FWRG filing — read by section

Item 8. Financial Statements and Supplementary Data

Item 8. Financial Statements and Supplementary Data 
 
 
 
 
 
 INDEX TO FINANCIAL INFORMATION 
 
 
 
 
 Report of Independent Registered Public Accounting Firm (PCAOB ID 238 ) 
 59 
 
 Consolidated Balance Sheets - December 25, 2022 and December 26, 2021 
 61 
 
 Consolidated Statements of Operations and Comprehensive Income ( Loss ) - For Fiscal Years 202 2 , 202 1 and 2 020 
 62 
 
 Consolidated Statements of Equity - For Fiscal Years 202 2 , 202 1 and 20 20 
 63 
 
 Consolidated Statements of Cash Flows - For Fiscal Years 2022, 2021 and 2020 
 64 
 
 Notes to Consolidated Financial Statements 
 66 
 

 
 
 
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 Report of Independent Registered Public Accounting Firm 
 
 
 To the Board of Directors and Shareholders of First Watch Restaurant Group, Inc. 
 
 
 Opinion on the Financial Statements 
 
 
 We have audited the accompanying consolidated balance sheets of First Watch Restaurant Group, Inc. and its subsidiaries (the “Company”) as of December 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. 
 
 
 Basis for Opinion 
 
 
 These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. 
 
 
 We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the 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. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. 
 
 
 
 
 /s/ PricewaterhouseCoopers LLP 
 Tampa, Florida 
 March 7, 2023 
 
 
 We have served as the Company’s auditor since 1999. 
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 FIRST WATCH RESTAURANT GROUP, INC. 
 CONSOLIDATED BALANCE SHEETS 
 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 
 
 
 
 DECEMBER 25, 2022 DECEMBER 26, 2021 
 Assets 
 Current assets: 
 Cash and cash equivalents $ 49,672 $ 51,864 
 Restricted cash 251 251 
 Accounts receivable 6,164 4,450 
 Inventory 5,028 4,023 
 Prepaid expenses 5,800 5,677 
 Other current assets 373 1,432 
 Total current assets 67,288 67,697 
 Goodwill 345,219 345,219 
 Intangible assets, net 143,151 143,000 
 Operating lease right-of-use assets 352,373 324,995 
 Property, fixtures and equipment, net of accumulated depreciation of $ 145,720 and $ 115,582 , respectively 
 195,117 164,695 
 Other long-term assets 1,298 1,311 
 Total assets $ 1,104,446 $ 1,046,917 
 Liabilities and Equity 
 Current liabilities: 
 Accounts payable $ 7,590 $ 11,060 
 Accrued liabilities 22,729 15,889 
 Accrued compensation and deferred payroll taxes 17,899 21,196 
 Deferred revenues 5,193 4,654 
 Current portion of operating lease liabilities 38,936 38,186 
 Current portion of long-term debt 6,257 3,186 
 Note payable 1,376 2,352 
 Total current liabilities 99,980 96,523 
 Operating lease liabilities 366,113 330,495 
 Long-term debt, net 94,668 99,753 
 Deferred income taxes 17,166 12,489 
 Other long-term liabilities 3,384 3,228 
 Total liabilities 581,311 542,488 
 Commitments and contingencies (Note 15) 
 Equity: 
 Preferred stock; $ 0.01 par value; 10,000,000 shares authorized; none issued and outstanding 
 — — 
 Common stock; $ 0.01 par value; 300,000,000 shares authorized; 59,211,019 and 59,048,446 shares issued and outstanding at December 25, 2022 and December 26, 2021, respectively 
 592 590 
 Additional paid-in capital 620,675 608,878 
 Accumulated deficit ( 98,132 ) ( 105,039 ) 
 Total equity 523,135 504,429 
 Total liabilities and equity $ 1,104,446 $ 1,046,917 

 The accompanying notes are an integral part of these consolidated financial statements. 
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 FIRST WATCH RESTAURANT GROUP, INC. 
 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) 
 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 
 
 FISCAL YEAR 
 2022 2021 2020 
 Revenues: 
 Restaurant sales $ 719,181 $ 592,343 $ 337,433 
 Franchise revenues 10,981 8,850 4,955 
 Total revenues 730,162 601,193 342,388 
 Operating costs and expenses: 
 Restaurant operating expenses (exclusive of depreciation and amortization shown below): 
 Food and beverage costs 172,561 134,201 76,975 
 Labor and other related expenses 238,257 189,167 120,380 
 Other restaurant operating expenses 114,476 94,847 61,821 
 Occupancy expenses 59,919 55,433 49,450 
 Pre-opening expenses 5,414 3,310 3,880 
 General and administrative expenses 84,959 70,388 46,322 
 Depreciation and amortization 34,230 32,379 30,725 
 Impairments and loss on disposal of assets 920 381 315 
 Transaction expenses (income), net 2,513 ( 1,156 ) ( 258 ) 
 Total operating costs and expenses 713,249 578,950 389,610 
 Income (Loss) from operations 16,913 22,243 ( 47,222 ) 
 Interest expense ( 5,232 ) ( 20,099 ) ( 22,815 ) 
 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 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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 FIRST WATCH RESTAURANT GROUP, INC. 
 CONSOLIDATED STATEMENTS OF EQUITY 
 (IN THOUSANDS, EXCEPT SHARE AMOUNTS) 
 
 
 
 Preferred Stock Common Stock Additional
Paid-In
Capital Accumulated
Deficit Total Equity 
 Shares Amount Shares Amount 
 Balance at December 29, 2019 — $ — 45,013,784 $ 450 $ 382,598 $ ( 53,251 ) $ 329,797 
 Share issuance 266,667 3 — — 39,997 — 40,000 
 Net loss — — — — — ( 49,681 ) ( 49,681 ) 
 Stock-based compensation — — — — 750 — 750 
 Balance at December 27, 2020 266,667 $ 3 45,013,784 $ 450 $ 423,345 $ ( 102,932 ) $ 320,866 
 Common stock issuance — — 10,877,850 109 176,965 — 177,074 
 Conversion of preferred shares ( 266,667 ) ( 3 ) 3,156,812 31 ( 28 ) — — 
 Net loss — — — — — ( 2,107 ) ( 2,107 ) 
 Stock-based compensation — — — — 8,596 — 8,596 
 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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 FIRST WATCH RESTAURANT GROUP, INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS 
 (IN THOUSANDS) 
 
 
 
 FISCAL YEAR 
 2022 2021 2020 
 Cash flows from 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 
 Non-cash operating lease costs 16,122 13,052 11,727 
 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 — 
 Impairments and loss on disposal of assets 920 381 315 
 Gain on insurance proceeds ( 219 ) — — 
 Changes in assets and liabilities: 
 Accounts receivable ( 1,714 ) ( 535 ) 1,826 
 Inventory ( 1,005 ) ( 1,108 ) ( 203 ) 
 Prepaid expenses ( 123 ) ( 3,187 ) 619 
 Deferred offering costs — — 1,307 
 Other assets, current and long-term 1,072 169 ( 446 ) 
 Accounts payable ( 3,470 ) 6,700 ( 866 ) 
 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 
 Deferred revenues, current and long-term 719 648 ( 3,060 ) 
 Operating lease liabilities ( 7,048 ) ( 9,760 ) 8,073 
 Other liabilities ( 309 ) 695 — 
 Net cash provided by (used in) operating activities 62,937 62,971 ( 18,364 ) 
 Cash flows from investing activities: 
 Insurance proceeds 219 — — 
 Capital expenditures ( 62,219 ) ( 35,311 ) ( 26,749 ) 
 Purchase of intangible assets ( 1,111 ) ( 371 ) ( 225 ) 
 Net cash used in investing activities ( 63,111 ) ( 35,682 ) ( 26,974 ) 

 The accompanying notes are an integral part of these consolidated financial statements. 
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 FIRST WATCH RESTAURANT GROUP, INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS - continued 
 (IN THOUSANDS) 
 
 
 
 FISCAL YEAR 
 2022 2021 2020 
 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 ) 
 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 ) 
 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 (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 period 52,115 39,097 11,121 
 End of period $ 49,923 $ 52,115 $ 39,097 
 
 Supplemental cash flow information: 
 Cash paid for interest $ 3,368 $ 16,152 $ 19,821 
 Cash paid for income taxes, net of refunds $ 915 $ 79 $ 163 
 
 Supplemental disclosures of non-cash investing and financing activities: 
 Interest converted to long-term debt $ — $ 3,063 $ 1,583 
 Leased assets obtained in exchange for new operating lease liabilities $ 45,979 $ 33,857 $ 21,333 
 Leased assets obtained in exchange for new finance lease liabilities $ 127 $ 217 $ 277 
 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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 FIRST WATCH RESTAURANT GROUP, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 
 

 
 
 1. Nature of Business and Organization 
 First Watch Restaurant Group, Inc. (collectively with its wholly-owned subsidiaries, “the Company” or “Management”) is a Delaware holding company. The Company operates and franchises restaurants in 29 sta tes operating under the “First Watch” trade name, which are focused on made-to-order breakfast, brunch and lunch. The Company does not operate outside of the United States and all of its assets are located in the United States. The Company’s outstanding stock was purchased by funds affiliated with or managed by Advent International Corporation on August 21, 2017 (the “Advent Acquisition”). 
 The Company operates restaurants through its wholly owned subsidiary, First Watch Restaurants, Inc., and is a franchisor through its wholly owned subsidiary, First Watch Franchise Development Co. As of December 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 
 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. 
 
 2. Summary of Significant Accounting Policies 
 Basis of Presentation 
 The Company reports financial information on a 52- or 53-week fiscal year ending on the last Sunday of each calendar year. The fiscal years ended December 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 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 income (loss) and comprehensive income (loss). 
 Principles of Consolidation 
 The Company’s consolidated financial statements include the accounts of its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. 
 The Company does not hold ownership interests in any franchisee and does not provide financial support to franchisees. As a result, the Company’s franchise relationships are not variable interest entities and are not consolidated. 
 Use of Estimates 
 The preparation of 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. 
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 FIRST WATCH RESTAURANT GROUP, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 
 
 

 Segment Reporting 
 Management determined the Company ’ s single operating segment on the basis that the Company ’ s Chief Operating Decision Maker (the “CODM”), the Chief Executive Officer, assesses performance and allocates resources at the Company's consolidated level. The Company does not have any customer that represents more than 10.0% of total revenues for the periods presented. 
 Business Combinations 
 The Company ’ s business combinations are accounted for using the purchase method of accounting . The consideration transferred in a business combination, identifiable assets acquired and liabilities assumed are measured at their estimated fair value as of the date of the acquisition. Goodwill is recognized for the amount by which the purchase consideration exceeds the fair values of the net assets acquired. Costs incurred in connection with business combinations are expensed as incurred. 
 Fair Value of Financial Instruments 
 Certain assets and liabilities are carried at fair value. Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. 
 Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable inputs and the last is considered unobservable. The classification of a financial asset or liability within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. 
 
 Level 1 Quoted prices (unadjusted) in active markets for identical assets or liabilities 
 Level 2 Observable inputs available other than quoted prices included in Level 1 
 Level 3 Unobservable inputs based on assumptions that cannot be determined by observable market data 

 The carrying amounts of the Company ’ s financial instruments, including cash equivalents, accounts receivable, accounts payable, accrued expenses, note payable and other current liabilities, approximate their fair values due to their short-term maturities. 
 Cash and Cash Equivalents and Restricted Cash 
 Cash and cash equivalents include all cash balances and highly liquid investments with an original maturity of three months or less. Amounts receivable from credit card processors are considered cash equivalents because they are highly liquid and are typically converted to cash within three business days. 
 Amounts included in restricted cash represent those required to be set aside by a contractual agreement for the settlement of insurance claims. 
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 FIRST WATCH RESTAURANT GROUP, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 
 
 

 Concentrations of Credit Risk 
 Financial instruments, which potentially subject the Company to concentrations of market and credit risk, are cash and cash equivalents and restricted cash. At times, cash balances may be in excess of the Federal Deposit Insurance Corporation insurance limits. The Company has not experienced any losses to date as a result of these risks. Management periodically assesses the quality of the financial institutions and believes that the risk related to these deposits is minimal. 
 Accounts Receivable 
 Accounts receivable consist primarily of receivables from franchisees, receivables from third-party delivery providers, receivables from gift card sales and vendor rebates. The Company believes all amounts to be collectible based on a variety of factors it evaluates, including historical experience, current economic conditions and other factors. Accordingly, no allowance for credit losses or doubtful accounts has been recorded as of December 25, 2022 and December 26, 2021. 
 Inventory 
 Inventory consists primarily of food and beverage costs and is stated at the lower of cost (determined by the first-in, first-out method) or net realizable value. Adjustments are not deemed necessary to reduce inventory to net realizable value due to the rapid turnover and utilization of inventory. 
 Deferred Offering Costs 
 Certain legal, professional accounting, and other third-party fees that are directly associated with in-process equity financings are capitalized as deferred offering costs until such financings are consummated. After consummation of the equity financing, these costs are recorded in equity as a reduction of additional paid-in capital generated as a result of the offering. The Company incurred $ 5.0 million of costs in connection with the IPO in Fiscal 2021, which were recorded in equity as a reduction of additional paid in capital. The Company incurred $ 2.0 million in deferred offering costs in Fiscal 2020, which were expensed in General and administrative expenses as a result of halting the Company ’ s public registration of equity in Fiscal 2020. 
 Leases 
 The Company ’ s restaurant facilities, corporate offices and certain restaurant equipment are leased under various agreements having initial terms expiring between 2023 and 2037. Restaurant facility leases generally have renewal periods of five to 20 years, exercisable at the option of the Company. At the commencement of each lease, an evaluation is performed to determine whether (i) the contract involves the use of property or equipment, (ii) the Company controls the use of the asset and (iii) the Company has the right to direct the use of the asset. Management determines the classification of lease contracts as operating or finance leases. The majority of the Company ’ s real estate leases are classified as operating leases and the majority of the Company ’ s equipment leases are classified as finance leases. 
 For operating leases with lease terms greater than twelve months, a lease liability is recognized for future fixed lease payments and a corresponding right-of-use asset is recognized representing the Company ’ s right to use the underlying asset during the lease term. The lease liability is initially measured as the present value of the future fixed lease payments that will be made over the lease term using the Company ’ s incremental borrowing rate as there are no implicit rates provided in the lease contracts. The Company ’ s incremental borrowing rate is based on a market yield implied by the Company ’ s outstanding secured term 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 renewal options will be exercised. 
 Leases with indexed rent escalation clauses are recorded using the index that existed at lease commencement or upon the latest modification requiring remeasurement. Subsequent changes in the index are recorded as variable lease expense. Contingent rent payments, which are based on a percentage of sales for certain restaurant facilities, are recorded as variable lease expense when the Company determines that such sales levels will be achieved. In addition to fixed lease payments, certain of the Company ’ s real estate leases also require payment of a proportionate share of property taxes, insurance and maintenance costs, which are expensed as incurred in the Consolidated Statements of Operations and Comprehensive Income (Loss) and future variable rent obligations are not included within the lease liabilities on the Consolidated Balance Sheets. 
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 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 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 Income (Loss). 
 In Fiscal 2020, Management renegotiated numerous lease agreements that primarily resulted in rent abatements or rent deferrals during the period of the closures of the company-owned restaurants as a result of the COVID-19 pandemic. Management elected the practical expedient for COVID-19 related rent concessions pursuant to the question and answer document issued by the Financial Accounting Standards Board (the “FASB”) in April 2020 and remeasured the lease liabilities using the original discount rate with a corresponding adjustment to the right-of-use assets. Rent deferrals increased the lease liabilities and right-of use assets until amounts are paid with no impact to lease expense. Rent abatements were recognized on a straight-line basis over the respective remaining lease term. 
 Finance lease liabilities and corresponding finance lease assets are recognized at an amount equal to the present value of the minimum lease payments over the 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. 
 Property, Fixtures and Equipment 
 Property, fixtures and equipment, including capitalized software, are stated at cost less accumulated depreciation. Refurbishments and improvements that increase the productive capacity or extend the useful life of assets are capitalized and depreciated over their estimated useful lives. Repair and maintenance costs are expensed as incurred. Leasehold improvements are depreciated over the shorter of their useful life or the 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 Income (Loss). 
 Direct internal costs associated with the acquisition, development, design and construction of company-owned restaurants are capitalized as these costs have a future benefit to the Company. Once a restaurant opens, these costs are depreciated and recorded in Depreciation and amortization. Direct internal costs of $ 0.7 million and $ 0.5 million were capitalized in Fiscal 2022 and Fiscal 2021, respectively. 
 Depreciation is computed using the straight-line method over the following estimated useful lives: 
 
 Building and land improvements 30 to 40 years 
 
 Leasehold improvements 3 to 20 years 
 
 Furniture and fixtures 2 to 10 years 
 
 Equipment (including capitalized software) 2 to 15 years 
 
 Vehicles 3 to 10 years 
 

 Goodwill and Indefinite-lived Intangible Assets 
 Goodwill and indefinite-lived intangible assets are evaluated for impairment annually on the first day of the fourth quarter of the fiscal year, or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company has one reporting unit for goodwill impairment testing purposes. 
 Management may elect to perform a qualitative assessment to determine whether it is more likely than not that the reporting unit and/or asset group is impaired. If the qualitative assessment is not performed, or if it is not more likely than not that the estimated fair value of the reporting unit and indefinite-lived intangible assets exceeds the respective carrying value, a quantitative analysis is required. 
 Prior to the IPO, Management’s quantitative assessment for determining the fair value of the reporting unit used a blend of the market capitalization approach and the income approach. The market capitalization approach used Management’s selection of peer companies to estimate fair value. The income approach used the discounted cash flow method estimating 
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 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. 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. 
 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 
 Intangible assets with definite lives consist of franchise rights which arose from the purchase price allocation in connection with the Advent Acquisition and also include reacquired rights from the Company ’ s acquisitions of franchised restaurants. Definite-lived intangible assets are amortized over their estimated useful lives and are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. 
 When evaluating the carrying amount for recoverability, the total future undiscounted net cash flows expected to be generated by the asset are compared to the carrying amount. If the total future undiscounted net cash flows are less than the carrying amount, this may be an indicator of impairment. An impairment loss is recognized when the asset’s carrying value exceeds its estimated fair value. Fair value is generally estimated using a discounted cash flow model using unobservable inputs that fall within Level 3 of the fair value hierarchy. No impairment loss was recorded for definite-lived intangible assets in Fiscal 2022, Fiscal 2021 and Fiscal 2020. 
 Impairment Assessment of Long-lived Assets 
 Long-lived assets deployed at company-owned restaurants include (i) property, fixtures and equipment, (ii) operating lease right-of-use asset, net of the related operating lease liability and (iii) reacquired rights to the extent the restaurant had been previously acquired by the Company. 
 When circumstances indicate that the carrying value may not be recoverable, an evaluation for impairment is performed at the lowest level of identifiable cash flows, which is at the individual restaurant level. If the total future undiscounted net cash flows are less than the carrying value of the long-lived assets at the individual restaurant level, the fair value is determined based on discounted future net cash flows expected to result from the use and eventual disposition of the assets, which are unobservable inputs that fall within Level 3 of the fair value hierarchy. An impairment loss is recognized in an amount equal to the excess of the carrying value over the estimated fair value. 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 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. 
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 FIRST WATCH RESTAURANT GROUP, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 
 
 

 Revenue Recognition 
 Revenues from food and beverage sales are reported, net of discounts and taxes. For in-restaurant dining and take-out sales, revenues are recognized when payment is tendered. For delivery sales made through the Company’s mobile application and website, the Company controls the delivery services and recognizes revenue, including delivery fees, when the delivery partner transfers the food and beverage to the customer. With respect to sales made through the delivery partner’s mobile application or website, the Company recognizes revenue, excluding delivery fees collected by the delivery partner, when control of the food and beverage is transferred to the delivery partner. Payment is received from the delivery partner subsequent to the transfer of food and beverage and the payment terms are short-term. 
 Franchise revenues include initial franchise fees and ongoing sales-based royalty and system fund contributions, which are used for advertising, marketing and public relations programs and materials. The license granted to develop and operate a restaurant is the distinct performance obligation that is transferred to the franchisee. Ancillary promised services, such as training, which are not considered distinct within the context of the franchise agreement, are combined with the franchise license and are considered one distinct performance obligation. Payments for initial franchise fees are received either upon execution of the franchise agreement and/or upon opening of the restaurant. These payments are deferred and recognized as revenue throughout the contractual term of the related franchise agreement. Unamortized deferred franchise fees are recognized as revenue upon the termination of franchise agreements with franchisees. The short-term and long-term unamortized portion of these liabilities are included in Deferred revenues and in Other long-term liabilities, respectively. 
 Royalty and system fund contributions from franchisees are based on a percentage of sales and are recognized as revenue in the period the sales occurred. 
 Gift cards are sold at restaurants and certain retail venues. Deferred revenues include liabilities established for the value of the gift cards when sold. Revenue is recognized from gift card sales upon redemption by the customer. Management estimates the amount of gift cards for which the likelihood of redemption is remote, referred to as “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. Utilizing this method, Management estimates both the breakage and the time period of redemption. If actual redemption patterns vary from these estimates, actual gift card breakage income may differ from the amounts recorded. Estimates of the redemption period and breakage rate applied are updated periodically. Gift card liabilities are included in Deferred revenues. 
 Food and Beverage Costs 
 The components of food and beverage costs at company-owned restaurants fluctuate directly with sales volumes and are impacted by changes in commodity prices or promotional activities. 
 Pre-opening Expenses 
 Pre-opening expenses are costs incurred to open new company-owned restaurants. Pre-opening expenses include pre-opening rent expense, which is recognized during the period between the date of possession of the restaurant facility and the restaurant opening date. In addition, pre-opening expenses include manager salaries, recruiting expenses, employee payroll and training costs, which are recognized in the period in which the expense was incurred. Pre-opening expenses can fluctuate from period to period, based on the number and timing of new company-owned restaurant openings. 
 Consideration Received from Vendors 
 The Company receives consideration from certain vendors for volume rebates and allowances. The Company accounts for consideration from a vendor as a reduction of the purchase price of the goods or services acquired from the vendor. 
 Advertising Costs 
 Advertising costs are recognized as incurred or, in the case of advertisements, when the advertisement occurs. Advertising costs 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 
 
 
 Debt discount and deferred issuance costs incurred in connection with the issuance of long-term debt are recorded as reductions of long-term debt and are amortized over the term of the related debt. Amortization expense of debt discount and deferred issuance costs is included in Interest expense. 
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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 
 
 

 Income Taxes 
 
 Income taxes are accounted for under the asset and liability method of accounting. Under this method, deferred tax assets or liabilities are recognized for the estimated future tax effects attributable to temporary differences between the carrying value and the tax basis of assets and liabilities as well as tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applicable in the years in which the differences are expected to be recovered or settled. Changes in deferred tax assets or liabilities are recognized in Income tax (expense) benefit. 
 
 
 Deferred tax assets are recognized for all deductible temporary differences to the extent that it is probable that taxable income will be available against which the deductible temporary differences can be utilized. Realization of deferred tax assets is dependent upon the availability of taxable income and a valuation allowance for deferred tax assets is provided when it is more likely than not that a portion of the deferred tax assets will not be realized. In the assessment for realization of deferred tax assets, Management considers all sources of taxable income including (i) taxable income in any available carry back period, (ii) scheduling of anticipated reversal of taxable temporary differences, (iii) tax-planning strategies and (iv) taxable income expected to be generated in the future other than from reversing temporary differences and 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. 
 
 
 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 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. Under the hybrid method, multiple valuation approaches are used and then combined into a single probability weighted valuation using a PWERM, which considers the probability of an initial public offering and sale scenarios. The results of the valuation approaches were weighted based on a variety of factors, including the current macroeconomic environment, current industry conditions and length of time since arms-length market transaction events. Additionally, a discount for lack of marketability was applied to account for the lack of access to an active public market. The resulting value was then allocated to outstanding equity using an option-pricing model. This process involved the use of estimates, judgments, and assumptions that are highly complex and subjective, such as those regarding our expected future revenue, expenses and future cash flows, discount rates, market multiples, the selection of comparable companies, and the probability of possible future events. The assumptions underlying these valuations represented Management’s best estimate, which involved inherent uncertainties and the application of Management’s judgment. As a result, if Management had used significantly different assumptions or estimates, the fair value of our common stock and our stock-based compensation expense could have been materially different. 
 
 
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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 
 
 

 Summary of Recently Issued Accounting Pronouncements 
 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 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. 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. 
 
 3. Revenues 
 The following tables include a detail of liabilities from contracts with customers: 
 
 (in thousands) DECEMBER 25, 2022 DECEMBER 26, 2021 
 Deferred revenues: 
 Deferred gift card revenue $ 4,897 $ 4,410 
 Deferred franchise fee revenue - current 296 244 
 Total current deferred revenues $ 5,193 $ 4,654 
 Other long-term liabilities: 
 Deferred franchise fee revenue - non-current $ 2,472 $ 2,292 

 Changes in deferred gift card contract liabilities were as follows: 
 
 FISCAL YEAR 
 (in thousands) 2022 2021 2020 
 Deferred gift card revenue: 
 Balance, beginning of period $ 4,410 $ 4,024 $ 6,902 
 Gift card sales 9,627 8,286 5,197 
 Gift card redemptions ( 8,225 ) ( 7,152 ) ( 6,924 ) 
 Gift card breakage ( 915 ) ( 748 ) ( 1,151 ) 
 Balance, end of period $ 4,897 $ 4,410 $ 4,024 

 
 
 Gift cards are combined in one homogeneous pool and are not separately identifiable. As such, the revenue recognized consists of gift cards that were part of the deferred revenue balance at the beginning of the period as well as gift cards that were issued during the period. 
 
 
 Changes in deferred franchise fee contract liabilities were as follows: 
 
 
 
 FISCAL YEAR 
 (in thousands) 2022 2021 2020 
 Deferred franchise fee revenue: 
 Balance, beginning of period $ 2,536 $ 2,274 $ 2,456 
 Cash received 530 537 158 
 Franchise revenues recognized ( 298 ) ( 275 ) ( 340 ) 
 Balance, end of period $ 2,768 $ 2,536 $ 2,274 

 
 
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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 
 
 

 Revenues recognized disaggregated by type were as follows: 
 
 FISCAL YEAR 
 (in thousands) 2022 2021 2020 
 Restaurant sales: 
 In-restaurant dining sales $ 571,048 $ 452,989 $ 257,029 
 Third-party delivery sales 82,049 70,486 38,524 
 Take-out sales 66,084 68,868 41,880 
 Total restaurant sales $ 719,181 $ 592,343 $ 337,433 
 
 Franchise revenues: 
 Royalty and system fund contributions $ 10,683 $ 8,575 $ 4,615 
 Initial fees 298 275 340 
 Total franchise revenues $ 10,981 $ 8,850 $ 4,955 
 Total revenues $ 730,162 $ 601,193 $ 342,388 

 Deferred revenues as of December 25, 2022 are expected to be recognized as follows: 
 
 Fiscal year (in thousands) 
 2023 $ 5,193 
 2024 $ 395 
 2025 $ 365 
 2026 $ 355 
 2027 $ 326 
 Thereafter $ 1,031 

 
 4. Accounts Receivable 
 Accounts receivable consisted of the following: 
 
 (in thousands) DECEMBER 25, 2022 DECEMBER 26, 2021 
 Receivables from third-party delivery providers $ 974 $ 1,021 
 Receivables from franchisees 1,076 927 
 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 

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 
 
 

 5. Intangible Assets, Net 
 Intangible assets, net consisted of the following: 
 DECEMBER 25, 2022 
 (in thousands) Weighted
Average
Useful Lives Gross
Carrying Value Accumulated
Amortization Net Carrying
Value 
 Registered trademarks, trade names, domains, liquor licenses Indefinite $ 139,258 $ ( 316 ) $ 138,942 
 Franchise rights 9 years 9,404 ( 5,195 ) 4,209 
 $ 148,662 $ ( 5,511 ) $ 143,151 

 
 
 
 DECEMBER 26, 2021 
 (in thousands) Weighted
Average
Useful Lives Gross
Carrying Value Accumulated
Amortization Net Carrying
Value 
 Registered trademarks, trade names, domains, liquor licenses Indefinite $ 138,143 $ ( 316 ) $ 137,827 
 Franchise rights 9 years 9,404 ( 4,231 ) 5,173 
 $ 147,547 $ ( 4,547 ) $ 143,000 

 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. 
 Estimated future amortization of definite-lived intangible assets as of December 25, 2022 is as follows: 
 
 Fiscal year (in thousands) 
 2023 $ 809 
 2024 $ 809 
 2025 $ 809 
 2026 $ 635 
 2027 $ 433 
 Thereafter $ 714 

 75 

 
 FIRST WATCH RESTAURANT GROUP, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

 6. Property, Plant and Equipment 
 
 (in thousands) DECEMBER 25, 2022 DECEMBER 26, 2021 
 Building and land improvements $ 1,354 $ 1,354 
 Leased land asset 1,190 1,190 
 Leasehold improvements 178,893 146,583 
 Furniture, fixtures and equipment (including capitalized software) 145,397 118,734 
 Financing lease assets 3,066 3,320 
 Vehicles 455 455 
 Total property, fixtures and equipment 330,355 271,636 
 Accumulated depreciation ( 145,720 ) ( 115,582 ) 
 Construction-in-progress 10,482 8,641 
 Total property, fixtures and equipment, net $ 195,117 $ 164,695 

 
 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 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. 
 
 7. Accrued Liabilities 
 Accrued liabilities consisted of the following: 
 
 (in thousands) DECEMBER 25, 2022 DECEMBER 26, 2021 
 Construction liabilities $ 6,908 $ 4,445 
 Sales tax 3,791 3,337 
 Self-insurance and general liability reserves 1,529 1,353 
 Utilities 1,468 1,306 
 Legal 379 105 
 Credit card fees 1,043 940 
 Property tax 951 638 
 Contingent rent 811 628 
 Common area maintenance 680 482 
 Other 5,169 2,655 
 Total accrued liabilities $ 22,729 $ 15,889 

 
 
 
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 FIRST WATCH RESTAURANT GROUP, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

 8. Debt 
 Long-term debt, net consisted of the following: 
 
 DECEMBER 25, 2022 DECEMBER 26, 2021 
 (in thousands) Balance Interest Rate Balance Interest Rate 
 Term Facility $ 98,125 5.89 % $ 100,000 2.71 % 
 Finance lease liabilities 1,433 2,017 
 Financing obligation 3,050 3,050 
 Less: Unamortized debt discount and deferred issuance costs ( 1,683 ) ( 2,128 ) 
 Total Debt, net 100,925 102,939 
 Less: Current portion of long-term debt ( 6,257 ) ( 3,186 ) 
 Long-term debt, net $ 94,668 $ 99,753 

 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. 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. 
 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. 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 income (expense), net. 
 Fair Value of Debt 
 The estimated fair value of the outstanding debt, excluding finance lease obligations and financing obligations, is classified as Level 3 in the fair value hierarchy and was estimated using discounted cash flow models, market yield and yield volatility. 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: 
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 FIRST WATCH RESTAURANT GROUP, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

 
 Fiscal Year (in thousands) 
 2023 $ 5,625 
 2024 5,000 
 2025 7,500 
 2026 80,000 
 $ 98,125 

 
 Letter of Credit 
 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 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 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. 
 Note Payable 
 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. 
 
 9. Leases 
 The following table includes a detail of lease assets and liabilities: 
 
 (in thousands) Consolidated Balance Sheets Classification DECEMBER 25, 2022 DECEMBER 26, 2021 
 Operating lease right-of-use assets Operating lease right-of-use assets $ 352,373 $ 324,995 
 Finance lease assets Property, fixtures and equipment, net 1,332 1,892 
 Total lease assets $ 353,705 $ 326,887 
 
 Operating lease liabilities (1) - current 
 Current portion of operating lease liabilities 38,936 38,186 
 Operating lease liabilities - non-current Operating lease liabilities 366,113 330,495 
 Finance lease liabilities - current Current portion of long-term debt 632 686 
 Finance lease liabilities - non-current Long-term debt, net 801 1,331 
 Total lease liabilities $ 406,482 $ 370,698 

 _____________ 
 (1) Excludes all variable lease expense. 
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 FIRST WATCH RESTAURANT GROUP, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

 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
Occupancy expenses
Pre-opening expenses
General and administrative expenses $ 49,620 $ 44,906 $ 41,813 
 Variable lease expense Food and beverage costs
Occupancy expenses
General and administrative expenses 14,642 12,811 9,692 
 Finance lease expense: 
 Amortization of leased assets Depreciation and amortization 521 543 501 
 Interest on lease liabilities Interest expense 130 174 184 
 Total lease expense (1) 
 $ 64,913 $ 58,434 $ 52,190 

 _____________ 
 (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: 
 
 FISCAL YEAR 
 (in thousands) 2022 2021 2020 
 Cash paid for amounts included in the measurement of lease liabilities: 
 Operating cash flows - operating leases $ 39,546 $ 40,601 $ 22,011 
 Operating cash flows - finance leases $ 130 $ 174 $ 184 
 Financing cash flows - finance leases $ 514 $ 507 $ 339 

 Supplemental information related to leases was as follows: 
 
 FISCAL YEAR 
 2022 2021 
 Weighted-average remaining lease term (in years) 
 Operating leases 14.6 15.4 
 Finance leases 2.8 3.5 
 Weighted-average discount rate (1) 
 
 Operating leases 8.6 % 9.0 % 
 Finance leases 7.6 % 7.9 % 

 ____________ 
 (1) Based on the Company’s incremental borrowing rate. 
 
 
 79 

 FIRST WATCH RESTAURANT GROUP, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

 As of December 25, 2022, future minimum lease payments for operating and finance leases consisted of the following: 
 
 (in thousands) OPERATING LEASES FINANCE LEASES 
 Fiscal year 
 2023 $ 40,562 $ 652 
 2024 50,198 610 
 2025 49,850 233 
 2026 49,659 44 
 2027 49,059 32 
 Thereafter 503,240 19 
 Total future minimum lease payments (1) 
 742,568 1,590 
 Less: imputed interest ( 337,519 ) ( 157 ) 
 Total present value of lease liabilities $ 405,049 $ 1,433 

 _____________ 
 (1) Excludes approxim ately $ 38.3 million of exec uted operating leases that have not commenced as of December 25, 2022. 
 Sale-Leaseback Transactions 
 In 2015, Management entered into an agreement relating to the sale and leaseback of the land for use in restaurant operations and received cash proceeds of $ 3.1 million. As the Company had continuing involvement with the property, the sale of the land did not qualify for sale accounting. As a result, the cash proceeds were recorded as a financing obligation. The balance of the financing obligation was $ 3.1 million as of December 25, 2022 and December 26, 2021. 
 
 10. Transaction Expenses (Income), Net 
 Transaction expenses (income), net consisted of the following: 
 
 FISCAL YEAR 
 (in thousands) 2022 2021 2020 
 Secondary offering and Registration Statement on Form S-3 costs $ 1,957 $ — $ — 
 Gain on lease modification — ( 1,961 ) — 
 Contingent consideration liability revaluation 165 801 ( 293 ) 
 Conversion costs — 2 71 
 Loss (Gain) on restaurant closures/relocations 391 2 ( 36 ) 
 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. 
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 FIRST WATCH RESTAURANT GROUP, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

 11. Income Taxes 
 Income tax (expense) benefit consisted of the following: 
 
 FISCAL YEAR 
 (in thousands) 2022 2021 2020 
 Current provision: 
 Federal $ — $ — $ — 
 State ( 1,007 ) ( 301 ) ( 118 ) 
 Total current provision ( 1,007 ) ( 301 ) ( 118 ) 
 Deferred (provision) benefit: 
 Federal ( 4,562 ) ( 1,825 ) 18,458 
 State ( 115 ) ( 351 ) 1,533 
 Total deferred (provision) benefit ( 4,677 ) ( 2,176 ) 19,991 
 Income tax (expense) benefit $ ( 5,684 ) $ ( 2,477 ) $ 19,873 

 A reconciliation of the federal statutory income tax rate to the Company’s effective income tax rate is as follows: 
 
 FISCAL YEAR 
 2022 2021 2020 
 Income taxes at federal statutory rate 21.0 % 21.0 % 21.0 % 
 State income taxes, net of federal tax effect 12.5 2.4 4.1 
 FICA tip credit ( 44.2 ) ( 1,200.2 ) 4.7 
 Valuation allowance for federal and state 46.7 1,528.2 ( 1.8 ) 
 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 — 
 Rate change 1.7 ( 17.3 ) 0.1 
 Other ( 0.6 ) 1.9 0.5 
 Total 45.1 % 669.5 % 28.6 % 

 
 
 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). 
 
 
 
 
 
 
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 FIRST WATCH RESTAURANT GROUP, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

 The components of deferred tax assets and liabilities were as follows: 
 
 (in thousands) DECEMBER 25, 2022 DECEMBER 26, 2021 
 Deferred income tax assets 
 FICA tip credit $ 41,556 $ 34,266 
 Net operating loss 30,672 34,619 
 Operating lease liabilities 101,927 91,768 
 Organizational costs 549 673 
 Interest limitation 797 596 
 Accrued compensation 1,750 2,903 
 Deferred revenues 682 618 
 Stock-based compensation 3,693 1,843 
 Other 1,210 919 
 Valuation allowance ( 41,754 ) ( 35,863 ) 
 Total deferred income tax assets 141,082 132,342 
 Deferred income tax liabilities 
 Operating lease right-of-use assets ( 87,154 ) ( 80,401 ) 
 Depreciation ( 34,577 ) ( 28,479 ) 
 Intangible assets ( 36,517 ) ( 35,951 ) 
 Total deferred income tax liabilities ( 158,248 ) ( 144,831 ) 
 Net deferred income tax liabilities $ ( 17,166 ) $ ( 12,489 ) 

 Based upon an evaluation of the Company's deferred tax assets, Management has recognized a valuation allowance of $ 41.8 million and $ 35.9 million as of December 25, 2022 and December 26, 2021, respectively. The valuation allowance primarily relates to the Company’s federal tax credit carryforwards that are not expected to be realized prior to the statutory expiration of the carryforward. The valuation allowance will be maintained until sufficient positive evidence exists to support its reversal, including but not limited to, the magnitude and duration of the Company’s historical losses as compared to potential future profits within taxing jurisdictions to overcome such negative evidence. 
 Tax Carryforwards 
 The amount and expiration dates of federal tax loss carryforwards as of December 25, 2022 are as follows: 
 
 (in thousands) Expiration Date Amount 
 Federal net operating loss carryforwards Indefinite $ 120,208 
 Federal net operating loss carryforwards 2036 - 2037 
 $ 16,152 

 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 $ 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 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. 
 82 

 FIRST WATCH RESTAURANT GROUP, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

 Changes in the deferred tax asset valuation allowance were as follows: 
 
 (in thousands) 
 Balance as of December 29, 2019 $ ( 28,975 ) 
 Increase ( 1,239 ) 
 Balance as of December 27, 2020 ( 30,214 ) 
 Increase ( 5,649 ) 
 Balance as of December 26, 2021 ( 35,863 ) 
 Increase ( 5,891 ) 
 Balance as of December 25, 2022 $ ( 41,754 ) 

 The Company is subject to examination by federal, state and local jurisdictions, where applicable. As of December 25, 2022, the tax years that remain subject to examination by major tax jurisdictions under the statute of limitations are from the year 2013 and forward. 
 On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) to provide certain relief as a result of COVID-19. The CARES Act provides tax relief, along with other stimulus measures, including a retroactive technical correction of prior tax legislation for tax depreciation of certain qualified improvement property, among other changes. A total of $ 59.3 million of accelerated tax depreciation deductions was recognized related to qualified assets placed in service in Fiscal 2020, Fiscal 2019 and Fiscal 2018. Furthermore, the CARES Act made favorable changes to the Section 163(j) interest limitation and as a result, the Company was able to deduct additional interest totaling $ 18.9 million and $ 8.6 million for Fiscal 2020 and Fiscal 2019, respectively. In addition, Management began deferring the employer-paid portion of social security taxes as permitted by the CARES Act in the second quarter of Fiscal 2020. A total of $ 6.7 million was deferred, of which $ 3.3 million was paid in Fiscal 2021. The remaining balance 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. As a result, a credit of $ 0.9 million was recorded as an offset to payroll tax expense in Fiscal 2020. 
 
 12. Stockholders’ Equity 
 In Fiscal 2020, the Company had issued 266,667 preferred stock shares having a par value of $ 0.01 per share to existing stockholders, including Advent International Corporation, directors and executive officers. The proceeds from the issuance of the preferred 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. 
 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. Common stockholders are entitled to receive dividends, as and if declared by the board of directors. In addition, all common stockholders are entitled to share equally on a share-for-share basis in any assets available for distribution to common stockholders upon liquidation, dissolution, or winding up of the Company after payment is made to the preferred stockholders. 
 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. 
 83 

 
 FIRST WATCH RESTAURANT GROUP, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

 13. Defined Contribution Plan 
 The Company sponsors a defined contribution 401(k) savings plan (“401(k) Plan”) which requires the Company to match contributions for participants with at least one year of service 25 % of the first 6 % of the employees’ wages deferred into the 401(k) Plan. The 401(k) Plan also allows for additional profit-sharing contributions by the Company at the sole discretion of Management. All Company contributions vest over a five -year period. Total expense for the Company’s contributions to the 401(k) Plan was $ 0.6 million, $ 0.5 million and $ 0.3 million in Fiscal 2022, Fiscal 2021 and Fiscal 2020, respectively. 
 
 14. Stock-Based Compensation 
 Stock Option Awards 
 Stock-based awards are granted to employees and non-employee directors. The Company has two compensation plans that provide for the granting of stock options and other share-based awards to key employees and non-employee members of the board of directors. The 2017 Omnibus Equity Incentive Plan (the “2017 Equity Plan”) and the 2021 Equity Incentive Plan (the “2021 Equity Plan”) provide for the grant of incentive stock options, non-qualified stock options, restricted stock awards, restricted stock units, stock appreciation rights and stock-based awards. 
 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 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, resulting in a new fair value for all the performance-based option awards using an option-pricing model as of the modification date. 
 84 

 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 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. The modification accelerated the vesting period of the performance-based option awards that convert into time-based option awards upon an initial public offering such that they no longer vest one-third (1/3rd) on each of the first two anniversaries of an initial public offering and one-third (1/3rd) on the 273rd day following the second anniversary of an initial public offering, but instead will vest on August 1, 2022. Additionally, the exercise period of these time-based and performance-based vested option awards was modified such that any vested option may be exercised at any time prior to the 10th anniversary of the original grant date. These actions were accounted for as modifications 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. 
 85 

 FIRST WATCH RESTAURANT GROUP, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

 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 
 (in years) 
 
 Outstanding, December 26, 2021 
 4,409,331 $ 9.48 $ 28,598 5.9 
 Granted 1,018,975 $ 12.67 
 Forfeited ( 150,059 ) $ 10.24 
 Exercised ( 162,573 ) $ 8.76 
 Outstanding, December 25, 2022 
 5,115,674 $ 10.12 $ 20,981 6.1 
 
 Exercisable, December 25, 2022 
 2,791,358 $ 9.15 $ 14,134 5.1 

 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 
 2,633,391 $ 7.03 
 Granted 1,018,975 $ 6.81 
 Vested ( 1,177,991 ) $ 6.25 
 Forfeited ( 150,059 ) $ 7.29 
 Nonvested, December 25, 2022 
 2,324,316 $ 7.31 

 
 
 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 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: 
 
 FISCAL YEAR 
 2022 2021 2020 
 Weighted average expected term (years) 6.5 4.6 4.5 
 Weighted average expected volatility 52.4 % 50.3 % 41.2 % 
 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 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. 
 86 

 FIRST WATCH RESTAURANT GROUP, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

 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 
 (in years) 
 
 Stock options $ 9,602 1.6 
 Restricted stock units $ 234 0.4 

 
 15. 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 
 The Company is subject to legal proceedings, claims and liabilities that arise in the ordinary course of business. The amount of the ultimate liability with respect to these matters was not material as of December 25, 2022. In the event any litigation losses become probable and estimable, the Company will recognize any anticipated losses. 
 87 

 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. 
 
 16. Net Income (Loss) Per Common Share 
 The following table sets forth the computations of basic and diluted net income (loss) per common share: 
 
 FISCAL YEAR 
 (in thousands, except share and per share data) 2022 2021 2020 
 Numerator: 
 Net income (loss) $ 6,907 $ ( 2,107 ) $ ( 49,681 ) 
 Denominator: 
 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 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. 
 88 

 
 FIRST WATCH RESTAURANT GROUP, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

 17. Condensed Financial Information of Registrant (Parent Company Only) 
 FIRST WATCH RESTAURANT GROUP, INC. 
 (PARENT COMPANY ONLY) 
 CONSOLIDATED BALANCE SHEETS 
 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 
 
 
 
 DECEMBER 25, 2022 DECEMBER 26, 2021 
 Assets 
 Investment in subsidiaries $ 523,135 $ 504,429 
 
 Equity 
 Preferred stock; $ 0.01 par value; 10,000,000 shares authorized; none issued and outstanding 
 $ — $ — 
 Common stock; $ 0.01 par value; 300,000,000 shares authorized; 59,211,019 and 59,048,446 shares issued and outstanding at December 25, 2022 and December 26, 2021, respectively 
 592 590 
 Additional paid-in capital 620,675 608,878 
 Accumulated deficit ( 98,132 ) ( 105,039 ) 
 Total equity attributable to First Watch Restaurant Group, Inc. $ 523,135 $ 504,429 

 FIRST WATCH RESTAURANT GROUP, INC. 
 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) 
 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 
 
 
 
 FISCAL YEAR 
 2022 2021 2020 
 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. did not have any cash as of, or for Fiscal 2022, Fiscal 2021 and Fiscal 2020. 
 Basis of Presentation 
 The Company is a holding company without any operations of its own (the “Parent Company”). 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. 
 These condensed financial statements have been prepared on a “parent-only” basis. These condensed parent company financial statements have been prepared using the same accounting principles and policies described in the notes to the Company’s consolidated financial statements, with the only exception being that the parent company accounts for its subsidiaries using the equity method. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. The accompanying financial information 
 89 

 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. 
 
 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 
 None.
First Watch Restaurant Group, Inc. 10-K

Item 8. Financial Statements and Supplementary Data
