Item 9A. Controls and Procedures
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We are responsible for establishing and maintaining disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act, such as this Annual Report on Form 10-K, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Disclosure controls and procedures also include, without limitation, controls and procedures that are designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Due to the material weaknesses in our internal control over financial reporting discussed below, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2023, our disclosure controls and procedures were not effective. In light of this fact, our management has performed additional analyses, reconciliations, and other post-closing procedures and has concluded that, notwithstanding the material weaknesses in our internal control over financial reporting, the consolidated financial statements for the periods covered by and included in this Annual Report on Form 10-K fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting. Management has adopted the framework in “Internal Control-Integrated Framework” (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
Based on management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2023 based on the COSO framework, management has determined that the Company’s internal control over financial reporting as of December 31, 2023 was not effective.
We identified material weaknesses in our internal control over financial reporting. The material weaknesses we identified were as follows:
We did not design and maintain an effective internal control environment commensurate with the financial reporting requirements of a public company. Specifically, we lacked a sufficient complement of personnel with an appropriate level of knowledge, experience and training in internal control over financial reporting and the reporting requirements of a public company. Additionally, we did not formally delegate authority or establish appropriate segregation of duties in our finance and accounting functions. As a result, we did not perform an effective risk assessment nor did we design and maintain internal controls in response to the risks of material misstatement. These material weaknesses contributed to the following material weaknesses:
• We did not design and maintain effective controls over the period-end financial reporting process, including controls over the preparation and review of account reconciliations and journal entries, and the appropriate classification and presentation of accounts and disclosures in the consolidated financial statements. This material weakness resulted in adjustments to accruals and within the statement of cash flows in our fiscal 2018 consolidated financial statements, which were recorded prior to the issuance of our fiscal 2018 consolidated financial statements.
• We did not design and maintain effective controls over the accounting for income taxes over the recording of deferred income taxes and the assessment of the realization of deferred tax assets. This material weakness resulted in adjustments to the income tax benefit, deferred taxes, goodwill, and liabilities in our fiscal 2018 consolidated financial statements, which were recorded prior to issuance. This material weakness also resulted in immaterial adjustments to the income tax benefit and deferred taxes and related disclosures in the fiscal 2017 and 2019
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consolidated financial statements, which were corrected in the fiscal 2019 and 2020 consolidated financial statements, respectively. This material weakness also resulted in adjustments to the income tax expense and deferred taxes in our fiscal 2021 consolidated financial statements, which were recorded prior to issuance and immaterial adjustments which were recorded in our fiscal 2023 consolidated financial statements.
Additionally, each of the aforementioned material weaknesses could result in a misstatement of the consolidated financial statements that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
Our independent registered public accounting firm will not be required to opine on the effectiveness of our internal control over financial reporting until we are no longer an “emerging growth company” as defined in the JOBS Act.
Remediation Efforts
We continue to implement measures designed to improve the Company’s internal control over financial reporting to address and remediate the previously identified material weaknesses. To date, such measures include the following:
• Hired new and reassigned existing financial reporting, accounting, and information technology leadership with public company experience to enhance public company financial reporting, technical accounting, and information technology services and solutions.
• Augmented financial reporting capabilities by staffing professionals with knowledge and experience in income tax, internal audit, information technology, and legal.
• Established various policies, including a formal delegation of authority policy defining the protocols for reviewing and authorizing commitments, contracts, invoices, and transactions as well as a comprehensive set of information technology policies to govern the Company’s information technology practices.
• Formalized certain roles and reviewed responsibilities, including ensuring appropriate segregation of duties.
• Designed and implemented period-end financial reporting controls, such as controls over the preparation and review of account reconciliations, financial statement disclosures, and the consolidated financial statements, including controls around classification of cash flows and disclosure of noncash items, as well as establishing a formal management Disclosure Committee to review the draft financial statements and disclosures prior to release, including a sub-certification process from various functional groups.
• Enhanced access restrictions for certain users over general ledger journal entries and designed new processes to further segregate journal entry creation from journal entry approval authority.
• Designed and implemented controls over the accounting for income taxes to ensure the appropriate recording of deferred income taxes, income taxes and related disclosures.
While the material weaknesses disclosed have not yet been remediated as of December 31, 2023, management is devoting substantial resources to the ongoing remediation efforts. As we continue to evaluate and work to improve our internal control over financial reporting, we may take additional measures to address control deficiencies, or we may modify certain of the remediation measures described above. The material weaknesses will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are designed and operating effectively.
Remediation of Prior Material Weakness in Internal Control Over Financial Reporting
As previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 25, 2022, the following control deficiencies constituted a material weakness in our internal control over financial reporting:
• We did not design and maintain effective controls over information technology general controls for information systems and applications that are relevant to the preparation of the consolidated financial statements. Specifically, we did not design and maintain: sufficient user access controls to ensure appropriate segregation of duties and adequately restrict user and privileged access to financial applications, programs and data to appropriate Company personnel; program change management controls to ensure that information technology program and data changes affecting financial information technology applications and underlying accounting records are identified, tested, authorized and implemented appropriately; computer operations controls to ensure that critical batch jobs are monitored, privileges are appropriately granted, and data backups are authorized and monitored; and testing and approval controls for program development to ensure that new software development is aligned with business and information technology requirements. The deficiencies, when aggregated, could impact our ability to maintain effective segregation of duties, as well as the effectiveness of information technology-dependent controls (such as
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automated controls that address the risk of material misstatement to one or more assertions, along with the information technology controls and underlying data that support the effectiveness of system-generated data and reports) that could result in misstatements potentially impacting all financial statement accounts and disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. Therefore, we concluded the information technology deficiencies resulted in a material weakness. However, these information technology deficiencies did not result in any misstatements to the consolidated financial statements.
The Company has designed and implemented the following measures to remediate the previously identified material weakness related to information technology general controls:
• Hired a seasoned information technology leader with public company experience to enhance information technology services and solutions.
• Designed and implemented user access controls to ensure appropriate segregation of duties and adequately restrict user and privileged access to financial applications, programs and data to appropriate Company personnel.
• Designed and implemented change management controls to ensure that information technology program and data changes affecting financial information technology applications and underlying accounting records are identified, tested, authorized, and implemented appropriately.
• Designed and implemented testing and approval controls for program development to ensure that new software is aligned with business and information technology requirements.
• Designed and implemented computer operation controls to ensure critical jobs are monitored and privileges are appropriately granted. Implemented a new backup and recovery platform to monitor data backups for all relevant systems in accordance with the applicable policy as well as manage a test recovery process.
As of December 31, 2023, the remediation measures described above have been completed, and the newly designed and enhanced controls have been implemented and operated for a sufficient time to demonstrate the material weakness has been remediated. Based on the testing performed by management, the controls have been determined to be appropriately designed and operating effectively as of December 31, 2023 and as such, the material weakness related to information technology general controls for information systems and applications that are relevant to the preparation of the consolidated financial statements has been remediated.
Changes in Internal Control over Financial Reporting
There have been no changes in internal control over financial reporting during the quarter ended December 31, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None.
PART III
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Item 10. Directors, Executive Officers and Corporate Governance
We have adopted a Code of Ethics and Business Conduct that applies to, among others, our chief executive officer, chief financial officer (who is also our principal accounting officer), and other finance and accounting leaders, which is a “code of ethics” as defined by applicable rules of the SEC. This code is publicly available on our website. The Internet address for our website is www.firstwatch.com, and the Code of Ethics and Business Conduct may be found on our main webpage by clicking first on “Investors” and then on “Corporate Governance” and next on “Code of Ethics and Business Conduct.” If we make any amendments to this code other than technical, administrative or other non-substantive amendments, or grant any waivers, including implicit waivers, from a provision of this code to our chief executive officer, chief financial officer (who is also our principal accounting officer), or other finance and accounting leaders, we will disclose the nature of the amendment or waiver, its effective date and to whom it applies on our website as specified above or in a report on Form 8-K filed with the SEC.
The remaining information required by this item is incorporated herein by reference to the sections entitled “Proposal 1: Director Election Proposal,” “Information Regarding the board of directors and Corporate Governance,” and “Executive Officers” in our definitive Proxy Statement for the Annual Meeting of Stockholders expected to be held on May 22, 2024 (the “Proxy Statement”).
We will provide disclosure of delinquent Section 16(a) reports, if any, in our Proxy Statement, and such disclosure, if any, is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to the sections entitled “Executive Compensation,” “Outstanding Equity Awards at Fiscal Year-End,” and “Director Compensation” in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated by reference to the section entitled “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference to the section entitled “Certain Relationships and Related Transactions” and “Information Regarding the board of directors and Corporate Governance” in the Proxy Statement.
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated by reference to the sections entitled “Proposal 2: Auditor Ratification Proposal,” “Auditors Fees and Services” and “Policy for Approval of Audit and Permitted Non-Audit Services” in the Proxy Statement.
PART IV
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Item 15. Exhibits and Financial Statement Schedules
(a) Documents filed as part of this Annual Report on Form 10-K:
1. Financial Statements
Consolidated financial statements filed as part of this report are listed under Item 8, “Financial Statements and Supplementary Data.”
2. Financial Statement Schedules
No schedules are required because either the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or notes thereto.
3. Exhibits
Exhibit No. DESCRIPTION FILINGS REFERENCED FOR INCORPORATION BY REFERENCE
3.1 Amended and Restated Certificate of Incorporation of First Watch Restaurant Group, Inc.
October 6, 2021 Form 8-K, Exhibit 3.1
3.2 Amended and Restated Bylaws of First Watch Restaurant Group, Inc.
October 6, 2021 Form 8-K, Exhibit 3.2
4.1 Form of Certificate of Common Stock
September 7, 2021 Form S-1, Exhibit 4.1
4.2 Registration Rights Agreement by and among First Watch Restaurant Group, Inc. and the other parties thereto, dated as of October 1, 2021
March 23, 2022, Form 10-K, Exhibit 4.2
4.3 Description of First Watch Restaurant Group, Inc. Securities
March 23, 2022, Form 10-K, Exhibit 4.3
10.1(a) Credit Agreement, dated as of October 6, 2021, by and among FWR Holding Corporation, AI Fresh Parent, Inc., the lenders party thereto, the other parties therein and Bank of America, N.A., as administrative agent
October 6, 2021, Form 8-K, Exhibit 10.1
10.1(b) Amendment No. 1 to Credit Agreement dated as of February 24, 2023, between FWR Holding Corporation as Borrower, the lenders party thereto, the other parties therein and Bank of America N.A., as administrative agent
March 7, 2023, Form 10-K, Exhibit 10.2
10.1(c)
Amendment No. 2 to Credit Agreement dated as of January 5, 2024, by and among FWR Holding Corporation as Borrower, the lenders party thereto, the other parties thereto and Bank of America N.A., as administrative agent
January 8, 2024, Form 8-K, Exhibit 10.1
10.2(a) Credit Agreement, dated as of August 21, 2017, between FWR Holding Corporation as Borrower, the lenders party thereto, and Golub Capital Markets LLC, as administrative agent
September 7, 2021, Form S-1, Exhibit 10.1(a)
10.2(b)
First Amendment to Credit Agreement, dated as of February 28, 2019, between FWR Holding Corporation as Borrower, the lenders party thereto, and Golub Capital Markets LLC, as administrative agent
September 7, 2021, Form S-1, Exhibit 10.1(b)
10.2(c) Second Amendment to Credit Agreement, dated as of December 20, 2019, between FWR Holding Corporation as Borrower, the lenders party thereto, and Golub Capital Markets LLC, as administrative agent
September 7, 2021, Form S-1, Exhibit 10.1(c)
10.2(d) Third Amendment to Credit Agreement, dated as of April 27, 2020, between FWR Holding Corporation as Borrower, the lenders party thereto, and Golub Capital Markets LLC, as administrative agent
September 7, 2021, Form S-1, Exhibit 10.1(d)
10.2(e) Fourth Amendment to Credit Agreement, dated as of August 14, 2020, between FWR Holding Corporation as Borrower, the lenders party thereto, and Golub Capital Markets LLC, as Administrative Agent
September 7, 2021, Form S-1, Exhibit 10.1(e)
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10.3* Employment Agreement, dated March 9, 2022, by and between First Watch Restaurants, Inc. and Christopher A. Tomasso
March 11, 2022, Form 8-K, Exhibit 10.1
10.4* Employment Agreement, dated August 21, 2017, by and between First Watch Restaurants, Inc. and Laura Sorensen
September 7, 2021, Form S-1, Exhibit 10.4
10.6* Letter Agreement, dated February 1, 2021, by and between First Watch Restaurants, Inc. and Kenneth L. Pendery, Jr.
September 7, 2021, Form S-1, Exhibit 10.8
10.7* Letter Agreement, dated July 12, 2018, by and between First Watch Restaurants, Inc. and Mel Hope
March 23, 2022, Form 10-K, Exhibit 10.7
10.8* First Watch Restaurant Group, Inc. 2017 Omnibus Equity Incentive Plan (formerly known as the AI Fresh Super Holdco, Inc. 2017 Omnibus Equity Incentive Plan)
September 7, 2021, Form S-1, Exhibit 10.3
10.9* First Watch Restaurant Group, Inc. 2021 Equity Incentive Plan
March 23, 2022, Form 10-K, Exhibit 10.9
10.10* Form of 2022 Stock Option Agreement
March 23, 2022, Form 10-K, Exhibit 10.10
10.11* Form of 2023 Restricted Stock Unit Award Agreement
March 7, 2023, Form 10-K, Exhibit 10.11
10.12* Form of 2024 Restricted Stock Unit Award Agreement
Filed herewith
10.13* Form of 2024 Restricted Stock Unit Award Agreement (Special Recognition Grant)
Filed herewith
10.14* Form of Director and Officer Indemnification Agreement
September 7, 2021, Form S-1, Exhibit 10.7
10.15 Form of Restricted Unit Award Agreement for Directors
March 7, 2023, Form 10-K, Exhibit 10.13
10.16*** Asset Purchase Agreement dated as of January 5, 2024, by and among VIM Holdings, LLC, its owners and affiliates, and First Watch Restaurants, Inc.
January 8, 2024, Form 8-K, Exhibit 2.1
21.1 List of subsidiaries
Filed herewith
23.1 Consent of Independent Registered Public Accounting Firm
Filed herewith
31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Filed herewith
31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Filed herewith
32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (**)
Furnished herewith
97.1 Incentive-Based Compensation Recovery Policy
Filed herewith
101 The financial information from First Watch Restaurant Group, Inc. ’ s Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed on March 5, 2024, formatted in Inline Extensible Business Reporting Language (“iXBRL”)
Filed herewith
104 Cover Page Interactive Date File (formatted as iXBRL and contained in Exhibit 101) Filed herewith
* Denotes a management contract or compensatory plan or arrangement.
** This certification is not deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section. This certification will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates them by reference.
***Disclosure schedules omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company will furnish supplementally a copy of any omitted schedule to the SEC upon request. The Company may request confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, for any schedules so furnished.
Item 16. Form 10-K Summary
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FIRST WATCH RESTAURANT GROUP, INC.
By: /s/ Mel Hope
Name Mel Hope
Title: Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Christopher A. Tomasso President, Chief Executive Officer and Director (Principal Executive Officer) March 5, 2024
Christopher A. Tomasso
/s/ Mel Hope Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) March 5, 2024
Mel Hope
/s/ Ralph Alvarez Director and Chairman of the Board March 5, 2024
Ralph Alvarez
/s/ Julie M.B. Bradley Director March 5, 2024
Julie M.B. Bradley
/s/ Irene Chang Britt Director March 5, 2024
Irene Chang Britt
/s/ Tricia Glynn Director March 5, 2024
Tricia Glynn
/s/ William Kussell Director March 5, 2024
William Kussell
/s/ Stephanie Lilak Director March 5, 2024
Stephanie Lilak
/s/ David Paresky Director March 5, 2024
David Paresky
/s/ Jostein Solheim Director March 5, 2024
Jostein Solheim
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