What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-03-07 compared with 2022-03-23 · 275 added, 350 removed, 677 unchanged (48% of the section changed)

3 unchanged sentences

Consolidated Balance Sheets - December 25, 2022 and December 26, 2021

Consolidated Statements of Operations and Comprehensive Loss - For Fiscal Years 2021, 2020 and 2019

Consolidated Statements of Operations and Comprehensive Income ( Loss ) - For Fiscal Years 202 2 , 202 1 and 2 020

Consolidated Statements of Equity - For Fiscal Years 202 2 , 202 1 and 20 20

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We have audited the accompanying consolidated balance sheets of First Watch Restaurant Group, Inc.

and its subsidiaries (the “Company”) as of December 26, 2021 and December 27, 2020, and the related consolidated statements of operations and comprehensive loss, of equity and of cash flows for each of the three years in the period ended December 26, 2021, including the related notes (collectively referred to as the “consolidated financial statements”).

and its subsidiaries (the “Company”) as of December 25, 2022 and December 26, 2021, and the related consolidated statements of operations and comprehensive income (loss), of equity and of cash flows for each of the three years in the period ended December 25, 2022, including the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 25, 2022 and December 26, 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 25, 2022 in conformity with accounting principles generally accepted in the United States of America.

Change in Accounting Principle

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.

Basis for Opinion

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We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

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Deferred income taxes 17,166 12,489

Deferred payroll taxes — 3,333

Other long-term liabilities 3,384 3,228

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$ 0.01 par value;

10,000,000 shares authorized and none outstanding at December 26, 2021;

266,667 shares authorized, issued and outstanding at December 27, 2020

10,000,000 shares authorized;

none issued and outstanding

Common stock;

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FIRST WATCH RESTAURANT GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

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Impairments and loss on disposal of assets 920 381 315

Transaction (income) expenses, net ( 1,156 ) ( 258 ) 1,709

Transaction expenses (income), net 2,513 ( 1,156 ) ( 258 )

Total operating costs and expenses 713,249 578,950 389,610

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Interest expense ( 5,232 ) ( 20,099 ) ( 22,815 )

Other (expense) income, net ( 1,774 ) 483 ( 255 )

Other income (expense), net 910 ( 1,774 ) 483

Income (Loss) before income taxes 12,591 370 ( 69,554 )

Income tax (expense) benefit ( 5,684 ) ( 2,477 ) 19,873

Net loss and total comprehensive loss ( 2,107 ) ( 49,681 ) ( 45,472 )

Net loss attributable to non-controlling interest — — ( 33 )

Net loss and comprehensive loss attributable to First Watch Restaurant Group, Inc.

$ ( 2,107 ) $ ( 49,681 ) $ ( 45,439 )

Net loss per common share attributable to First Watch Restaurant Group, Inc.

- basic and diluted $ ( 0.04 ) $ ( 1.10 ) $ ( 1.01 )

Weighted average number of common shares outstanding - basic and diluted 48,213,995 45,013,784 45,013,784

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

Net income (loss) per common share - basic $ 0.12 $ ( 0.04 ) $ ( 1.10 )

Net income (loss) per common share - diluted $ 0.11 $ ( 0.04 ) $ ( 1.10 )

Weighted average number of common shares outstanding - basic 59,097,512 48,213,995 45,013,784

Weighted average number of common shares outstanding - diluted 60,140,045 48,213,995 45,013,784

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

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Capital Accumulated

Deficit Total Equity Attributable to First Watch Restaurant Group, Inc.

Non-controlling Interest Total Equity

Deficit Total Equity

Shares Amount Shares Amount

Balance at December 29, 2019 — $ — 45,013,784 $ 450 $ 382,598 $ ( 53,251 ) $ 329,797

Net loss — — — — — ( 45,439 ) ( 45,439 ) ( 33 ) ( 45,472 )

Stock-based compensation — — — — 1,160 — 1,160 — 1,160

of non-controlling interest — — — — ( 227 ) — ( 227 ) ( 217 ) ( 444 )

Adoption of lease standard (ASC 842) — — — — — ( 121 ) ( 121 ) — ( 121 )

Balance at December 29, 2019 — $ — 45,013,784 $ 450 $ 382,598 $ ( 53,251 ) $ 329,797 $ — $ 329,797

Share issuance 266,667 3 — — 39,997 — 40,000

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Balance at December 26, 2021 — $ — 59,048,446 $ 590 $ 608,878 $ ( 105,039 ) $ 504,429

Common stock issued upon exercise of stock options, net — — 162,573 2 1,423 — 1,425

Net income — — — — — 6,907 6,907

Stock-based compensation — — — — 10,374 — 10,374

Balance at December 25, 2022 — $ — 59,211,019 $ 592 $ 620,675 $ ( 98,132 ) $ 523,135

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

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Cash flows from operating activities:

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

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

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

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

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

Stock-based compensation 10,374 8,596 750

Deferred income taxes 2,176 ( 19,991 ) ( 12,558 )

Non-cash operating lease costs 16,122 13,052 11,727

Non-cash portion of gain on lease modification ( 961 ) — —

Non-cash portion of gain on lease modifications ( 83 ) ( 961 ) —

Deferred income taxes 4,677 2,176 ( 19,991 )

Amortization of debt discount and deferred issuance costs 445 1,088 1,282

Loss on extinguishment of debt — 2,403 —

Settlement gains from acquisitions — — ( 160 )

Impairments and loss on disposal of assets 920 381 315

Changes in assets and liabilities, net of acquisitions:

Gain on insurance proceeds ( 219 ) — —

Changes in assets and liabilities:

Accounts receivable ( 1,714 ) ( 535 ) 1,826

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Accounts payable ( 3,470 ) 6,700 ( 866 )

Accrued liabilities 5,335 ( 3,670 ) 5,566

Accrued liabilities and other long-term liabilities 4,739 5,335 ( 3,670 )

Accrued compensation and deferred payroll taxes, current and long-term ( 3,297 ) 7,007 2,929

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Cash flows from investing activities:

Insurance proceeds 219 — —

Capital expenditures ( 62,219 ) ( 35,311 ) ( 26,749 )

Purchase of intangible assets ( 1,111 ) ( 371 ) ( 225 )

Acquisitions, net of cash acquired — — ( 22,770 )

Acquisition of non-controlling interest — — ( 450 )

Net cash used in investing activities ( 63,111 ) ( 35,682 ) ( 26,974 )

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(IN THOUSANDS)

Cash flows from financing activities:

Proceeds from common stock issuance, net of underwriting discounts and commissions

2022 2021 2020

Proceeds from preferred stock issuance — 40,000 —

Cash flows from financing activities:

Note payable borrowing $ 1,892 $ 2,874 $ —

Repayments of note payable ( 2,868 ) ( 522 ) —

Proceeds from issuance of long-term debt — 100,000 54,600

Repayments of long-term debt, including finance lease liabilities ( 2,389 ) ( 291,602 ) ( 4,286 )

Payment of initial public offering costs ( 4,881 ) — —

Proceeds from common stock issuance, net of underwriting discounts and commissions — 182,095 —

Proceeds from exercise of stock options, net of employee taxes paid 1,425 — —

Proceeds from preferred stock issuance — — 40,000

Proceeds from borrowings on revolving credit facility — — 22,000

Repayments of borrowings on revolving credit facility — — ( 39,000 )

Note payable borrowing 2,874 — —

Repayments of note payable ( 522 ) — —

Payment of debt discount and deferred issuance costs ( 2,226 ) — ( 915 )

Contingent consideration payment ( 78 ) ( 9 ) —

Payment of initial public offering costs — ( 4,881 ) —

Payment of debt discount and deferred issuance costs — ( 2,226 ) —

Net cash (used in) provided by financing activities ( 2,018 ) ( 14,271 ) 73,314

Net increase (decrease) in cash and cash equivalents and restricted cash 13,018 27,976 ( 5,163 )

Net (decrease) increase in cash and cash equivalents and restricted cash ( 2,192 ) 13,018 27,976

Cash and cash equivalents and restricted cash:

Beginning of year 39,097 11,121 16,284

End of year $ 52,115 $ 39,097 $ 11,121

Beginning of period 52,115 39,097 11,121

End of period $ 49,923 $ 52,115 $ 39,097

Supplemental cash flow information:

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Leased assets obtained in exchange for new operating lease liabilities $ 45,979 $ 33,857 $ 21,333

Remeasurements of operating lease assets and lease liabilities $ ( 3,029 ) $ ( 3,850 ) $ 134

Terminations of operating lease liabilities $ ( 41 ) $ ( 711 ) $ ( 3,293 )

Leased assets obtained in exchange for new finance lease liabilities $ 127 $ 217 $ 277

Remeasurements of finance leased assets and lease liabilities $ 6 $ 164 $ —

Change in liabilities from acquisition of property, fixtures and equipment $ 144 $ ( 860 ) $ 210

Remeasurements and terminations of operating lease assets and lease liabilities $ ( 2,563 ) $ ( 3,070 ) $ ( 4,561 )

Remeasurements and terminations of finance lease assets and lease liabilities $ ( 197 ) $ 6 $ 164

Increase (Decrease) in liabilities from acquisition of property, fixtures and equipment $ 2,463 $ 144 $ ( 860 )

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

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The Company operates restaurants through its wholly owned subsidiary, First Watch Restaurants, Inc., and is a franchisor through its wholly owned subsidiary, First Watch Franchise Development Co.

As of December 26, 2021, the Company had 341 company-owned restaurants and 94 franchise-owned restaurants.

As of December 25, 2022 and December 26, 2021, the Company operated 366 company-owned restaurants and 341 company-owned restaurants, respectively, and had 108 franchise-owned restaurants and 94 franchise-owned restaurants, respectively.

Initial Public Offering

On September 20, 2021, the Company’s board of directors and its stockholders approved an amendment to the Company’s Certificate of Incorporation.

Such amendment (i) effected a 11.838 -for-1 stock split of its issued and outstanding shares of common stock and a proportional adjustment to the existing conversion ratio of the preferred stock and (ii) authorized an increase to the number of shares of common stock of the Company to 300,000,000 and an increase to the number of shares of preferred stock to 10,000,000 .

The par value of the Company’s common and preferred stock was not adjusted in connection with the stock split.

All common share and per share amounts for all periods presented in the accompanying consolidated financial statements and notes thereto have been adjusted retroactively to reflect this stock split.

On September 30, 2021, the Company’s registration statement on Form S-1 related to its initial public offering (“IPO”) was declared effective and the Company’s common stock began trading on the Nasdaq Global Select Market (“Nasdaq”) on October 1, 2021.

On October 5, 2021, the Company completed its IPO, in which the Company sold 10,877,850 shares of common stock at the initial public offering price of $ 18.00 per share and received aggregate net proceeds of $ 182.1 million after deducting underwriting discounts and commissions of $ 13.7 million.

The shar es sold included th e underwriters’ full exercise of their option to purchase up to an additional 1,418,850 shares of common stock at the initial public offering price of $ 18.00 per share.

All of the Company ’ s outstanding shares of preferred stock were adjusted in connection with the aforementioned stock split and were automatically converted into 3,156,812 shares of common stock immediately prior to and in connection with the consummation of the IPO.

The Company completed its initial public offering (“IPO”) on October 5, 2021, in which the Company sold 10,877,850 shares of common stock, which included the underwriters’ full exercise of their option to purchase up to an additional 1,418,850 shares of common stock, at the initial public offering price of $ 18.00 per share.

The Company received aggregate net proceeds of $ 182.1 million after deducting underwriting discounts and commissions of $ 13.7 million.

Summary of Significant Accounting Policies

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The fiscal years ended December 25, 2022 (“Fiscal 2022”), December 26, 2021 (“Fiscal 2021”) and December 27, 2020 (“Fiscal 2020”) contained 52 weeks.

The accompanying consolidated financial statements of the Company have been prepared in U.S.

dollars and in accordance with generally accepted accounting principles in the United States of America (“GAAP”).

The accompanying consolidated financial statements of the Company have been prepared by the Company in accordance with generally accepted accounting principles in the United States of America (“GAAP”).

Comprehensive income (loss) is a measure of net income (loss) and all other changes in equity that result from transactions other than with equity holders, and would normally be recorded in the Consolidated Statements of Equity and the Consolidated Statements of Comprehensive Income (Loss).

The Company does not have any components of other comprehensive income (loss) recorded within its consolidated financial statements.

Accordingly, there is no difference between net loss and comprehensive loss.

Reclassifications

The Company reclassified certain items in the accompanying consolidated financial statements for the prior periods to be comparable with the classification for the current period.

These reclassifications are related to the presentation of Pre-opening expenses on the Consolidated Statements of Operations and Comprehensive Loss for all periods presented, which were previously included in Other restaurant operating expenses and Occupancy expenses.

These reclassifications had no effect on previously reported net loss and comprehensive loss.

FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

COVID-19 Global Pandemic

In March 2020, the World Health Organization declared the novel strain of coronavirus (“COVID-19”) a global pandemic and recommended containment and mitigation measures worldwide.

The Company experienced a significant reduction in guest traffic at its restaurants due to changes in consumer behavior as public health officials encouraged social distancing and state and local governments mandated restrictions including suspension of dine-in operations, reduced restaurant seating capacity, table spacing requirements and additional physical barriers.

On April 13, 2020, to help ensure the safety of its employees, Management temporarily suspended all operations at the company-owned restaurants.

In June 2020, substantially all of the company-owned restaurants were reopened in compliance with state and local capacity restrictions and by March 2021, nearly all our restaurants had reopened to full dining-room capacity.

The COVID-19 pandemic is not eradicated and the extent to which COVID-19 may continue to impact the Company ’ s business and its customers is uncertain.

The consolidated financial statements include estimates and judgments and there may be changes to those estimates in future periods as a result of the COVID-19 pandemic (see Note 4, COVID-19 Charges , for additional information).

Accordingly, there is no difference between net income (loss) and comprehensive income (loss).

Principles of Consolidation

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All intercompany transactions and balances have been eliminated in consolidation.

In Fiscal 2019, the Company’s consolidated financial statements included the accounts of its majority-owned subsidiary, TFW-NC, LLC, (“TFW”), in which the Company owned 75 % of the voting shares and had a controlling financial interest.

On December 24, 2019, the Company acquired the remaining 25 % interest in TFW for $ 0.45 million.

The acquisition was accounted for as an equity transaction with the difference between the cash paid and the carrying amount of the non-controlling interest recognized as a decrease to equity attributable to First Watch Restaurant Group, Inc.

The Company does not hold ownership interests in any franchisee and does not provide financial support to franchisees.

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Use of Estimates

The preparation of the consolidated financial statements in accordance with GAAP requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.

Actual results could differ from those estimates and such differences could be material.

The preparation of consolidated financial statements in accordance with GAAP requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.

Actual results could differ from the estimates and such differences could be material.

FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Segment Reporting

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Costs incurred in connection with business combinations are expensed as incurred.

On December 31, 2018, four restaurants were acquired from a franchisee for approximately $ 7.0 million in cash and the acquisition was accounted for as a business combination.

On January 28, 2019, five operating restaurants and rights for two additional restaurant sites were acquired from a franchisee for approximately $ 9.9 million in cash and the acquisition was accounted for as a business combination.

During the months June 2019 through December 2019, a series of acquisitions of nine individual restaurants from unrelated franchisees were completed for total cash consideration of approximately $ 6.2 million.

The acquisitions were individually accounted for as business combinations.

The Company incurred transaction costs totaling $ 0.9 million during Fiscal 2019 for all acquisitions, which were expensed as incurred.

FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Fair Value of Financial Instruments

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Amounts included in restricted cash represent those required to be set aside by a contractual agreement for the settlement of insurance claims.

FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Concentrations of Credit Risk

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The Company incurred $ 2.0 million in deferred offering costs in Fiscal 2020, which were expensed in General and administrative expenses as a result of halting the Company ’ s public registration of equity in Fiscal 2020.

FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The Company ’ s restaurant facilities, corporate offices and certain restaurant equipment are leased under various agreements having initial terms expiring between 2023 and 2037.

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The lease liability is initially measured as the present value of the future fixed lease payments that will be made over the lease term using the Company ’ s incremental borrowing rate as there are no implicit rates provided in the lease contracts.

The Company ’ s incremental borrowing rate is based on a market yield implied by the Company ’ s outstanding secured term loans interpolated for various maturities using the Company ’ s synthetic credit rating, which was determined using a regression analysis of rated publicly-traded comparable companies and their financial data.

Lease expense, which includes the effects of free rent periods and rent escalation clauses within certain of the Company ’ s leases, is recognized on a straight-line basis over the lease term.

The Company ’ s incremental borrowing rate is based on a market yield implied by the Company ’ s outstanding secured term loan interpolated for various maturities using the Company ’ s synthetic credit rating, which was determined using a regression analysis of rated publicly-traded comparable companies and their financial data.

Occupancy expense, which includes the effects of free rent periods and rent escalation clauses within certain of the Company ’ s leases, is recognized on a straight-line basis over the lease term.

Tenant improvement allowances are amortized on a straight-line basis over the term of the lease as a reduction of lease expense.

The lease term, which commences on the date the Company has the right to control the use of the property, includes the Company ’ s options to extend the lease to the extent it is reasonably certain that the extension options will be exercised.

Leases with indexed rent escalation clauses are recorded using the index that existed at lease commencement or upon the latest modification requiring remeasurement.

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Contingent rent payments, which are based on a percentage of sales for certain restaurant facilities, are recorded as variable lease expense when the Company determines that such sales levels will be achieved.

In addition to fixed lease payments, certain of the Company ’ s real estate leases also require payment of a proportionate share of property taxes, insurance and maintenance costs, which are expensed as incurred in the Consolidated Statements of Operations and Comprehensive Loss and future variable rent obligations are not included within the lease liabilities on the Consolidated Balance Sheets.

In addition to fixed lease payments, certain of the Company ’ s real estate leases also require payment of a proportionate share of property taxes, insurance and maintenance costs, which are expensed as incurred in the Consolidated Statements of Operations and Comprehensive Income (Loss) and future variable rent obligations are not included within the lease liabilities on the Consolidated Balance Sheets.

FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The operating lease right-of-use asset is measured at the amount of the lease liability with adjustments for (i) rent prepayments made prior to or at lease commencement, (ii) landlord incentives and (iii) favorable and unfavorable leasehold positions.

The depreciable life of an operating lease right-of-use asset is limited by the expected lease term.

The depreciable life of an operating lease right-of-use asset is limited by the lease term.

The Company’s leases do not contain any material residual value guarantees or material restrictive covenants.

Fixed lease and non-lease components of the Company’s restaurant facility leases are accounted for as a single lease component.

Leases with an initial term of 12 months or less are not recorded on the Consolidated Balance Sheets, however, they are recognized on a straight-line basis over the lease term in the Consolidated Statements of Operations and Comprehensive Loss.

In Fiscal 2020, Management renegotiated numerous lease agreements that primarily resulted in rent abatements or rent deferrals during the period of the closures of the company-owned restaurants as a result of the COVID-19 pandemic.

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Rent abatements were recognized on a straight-line basis over the respective remaining lease term.

Finance lease liabilities and corresponding finance lease assets are recognized at an amount equal to the present value of the minimum lease payments over the expected lease term.

Finance lease liabilities and corresponding finance lease assets are recognized at an amount equal to the present value of the minimum lease payments over the lease term.

The amortization of finance lease assets is recognized over the shorter of the lease term or useful life of the underlying asset within Depreciation and amortization.

The interest expense related to finance leases, including any variable lease payments, is recognized in Interest expense.

Finance lease assets are classified in Property, fixtures and equipment, net and current maturities and long-term portions of finance lease liabilities are classified within Current portion of long-term debt and Long-term debt, net, respectively, on the Consolidated Balance Sheets.

FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Property, Fixtures and Equipment

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Repair and maintenance costs are expensed as incurred.

Leasehold improvements are depreciated over the shorter of their useful life or the expected lease term.

The carrying amount of assets sold, replaced or retired and the related accumulated depreciation are eliminated at the time of disposal and any resulting gains and losses on disposal are recognized in the Consolidated Statements of Operations and Comprehensive Loss.

Leasehold improvements are depreciated over the shorter of their useful life or the lease term.

Direct internal costs associated with the acquisition, development, design and construction of company-owned restaurants are capitalized as these costs have a future benefit to the Company.

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The market capitalization approach used Management’s selection of peer companies to estimate fair value.

The income approach used the discounted cash flow method estimating future cash flow, sales and traffic growth rates, operating margins, and new restaurant openings, each of which are inputs that fall within Level 3 of the fair value hierarchy.

The fair value of the indefinite-lived intangibles is determined through a relief from royalty method using certain unobservable inputs that fall within Level 3 of the fair value hierarchy.

The respective carrying values are compared to the related estimated fair values and an impairment loss is recognized in an amount equal to the excess of the carrying value over estimated fair values.

The income approach used the discounted cash flow method estimating

FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

future cash flow, sales and traffic growth rates, operating margins and new restaurant openings, each of which are inputs that fall within Level 3 of the fair value hierarchy.

The fair value of the indefinite-lived intangibles is determined through a relief from royalty method using certain unobservable inputs that fall within Level 3 of the fair value hierarchy.

Management performed a qualitative annual impairment assessment for goodwill and indefinite-lived intangible assets as of the first day of the fourth quarter of Fiscal 2022 and Fiscal 2021 and concluded that impairment of both goodwill and indefinite-lived intangible assets was not more likely than not.

As a result, a quantitative assessment was not required.

Definite-Lived Intangible Assets

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Fair value is generally estimated using a discounted cash flow model using unobservable inputs that fall within Level 3 of the fair value hierarchy.

No impairment loss was recorded for definite-lived intangible assets in Fiscal 2022, Fiscal 2021 and Fiscal 2020.

Impairment Assessment of Long-lived Assets

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An impairment loss is recognized in an amount equal to the excess of the carrying value over the estimated fair value.

No impairment loss was recorded for long-lived assets in Fiscal 2022, Fiscal 2021 and Fiscal 2020.

Self-Insurance Reserves

The Company is self-insured primarily for employee group healt h claims and for workers’ compensation in Ohio.

The Company holds stop-loss insurance which funds individual health claims in excess of $ 125,000 per occurrence and workers’ compensation claims in Ohio in excess of $ 500,000 per occurrence annually.

The Consolidated Statements of Operations and Comprehensive Loss include expenses related to the costs of claims reported and an estimate of claims incurred but not reported.

The Company holds stop-loss insurance which funds individual health claims in excess of $ 125,000 per occ urrence and workers’ compensation claims in Ohio in excess of $ 500,000 per occurrence annually.

The Consolidated Statements of Operations and Comprehensive Income (Loss) include expenses related to the costs of claims reported and an estimate of claims incurred but not reported.

A liability of $ 1.5 million and $ 1.4 million for e stimated unpaid claims and other insurance liabilities is recorded within Accrued liabilities as of December 25, 2022 and December 26, 2021, respectively.

FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Revenue Recognition

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The short-term and long-term unamortized portion of these liabilities are included in Deferred revenues and in Other long-term liabilities, respectively.

FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Royalty and system fund contributions from franchisees are based on a percentage of sales and are recognized as revenue in the period the sales occurred.

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Revenue is recognized from gift card sales upon redemption by the customer.

Management estimates the amount of gift cards for which the likelihood of redemption is remote, referred to as the “breakage factor, ” using historical gift card redemption patterns.

Management estimates the amount of gift cards for which the likelihood of redemption is remote, referred to as “breakage, ” using historical gift card redemption patterns.

The estimated breakage, less an administrative fee, is recognized over the expected period of redemption as the remaining gift card values are redeemed, which is generally over a period of two years.

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Consideration Received from Vendors

The Company receives consideration from certain vendors for volume rebates and advertising allowances.

The Company receives consideration from certain vendors for volume rebates and allowances.

The Company accounts for consideration from a vendor as a reduction of the purchase price of the goods or services acquired from the vendor.

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Advertising costs are recognized as incurred or, in the case of advertisements, when the advertisement occurs.

Advertising costs we re $ 4.8 million, $ 3.3 million and $ 4.4 million during Fiscal 2021, Fiscal 2020, and Fiscal 2019, respectively, and are included in General and administrative expenses and in Other restaurant operating expenses.

Advertising costs were $ 6.4 million, $ 4.8 million and $ 3.3 million during Fiscal 2022, Fiscal 2021 and Fiscal 2020, respectively, and are included in General and administrative expenses and in Other restaurant operating expenses.

Debt Discount and Deferred Issuance Costs

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Amortization expense of debt discount and deferred issuance costs is included in Interest expense.

FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Income taxes are accounted for under the asset and liability method of accounting.

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Realization of deferred tax assets is dependent upon the availability of taxable income and a valuation allowance for deferred tax assets is provided when it is more likely than not that a portion of the deferred tax assets will not be realized.

In the assessment for realization of deferred tax assets, Management considers all sources of taxable income including (i) taxable income in any available carry back period, (ii) scheduling of anticipated reversal of taxable temporary differences, (iii) tax-planning strategies and (iv) taxable income expected to be generated in the future other than from reversing temporary differences and

FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

carryforwards.

Management continues to evaluate the rationale for recording a valuation allowance on its deferred tax assets and as the Company increases earnings and utilizes deferred tax assets, it is possible the valuation allowance could be reduced or eliminated.

The Company has no uncertain tax positions requiring recognition or disclosure in the consolidated financial statements in Fiscal 2021, Fiscal 2020 and Fiscal 2019.

Interest and penalties, when incurred, are recognized in Other (expense) income, net.

Stock-Based Compensation

Stock-based compensation expense is recognized for stock option awards granted and is based on the fair value of the options on the date of grant.

Stock-based compensation expense is recognized for stock option awards granted and is based on the fair value of the stock option awards on the date of grant.

The fair value of stock option awards is determined using the Black-Scholes option pricing model.

The fair value of performance-based stock option awards is recognized as expense when the achievement of the performance condition is probable.

Forfeitures of stock option awards are recognized as they occur.

Determining the fair value of stock option awards at the grant date requires judgment, including estimating the expected term that the stock option awards will be outstanding prior to exercise, volatility, dividend yield and risk-free interest rate.

Stock-based compensation expense is included in General and administrative expenses.

Stock option exercises are settled with authorized but unissued shares of the Company’s common stock.

Fair Value of Common Stock

In Fiscal 2021, prior to the IPO, the Company’s equity value was determined using the probability weighted expected return method (“PWERM”), or the hybrid method.

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As a result, if Management had used significantly different assumptions or estimates, the fair value of our common stock and our stock-based compensation expense could have been materially different.

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

The fair value of performance-based stock option awards is recognized as expense when the performance condition is probable of being achieved.

Forfeitures of stock option awards are recognized as they occur.

Determining the fair value of stock option awards at the grant date requires judgment, including estimating the expected term that the stock options will be outstanding prior to exercise, volatility, dividend yield and risk-free interest rate.

Stock-based compensation expense is included in General and administrative expenses.

Stock option exercises are settled with authorized but unissued shares of the Company’s common stock.

Recently Adopted Financial Accounting Standards

On December 28, 2020, we adopted ASU 2019-12, “ Simplifying the Accounting for Income Taxes (Topic 740) ,” which simplified and clarifying certain technical guidelines for accounting for income taxes.

The adoption of ASU 2019-12 did not result in a material change to our consolidated financial statements.

On December 31, 2018, the Company adopted ASC 842 using the modified retrospective transition method included in ASU 2018-11, “ Leases (Topic 842), Targeted Improvements, ” (“ASU 2018-11”).

Management elected the package of practical expedients permitted under the transition guidance and also elected the accounting policy election to combine lease and non-lease components for restaurant facility leases.

In addition, the Company adopted the short-term lease recognition exemption and did not recognize operating lease right-of-use assets and operating lease liabilities for leases with terms of twelve months or less.

Management used the Company’s incremental borrowing rate to discount the future fixed lease payments for all leases.

The Company’s incremental borrowing rate was determined based on a market yield implied by the outstanding secured term loans (see Note 10, Debt , for additional information), which was interpolated for various maturities based on the shape of the corresponding market yield curve.

The corresponding market yield curve was selected based on the Company’s synthetic credit rating, which was determined using a regression analysis of rated publicly-traded comparable companies and their financial data.

On December 31, 2018, operating lease right-of-use assets of $ 246.0 million, operating lease liabilities of $ 252.8 million and a debit to the beginning balance of accumulated deficit for $ 0.1 million were recorded in conjunction with the adoption

FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

of ASU 2018-11.

In addition, the land lease asset and related financing obligation of $ 1.5 million which related to one restaurant facility that was sold and leased back from a third party in 2014 and which did not previously qualify for sale accounting was derecognized.

The lease related to this transaction is accounted for as an operating lease.

Financing obligations are classified within Long-term debt, net.

The adoption of ASC 842 did not have a material impact on the Consolidated Statements of Operations and Comprehensive Loss and the Consolidated Statement of Cash Flows in Fiscal 2019.

Summary of Recently Issued Accounting Pronouncements

In March 2020, the FASB issued ASU 2020-04, “ Reference Rate Reform (Topic 848):

In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-04, “ Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting ” (“ASU 2020-04”).

The new guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met.

The guidance provides optional expedients and exceptions to apply to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met.

ASU 2020-04 was effective beginning March 12, 2020 and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022.

Management is currently evaluating its contracts and the optional expedients provided by the new standard.

In December 2022, ASU 2022-06, “ Reference Rate Reform (Topic 848):

Deferral of the Sunset Date of Topic 848” (“ASU 2022-06”) was issued which defers the sunset date referenced in Topic 848 from December 31, 2022 to December 31, 2024, after which companies will no longer be permitted to apply the relief in Topic 848.

This standard and the optional expedients will not have a material impact to the Company.

In February 2023, the Company amended its credit agreement dated as of October 6, 2021 (the “Credit Agreement”) to replace the London interbank offer rate (“LIBOR”) with a secured overnight financing rate (“SOFR”) pursuant to the terms and LIBOR fallback language in the Credit Agreement.

All outstanding borrowings under the Credit Agreement will continue to bear interest at LIBOR until the end of the current interest period or payment period pursuant to the terms of the Credit Agreement.

Recent accounting guidance not discussed herein is not applicable, did not have, or is not expected to have a material impact to the Company.

The following tables include a detail of liabilities from contracts with customers:

6 unchanged sentences

Deferred franchise fee revenue - non-current $ 2,472 $ 2,292

Changes in deferred gift card liabilities were as follows:

Changes in deferred gift card contract liabilities were as follows:

(in thousands) 2022 2021 2020

4 unchanged sentences

Gift card breakage ( 915 ) ( 748 ) ( 1,151 )

Gift card liabilities assumed through acquisitions — — 146

Balance, end of period $ 4,897 $ 4,410 $ 4,024

1 unchanged sentence

As such, the revenue recognized consists of gift cards that were part of the deferred revenue balance at the beginning of the period as well as gift cards that were issued during the period.

FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Changes in deferred franchise fee liabilities were as follows:

Changes in deferred franchise fee contract liabilities were as follows:

(in thousands) 2022 2021 2020

3 unchanged sentences

Franchise revenues recognized ( 298 ) ( 275 ) ( 340 )

( 275 ) ( 340 ) ( 436 )

Business combinations — — $ ( 126 )

Balance, end of period $ 2,768 $ 2,536 $ 2,274

FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Revenues recognized disaggregated by type were as follows:

13 unchanged sentences

Thereafter $ 1,031

FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

COVID-19 Charges

Charges recorded in connection with the COVID-19 pandemic were as follows for Fiscal 2021 and Fiscal 2020:

(in thousands) Consolidated Statements of Operations and Comprehensive Loss 2021 2020

Inventory obsolescence and spoilage Food and beverage costs $ — $ 562

Compensation for employees upon furlough and return from furlough Labor and other related expenses 3 1,065

Health insurance costs paid for furloughed employees, net of employee retention credit of zero and $ 0.9 million, respectively

Labor and other related expenses — 746

Other expenses Other restaurant operating expenses 16 936

Compensation for employees upon furlough and return from furlough General and administrative expenses 128 360

Other expenses General and administrative expenses 64 1,080

Total COVID-19 charges $ 211 $ 4,749

Accounts Receivable

Accounts receivable consists of the following:

Accounts receivable consisted of the following:

(in thousands) DECEMBER 25, 2022 DECEMBER 26, 2021

Receivables related to gift card sales $ 1,453 $ 1,028

Receivables from third-party delivery providers $ 974 $ 1,021

Receivables from franchisees 1,076 927

Rebate receivables 428 514

Receivables from vendors 920 428

Receivables related to gift card sales 1,565 1,453

Other receivables 1,629 621

Total accounts receivable $ 6,164 $ 4,450

As of December 26, 2021 and December 27, 2020, the Company had goodwill of $ 345.2 million.

Management performed a qualitative annual impairment assessment for goodwill as of the first day of the fourth quarter of Fiscal 2021 and concluded that impairment of goodwill was not more likely than not.

As a result, a quantitative assessment was not required.

Management performed a quantitative impairment assessment of goodwill in April 2020 as the effect of the COVID-19 pandemic was considered a triggering event indicating that the carrying value of goodwill may not be recoverable.

Management determined there was no impairment loss to be recognized.

Management also performed the annual impairment test of goodwill as of the first day of the fourth quarter of Fiscal 2020 and determined there was no impairment loss to be recognized.

FIRST WATCH RESTAURANT GROUP, INC.

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Intangible Assets, Net

Intangible assets, net consists of the following:

Intangible assets, net consisted of the following:

DECEMBER 25, 2022

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$ 147,547 $ ( 4,547 ) $ 143,000

Management performed a qualitative annual impairment assessment of substantially all of the indefinite-lived intangible assets on the first day of the fourth quarter of Fiscal 2021 and concluded that impairment of the indefinite-lived intangible assets was not more likely than not.

As a result, a quantitative assessment was not required.

The indefinite-lived liquor licenses and definite-lived reacquired rights from the Company’s acquisitions were tested at the individual restaurant level in the asset group which includes long-lived assets of the individual restaurants (see Note 8, Property, Fixtures and Equipment, Net , for additional information).

Management performed a quantitative impairment assessment of the indefinite-lived intangible assets in April 2020 as the effect of the COVID-19 pandemic was considered a triggering event indicating that the carrying value of the intangible assets may not be recoverable.

Management determined there was no impairment loss to be recognized.

Management also performed an annual impairment test for the intangible assets on the first day of the fourth quarter of Fiscal 2020 and determined there was no impairment loss to be recognized.

In Fiscal 2019, a total non-cash impairment charge of $ 32.2 million was recognized related to The Egg & I trade name and franchise rights following Management’s identification of a triggering event resulting from a strategic review of its operations.

All restaurants that operated under The Egg & I trade name had either closed, disenfranchised or were strategically acquired by the Company and converted to restaurants operating under the First Watch trade name as of December 29, 2019.

Total amortization expense related to definite-lived intangible assets was $ 1.0 million, $ 1.0 million and $ 1.1 million in Fiscal 2022, Fiscal 2021 and Fiscal 2020, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Property, Fixtures and Equipment, Net

Property, fixtures and equipment, net consists of the following:

Property, Plant and Equipment

(in thousands) DECEMBER 25, 2022 DECEMBER 26, 2021

10 unchanged sentences

Depreciation expense was $ 33.3 million, $ 31.3 million and $ 29.6 million during Fiscal 2022, Fiscal 2021 and Fiscal 2020, respectively.

The Company did not recognize an impairment loss in Fiscal 2021.

The Company’s long-lived assets at company-owned restaurants were evaluated for impairment in April 2020 as a result of the effects of the COVID-19 pandemic using future undiscounted net cash flows over the respective lease terms.

As the estimated future undiscounted net cash flows were greater than the net book value of the respective asset groups, no impairment loss was recognized in Fiscal 2020.

In Fiscal 2019, a non-cash impairment charge of $ 0.3 million was recognized primarily related to one under-performing restaurant, which was recorded in Impairments and loss on disposal of assets.

The impairment was determined as the amount by which the carrying value of the restaurant’s asset group exceeded its fair value.

Fair value was determined based on estimates of discounted future cash flows.

Loss on disposals of assets recognized of $ 0.4 million and $ 0.3 million during Fiscal 2021 and Fiscal 2020, respectively related to retirements, replacements and disposals of fixed assets in the ordinary course of business.

In Fiscal 2019, a loss on disposal of assets of $ 1.1 million was recognized associated with restaurants that were remodeled, relocated or closed.

The Company did not recognize an impairment loss in Fiscal 2022, Fiscal 2021 and Fiscal 2020.

Loss on disposals of assets recognized of $ 0.9 million, $ 0.4 million and $ 0.3 million during Fiscal 2022, Fiscal 2021 and Fiscal 2020, respectively, primarily related to the write-off of assets retired as a result of restaurant closures or replacements of assets.

As of December 25, 2022 and December 26, 2021, Property, fixtures and equipment, net included $ 1.2 million in land related to sale and leaseback transactions accounted for as financing obligations.

Accrued Liabilities

Accrued liabilities consists of the following:

Accrued liabilities consisted of the following:

(in thousands) DECEMBER 25, 2022 DECEMBER 26, 2021

3 unchanged sentences

Utilities 1,468 1,306

Legal 379 105

Credit card fees 1,043 940

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Long-term debt, net consists of the following:

Long-term debt, net consisted of the following:

DECEMBER 25, 2022 DECEMBER 26, 2021

(in thousands) Balance Interest Rate Balance Interest Rate

New Facilities:

New Term Facility $ 100,000 2.71 % $ — —

Senior Credit Facilities (1):

Initial Term Loan — — 150,214 8.00 %

Initial Delayed Draw Term Loan — — 48,992 8.00 %

First Amendment Delayed Draw Term Facility

— — 49,458 8.00 %

Second Amendment Delayed Draw Term Facility

— — 39,369 8.00 %

Term Facility $ 98,125 5.89 % $ 100,000 2.71 %

Finance lease liabilities 1,433 2,017

4 unchanged sentences

Long-term debt, net $ 94,668 $ 99,753

______________________________________________________________

(1) Borrowings under the Senior Credit Facilities bore interest, at the Company’s option, at a rate per annum equal to either (a) (i) the greater of an adjusted London Interbank Offered Rate (the “Adjusted Eurocurrency Rate”) and 1.00 %, plus (ii) the applicable Adjusted Eurocurrency Rate spread, or (b) (i) the alternate base rate (“ABR”) plus (ii) the applicable ABR spread.

ABR is a floating rate per annum equal to the highest of (i) the federal funds effective rate plus 0.50 %, (ii) to the extent ascertainable, the London interbank offered rate for a one-month interest period on such day plus 1.00 %, (iii) the rate of interest last quoted by The Wall Street Journal as the “prime rate” in the U.S.

and (iv) 1.00 %.

Borrowings under the Senior Credit Facilities also bore an additional interest pursuant to the Fourth Amendment that is paid in kind.

The applicable rate for the additional interest ranged from 0.25 % to 1.50 % of the outstanding balances, depending on the leverage ratio.

New Facilities

FWR Holding Corporation, (“FWR”), an indirect subsidiary of the Company, is the borrower under a new credit agreement, dated as of October 6, 2021, (the “New Credit Agreement”), which provides for (i) a $ 100.0 million term loan A facility (the “New Term Facility”) and (ii) a $ 75.0 million revolving credit facility (the “New Revolving Credit Facility” and, together with the New Term Facility, collectively, the “New Facilities”).

The New Facilities mature on October 6, 2026.

The New Revolving Credit Facility was undrawn at December 26, 2021.

The New Term Facility is subject to amortization of principal, payable in quarterly installments on the last business day of each fiscal quarter, commencing on March 27, 2022, equal to (i) 2.50 % of the original principal amount of the term loans in fiscal year ended December 25, 2022, (ii) 5.00 % of the original principal amount of the term loans in fiscal year ended December 31, 2023, (iii) 5.00 % of the original principal amount of the term loans in fiscal year ended December 29, 2024, (iv) 7.50 % of the original principal amount of the term loans in fiscal year ended December 28, 2025 and (v) 10.00 % of the original principal amount of the term loans in fiscal year ended December 27, 2026.

The remaining aggregate principal amount outstanding (together with accrued and unpaid interest on the principal amount) under the New Term Facility is payable at the maturity of the New Term Facility.

Borrowings under the New Facilities bear interest, at the option of FWR at either (i) the base rate plus a margin of between 125 and 200 basis points depending on the total rent adjusted net leverage ratio of FWR and its restricted subsidiaries on a consolidated basis (the “Total Rent Adjusted Net Leverage Ratio”) or (ii) the London interbank offer rate (“LIBOR”) plus a margin of between 225 and 300 basis points depending on the Total Rent Adjusted Net Leverage Ratio.

In addition, an unused commitment fee of between 25 and 50 basis points will be paid on the undrawn commitments under the New Revolving Credit Facility, also depending on the Total Rent Adjusted Net Leverage Ratio.

The New Credit Agreement has LIBOR fallback language and may be amended to replace the LIBOR with a secured overnight financing rate or another alternate benchmark rate upon reference rate reform and the occurrence of certain LIBOR cessation events.

Senior Credit Facilities

FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Through October 6, 2021, FWR was the borrower under a credit agreement, dated as of August 21, 2017 (as amended by the First Amendment to Credit Agreement dated as of February 28, 2019 (the “First Amendment”), the Second Amendment to Credit Agreement dated as of December 20, 2019 (the “Second Amendment”), the Third Amendment and Waiver to Credit Agreement dated as of April 27, 2020 (the “Third Amendment”) and the Fourth Amendment to Credit Agreement dated as of August 14, 2020 (the “Fourth Amendment”), the “Credit Agreement”), which consisted of an initial term loan facility ($ 155.0 million), an initial delayed draw term facility ($ 50.0 million) and a revolving credit facility (available commitment of $ 20.0 million, including a $ 5.0 million sub-limit for letters of credit) for an initial total available borrowing commitment of $ 225.0 million.

Pursuant to the First Amendment, an aggregate principal amount of $ 50.0 million was made available (the “first amendment delayed draw term facility”) and had been drawn in Fiscal 2019.

Pursuant to the Second Amendment, an aggregate principal amount of $ 40.0 million was made available (the “second amendment delayed draw term facility”) and a total of $ 39.6 million had been drawn in Fiscal 2020.

The Credit Agreement was set to mature on August 21, 2023.

The Senior Credit Facilities were subject to amortization of principal, payable in quarterly installments on the last business day of each fiscal quarter, equal to 0.25 % of the original principal amounts borrowed.

The remaining aggregate principal amounts outstanding (together with accrued and unpaid interest on the principal amount) under the Senior Credit Facilities were payable upon maturity.

The First Amendment and Second Amendment were accounted for as debt modifications and a total of $ 1.5 million in costs was incurred, of which $ 0.9 million was recognized and amortized as debt discount and deferred issuance costs and $ 0.6 million was recognized in Other (expense) income, net during Fiscal 2019.

The Third Amendment, which was a condition to borrowing under each delayed draw term facility and the revolving credit facility, (i) required that the aggregate cash balance of FWR and its subsidiaries would not exceed $ 15.0 million at the time of and immediately after giving effect to any such borrowing, (ii) modified certain affirmative and negative covenants under the Credit Agreement, (iii) added new affirmative covenants that required monthly financial and cash flow reporting through December 31, 2020 and (iv) waived a specific event of default relating to an over-borrowing.

The Third Amendment was accounted for as a debt modification and all costs incurred were third-party costs that were recognized in Other (expense) income, net in Fiscal 2020.

Prior to the execution of the Fourth Amendment in August 2020, the Company received proceeds from an offering of preferred shares totaling $ 40.0 million (see Note 14, Stockholders ’ Equity , for additional information).

A portion of these proceeds were subsequently used to repay the outstanding balance of $ 10.5 million on the revolving credit facility.

Pursuant to the Fourth Amendment, which superseded the Third Amendment, additional interest was charged on outstanding amounts drawn that were to be paid in kind by being added to the outstanding principal amounts.

The Fourth Amendment also provided for:

(i) the suspension of debt covenant compliance from April 1, 2020 through March 28, 2021, (ii) additional reporting requirements, (iii) restrictions on payments, additional indebtedness and capital expenditures and (iv) additional financial and liquidity covenants.

The Fourth Amendment was accounted for as a debt modification and all costs incurred were third-party costs that were recognized in Other (expense) income, net in Fiscal 2020.

The proceeds from the IPO, the proceeds from the New Term Facility and cash on hand were used to repay in full the outstanding indebtedness of the Senior Credit Facilities in October 2021.

This repayment was accounted for as a debt extinguishment for accounting purposes and a loss on debt extinguishment of $ 2.4 million was recorded in the fourth fiscal quarter of 2021 in Other (expense) income, net.

Credit Facilities

FWR Holding Corporation, (“FWR”), an indirect subsidiary of the Company, is the borrower under the Credit Agreement, which provides for (i) a $ 100.0 million term loan A facility (the “Term Facility”) and (ii) a $ 75.0 million revolving credit facility (the “Revolving Credit Facility” and, together with the Term Facility, collectively, the “Credit Facilities”).

The Revolving Credit Facility was undrawn at December 25, 2022 and December 26, 2021.

The Credit Facilities mature on October 6, 2026.

The 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) 2.5 % of the original principal amount of the term loans in fiscal year ended December 25, 2022, (ii) 5.0 % of the original principal amount of the term loans in fiscal year ended December 31, 2023, (iii) 5.0 % of the original principal amount of the term loans in fiscal year ended December 29, 2024, (iv) 7.5 % of the original principal amount of the term loans in fiscal year ended December 28, 2025 and (v) 10.0 % 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 Term Facility is payable at the maturity of the Term Facility.

Borrowings under the Credit 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) LIBOR plus a margin of between 225 and 300 basis points depending on the Total Rent Adjusted Net Leverage Ratio.

In addition, an unused commitment fee of between 25 and 50 basis points will be paid on the undrawn commitments under the Revolving Credit Facility, also depending on the Total Rent Adjusted Net Leverage Ratio.

In February 2023, the Company amended its Credit Agreement to replace LIBOR with SOFR pursuant to the terms and LIBOR fallback language in the Credit Agreement.

The aggregate net proceeds from the IPO, the proceeds from borrowings under the Term Facility and cash on hand were used to repay in full the outstanding borrowings under our previous senior credit facilities in October 2021.

Fair Value of Debt

The estimated fair value of the outstanding debt, excluding finance lease obligations and financing obligations, is classified as Level 3 in the fair value hierarchy and was estimated using discounted cash flow models using market yield and yield volatility.

At December 26, 2021, the estimated fair value of the outstanding debt under the New Facilities was $ 100.0 million.

At December 25, 2022, the estimated fair value of the outstanding debt under the Credit Facilities was $ 97.1 million.

Principal payments due on the outstanding debt, excluding finance lease liabilities and financing obligations, as of December 25, 2022 are as follows:

3 unchanged sentences

Letter of Credit

The Company utilizes a standby letter of credit to satisfy workers’ compensation requirements, as discussed in Note 2, Summary of Significant Accounting Policies .

The Company utilizes a standby letter of credit to satisfy workers’ compensation requirements.

The contract amount of the letter of credit approximates its fair value.

As of December 26, 2021 and December 27, 2020, the open letter of credit was approximately $ 0.4 million and there were no draws against the letter of credit.

As of December 25, 2022 and December 26, 2021, the open letter of credit was approximately $ 0.2 million and $ 0.4 million, respectively, and there were no draws against the letter of credit.

The Company pays participation fees for the letter of credit based on a varying percentage of the amount not drawn.

Debt Covenants

The New Facilities are guaranteed by all of FWR’s wholly-owned domestic restricted subsidiaries, subject to customary exceptions, and by AI Fresh Parent, Inc., a Delaware corporation and the direct parent company of FWR, (“Holdings”), and are secured by associated collateral agreements that pledge a lien on substantially all of FWR’s and each guarantor’s assets, including fixed assets and intangibles, in each case, subject to customary exceptions.

Under the New Credit Agreement, FWR (and in certain circumstances, Holdings) and its restricted subsidiaries are subject to customary affirmative, negative and financial covenants, maintenance of certain ratios, restrictions on additional indebtedness and events of default for facilities of this type (with customary grace periods, as applicable, and lender remedies).

FWR was in compliance with covenants under the New Credit Agreement as of December 26, 2021.

FWR was in compliance with the covenants under the Credit Agreement as of December 27, 2020.

In October 2021, the Company entered into a financing agreement for the financing of insurance premiums in a total amount of approximately $ 3.0 million that bears interest of 2.41 % and is payable in monthly installments of $ 0.3 million through August 30, 2022.

As of December 26, 2021, the balance on the note payable was approximately $ 2.4 million.

The Credit Facilities are guaranteed by all of FWR’s wholly-owned domestic restricted subsidiaries, subject to customary exceptions, and by AI Fresh Parent, Inc., a Delaware corporation and the direct parent company of FWR (“Holdings”), and are secured by associated collateral agreements that pledge a lien on substantially all of FWR’s and each guarantor’s assets, including fixed assets and intangibles, in each case, subject to customary exceptions.

Under the Credit Agreement, FWR (and in certain circumstances, Holdings) and its restricted subsidiaries are subject to customary affirmative, negative and financial covenants, maintenance of certain ratios, restrictions on additional indebtedness and events of default for facilities of this type (with customary grace periods, as applicable, and lender remedies).

FWR was in compliance with covenants under the Credit Agreement as of December 25, 2022 and December 26, 2021.

In October 2022, the Company entered into an agreement for the financing of insurance premiums in a total amount of approximately $ 1.9 million.

The note payable bears interest of 6.04 % and is payable in monthly installments of $ 0.2 million through September 30, 2023.

As of December 25, 2022, the balance on the note payable was $ 1.4 million.

In October 2021, the Company entered into a financing agreement for the financing of insurance premiums in a total amount of approximately $ 3.0 million that bears interest of 2.41 % and was payable in monthly installments of $ 0.3 million through August 30, 2022.

As of December 26, 2021, the balance on the note payable was $ 2.4 million.

The following table includes a detail of lease assets and liabilities:

13 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The components of lease expense are as follows:

(in thousands) Consolidated Statements of Operations and Comprehensive Loss Classification 2021 2020 2019

The components of lease expense were as follows:

(in thousands) Consolidated Statements of Operations and Comprehensive Income (Loss) Classification FISCAL YEAR

2022 2021 2020

Operating lease expense Other restaurant operating expenses

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_____________

(1) Includes contingent rent of $ 1.1 million, $ 0.1 million and $ 0.7 million during Fiscal 2021, Fiscal 2020 and Fiscal 2019, respectively

Supplemental cash flow information related to leases is as follows:

(1) Includes contingent rent expense of $ 1.6 million and $ 1.1 million and $ 0.1 million during Fiscal 2022, Fiscal 2021 and Fiscal 2020 , respectively.

Supplemental cash flow information related to leases was as follows:

(in thousands) 2022 2021 2020

10 unchanged sentences

Finance leases 7.6 % 7.9 %

__________________________________

(1) Based on the Company’s incremental borrowing rate.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Future minimum lease payments on lease liabilities as of December 26, 2021 are as follows:

As of December 25, 2022, future minimum lease payments for operating and finance leases consisted of the following:

(in thousands) OPERATING LEASES FINANCE LEASES

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_____________

(1) Excludes approximately $ 30.2 million of executed operating leases that have not commenced as of December 26, 2021

(1) Excludes approxim ately $ 38.3 million of exec uted operating leases that have not commenced as of December 25, 2022.

Sale-Leaseback Transactions

3 unchanged sentences

The balance of the financing obligation was $ 3.1 million as of December 25, 2022 and December 26, 2021.

Transaction (Income) Expenses, Net

Transaction (income) expenses, net consists of the following:

Transaction Expenses (Income), Net

Transaction expenses (income), net consisted of the following:

(in thousands) 2022 2021 2020

Secondary offering and Registration Statement on Form S-3 costs $ 1,957 $ — $ —

Gain on lease modification — ( 1,961 ) —

2 unchanged sentences

Loss (Gain) on restaurant closures/relocations 391 2 ( 36 )

Gain on lease termination, net — — ( 885 )

Acquisition - related costs — — 872

Total transaction (income) expenses, net $ ( 1,156 ) $ ( 258 ) $ 1,709

On September 27, 2021, an agreement was executed to terminate the lease for one company-owned restaurant.

Pursuant to the agreement, the Company received $ 1.0 million in December 2021 and an additional $ 1.0 million will be paid to the Company upon vacating the leased restaurant facility by December 31, 2022, which is recorded within Other current assets.

A gain on lease modification of $ 2.0 million was recognized in Fiscal 2021 as a result of this agreement.

The Company revalued the contingent consideration liability initially recognized in connection with the Advent Acquisition (see Note 13, Income Taxes , for additional information) and recorded a loss of $ 0.8 million in Fiscal 2021, a gain of $ 0.3 million in Fiscal 2020 and a gain of $ 0.4 million in Fiscal 2019.

In Fiscal 2019, a gain on lease termination of $ 0.9 million, net of closure costs, was recognized pursuant to an executed agreement to terminate the lease for one restaurant facility.

In addition, a total of $ 1.6 million of costs were incurred in Fiscal 2019 in connection with the conversion of certain restaurants to company-owned restaurants operating under the First Watch trade name and a total of $ 0.9 million of costs were incurred in connection with the acquisitions of certain restaurants from franchisees.

Total transaction expenses (income), net $ 2,513 $ ( 1,156 ) $ ( 258 )

During Fiscal 2022, a total of $ 2.0 million of costs was incurred by the Company 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 for the 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.

The Company revalued the contingent consideration liability initially recognized in connection with the Advent Acquisition (see Note 11, Income Taxes , for additional information) and recorded a loss of $ 0.2 million in Fiscal 2022, a loss of $ 0.8 million in Fiscal 2021 and a gain of $ 0.3 million in Fiscal 2020.

A gain on lease modification of $ 2.0 million was recognized in Fiscal 2021 in connection with a lease termination for the redevelopment of a restaurant facility by a landlord.

Pursuant to the agreement, the Company received $ 1.0 million in December 2021 and received an additional $ 1.0 million after vacating the leased restaurant facility in December 2022.

FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Income tax (expense) benefit consists of the following:

Income tax (expense) benefit consisted of the following:

(in thousands) 2022 2021 2020

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Stock-based compensation 4.2 275.9 — —

Secondary Offering and Registration Statement on Form S-3 costs 3.2 — —

Other permanent items 0.6 57.6 —

2 unchanged sentences

Total 45.1 % 669.5 % 28.6 %

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

The effective income tax rate for Fiscal 2021, Fiscal 2020 and Fiscal 2019 was different than the blended federal and state statutory rate mainly due to (i) the change in the valuation allowance and (ii) the benefit of the tax credits for FICA taxes on certain employee tips.

The effective income tax rate for Fiscal 2022, Fiscal 2021 and Fiscal 2020 was different than the blended federal and state statutory rate mainly due to (i) the change in the valuation allowance, (ii) the benefit of the tax credits for FICA taxes on certain employee tips, (iii) impacts of executive stock-based compensation and (iv) non-deductible costs associated with the Secondary Offering and the Registration Statement on Form S-3.

The effective income tax rate for Fiscal 2021 was also different than the blended federal and state statutory rate as a result of the pre-vesting forfeiture of performance-based stock option awards for which the market condition was not satisfied upon the Company’s IPO (see Note 14, Stock-Based Compensation, for additional information).

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The components of deferred tax assets and liabilities are as follows:

The components of deferred tax assets and liabilities were as follows:

(in thousands) DECEMBER 25, 2022 DECEMBER 26, 2021

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The Company also has state net operating loss carryforwards of $ 42.7 million at December 25, 2022.

In addition, the Company has general business tax credits of $ 34.4 million at December 26, 2021, which can be carried forward twenty years and will expire between 2027 and 2041.

As of December 26, 2021, approximately $ 28.9 million, $ 19.0 million and $ 14.7 million of the federal loss carryforwards, state loss carryforwards and general business credits, respectively, were accumulated from operations prior to the Advent Acquisition in August 2017.

To the extent these federal and state loss carryforwards and general business credits are utilized to reduce taxes payable, the Company is required to pay the previous stockholders an amount equal to tax savings.

In addition, the Company has general business tax credits of $ 41.7 million at December 25, 2022, which can be carried forward 20 years and will expire between 2027 and 2042.

There were certain federal loss carryforward, state loss carryforward and general business credits that were accumulated from operations prior to the Advent Acquisition in August 2017.

To the extent that these are utilized to reduce taxes payable, the Company is required to pay the previous stockholders an amount equal to tax savings.

This requirement lapses with respect to any tax year, or portion thereof, beginning after December 31, 2024, or if a change in control event occurs.

In connection with the accounting for the Advent Acquisition, a contingent consideration liability of $ 1.2 million was initially recognized, of which approximately $ 0.2 million was paid in Fiscal 2019.

As a result of revaluing the contingent consideration liability using actual results, expected projections and state tax law changes in Fiscal 2021, the contingent consideration liability for expected payments to be made to the previous stockholders was $ 1.1 million as of December 26, 2021, of which $ 0.2 million was recorded within Accrued liabilities and $ 0.9 million was

In connection with the Advent Acquisition, a contingent consideration liability of $ 1.2 million was initially recognized for expected payments to be made to the previous stockholders.

As of December 25, 2022, the contingent consideration liability was $ 1.2 million, of which $ 0.6 million was recorded within Accrued liabilities and $ 0.6 million was recorded within Other long-term liabilities.

As of December 26, 2021, the contingent consideration liability was $ 1.1 million, of which $ 0.2 million was recorded within Accrued liabilities and $ 0.9 million was recorded within Other long-term liabilities.

FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

recorded within Other long-term liabilities.

As of December 27, 2020, the contingent consideration liability was $ 0.3 million, of which $ 0.1 million was recorded within Accrued liabilities and $ 0.2 million within Other long-term liabilities.

Changes in the deferred tax asset valuation allowance are as follows:

Changes in the deferred tax asset valuation allowance were as follows:

(in thousands)

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A total of $ 6.7 million was deferred, of which $ 3.3 million was paid in Fiscal 2021.

The remaining balance is recorded within Accrued compensation and deferred payroll taxes at December 26, 2021.

The remaining balance was paid in Fiscal 2022.

Furthermore, the CARES Act provided for refundable employee retention tax credits, which can be used to offset payroll tax liabilities.

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In Fiscal 2020, the Company had issued 266,667 preferred stock shares having a par value of $ 0.01 per share to existing stockholders, including Advent International Corporation, directors and executive officers.

The proceeds from the issuance of the preferred shares were used to repay the outstanding balance of $ 10.5 million on the revolving credit facility and for working capital and general corporate purposes in Fiscal 2020.

The proceeds from the issuance of the preferred stock were used to repay a portion of borrowings under our previous senior credit facilities and for working capital and general corporate purposes in Fiscal 2020.

The preferred stock was automatically converted into 3,156,812 shares of common stock immediately prior to and in connection with the consummation of the Company’s IPO in October 2021.

Pursuant to the amendment to the Company’s Amended and Restated Certificate of Incorporation, the Company is authorized to issue 300,000,000 common stock shares with a par value of $ 0.01 per share and 10,000,000 preferred shares with a par value of $ 0.01 per share.

The Company is authorized to issue 300,000,000 common stock shares with a par value of $ 0.01 per share and 10,000,000 preferred stock shares with a par value of $ 0.01 per share pursuant to the Company’s Amended and Restated Certificate of Incorporation.

Each share of common stock entitles the holder to one vote for each share of common stock held and common stockholders will not have cumulative voting rights.

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In addition, all common stockholders are entitled to share equally on a share-for-share basis in any assets available for distribution to common stockholders upon liquidation, dissolution, or winding up of the Company after payment is made to the preferred stockholders.

During Fiscal 2022, funds managed by the Company’s majority owner, Advent International Corporation, sold 4,500,000 shares of the Company’s common stock in the Secondary Offering.

The selling stockholders sold an additional 675,000 shares of common stock on October 6, 2022 pursuant to the terms of the underwriters option associated with the Secondary Offering.

All net proceeds from the sale of the shares of common stock were distributed to the selling stockholders.

No cash dividends were declared or paid in Fiscal 2022, Fiscal 2021 and Fiscal 2020.

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Stock-Based Compensation

Stock Option Awards

Stock-based awards are granted to employees and non-employee directors.

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2021 Equity Plan

The number of shares of common stock reserved for issuance under the 2021 Equity Plan is 4,034,072 common shares (“Share Reserve”) at December 25, 2022.

The number of shares of common stock that may be issued under the 2021 Equity Plan will automatically increase on the first day of each fiscal year, beginning on December 26, 2022 and continuing for each fiscal year until, and including, the fiscal year ending on (and including) December 29, 2030, equal to the least of (i) 2.0 % of the total number of shares of common stock actually issued and outstanding on the last day of the preceding fiscal year, (ii) a number of shares of common stock determined by the board of directors;

and (iii) the number of shares of common stock equal to the Share Reserve.

If any award granted under the 2021 Equity Plan is cancelled, expired, forfeited, or surrendered without consideration or otherwise terminated without delivery of the shares to the participant, then such unissued shares will be returned to the 2021 Equity Plan and be available for future awards under the 2021 Equity Plan.

Shares that are withheld from any award in payment of the exercise, base or purchase price or taxes related to such an award, not issued or delivered as a result of the net settlement of any award, or repurchased by the Company on the open market with the proceeds of a stock option will be deemed to have been delivered under the 2021 Equity Plan and will not be available for future awards under the 2021 Equity Plan.

A total of 1,018,975 non-qualified time-based stock option awards were granted under the 2021 Equity Plan during Fiscal 2022, which vest over a three-year requisite service period from the date of grant and expire 10 years after the grant date.

Stock-based compensation expense is recognized on a straight-line recognition method over the requisite service period.

2017 Equity Plan

The 2017 Equity Plan authorizes stock-based awards to be granted for up to 6,138,240 shares of common stock.

The awards granted under the 2017 Equity Plan consist of non-qualified stock options that generally vest based over a five -year requisite service period from the date of grant (the “time-based option awards”), as well as upon the occurrence of certain events and if certain market conditions were achieved, the (“performance-based option awards”).

Stock options have an exercisable life of no more than ten years from the date of grant.

The exercise price for any stock option award must be at least equal to the fair value of the common stock on the grant date.

A total of 4,409,331 shares of common stock are subject to outstanding option awards under the 2017 Equity Plan as of December 26, 2021.

The Company does not intend to grant any further awards under the 2017 Equity Plan.

The awards granted under the 2017 Equity Plan consisted of non-qualified stock options that generally vest based over a five-year requisite service period from the date of grant (the “time-based option awards”), as well as upon the occurrence of certain events and if certain market conditions were achieved, the (“performance-based option awards”).

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

All stock options have an exercisable life of no more than 10 years from the date of grant.

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

Modification of Performance-Based Option Awards - 2017 Equity Plan

On August 31, 2021, the Company’s board of directors amended the 2017 Equity Plan such that the performance-based option awards that convert into time-based option awards upon an initial public offering no longer vest over a period of three years , but instead vest one-third (1/3rd) on each of the first two anniversaries of an initial public offering and one-third (1/3rd) on the 273rd day following the second anniversary of an initial public offering.

This was accounted for as a modification for accounting purposes, resulting in a new fair value for all the performance-based option awards using an option-pricing model as of the modification date.

As of the modification date, the unrecognized compensation expense of all outstanding performance-based option awards was $ 15.6 million.

This was accounted for as a modification, resulting in a new fair value for all the performance-based option awards using an option-pricing model as of the modification date.

FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

On September 19, 2021, the Company’s board of directors modified performance-based option awards that contained a market condition granted under the 2017 Equity Plan, such that the vesting terms for one such tranche were amended to waive the market condition.

Accordingly, upon the Company’s IPO, such tranche converted into time-based option awards and vest one-third (1/3rd) on each of the first two anniversaries of the Company’s IPO and one-third (1/3rd) on the 273rd day following the second anniversary of the Company’s IPO.

This was accounted for as a modification for accounting purposes resulting in a new fair value using the option-pricing model for such performance-based option awards as of the modification date.

As of the modification date, the unrecognized compensation expense of this outstanding tranche was approximately $ 10.4 million.

This was accounted for as a modification resulting in a new fair value using the option-pricing model for such performance-based option awards as of the modification date.

On September 19, 2021, the Company’s board of directors modified the terms of performance-based option awards granted under the 2017 Equity Plan to the Company’s Chairman Emeritus.

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Additionally, the exercise period of these time-based and performance-based vested option awards was modified such that any vested option may be exercised at any time prior to the 10th anniversary of the original grant date.

These actions were accounted for as modifications for accounting purposes and resulted in an increase of $ 0.3 million to the fair value of these awards.

These actions were accounted for as modifications and resulted in an increase of $ 0.3 million to the fair value of these awards.

Upon the consummation of the Company’s IPO in October 2021, certain performance-based option awards converted into time-based option awards and stock compensation expense of $ 2.4 million was recognized in the fourth quarter of Fiscal 2021.

The remaining expense is being recognized on an accelerated recognition method over the remaining service period.

An immediate one-time charge of $ 5.6 million was recognized upon closing of the IPO, which included (i) the expense from the date of the modifications through the IPO date and (ii) the expense related to performance-based option awards for which the market condition was not satisfied upon the IPO.

FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Performance-Based Option Awards - 2017 Equity Plan

The remaining expense will be recognized on an accelerated recognition method over the remaining service period.

A summary of stock option activity under the 2017 Equity Plan for Fiscal 2021 is as follows:

A summary of stock option activity during Fiscal 2022 is as follows:

NUMBER OF OPTIONS WEIGHTED AVERAGE

EXERCISE PRICE AGGREGATE INTRINSIC VALUE

(in thousands)

WEIGHTED AVERAGE REMAINING CONTRACTUAL LIFE

Outstanding, December 26, 2021

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Forfeited ( 150,059 ) $ 10.24

Exercised ( 162,573 ) $ 8.76

Outstanding, December 25, 2022

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2,791,358 $ 9.15 $ 14,134 5.1

A summary of the non-vested stock options under the 2017 Equity Plan is as follows:

The aggregate intrinsic value is based on the difference between the exercise price of the stock option and the closing price of the Company’s common stock on the Nasdaq Global Select Market.

A summary of the non-vested stock option activity during Fiscal 2022 is as follows:

NUMBER OF OPTIONS WEIGHTED AVERAGE GRANT DATE FAIR VALUE

Nonvested, December 26, 2021

Granted 829,807 $ 1.33

Vested ( 429,979 ) $ 1.86

Forfeited ( 53,271 ) $ 1.68

Nonvested, December 29, 2019 4,330,860 $ 1.74

2,633,391 $ 7.03

Granted 1,018,975 $ 6.81

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2,324,316 $ 7.31

( 514,326 ) $ 1.76

Forfeited (1)

( 881,859 ) $ 4.26

Nonvested, December 26, 2021 (1)

2,633,391 $ 7.03

______________________________

(1) Weighted-average grant date fair value includes the fair value of the performance-based option awards as of the modification dates, as described above

The aggregate intrinsic value is based on the difference between the exercise price of the stock option and the estimated fair value of the Company’s common stock, or after the IPO, based on the closing price of the Company’s common stock on the Nasdaq.

The fair value of vested stock options was $ 0.9 million, $ 0.9 million and $ 0.8 million during Fiscal 2021, Fiscal 2020 and Fiscal 2019, respectively.

Stock-based compensation expense was $ 8.6 million, $ 0.8 million and $ 1.2 million in Fiscal 2021, Fiscal 2020 and Fiscal 2019, respectively.

FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

As of December 26, 2021, the amount of stock-based compensation expense not yet recognized on non-vested stock option awards was approximately $ 13.4 million and will be recognized over a weighted-average period of approximately 1.4 years.

T he remaining contractual life for stock option awards granted was approximately 6.2 years at December 26, 2021.

The weighted average grant date fair value of options granted during Fiscal 2022, Fiscal 2021 and Fiscal 2020 was $ 6.81 , $ 6.35 and $ 1.02 , respectively.

The total fair value of stock options vested during Fiscal 2022, Fiscal 2021 and Fiscal 2020 was $ 7.4 million, $ 0.9 million and $ 0.9 million, respectively.

Fair value of Stock Options

The assumptions utilized to determine the fair value of the stock option awards were as follows for the following periods:

The fair value of stock option awards is estimated on the date of grant using the Black-Scholes valuation model.

The assumptions utilized to estimate the grant date fair value of the stock option awards granted were as follows:

2022 2021 2020

Weighted average risk-free interest rate 1.0 % 0.6 % 2.0 %

Weighted average expected term (years) 6.5 4.6 4.5

Weighted average expected volatility 52.4 % 50.3 % 41.2 %

Expected term (years) 4.6 4.5 4.5

Risk-free interest rate 2.6 % 1.0 % 0.6 %

Expected dividend yield — — —

The Company does not have sufficient historical stock option exercise activity and therefore the expected term of stock options granted in Fiscal 2022 was estimated using the simplified method, which represents the mid-point between the vesting period and the contractual term for each grant.

In Fiscal 2021 and Fiscal 2020, the expected term of stock option awards had been determined based on data from publicly traded companies.

For Fiscal 2022, Fiscal 2021 and Fiscal 2020, the expected volatility of stock options 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 term of stock option awards has been determined based on data from publicly traded companies as the Company lacks company-specific historical or implied volatility information.

Therefore, Management also estimated its expected volatility based on historical volatilities of a publicly traded set of peer companies in the restaurant industry.

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

2021 Equity Plan

On September 19, 2021, the Company’s board of directors adopted, and on September 19, 2021 its stockholders approved, the 2021 Equity Plan, which became effective immediately prior to the effectiveness of the registration statement for the Company’s initial public offering on September 30, 2021.

The number of shares of common stock to be reserved for issuance under the 2021 Equity Plan is 4,034,072 common shares (“Share Reserve”).

The number of shares of common stock that may be issued under the 2021 Equity Plan will automatically increase on the first day of each fiscal year, commencing on January 1, 2023 and continuing for each fiscal year until, and including, the fiscal year ending on (and including) January 1, 2032, equal to the least of (i) 2 % of the total number of shares of common stock actually issued and outstanding on the last day of the preceding fiscal year, (ii) a number of shares of common stock determined by the board of directors;

and (iii) the number of shares of common stock equal to the Share Reserve.

Shares that are withheld from any award in payment of the exercise, base or purchase price or taxes related to such an award, not issued or delivered as a result of the net settlement of any award, or repurchased by the Company on the open market with the proceeds of a stock option will be deemed to have been delivered under the 2021 Equity Plan and will not be returned to the 2021 Equity Plan nor be available for future awards under the 2021 Equity Plan.

There were no issuances under the 2021 Equity Plan as of December 26, 2021.

Commitments and Contingencies

Purchase Commitments

Purchase obligations include agreements related to the construction or remodeling of restaurant facilities, the purchase of food, beverages, paper goods and other supplies, equipment purchases, marketing-related contracts and software license commitments and service contracts in the normal course of business.

These obligations are generally pursuant to short-term purchase orders at prevailing market prices and are recorded as liabilities when the related goods are received or services

FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

Restricted Stock Units

During Fiscal 2022, a total of 38,311 restricted stock units were granted under the 2021 Equity Plan at the weighted average grant date fair value of $ 14.36 .

The restricted stock units will vest over a one-year requisite service period from the date of grant and the fair value of restricted stock units was determined based on the closing market price of the Company’s common stock on the date of grant.

Stock-based compensation expense related to the restricted stock units is recognized on a straight-line basis over the vesting period.

There were no forfeitures of restricted stock units in Fiscal 2022.

Stock-Based Compensation Expense

Stock-based compensation expense was $ 10.4 million, $ 8.6 million and $ 0.8 million during Fiscal 2022, Fiscal 2021 and Fiscal 2020, respectively.

The total related income tax benefit for stock-based compensation expense was $ 2.1 million, $ 0.9 million and $ 0.2 million for Fiscal 2022, Fiscal 2021 and Fiscal 2020, respectively.

Cash received from stock options exercised was $ 1.4 million and the tax benefit realized from the option exercises was $ 0.3 million in Fiscal 2022.

The total intrinsic value of stock options exercised during Fiscal 2022 was $ 1.1 million.

There were no stock option exercises in Fiscal 2021 and 2020.

Unrecognized Stock-Based Compensation Expense

The following represents unrecognized stock-based compensation expense and the remaining weighted average vesting period as of December 25, 2022:

UNRECOGNIZED STOCK-BASED COMPENSATION EXPENSE

(in thousands)

REMAINING WEIGHTED AVERAGE

VESTING PERIOD

Stock options $ 9,602 1.6

Restricted stock units $ 234 0.4

Commitments and Contingencies

Purchase Commitments

We enter into various purchase obligations in the ordinary course of business, generally of a short-term nature.

These purchase obligations include commitments for inventory purchases, marketing-related contracts, corporate sponsorships, software/license commitments and service contracts.

We also enter into long-term, exclusive contracts with vendors to supply us with certain goods and services, however, they generally do not include firm minimum purchase commitments.

In July 2022, Management entered into an agreement with a vendor to purchase product.

The agreement will remain in effect through the later of (i) the purchase of 585,940 gallons of product or (ii) five years from the effective date of the agreement.

The remaining minimum purchase commitment as of December 25, 2022 was approximately $ 9.1 million.

Legal Proceedings

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In the event any litigation losses become probable and estimable, the Company will recognize any anticipated losses.

Net Loss Per Common Share

The following table sets forth the computations of basic and diluted net loss per common share attributable to First Watch Restaurant Group, Inc.:

FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Unclaimed Property

The Company is subject to unclaimed or abandoned property (escheat) laws which require it to turn over to state governmental authorities the property of others held by the Company that has been unclaimed for specified periods of time.

Property subject to escheat laws generally relates to uncashed checks, trade accounts receivable credits and unredeemed gift card balances.

During the first quarter of 2022, the Company received a letter from the Delaware Secretary of State inviting the Company to participate in the Delaware Secretary of State’s Abandoned or Unclaimed Property Voluntary Disclosure Agreement Program to avoid being sent an audit notice by the Delaware Department of Finance.

On August 31, 2022, the Company was accepted into Delaware’s Voluntary Disclosure Agreement Program, entitling it to certain benefits and protections offered to participants in the program.

The Company intends to work in good faith to complete a review of its books and records related to unclaimed or abandoned property during the periods required under the program.

The Company will continue to examine its options regarding the escheat laws of Delaware including completing Delaware’s Voluntary Disclosure Agreement Program or proceeding to audit.

Any potential loss, or range of loss, that may result from this matter is not currently reasonably estimable.

As of December 26, 2022, Management believes the Company is not currently required to remit any amounts relating to future unredeemed gift cards to states as the Company’s subsidiary that is the issuer of our gift cards was re-domiciled in Florida, which exempts gift cards from the abandoned and unclaimed property laws.

Net Income (Loss) Per Common Share

The following table sets forth the computations of basic and diluted net income (loss) per common share:

(in thousands, except share and per share data) 2022 2021 2020

Net loss attributable to First Watch Restaurant Group, Inc.

$ ( 2,107 ) $ ( 49,681 ) $ ( 45,439 )

Weighted average common shares outstanding - basic and diluted 48,213,995 45,013,784 45,013,784

Net loss per common share attributable to First Watch Restaurant Group, Inc.

- basic and diluted $ ( 0.04 ) $ ( 1.10 ) $ ( 1.01 )

Diluted net loss per common share is calculated by adjusting the weighted average shares outstanding for the theoretical effect of potential common shares that would be issued for preferred stock and stock option awards outstanding and unvested at the end of the reporting period using the two-class method and treasury method, respectively.

All stock option awards outstanding were excluded from the calculation of diluted net loss per common share because of their anti-dilutive impact for Fiscal 2021, Fiscal 2020 and Fiscal 2019.

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

Weighted average common shares outstanding - basic 59,097,512 48,213,995 45,013,784

Weighted average common shares outstanding - diluted 60,140,045 48,213,995 45,013,784

Net income (loss) per common share - basic $ 0.12 $ ( 0.04 ) $ ( 1.10 )

Net income (loss) per common share - diluted $ 0.11 $ ( 0.04 ) $ ( 1.10 )

Stock options outstanding not included in diluted net income (loss) per common share as their effect is anti-dilutive 1,787,517 4,409,331 5,143,229

Diluted net income (loss) per common share is calculated by adjusting the weighted average shares outstanding for the theoretical effect of potential common shares that would be issued for preferred stock using the two-class method, as well as for stock options and restricted stock units outstanding and unvested as of the respective periods using the treasury method.

All stock option awards outstanding were excluded from the calculation of diluted net loss per common share because of their anti-dilutive impact for Fiscal 2021 and Fiscal 2020.

All preferred stock shares were excluded from the calculation of diluted net loss per common share because of their anti-dilutive impact for Fiscal 2021 and Fiscal 2020.

As a result, there was no difference between basic and diluted net loss per common share attributable to First Watch Restaurant Group, Inc.

during Fiscal 2021, Fiscal 2020 and Fiscal 2019.

during Fiscal 2021 and Fiscal 2020.

During Fiscal 2020, the performance-based stock options that were granted under the 2017 Equity Plan, certain of which were converted into time-based stock options upon the Company’s IPO, were excluded from the diluted net loss per common share calculation as the performance condition was not considered probable of being met.

FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Condensed Financial Information of Registrant (Parent Company Only)

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$ 0.01 par value;

10,000,000 shares authorized and none outstanding at December 26, 2021;

266,667 shares authorized, issued and outstanding at December 27, 2020

10,000,000 shares authorized;

none issued and outstanding

Common stock;

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FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

FIRST WATCH RESTAURANT GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

2022 2021 2020

Equity in net loss of subsidiaries

Net loss and comprehensive loss $ ( 2,107 ) $ ( 49,681 ) $ ( 45,472 )

Net loss per common share attributable to First Watch Restaurant Group, Inc.

- basic and diluted $ ( 0.04 ) $ ( 1.10 ) $ ( 1.01 )

Weighted average number of common shares outstanding - basic and diluted 48,213,995 45,013,784 45,013,784

Equity in net income (loss) of subsidiaries

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

Net income (loss) per common share attributable to First Watch Restaurant Group, Inc.

- basic $ 0.12 $ ( 0.04 ) $ ( 1.10 )

Net income (loss) per common share attributable to First Watch Restaurant Group, Inc.

- diluted $ 0.11 $ ( 0.04 ) $ ( 1.10 )

Weighted average number of common shares outstanding -basic 59,097,512 48,213,995 45,013,784

Weighted average number of common shares outstanding - diluted 60,140,045 48,213,995 45,013,784

Statements of cash flows have not been presented as First Watch Restaurant Group, Inc.

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The Company is a holding company without any operations of its own (the “Parent Company”).

Pursuant to the terms of the New Credit Agreement discussed in Note 10, Debt, the Company and certain subsidiaries of the Company have restrictions on their ability to, among other things, (i) incur additional indebtedness, pay dividends or make certain intercompany loans and advances, and (ii) exceed a maximum total rent adjusted net leverage ratio or fall below a minimum fixed charge coverage ratio.

Pursuant to the terms of the Credit Agreement discussed in Note 8, Debt, the Company and certain subsidiaries of the Company have restrictions on their ability to, among other things, (i) incur additional indebtedness, pay dividends or make certain intercompany loans and advances, and (ii) exceed a maximum total rent adjusted net leverage ratio or fall below a minimum fixed charge coverage ratio.

As a result of these restrictions, these parent company financial statements have been prepared in accordance with Rule 12-04 of Regulation S-X, as restricted net assets of the Company’s subsidiaries (as defined in Rule 4-08(e)(3) of Regulation S-X) exceed 25 % of the Company’s consolidated net assets as of December 25, 2022 and December 26, 2021.

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Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted.

The accompanying financial information should be read in conjunction with the accompanying Company’s consolidated financial statements and related notes thereto.

The accompanying financial information

FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

should be read in conjunction with the accompanying Company’s consolidated financial statements and related notes thereto.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

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 8. Financial Statements and Supplementary Data