) Not meaningful.

The effective income tax rate was 669.5% in 2021 as compared to 28.6% for 2020.

The change in the effective income tax rate in 2021 as compared to 2020 was mainly due to (i) the change in the valuation allowance, (ii) the benefit of the tax credits for FICA taxes on certain employee tips and (iii) the pre-vesting forfeiture of the performance-based option stock option awards for which the market condition was not satisfied upon the Company’s IPO.

The Company has a blended federal and state statutory rate of approximately 25.0%.

The effective income tax rates for 2021 and 2020 were different than the blended federal and state statutory rate primarily due to (i) the change in the valuation allowance for federal and state deferred tax assets, (ii) the benefit of the tax credits for FICA taxes on certain employee tips and (iii) the pre-vesting forfeiture of the performance-based option stock option awards for which the market condition was not satisfied upon the Company’s IPO.

The change in the effective income tax rates for 2022 as compared to 2021 was mainly due to (i) the Company’s increased profitability, (ii) the benefit of tax credits for FICA taxes on certain employees’ tip wages, (iii) non-deductible costs associated with the Secondary Offering and the Registration Statement on Form S-3 and (iv) impacts of executive stock-based compensation.

Net Income (Loss) and Net Income (Loss) Margin

(in thousands) 2022 2021 Change

Net Loss $ (2,107) $ (49,681) $ 47,574 95.8 %

As a percentage of total revenues (0.4) % (14.5) % 14.1%

Net loss during 2021 improved as compared to 2020 primarily due to (i) income from operations and (ii) the decrease in interest expense, partially offset by (iii) income tax expense and (iv) the $2.4 million loss on extinguishment of debt recorded in connection with the full repayment of the Senior Credit Facilities.

Net income (loss) $ 6,907 $ (2,107) n/m (1)

Net income (loss) margin 0.9 % (0.4) % n/m (1)

(1) Not meaningful.

Net income and Net income margin during 2022 as compared to Net loss and Net loss margin during 2021 was primarily due to (i) lower interest expense and (ii) the loss on extinguishment of debt recognized in 2021.

This was partially offset by (i) the decrease in income from operations, (ii) costs associated with the Secondary Offering and the Registration Statement on Form S-3, as well as (iii) the increase in income tax expense.

Restaurant Level Operating Profit and Restaurant level Operating Profit Margin

(in thousands) 2022 2021 Change

Restaurant level operating profit $ 115,404 $ 28,236 $ 87,168 n/m (1)

Restaurant level operating profit $ 128,936 $ 115,404 $ 13,532 11.7 %

Restaurant level operating profit margin 17.9 % 19.5 % (1.6)%

(1) Not meaningful

The increase in Restaurant level operating profit during 2021 as compared to 2020 was primarily due to the (i) the increase in restaurant sales, driven by the increase in traffic, and off-premises sales as well as (ii) the operations of the 22 NROs.

Restaurant level operating profit margin during 2022 decreased as compared to 2021 primarily due to (i) inflation across commodities and supplies and (ii) the increase in restaurant-level wages and staffing.

This decrease was partially offset by (i) leveraging the increase in restaurant sales and (ii) menu price increases.

Restaurant level operating profit during 2022 increased as compared to 2021 primarily due to same-restaurant sales growth, driven by same-restaurant traffic growth, the increase in average check per person and the increase in third-party delivery sales.

This increase was partially offset by (i) inflation across commodities and supplies, (ii) the increase in restaurant-level wages and staffing and (iii) the increase in operating costs and expenses driven by higher restaurant sales and our restaurant growth.

Adjusted EBITDA and Adjusted EBITDA Margin

(in thousands) 2022 2021 Change

Adjusted EBITDA $ 66,301 $ (5,744) $ 72,045 n/m (1)

Adjusted EBITDA $ 69,278 $ 66,301 $ 2,977 4.5 %

Adjusted EBITDA margin 9.5 % 11.0 % (1.5)%

(1) Not meaningful

The increase in Adjusted EBITDA during 2021 as compared to 2020 was primarily due to (i) the increase in restaurant level operating profit, partially offset by (ii) the increase in general and administrative expenses mainly due to the increase in employee headcount, performance-related and discretionary bonuses, as well as, marketing spend, insurance, recruiting, training and travel expenses.

Non-GAAP Financial Measures

To supplement the consolidated financial statements, which are prepared in accordance with GAAP, we use non-GAAP measures, which present operating results on an adjusted basis.

These are supplemental measures of performance that are not required by or presented in accordance with GAAP include the following:

(i) Adjusted EBITDA, (ii) Adjusted EBITDA margin, (iii) Restaurant level operating profit and (iv) Restaurant level operating profit margin.

Management believes that the use of these non-GAAP measures provides investors with additional transparency of our operations, facilitates analysis and comparisons of our ongoing business operations because they exclude items that may not be indicative of our ongoing operating performance, identifies operational trends and allows for greater transparency with respect to key metrics used by us in our financial and operational decision making.

Our non-GAAP measures may not be comparable to similarly titled measures used by other companies and have important limitations as analytical tools.

These non-GAAP measures should not be considered in isolation or as substitutes for analysis of our results as reported under GAAP as they may not provide a complete understanding of our performance.

These non-GAAP measures should be reviewed in conjunction with our consolidated financial statements prepared in accordance with GAAP.

Restaurant level operating profit and restaurant level operating profit margin are important measures we use to evaluate the performance and profitability of each operating restaurant, individually and in the aggregate and to make decisions regarding future spending and other operational decisions.

The following table reconciles Net loss and Net loss margin, the most directly comparable GAAP measures, to Adjusted EBITDA and Adjusted EBITDA margin for the periods indicated:

The decrease in Adjusted EBITDA margin during 2022 as compared to 2021 was primarily due to (i) the decrease in restaurant level operating profit margin and (ii) the increase in general and administrative expenses mainly due to legal, accounting, consulting and insurance costs associated with being a public company, costs for strategic initiatives, as well as the increase in marketing expenses.

The increase in Adjusted EBITDA during 2022 as compared to 2021 was primarily due to the increase in restaurant level operating profit.

This increase was partially offset by higher general and administrative expenses mainly due to legal, accounting, consulting and insurance costs associated with being a public company, costs for strategic initiatives, as well as the increase in marketing expenses.

Non-GAAP Financial Measure Reconciliations

Adjusted EBITDA and Adjusted EBITDA margin - The following table reconciles Net income (Loss) and Net income (loss) margin, the most directly comparable GAAP measures to Adjusted EBITDA and Adjusted EBITDA margin for the periods indicated:

(in thousands) 2022 2021 2020

$ (2,107) $ (49,681) $ (45,472)

Net income (loss) $ 6,907 $ (2,107) $ (49,681)

Depreciation and amortization 34,230 32,379 30,725

32,379 30,725 28,027

Interest expense 5,232 20,099 22,815

20,099 22,815 20,080

2,477 (19,873) (12,419)

52,848 (16,014) (9,784)

Income taxes 5,684 2,477 (19,873)

EBITDA 52,053 52,848 (16,014)

IPO-readiness and strategic transition costs (1)

3 unchanged sentences

Loss on extinguishment of debt — 2,403 —

Transaction (income) expenses, net (3)

Transaction expenses (income), net (3)

2,513 (1,156) (258)

Impairments and loss on disposal of assets (4)

381 315 33,596

Recruiting and relocation costs (5)

351 228 1,081

Severance costs (6)

Delaware Voluntary Disclosure Agreement Program (7)

Costs in connection with natural disasters, net of insurance recoveries (8)

COVID-19 related charges (9)

Adjusted EBITDA $ 69,278 $ 66,301 $ (5,744)

$ 66,301 $ (5,744) $ 38,099

Total revenues $ 730,162 $ 601,193 $ 342,388

$ 601,193 $ 342,388 $ 436,373

Net loss margin

(0.4) % (14.5) % (10.4) %

Net income (loss) margin 0.9 % (0.4) % (14.5) %

Adjusted EBITDA margin 9.5 % 11.0 % (1.7) %

11.0 % (1.7) % 8.7 %

Additional information

Deferred rent (income) expense (8)

Deferred rent expense (income) (10)

$ 2,418 $ (2,011) $ 10,087

_____________________________

(1) Represents costs related to information technology support and external professional service costs incurred in connection with IPO-readiness efforts as well as the assessment and redesign of our systems and processes.

These costs are recorded in General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Loss.

(2) Represents non-cash, stock-based compensation expense which is recorded in General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Loss.

(3) The amount in 2021 includes a gain of $2.0 million related to an executed agreement to terminate the lease for one company-owned restaurant (see Note 12, Transaction (Income) Expenses, Net in the accompanying notes to the consolidated financial statements).

The amounts for the periods presented also include (i) the revaluation of the contingent consideration payable to previous stockholders for tax savings generated through use of federal and state loss carryforwards and general business credits that had been accumulated from operations prior to August 2017 (see Note 13, Income Taxes , in the accompanying notes to the consolidated financial statements), (ii) costs incurred in connection with the acquisition of certain franchise-owned restaurants, (iii) costs incurred in connection with the conversion of certain restaurants to company-owned restaurants operating under the First Watch trade name and (iv) costs related to restaurant closures.

(4) Includes impairments recognized on intangible assets and fixed assets as well as costs related to the disposal of assets due to retirements, replacements or certain restaurant closures.

(1) Represents costs related to the assessment and redesign of our systems and processes.

In 2021 and 2020, the costs also include information technology support and external professional service costs incurred in connection with IPO-readiness efforts.

These costs are recorded within General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss).

(2) Represents non-cash, stock-based compensation expense which is recorded within General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss).

(3) Represents (i) revaluations of contingent consideration payable to previous stockholders for tax savings generated through the use of federal and state loss carryforwards and general business credits that had been accumulated from operations prior to August 2017, (ii) gains or losses associated with lease or contract terminations, (iii) costs incurred in connection with the acquisition of franchise-owned restaurants, (iv) costs related to restaurant closures and (v) costs related to secondary offerings of the Company’s common stock.

(4) Represents costs related to the disposal of assets due to retirements, replacements, restaurant closures and natural disasters.

There were no impairments recognized during the periods presented.

(5) Represents costs incurred for hiring qualified individuals as we assessed the redesign of our systems and processes.

These costs are recorded in General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Loss.

(6) Severance costs are recorded in General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Loss.

(7) Consists of costs incurred in connection with the economic impact of the COVID-19 pandemic (see Note 4, COVID-19 Charges , in the accompanying notes to the consolidated financial statements).

(8) Consists of the non-cash portion of straight-line rent expense included in Occupancy expenses and General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Loss.

The following table reconciles Income (Loss) from operations and Income (Loss) from operations margin, the most directly comparable GAAP financial measure, to Restaurant level operating profit and Restaurant level operating profit margin for the periods presented:

These costs are recorded within General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss).

(6) Severance costs are recorded in General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss).

(7) Represents professional service costs incurred in connection with the Delaware Voluntary Disclosure Agreement Program related to unclaimed or abandoned property.

These costs are recorded in General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss).

(8) Represents costs incurred, net of insurance recoveries, in connection with Hurricane Ian.

The costs include inventory obsolescence and spoilage, compensation for employees and support for hurricane relief, which were recorded in Food and beverage costs, Labor and other expenses and General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss).

(9) Represents costs incurred in connection with the economic impact of the COVID-19 pandemic.

(10) Represents the non-cash portion of straight-line rent expense recorded within both Occupancy expenses and General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss).

Restaurant level operating profit and Restaurant level operating profit margin - The following table reconciles Income from operations and Income from operations margin, the most comparable GAAP measures to Restaurant level operating profit and Restaurant level operating profit margin for the periods indicated:

(in thousands) 2022 2021 2020

Income (Loss) from operations $ 22,243 $ (47,222) $ (37,556)

Income from operations $ 16,913 $ 22,243 $ (47,222)

Franchise revenues (10,981) (8,850) (4,955)

1 unchanged sentence

Depreciation and amortization 34,230 32,379 30,725

Transaction (income) expenses, net (1)

Transaction expenses (income), net (1)

2,513 (1,156) (258)

Impairments and loss on disposal of assets (2)

381 315 33,596

Costs in connection with natural disasters (3)

COVID-19 related charges (4)

1 unchanged sentence

Restaurant sales $ 719,181 $ 592,343 $ 337,433

Income (Loss) from operations margin 3.8 % (14.0) % (8.7) %

Income from operations margin 2.4 % 3.8 % (14.0) %

Restaurant level operating profit margin 17.9 % 19.5 % 8.4 %

Additional information

Deferred rent (income) expense (4)

Deferred rent expense (income) (5)

$ 2,219 $ (2,075) $ 10,029

_____________________________

(1) The amount in 2021 includes a gain of $2.0 million related to an executed agreement to terminate the lease for one company-owned restaurant (see Note 12, Transaction (Income) Expenses, Net in the accompanying notes to the consolidated financial statements).

The amounts for the periods presented also include (i) the revaluation of the contingent consideration payable to previous stockholders for tax savings generated through use of federal and state loss carryforwards and general business credits that had been accumulated from operations prior to August 2017 (see Note 13, Income Taxes , in the accompanying notes to the consolidated financial statements for additional information), (ii) costs incurred in connection with the acquisition of certain franchise-owned restaurants, (iii) costs incurred in connection with the conversion of certain restaurants to company-owned restaurants operating under the First Watch trade name and (iv) costs related to restaurant closures.

(2) Includes impairments recognized on intangible assets and fixed assets as well as costs related to the disposal of assets due to retirements, replacements or certain restaurant closures.

(3) Consists of costs incurred in connection with the economic impact of the COVID-19 pandemic (see Note 4, COVID-19 Charges , in the accompanying notes to the consolidated financial statements for additional information).

(4) Consists of the non-cash portion of straight-line rent expense included in Occupancy expenses on the Consolidated Statements of Operations and Comprehensive Loss.

(1) Represents (i) revaluations of contingent consideration payable to previous stockholders for tax savings generated through the use of federal and state loss carryforwards and general business credits that had been accumulated from operations prior to August 2017, (ii) gains or losses associated with lease or contract terminations, (iii) costs incurred in connection with the acquisition of franchise-owned restaurants, (iv) costs related to restaurant closures and (v) costs related to secondary offerings of the Company’s common stock.

(2) Represents costs related to the disposal of assets due to retirements, replacements, certain restaurant closures and natural disasters.

There were no impairments recognized during the periods presented.

(3) Represents costs incurred in connection with Hurricane Ian.

The costs include inventory obsolescence and spoilage as well as compensation for employees, which were recorded in Food and beverage costs and Labor and other expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss).

(4) Represents costs incurred in connection with the economic impact of the COVID-19 pandemic.

(5) Represents the non-cash portion of straight-line rent expense recorded within Occupancy expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss).

Liquidity and Capital Resources

On October 5, 2021, the Company completed its IPO, pursuant to which 10,877,850 shares of common stock were sold at the IPO price of $18.00 per share, which included the full exercise by the underwriters of their option to purchase up to an additional 1,418,850 shares of common stock.

We received aggregate net proceeds of $182.1 million .

On October 6, 2021, FWR Holding Corporation ( “FWR”), one of our indirect subsidiaries, entered into the New Credit Agreement, with Bank of America, N.A., which provides for (i) a $100.0 million term loan A facility that was drawn in full on October 6, 2021, and (ii) a $75.0 million revolving credit facility which was undrawn at December 26, 2021.

The loans under the New Facilities mature on October 6, 2026 .

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 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 on the undrawn commitments under the New Revolving Credit Facility will be paid, also depending on the Total Rent Adjusted Net Leverage Ratio of FWR and its restricted subsidiaries on a consolidated basis.

The New Credit Agreement contains LIBOR fallback language, pursuant to which the New Credit Agreement may be amended to replace LIBOR with a secured overnight financing rate or another alternate benchmark rate upon the occurrence of certain LIBOR cessation events .

See Note 10, Debt , in the accompanying notes to the consolidated financial statements for additional information.

The aggregate net proceeds from our IPO, the proceeds from the New Term Facility and cash on hand were used to repay in full the outstanding borrowings under our previous senior credit facilities, which were comprised of the Initial Term Loan Facility, Initial Delayed Draw Term Loan Facility, First Amendment Delayed Draw Term Facility, Second Amendment Delayed Draw Term Facility and Revolving Credit Facility (collectively, “Senior Credit Facilities”).

A loss on debt extinguishment of $2.4 million was recorded in the fourth quarter of 2021 as a result of this repayment.

Our primary sources of liquidity are cash flow from operations, cash and cash equivalents, credit capacity under our New Facilities and proceeds from equity offerings, including our IPO.

As of December 26, 2021, we had cash and cash equivalents of $51.9 million and $100.0 million in outstanding borrowings, excluding unamortized debt issuance costs and deferred issuance costs.

As of December 26, 2021, we had unused borrowing capacity under our New Revolving Credit Facility of $75.0 million.

As of December 25, 2022, the Company had cash and cash equivalents of $49.7 million and outstanding borrowings under the Term Facility of $98.1 million, excluding unamortized debt issuance costs and deferred issuance costs .

In addition, availability under our Revolving Credit Facility was $75.0 million.

Our principal uses of cash include capital expenditures for the development, acquisition or remodeling of restaurants, lease obligations, debt service payments and strategic infrastructure investments.

Our requirements for working capital are not significant because our customers pay for their food and beverage purchases in cash or on debit or credit cards at the time of the sale and we are able to sell many of our inventory items before payment is due to the supplier of such items.

We estimate that our capital expenditures will total approximately $60.0 million to $70.0 million in 2022, which will be invested primarily in new restaurant projects, planned remodels and new in-restaurant technology.

We plan to fund the capital expenditures primarily with cash generated from our operating activities as well as with borrowings from our New Facilities.

We believe that our cash flow from operations, availability under our New Facilities and available cash and cash equivalents will be sufficient to meet our liquidity needs for at least the next 12 months.

We anticipate that to the extent that we require additional liquidity, it will be funded through additional indebtedness, the issuance of equity, or a combination thereof.

Our working capital requirements are low because our restaurants store very little inventory and our customers pay for their purchases at the time of the sale which frequently precedes our payment terms with suppliers.

We believe that our cash flow from operations, availability under our Credit Agreement and available cash and cash equivalents will be sufficient to meet our liquidity needs for at least the next 12 months.

We anticipate that to the extent that we require additional liquidity, or should we decide to pursue one or more significant acquisitions, it will be funded first through additional indebtedness and thereafter through the issuance of equity.

Although we believe that our current level of total available liquidity is sufficient to meet our short-term and long-term liquidity requirements, we regularly evaluate opportunities to improve our liquidity position in order to enhance financial flexibility.

Although we have no specific current plans to do so, if we decide to pursue one or more significant acquisitions, we may incur additional debt or sell additional equity to finance such acquisitions, which would result in additional expenses or dilution.

On November 7, 2022, we filed a Registration Statement on Form S-3 that allows the Company to sell up to 5,000,000 shares of common stock from time to time in one or more offerings.

We estimate that our capital expenditures will total approximately $100.0 million to $110.0 million in 2023, which will be invested primarily in new restaurant projects and planned remodels.

We plan to fund the capital expenditures primarily with cash generated from our operating activities as well as with borrowings from our facilities pursuant to our Credit Agreement.

Summary of Cash Flows

The following table presents a summary of our cash provided (used in) by operating, investing and financing activities for 2021 and 2020:

The following table presents a summary of our cash provided by (used in) operating, investing and financing activities for 2022 and 2021:

(in thousands) 2022 2021

Cash provided by (used in) operating activities $ 62,971 $ (18,364)

Cash provided by operating activities $ 62,937 $ 62,971

Cash used in investing activities (63,111) (35,682)

Cash (used in) provided by financing activities (14,271) 73,314

Net increase in cash and cash equivalents and restricted cash $ 13,018 $ 27,976

Cash provided by operating activities increased during 2021 as compared to 2020 primarily due to the decrease in net loss of $47.6 million, which included an increase in the impact of non-cash charges of $34.3 million and the net decrease in operating assets and liabilities of $0.5 million.

The increase in the impact of the non-cash charges was primarily driven by (i) the increase in stock based compensation expense, (ii) the loss on extinguishment of debt and (iii) the deferred income taxes provision.

In addition, the net increase in operating assets and liabilities was as a result of (i) the timing of operational receipts and payments, (ii) higher accrued wages and (iii) the increase in gift card deferred revenues, partially offset by (iv) the payments for rent deferrals.

The increase in cash used in investing activities during 2021 as compared to 2020 was primarily as a result of curtailing new restaurant construction during the first half of 2020 due to the COVID-19 pandemic.

Cash used in financing activities during 2021 was primarily comprised of (i) the repayment of our outstanding Senior Credit Facilities of $291.1 million and (ii) payments of IPO costs of $4.9 million, partially offset by (iii) proceeds from our IPO, net of underwriting discounts and commissions of $182.1 million and (iv) proceeds from our New Facilities of $100.0 million.

Cash provided by financing activities during 2020 was comprised of (i) proceeds from an offering of preferred shares totaling $40.0 million and (ii) the issuance of long-term debt, net of repayments made on our Senior Credit Facilities of $33.7 million.

Cash used in financing activities (2,018) (14,271)

Net (decrease) increase in cash and cash equivalents and restricted cash $ (2,192) $ 13,018

Cash provided by operating activities during 2022 was $62.9 million as compared to $63.0 million during 2021 primarily due to (i) the increase in net income of $9.0 million and (ii) the impact of non-cash charges of $7.4 million, which were offset by (iii) a net change in operating assets and liabilities of $16.4 million.

The increase in the non-cash charges was primarily driven by (i) additional stock-based compensation expense resulting from certain stock option awards that converted into time-based stock option awards upon closing of the IPO as well as new stock option awards and restricted stock units issued under the 2021 Equity Plan, (ii) the increase in non-cash operating lease costs and depreciation expense mainly due to our restaurant growth.

The net change in operating assets and liabilities of $16.4 million was primarily a result of (i) the timing of employee compensation payments, (ii) the payment of payroll taxes deferred in 2020 as a result of the Coronavirus, Aid, Relief and Economic Security Act and (iii) the timing of operational payments.

Cash used in investing activities increased to $63.1 million during 2022 from $35.7 million during 2021 primarily as a result of the increase in capital expenditures to support our restaurant growth and new restaurant technology.

Cash used in financing activities decreased to $2.0 million during 2022 from $14.3 million during 2021 primarily as a result of the repayment of our outstanding borrowings under our previous senior credit facilities, which was partially offset by proceeds from our IPO and proceeds from our borrowings under our Credit Agreement in 2021.

Contractual Obligations

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These commitments are cancellable and there are no material financial penalties associated with these commitments in the event of early termination.

Purchase obligations also include firm minimum commitments in excess of 12 months for certain supply contracts.

Refer to Note 15, Commitments and Contingencies, in the accompanying consolidated financial statements for additional information.

Critical Accounting Policies and Estimates

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The multiples are derived from comparable publicly-traded companies with similar operating and investment characteristics.

The income approach uses internal future cash flow estimates, which are influenced by revenue growth rates and operating margins, that are discounted using a weighted-average cost of capital that reflects current market conditions.

The income approach uses internal future cash flow estimates, which are influenced by revenue growth rates, operating margins and new restaurant openings, that are discounted using a weighted-average cost of capital that reflects current market conditions.

We recognize an impairment loss when the carrying value of the reporting unit exceeds the estimated fair value.

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We recognize an impairment loss when the carrying value of the asset exceeds the estimated fair value.

During 2021, we elected to perform a qualitative assessment for our annual impairment review of goodwill and indefinite-lived intangibles to determine whether or not indicators of impairment exist.

In considering the qualitative approach related to goodwill, we evaluated factors including, but not limited to, the COVID-19 pandemic, macro-economic conditions, market and industry conditions, the competitive environment, results of prior impairment tests, operational stability, the overall financial performance of the reporting unit and the impacts of the discount rates.

Management also considers the specific future outlook for the reporting unit.

As it relates to our trade names and trademarks, we evaluate similar factors from the goodwill assessment, in addition to impacts of potential changes to the assumed royalty rate.

Based on the results of the qualitative assessment, which considered the financial performance, as well as the improved overall operating environment as compared to the previous quantitative assessment, no indicators of impairment were identified.

Management concluded that impairment of goodwill and its indefinite-lived intangibles was not likely and as a result, was not required to perform a quantitative assessment.

Changes in circumstances existing at the measurement date or at other times in the future, or in the numerous estimates associated with management’s judgments and assumptions made in

assessing the fair value of our goodwill and indefinite-lived intangibles, could result in an impairment loss of a portion or all of our goodwill or indefinite-lived intangibles.

We do not anticipate recording significant impairment charges in the next 12 months.

The subjective estimates associated with management’s judgments and assumptions in fair value calculations at the measurement date are affected by various factors including changes in economic conditions, our operating performance and our business strategies.

During 2022 and 2021, we elected to perform a qualitative assessment for our annual impairment review of goodwill and indefinite-lived intangibles.

In considering the qualitative approach related to goodwill, we considered factors including, but not limited to, macro-economic conditions, market and industry conditions, the competitive environment, results of prior impairment tests, operational stability, the overall financial performance of the reporting unit and the impacts of the discount rates.

Management also considered the specific future outlook for the reporting unit.

As it relates to our trade names and trademarks, we evaluate similar factors as the goodwill assessment, in addition to impacts of potential changes to the assumed royalty rate.

Based on the results of the qualitative assessment, Management concluded that impairment of

goodwill and its indefinite-lived intangibles was not likely and as a result, management was not required to perform a quantitative assessment.

Long-lived assets and definite-lived intangible assets

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The comparison is performed at the lowest level of identifiable cash flows, which is primarily at the individual restaurant level.

Significant judgement is used to determine the expected useful lives of long-lived assets and the estimated future cash flows, including projected sales growth and operating margins.

Significant judgment is used to determine the expected useful lives of long-lived assets and the estimated future cash flows, including projected sales growth, operating margins and ongoing maintenance and improvement of the assets.

If the carrying amount of the asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized.

Definite-lived intangible assets 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 on a straight-line basis over their estimated useful lives and are also reviewed for impairment whenever events or change in circumstances indicate that the carrying amount of an asset may not be recoverable.

Definite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives and are reviewed for impairment when events or change in circumstances indicate that the carrying amount of such assets may not be recoverable.

Significant judgments are used to determine if an indicator of impairment has occurred.

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negative operating performance of our restaurants, economic and restaurant industry trends, legal factors, significant competition or changes in our business strategy.

Any adverse change in these factors could have a significant impact on the recoverability of these assets and the resulting impairment charge could have a material impact on our consolidated financial statements.

Adverse changes in these factors could have a significant impact on the recoverability of these assets and the resulting impairment charge could be material to our consolidated financial statements.

Recoverability of definite-lived intangible assets is measured by a comparison of the carrying amount of the asset group to the estimated undiscounted future cash flows expected to be generated by the asset group.

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An impairment loss is recognized when the asset’s carrying value exceeds its estimated fair value, which is generally estimated using discounted future cash flows expected from future use of the asset group.

Management did not identify any triggering events in 2021 and no impairment charges were recorded in 2021.

Management did not identify any triggering events in 2022 and 2021 and no impairment charges were recorded in 2022 and 2021.

We lease our restaurant facilities and corporate offices, as well as certain restaurant equipment under various non-cancelable agreements.

At contract inception, we evaluate our leases to estimate their expected term which includes reasonably certain renewal options, and their classification as either operating leases or finance leases.

Lease liabilities represent the present value of lease payments not yet paid.

To determine the present value of the lease liability, we estimate the incremental borrowing rates corresponding to the reasonably certain lease term as our leases do not provide an implicit rate.

At the inception of each lease, we evaluate the expected term which includes reasonably certain renewal options, and the classification as either an operating leases or a finance lease.

Lease liabilities represent the present value of future lease payments.

To determine the present value of the lease liability, we estimate the incremental borrowing rates corresponding to the reasonably certain lease term as our leases do not provide implicit rates.

Assumptions used in determining our incremental borrowing rate include a market yield implied by our outstanding secured term loans interpolated for various maturities using our synthetic credit rating, which is determined using a regression analysis of rated publicly-traded comparable companies and their financial data.

We assess the impairment of the right-of-use asset at the asset group level whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable.

Changes in these assumptions and management judgments may produce materially different amounts in the recognition of the right-of-use assets and lease liabilities.

Changes in management’s judgments and in the assumptions being used may produce materially different amounts in the recognition of the right-of-use assets, lease liabilities and lease expense.

We use the asset and liability method of accounting for income taxes.

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.

The estimates we make under this method include, among other items, depreciation and amortization expense allowable for tax purposes, credits for items such as taxes paid on reported employee tip income, effective rates for state and local income taxes and the deductibility of certain items.

In addition, our annual effective income tax rate is adjusted as additional information becomes available during the reporting period.

The estimates we make under this method include, among other items, depreciation and amortization expense allowable for tax purposes, credits for items such as taxes paid on reported employee tip wages, effective rates for state and local income taxes and the deductibility of certain items.

addition, our annual effective income tax rate is adjusted as additional information becomes available during the reporting period.

We recognize deferred tax assets 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.

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.

Potential for recovery of deferred tax assets is evaluated by estimating the future taxable profits expected, scheduling of anticipated reversal of taxable temporary differences, and considering prudent and feasible tax planning strategies.

Potential for recovery of deferred tax assets is evaluated by estimating the taxable income in any available carry back period, considering future taxable income expected, scheduling of anticipated reversal of taxable temporary differences and considering prudent and feasible tax planning strategies.

We continue to monitor and evaluate the rationale for recording a valuation allowance against deferred tax assets.

As we increase earnings and utilize deferred tax assets, it is possible the valuation allowance could be reduced or eliminated.

Fair value of Common Stock and Stock-Based Compensation

In addition, our ability to utilize net operating loss carryforwards and tax credit carryforwards could be adversely impacted by, among other things, a future “ownership change” as defined under Section 382 of the Internal Revenue Code.

Changes in assumptions regarding our level and composition of earnings, tax laws or the deferred tax valuation allowance and the results of tax audits, may materially impact the effective income tax rate.

Stock-Based Compensation and Fair Value of Common Stock

Stock-based compensation expense is measured based on the award’s grant date fair value.

Stock-based compensation expense related to time-based stock option awards is recognized as stock-based compensation expense on an accelerated recognition method over the requisite service period.

Prior to our IPO, we had not recognized any stock-based compensation expense for our performance-based stock option awards as the satisfaction of the performance conditions were not considered probable.

Upon consummation of the Company’s IPO in October 2021, certain performance-based stock option awards for which the performance and market conditions were satisfied as a result of the Company’s IPO, converted into time-based stock option awards with the related stock-based compensation expense to be recognized on an accelerated recognition method over the remaining service period.

Stock-based compensation expense related to time-based stock option awards issued under the 2017 Equity Plan is recognized on an accelerated recognition method over the requisite service period.

Prior to our IPO, we had not recognized any stock-based compensation expense for our performance-based stock option awards issued under the 2017 Equity Plan as the satisfaction of the performance conditions were not considered probable.

Upon consummation of the Company’s IPO in October 2021, certain performance-based stock option awards issued under the 2017 Equity Plan for which the performance and market conditions were satisfied as a result of the Company’s IPO, converted into time-based stock option awards with the related stock-based compensation expense to be recognized on an accelerated recognition method over the remaining service period.

The performance-based stock option awards that did not convert into time-based stock option awards were canceled and unrecognized compensation expense for those canceled performance-based stock option awards was recognized on the date of the Company’s IPO.

We account for forfeitures as they occur.

See Note 16, Stock-Based Compensation , in the accompanying notes to the consolidated financial statements for additional information.

After the completion of the IPO, the fair value of our common stock and our stock-based awards’ grant date fair value is determined based on the Nasdaq closing price.

Prior to our IPO, given the absence of a public trading market for our common stock, the estimated fair value had been determined with input from management exercising reasonable judgment and considering several objective and subjective factors including:

No awards were granted under the 2017 Equity Plan during 2022 and the Company does not intend to grant any further awards under the 2017 Equity Plan.

Stock-based compensation expense related to time-based stock option awards issued under the 2021 Equity Plan is recognized on a straight-line basis over the requisite service period.

Forfeitures are recognized as they occur for all awards.

We estimate the fair value of stock option awards using the Black-Scholes valuation model, which involves several assumptions and judgments including the expected term of the stock option, expected volatility, the risk-free interest rate and the expected dividend yield.

The Company does not have sufficient historical stock option exercise activity and therefore we estimated the expected term of stock options granted under the 2021 Plan using the simplified method, which represents the mid-point between the vesting period and the contractual term for each grant.

Prior to the IPO, the expected term of stock option awards was determined based on data from publicly traded companies.

The expected volatility of stock option awards is based on the historical volatilities of a set of publicly traded peer companies in a similar industry as the Company lacks company-specific historical or implied volatility information.

The risk-free interest rate is determined by reference to the U.S.

Treasury yield curve for time periods approximately equal to the expected term of the stock option award.

The expected dividend yield is based on the fact that the Company has never paid cash dividends and does not have intentions of paying dividends in the foreseeable future.

These assumptions represented management’s best estimate, which involved inherent uncertainties and the application of management’s judgment.

As a result, if we had used significantly different assumptions or estimates, our stock-based compensation expense could have been materially different.

The fair value of our common stock and our stock-based awards’ grant date fair value is determined based on the closing price on our common stock on Nasdaq.

Prior to our IPO and our common stock being listed on Nasdaq, given the absence of a public trading market for our common stock, the estimated fair value had been determined with input from management exercising reasonable judgment and considering several objective and subjective factors including:

(i) third-party valuations of our common stock, (ii) a combination of the income approach and the market approach and (iii) general economic outlook including economic growth, inflation and interest rates.

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As a result, if we 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.

We estimated the fair value of stock option awards using the Black-Scholes valuation model, which requires certain assumptions and judgments.

We based our volatility assumptions on the historical volatility of the selected peer group and we determined our expected term using the historical information of the selected peer group.

These assumptions represented management’s best estimate, which involved inherent uncertainties and the application of management’s judgment.

As a result, if we 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.

See Note 14, Stock-Based Compensation , in the accompanying notes to the consolidated financial statements for additional information.

Recently Issued Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis