UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 24, 2023 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ Commission file number 001-40866 First Watch Restaurant Group, Inc. (State or other jurisdiction of incorporation or organization) Delawa ...

Financial Data and Key Metrics Changes - Total revenues for Q2 2023 were $216.3 million, representing a 17.3% increase compared to Q2 2022 [13] - Restaurant level operating profit was $44.4 million with a margin of 20.9%, an improvement from 18.2% in the same period last year [14] - Adjusted EBITDA was $25.8 million with a margin of 11.9%, up from 9.6% in Q2 2022 [29] Business Line Data and Key Metrics Changes - Same-restaurant sales growth was 7.8%, driven by price increases and favorable menu mix, partially offset by a traffic decline of 1.2% [27][28] - The company opened nine system-wide restaurants in Q2, including six company-owned locations [25] Market Data and Key Metrics Changes - In-restaurant traffic increased low single digits, while overall traffic declined by 1.2% [9] - Off-premise occasions represented about 18% of overall sales, up from 5% pre-COVID [35] Company Strategy and Development Direction - The company is focused on two growth pipelines: people and restaurants, with over 100 new restaurants in various stages of development [5] - The strategy includes acquiring franchise-owned restaurants, with six acquired in Omaha and five in Milwaukee [11] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in long-term growth potential, citing historical cash-on-cash returns and a strong pipeline of new restaurant openings [5] - The company expects total revenue growth for the year to be in the range of 18% to 21%, up from a previous estimate of 16% to 20% [17] Other Important Information - The company has implemented a new labor scheduling tool to improve operational efficiency, although quantifying its benefits remains challenging [100] - The average menu price increase in the third quarter was 1%, with an expected overall price increase of 6% for the second half of the year [15] Q&A Session Summary Question: Can you explain the decline in off-premise occasions? - Management noted that off-premise occasions are the most expensive dining option, and while there is some pressure, off-premise still represents 18% of sales, up from 5% pre-COVID [35] Question: How many of the 100 restaurants in development are under construction? - Approximately 20 of the 100 restaurants are currently under construction, with the rest in various stages of lease negotiation or permitting [38] Question: What is the current state of the labor market? - The company has not experienced labor shortages and turnover is returning to pre-pandemic levels, with improved statistics compared to the industry average [42][44] Question: How is the company managing pricing in light of inflation? - The company has taken price increases primarily in markets affected by minimum wage increases, with a philosophy of offsetting inflation through pricing [110] Question: What are the expectations for restaurant openings in the third quarter? - The company expects third quarter openings to be similar to last year, with a focus on maintaining a steady pace of development [58]

___________________________ (1) Average unit volume presented on an annual basis only. (2) Reconciliations from Income (Loss) from operations and Income (Loss) from operations margin, the most comparable GAAP measures to Restaurant level operating profit and Restaurant level operating profit margin, are set forth in the schedules within the "Non-GAAP Financial Measures" section. (3) Reconciliations from Net income (loss) and Net income (loss) margin, the most comparable GAAP measures to Adjusted EBITDA and ...

```markdown Part I. Financial Information [Item 1. Financial Statements (Unaudited)](index=5&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) The unaudited financial statements for the twenty-six weeks ended June 25, 2023, show significant growth in revenues and net income compared to the prior year, with total assets increasing to $1.16 million and net cash from operating activities rising to $55.6 thousand [Consolidated Balance Sheets](index=5&type=section&id=Consolidated%20Balance%20Sheets) As of June 25, 2023, total assets grew to $1.16 million from $1.10 million at year-end 2022, primarily driven by an increase in cash and cash equivalents and goodwill, while total liabilities rose to $616.8 thousand Consolidated Balance Sheet Highlights (in thousands) | Account | June 25, 2023 (in thousands) | December 25, 2022 (in thousands) | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $66,765 | $49,672 | | Goodwill | $350,491 | $345,219 | | Total assets | $1,162,618 | $1,104,446 | | **Liabilities & Equity** | | | | Total current liabilities | $109,161 | $99,980 | | Long-term debt, net | $92,174 | $94,668 | | Total liabilities | $616,781 | $581,311 | | Total equity | $545,837 | $523,135 | [Consolidated Statements of Operations and Comprehensive Income](index=6&type=section&id=Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Income) For the second quarter of 2023, total revenues increased 17.3% year-over-year to $216.3 thousand, with net income rising significantly to $8.0 thousand, and for the twenty-six weeks ended, revenues grew 19.6% to $427.7 thousand, with net income more than doubling to $17.3 thousand Q2 2023 vs Q2 2022 Performance (in thousands, except per share data) | Metric | Thirteen Weeks Ended June 25, 2023 (in thousands) | Thirteen Weeks Ended June 26, 2022 (in thousands) | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $216,300 | $184,453 | +17.3% | | Income from Operations | $11,343 | $5,053 | +124.5% | | Net Income | $7,959 | $2,707 | +194.0% | | Diluted EPS | $0.13 | $0.05 | +160.0% | YTD 2023 vs YTD 2022 Performance (in thousands, except per share data) | Metric | Twenty-Six Weeks Ended June 25, 2023 (in thousands) | Twenty-Six Weeks Ended June 26, 2022 (in thousands) | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $427,706 | $357,565 | +19.6% | | Income from Operations | $26,674 | $12,813 | +108.2% | | Net Income | $17,319 | $7,347 | +135.7% | | Diluted EPS | $0.28 | $0.12 | +133.3% | [Consolidated Statements of Cash Flows](index=8&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) For the first twenty-six weeks of 2023, net cash provided by operating activities increased significantly to $55.6 thousand, while cash used in investing activities was $37.2 thousand, primarily for capital expenditures and an acquisition Cash Flow Summary (in thousands) | Cash Flow Activity | Twenty-Six Weeks Ended June 25, 2023 (in thousands) | Twenty-Six Weeks Ended June 26, 2022 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $55,583 | $31,812 | | Net cash used in investing activities | ($37,170) | ($26,945) | | Net cash used in financing activities | ($1,245) | ($3,165) | | **Net increase in cash** | **$17,168** | **$1,702** | [Notes to Unaudited Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Unaudited%20Consolidated%20Financial%20Statements) Key notes detail a business acquisition of six franchise-owned restaurants for $8.2 million, strong growth in in-restaurant dining revenue, and the execution of a variable-to-fixed interest rate swap on $90.0 thousand of debt - On May 1, 2023, the company acquired six franchise-owned restaurants for approximately **$8.2 million** in cash[29](index=29&type=chunk) - On June 23, 2023, the company entered into variable-to-fixed interest rate swaps with an aggregate notional amount of **$90.0 thousand** to hedge its variable rate debt, paying a fixed rate of **4.16%**[39](index=39&type=chunk) - Subsequent to the quarter's end, the company acquired five more franchisee restaurants for **$8.6 million** and executed an agreement to acquire another six operating restaurants for approximately **$13.9 million**[68](index=68&type=chunk)[69](index=69&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=23&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management attributes the strong Q2 2023 performance to a 7.8% growth in same-restaurant sales and expansion, with revenue growing 17.3% to $216.3 thousand and Adjusted EBITDA rising 45.1% to $25.8 thousand, driven by sales leverage and moderating commodity inflation [Recent Developments and Financial Highlights](index=23&type=section&id=Recent%20Developments%20and%20Financial%20Highlights) In Q2 2023, the company demonstrated robust growth with a 17.3% increase in total revenues and a 7.8% rise in same-restaurant sales, while profitability improved significantly with Adjusted EBITDA increasing to $25.8 thousand Q2 2023 Key Financial Highlights vs. Q2 2022 | Metric | Q2 2023 | Q2 2022 | | :--- | :--- | :--- | | Total Revenues | $216.3 million | $184.5 million | | Same-Restaurant Sales Growth | 7.8% | 13.4% | | Same-Restaurant Traffic Decline | (1.2)% | 8.1% | | Restaurant Level Operating Profit Margin | 20.9% | 18.2% | | Net Income | $8.0 million | $2.7 million | | Adjusted EBITDA | $25.8 million | $17.8 million | - The company opened **9 system-wide restaurants** (**6 company-owned**, **3 franchise-owned**) and acquired **6 franchise-owned restaurants** in Q2 2023[74](index=74&type=chunk) [Results of Operations](index=27&type=section&id=Results%20of%20Operations) The analysis of operations for Q2 2023 reveals a 17.0% increase in restaurant sales, driven by 7.8% same-restaurant sales growth, with food and beverage costs decreasing due to lower commodity prices, while labor costs rose due to wage increases - Restaurant sales for Q2 2023 increased by **17.0%** to **$212.6 thousand**, driven by **7.8% same-restaurant sales growth** and **$28.5 thousand** from restaurants not in the comparable base[96](index=96&type=chunk)[97](index=97&type=chunk) - Food and beverage costs as a percentage of restaurant sales decreased by **2.5 percentage points** in Q2 2023 compared to Q2 2022, primarily due to lower commodity costs, especially for pork and avocados[102](index=102&type=chunk) - Labor costs as a percentage of restaurant sales increased by **0.9 percentage points** in Q2 2023, driven by average hourly labor increases and additional staffing for dining rooms[105](index=105&type=chunk)[106](index=106&type=chunk) [Non-GAAP Financial Measures Reconciliations](index=34&type=section&id=Non-GAAP%20Financial%20Measures%20Reconciliations) The company provides reconciliations for non-GAAP measures, showing Adjusted EBITDA of $25.8 thousand for Q2 2023, a 45.1% increase, and Restaurant Level Operating Profit growth of 34.2% to $44.4 thousand, excluding specific non-operating items Reconciliation of Net Income to Adjusted EBITDA (in thousands) | Line Item | Thirteen Weeks Ended June 25, 2023 (in thousands) | Thirteen Weeks Ended June 26, 2022 (in thousands) | | :--- | :--- | :--- | | Net income | $7,959 | $2,707 | | Depreciation and amortization | $9,441 | $8,400 | | Interest expense | $2,037 | $1,126 | | Income taxes | $2,032 | $1,336 | | Stock-based compensation | $2,125 | $2,808 | | Transaction expenses, net | $1,744 | $300 | | Other adjustments | $178 | $914 | | **Adjusted EBITDA** | **$25,816** | **$17,789** | Reconciliation of Income from Operations to Restaurant Level Operating Profit (in thousands) | Line Item | Thirteen Weeks Ended June 25, 2023 (in thousands) | Thirteen Weeks Ended June 26, 2022 (in thousands) | | :--- | :--- | :--- | | Income from operations | $11,343 | $5,053 | | Less: Franchise revenues | ($3,713) | ($2,771) | | Add: G&A, D&A, and other expenses | $36,768 | $30,797 | | **Restaurant level operating profit** | **$44,398** | **$33,079** | [Liquidity and Capital Resources](index=35&type=section&id=Liquidity%20and%20Capital%20Resources) As of June 25, 2023, the company maintained a strong liquidity position with $66.8 thousand in cash and $75.0 thousand available under its revolving credit facility, with projected capital expenditures for 2023 estimated between $100.0 thousand and $110.0 thousand - The company holds **$66.8 thousand** in cash and cash equivalents and has full availability of its **$75.0 thousand** revolving credit facility as of June 25, 2023[153](index=153&type=chunk) - Projected capital expenditures for fiscal year 2023 are estimated to be between **$100.0 thousand** and **$110.0 thousand**[155](index=155&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=36&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company is exposed to interest rate risk on its variable rate debt, which it mitigated by entering into an interest rate swap agreement on June 23, 2023, to hedge $90.0 thousand of its outstanding variable rate debt at a fixed rate of 4.16% - To manage interest rate risk, the company entered into a variable-to-fixed interest rate swap on June 23, 2023, covering **$90.0 thousand** of its variable rate debt at a weighted average fixed rate of **4.16%**[161](index=161&type=chunk) [Item 4. Controls and Procedures](index=37&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were not effective as of June 25, 2023, due to previously identified material weaknesses in internal control over financial reporting, despite which the financial statements are asserted to be fairly presented, with remediation efforts underway - The CEO and CFO concluded that disclosure controls and procedures were **not effective** as of June 25, 2023, due to ongoing **material weaknesses** in internal control over financial reporting[165](index=165&type=chunk) - The company is implementing remediation efforts, which include hiring new leadership with public company experience, augmenting financial reporting capabilities, and designing new period-end financial reporting and IT controls[168](index=168&type=chunk)[172](index=172&type=chunk) Part II. Other Information [Item 1. Legal Proceedings](index=39&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in various claims and legal actions arising in the ordinary course of business but does not believe their ultimate resolution will have a material adverse effect on its financial position or results of operations - The company reports **no legal proceedings** that are expected to have a **material adverse effect** on its financial condition[173](index=173&type=chunk) [Item 1A. Risk Factors](index=39&type=section&id=Item%201A.%20Risk%20Factors) There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 25, 2022 - No **material changes** to the risk factors disclosed in the 2022 Form 10-K have occurred[174](index=174&type=chunk) [Other Items (Items 2, 3, 4, 5, 6)](index=39&type=section&id=Other%20Items) Under Items 2, 3, 4, and 5, the company reports no unregistered sales of equity securities, no defaults upon senior securities, no mine safety disclosures, and no other information, with Item 6 listing the exhibits filed with the report - The company reported **'None'** or **'Not applicable'** for Unregistered Sales of Equity Securities, Defaults Upon Senior Securities, Mine Safety Disclosures, and Other Information[175](index=175&type=chunk) ```

[Part I. Financial Information](index=5&type=section&id=Part%20I.%20Financial%20Information) [Financial Statements (Unaudited)](index=5&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) This section presents First Watch Restaurant Group's unaudited consolidated financial statements as of March 26, 2023, highlighting increased total revenues to $211.4 million and net income to $9.4 million [Consolidated Balance Sheets](index=5&type=section&id=Consolidated%20Balance%20Sheets) Total assets increased to $1.115 billion, total liabilities remained stable at $580.5 million, and total equity rose to $534.6 million as of March 26, 2023 Consolidated Balance Sheet Highlights (in thousands) | Account | March 26, 2023 | December 25, 2022 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $54,416 | $49,672 | | Total current assets | $70,159 | $67,288 | | Goodwill | $345,219 | $345,219 | | Total assets | $1,115,052 | $1,104,446 | | **Liabilities & Equity** | | | | Total current liabilities | $91,661 | $99,980 | | Long-term debt, net | $93,410 | $94,668 | | Total liabilities | $580,495 | $581,311 | | Total equity | $534,557 | $523,135 | [Consolidated Statements of Operations and Comprehensive Income](index=6&type=section&id=Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Income) Total revenues grew 22.1% to $211.4 million, income from operations nearly doubled to $15.3 million, and net income increased to $9.4 million for Q1 2023 Statement of Operations Summary (in thousands, except per share data) | Metric | Q1 2023 (Thirteen Weeks Ended Mar 26) | Q1 2022 (Thirteen Weeks Ended Mar 27) | | :--- | :--- | :--- | | Total revenues | $211,406 | $173,112 | | Income from operations | $15,331 | $7,760 | | Net income | $9,360 | $4,640 | | Net income per common share - diluted | $0.15 | $0.08 | [Consolidated Statements of Cash Flows](index=8&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Net cash from operating activities significantly increased to $21.1 million, with a net cash increase of $4.7 million for Q1 2023 Cash Flow Summary (in thousands) | Activity | Q1 2023 (Thirteen Weeks Ended Mar 26) | Q1 2022 (Thirteen Weeks Ended Mar 27) | | :--- | :--- | :--- | | Net cash provided by operating activities | $21,143 | $7,989 | | Net cash used in investing activities | ($14,441) | ($11,458) | | Net cash used in financing activities | ($1,958) | ($1,874) | | Net increase (decrease) in cash | $4,744 | ($5,343) | | Cash and cash equivalents, end of period | $54,667 | $46,772 | [Notes to Unaudited Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Unaudited%20Consolidated%20Financial%20Statements) Notes detail accounting policies, restaurant operations (370 company-owned, 114 franchise), strong in-restaurant dining growth, credit agreement amendment, and a post-period acquisition - As of March 26, 2023, the company operated **370 company-owned** and **114 franchise-owned restaurants** across 29 states[22](index=22&type=chunk) Disaggregated Restaurant Sales (in thousands) | Sales Type | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | In-restaurant dining sales | $169,229 | $132,892 | | Third-party delivery sales | $22,314 | $21,026 | | Take-out sales | $16,425 | $16,751 | - On February 24, 2023, the company amended its credit agreement to replace LIBOR with the Secured Overnight Financing Rate (SOFR) for interest calculations, effective March 27, 2023[33](index=33&type=chunk) - On May 1, 2023, the company acquired six restaurants, including franchise and development rights, from a franchisee for **$8.2 million** in cash[54](index=54&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=19&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Q1 2023 financial results, highlighting strong revenue growth to $211.4 million, 12.9% same-restaurant sales growth, and robust liquidity [Recent Developments and Key Performance Indicators](index=19&type=section&id=Recent%20Developments%20and%20Key%20Performance%20Indicators) Q1 2023 saw total revenues increase 22.1%, same-restaurant sales grow 12.9%, and Adjusted EBITDA rise 41.6% to $27.4 million Q1 2023 Financial Highlights vs. Q1 2022 | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Total revenues | $211.4 million | $173.1 million | | Same-restaurant sales growth | 12.9% | 27.2% | | Same-restaurant traffic growth | 5.1% | 21.9% | | Net income | $9.4 million | $4.6 million | | Adjusted EBITDA | $27.4 million | $19.4 million | | System-wide restaurants | 484 | 441 | [Business Trends](index=20&type=section&id=Business%20Trends) Same-restaurant sales grew 12.9% driven by traffic and price, while commodity inflation decelerated to 3.0% and wage inflation was 11.0% - Q1 2023 same-restaurant sales growth of **12.9%** was driven by **5.1% traffic growth** and an approximate **7.0% average price increase** over Q1 2022[60](index=60&type=chunk) - Commodity inflation was **3.0%** in Q1 2023, with fixed prices for eggs and potatoes, constituting about **15.0%** of the market basket[61](index=61&type=chunk) - Restaurant-level hourly wage inflation was approximately **11.0%** in Q1 2023, with overall restaurant-level labor inflation at about **9.0%**[62](index=62&type=chunk) [Results of Operations](index=23&type=section&id=Results%20of%20Operations) Total revenues increased 22.1% to $211.4 million, driven by restaurant and franchise sales, while income from operations grew 97.6% to $15.3 million - Restaurant sales increased by **21.9%** to **$208.0 million**, primarily due to **12.9% same-restaurant sales growth** and **$24.0 million** from new restaurants[82](index=82&type=chunk) - Food and beverage costs as a percentage of restaurant sales decreased from **23.1% to 22.4%** year-over-year, aided by lower pork and avocado prices and menu price increases[86](index=86&type=chunk) - Labor expenses increased as a percentage of sales from **32.3% to 33.0%** year-over-year, driven by investments in wages and staffing levels[88](index=88&type=chunk) - General and administrative expenses increased by **16.1%** to **$22.7 million**, mainly due to higher compensation expense and technology investments supporting growth[99](index=99&type=chunk) [Non-GAAP Financial Measures Reconciliations](index=31&type=section&id=Non-GAAP%20Financial%20Measures%20Reconciliations) Reconciliations of non-GAAP measures show Q1 2023 Net Income of $9.4 million reconciled to Adjusted EBITDA of $27.4 million, and Income from Operations to Restaurant Level Operating Profit Reconciliation of Net Income to Adjusted EBITDA (in thousands) | Line Item | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net income | $9,360 | $4,640 | | Depreciation and amortization | $9,117 | $8,223 | | Interest expense | $1,907 | $1,006 | | Income taxes | $4,558 | $2,277 | | Stock-based compensation | $1,497 | $2,294 | | Other adjustments | $639 | $844 | | **Adjusted EBITDA** | **$27,413** | **$19,364** | Reconciliation of Income from Operations to Restaurant Level Operating Profit (in thousands) | Line Item | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Income from operations | $15,331 | $7,760 | | Less: Franchise revenues | ($3,438) | ($2,443) | | Add: G&A, D&A, other | $32,209 | $28,122 | | **Restaurant level operating profit** | **$44,102** | **$33,439** | [Liquidity and Capital Resources](index=32&type=section&id=Liquidity%20and%20Capital%20Resources) As of March 26, 2023, the company maintained strong liquidity with $54.4 million in cash and $75.0 million available credit, projecting $100.0-$110.0 million in 2023 capital expenditures - The company's liquidity position as of March 26, 2023, includes **$54.4 million** in cash and cash equivalents and **$75.0 million** available under its undrawn revolving credit facility[130](index=130&type=chunk) - Projected capital expenditures for 2023 are estimated to be between **$100.0 million and $110.0 million**, focused on new restaurants and remodels[132](index=132&type=chunk) - Cash provided by operating activities increased to **$21.1 million** in Q1 2023 from **$8.0 million** in Q1 2022, driven by higher net income and changes in operating assets and liabilities[133](index=133&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=34&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) No material changes to the company's market risk exposure have occurred since the 2022 Form 10-K filing - There have been no material changes to the company's market risk exposure since the 2022 Form 10-K filing[138](index=138&type=chunk) [Controls and Procedures](index=34&type=section&id=Item%204.%20Controls%20and%20Procedures) Disclosure controls and procedures were deemed ineffective as of March 26, 2023, due to material weaknesses, though remediation efforts are ongoing - The CEO and CFO concluded that disclosure controls and procedures were not effective as of March 26, 2023, due to ongoing material weaknesses in internal control over financial reporting[141](index=141&type=chunk) - The company is continuing remediation efforts, which include hiring new leadership, augmenting staff capabilities, formalizing policies and roles, and implementing enhanced controls for financial reporting and information technology[144](index=144&type=chunk)[148](index=148&type=chunk) - Changes were made during the quarter to internal controls over financial reporting that are reasonably likely to materially affect them, as part of the ongoing remediation plan[147](index=147&type=chunk) [Part II. Other Information](index=36&type=section&id=Part%20II.%20Other%20Information) [Legal Proceedings](index=36&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in ordinary course legal proceedings, not expected to materially impact financial position or results - The company is subject to ordinary course legal proceedings but does not expect them to have a material adverse effect[149](index=149&type=chunk) [Risk Factors](index=36&type=section&id=Item%201A.%20Risk%20Factors) No material changes have occurred to the risk factors previously disclosed in the 2022 Form 10-K - No material changes have occurred to the risk factors previously disclosed in the 2022 Form 10-K[150](index=150&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=36&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) No unregistered sales of equity securities or use of proceeds to report - None[151](index=151&type=chunk) [Defaults Upon Senior Securities](index=36&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) No defaults upon senior securities to report - None[152](index=152&type=chunk) [Mine Safety Disclosures](index=36&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) Mine safety disclosures are not applicable to the company's operations - Not applicable[153](index=153&type=chunk) [Other Information](index=36&type=section&id=Item%205.%20Other%20Information) No other information to report - None[154](index=154&type=chunk) [Exhibits](index=37&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with the Form 10-Q, including CEO/CFO certifications and iXBRL data files - The exhibits listed in the Exhibits index are incorporated by reference[155](index=155&type=chunk)

Financial Data and Key Metrics Changes - System-wide sales increased by 21.9% year-over-year, reaching $914.8 million compared to $750.7 million [44] - Total revenues rose by 21.5% year-over-year, while adjusted EBITDA increased by 4.5% [44] - Same-restaurant sales growth was 14.5% compared to 2021 and 29.6% compared to 2019, with a traffic growth of 7.7% versus 2021 [20][21] Business Line Data and Key Metrics Changes - The company opened 43 new restaurants in 2022, with 29 company-owned locations achieving annualized average unit volumes (AUVs) about 7% above the comp group AUV of $2 million [22] - Adjusted EBITDA for the fourth quarter was $15.1 million, with a margin of 8.1% [33] - Restaurant-level operating profit was $30.5 million for the quarter, with a margin of 16.7% [77] Market Data and Key Metrics Changes - The company experienced a 3% year-over-year decline in same-restaurant traffic across the industry, contrasting with its own growth metrics [21] - Labor and related expenses were 34.5% of sales in the fourth quarter, up from 33.3% in the third quarter [32] Company Strategy and Development Direction - The company is focused on five primary strategic initiatives to enhance both front and back of house operations, including evolving real estate strategy and kitchen equipment upgrades [49][50] - The goal is to reach 2,200 domestic locations, with capital expenditures expected between $100 million and $110 million for 2023 [36] - The company aims for same-restaurant sales growth of 6% to 8% in 2023, with total revenue growth projected between 15% and 19% [80] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the challenges posed by macroeconomic conditions but expressed confidence in the company's growth trajectory and ability to meet evolving consumer preferences [30][54] - The company is prepared for potential inflationary pressures and plans to adjust pricing as necessary to protect margins [66][80] Other Important Information - The company has implemented a market revitalization program to remodel restaurants and enhance customer experience [3] - The company has secured fixed price agreements for eggs and potatoes to mitigate volatility in food costs [56] Q&A Session Summary Question: What is the outlook for restaurant margins and pricing strategies? - Management indicated a target of 18% to 20% for restaurant-level operating profit and plans to evaluate pricing adjustments mid-year if necessary [66] Question: Can you clarify the labor inflation expectations? - Labor inflation is expected to be 9% to 11%, primarily due to increases in minimum wage regulations in certain states [68] Question: How is the rollout of alcohol sales progressing? - Alcohol is now available in about 85% of restaurants, contributing to approximately 6.1% of sales mix in those locations [95] Question: What are the expectations for commodity inflation? - Commodity inflation is projected to be between 4% and 6% for the year, with expectations of stability throughout [80][138] Question: How does the company plan to optimize restaurant operations? - The company is focusing on role specialization and process improvements to enhance efficiency and customer satisfaction [51][144]

[Cautionary Note Regarding Forward-Looking Statements](index=4&type=section&id=Cautionary%20Note%20Regarding%20Forward-Looking%20Statements) This section warns that forward-looking statements are based on current expectations, but actual results may differ materially due to inherent uncertainties and risks - Forward-looking statements are based on current expectations and assumptions, but actual results may differ materially due to inherent uncertainties, risks, and changes in circumstances[11](index=11&type=chunk) - Key risk factors include vulnerability to economic conditions (inflation, recession), inability to open new restaurants, declining visitor numbers, failure to generate same-restaurant sales growth, supply chain disruptions, COVID-19 impacts, food-borne illness, competition, employee retention issues, ESG matters, franchisee issues, and reliance on limited suppliers[12](index=12&type=chunk) PART I. [Item 1. Business](index=5&type=section&id=Item%201.%20Business) First Watch is a Delaware holding company specializing in 'Daytime Dining' with 474 restaurants across 29 states, reporting an average unit volume of $2.0 million in 2022 [Overview](index=5&type=section&id=Overview) First Watch is a pioneer in 'Daytime Dining' since 1983, focusing on made-to-order breakfast, brunch, and lunch using fresh ingredients and a 'You First' culture - First Watch is a pioneer in 'Daytime Dining' since 1983, focusing on made-to-order breakfast, brunch, and lunch using fresh ingredients, without microwaves, heat lamps, or deep fryers[14](index=14&type=chunk)[16](index=16&type=chunk) Metric | Metric | Value (as of Dec 25, 2022) | | :----- | :------------------------- | | Total Restaurants | 474 | | Company-Owned | 366 | | Franchise-Owned | 108 | | States of Operation | 29 | | Average Unit Volume (2022) | $2.0 million | - The company's 'You First' culture prioritizes employees and customers, contributing to high retention and satisfaction, and has been recognized with awards for work/life balance and employee satisfaction[17](index=17&type=chunk) [Growth Strategies](index=6&type=section&id=Growth%20Strategies) The company aims for over 2,200 restaurants in the U.S. with low double-digit system-wide growth, driven by new openings, acquisitions, menu innovation, and off-premises sales - The company targets over **2,200 restaurants** in the continental U.S. with a long-term goal of low double-digit percentage increase in system-wide restaurants[19](index=19&type=chunk) Growth Area | Growth Area | Details | | :---------- | :------ | | New Restaurant Openings (2022) | 43 system-wide restaurants across 16 states | | New Company-Owned AUV (2022) | $2.2 million | | Franchise Acquisitions | 60 franchise-owned restaurants subject to purchase option as of Dec 25, 2022 | | Menu Innovation | Seasonal menus, Fresh Juice (15.4% of sales in 2022, up from 9.6% in 2018), Shareables (7.1% of sales in 2022, up from 3.4% in 2018) | | Off-Premises Sales (2022) | 20.6% of total restaurant sales | | Alcohol Offerings (as of Dec 25, 2022) | Available in ~85.0% of system-wide restaurants | [Operations](index=7&type=section&id=Operations) Operations emphasize high food quality and safety, efficient digital management systems, and targeted digital marketing to build brand awareness and customer engagement - Emphasizes high food quality and safety through careful training, supervision, rigorous standards, and third-party inspections[24](index=24&type=chunk) - Utilizes digital management information systems for efficient operations, supply chain management, and timely access to financial and marketing data[31](index=31&type=chunk) - Marketing efforts focus on targeted digital channels, social media, and first-party data to build brand awareness and engage specific customer segments (Millennial and Gen Z)[25](index=25&type=chunk)[32](index=32&type=chunk) [Franchise Program](index=9&type=section&id=Franchise%20Program) The company operates a franchise program with 15 franchisees and 108 restaurants, but is currently not extending agreements to new franchisees Metric | Metric | Value (as of Dec 25, 2022) | | :----- | :------------------------- | | Number of Franchisees | 15 | | Franchise-Owned Restaurants | 108 | | New Restaurant Development Obligations | 39 | | Initial Franchise Fee | $35,000 - $40,000 | | Royalty Fees | 4.0% - 4.5% of sales | | System Fund Contributions | 1.0% - 3.0% of sales | - The company is currently not extending franchise agreements to new franchisees[33](index=33&type=chunk) [Human Capital](index=9&type=section&id=Human%20Capital) The 'You First' culture promotes high employee retention, diversity, and inclusion, with leadership actively gathering feedback for continuous improvement - 'You First' culture fosters high employee retention and satisfaction, recognized by awards like Newsweek's Top 100 Most Loved Workplaces[34](index=34&type=chunk) - Implemented beabetterhuman campaign and R.I.S.E. (Race Inclusion and Support Exchange) Council to promote diversity, inclusion, and leadership development for under-represented groups[35](index=35&type=chunk)[36](index=36&type=chunk) - Executive leadership conducts annual 'W.H.Y. Tour' (We Hear You) to gather hourly employee feedback, leading to direct improvements in benefits, practices, and operational tools[38](index=38&type=chunk)[39](index=39&type=chunk) [Government Regulation](index=10&type=section&id=Government%20Regulation) The company is subject to extensive federal, state, and local regulations covering public health, safety, labor, and alcoholic beverage control - Subject to extensive federal, state, and local regulations including public health, safety, zoning, alcoholic beverage control, franchising, and labor laws (e.g., Fair Labor Standards Act, Immigration Reform and Control Act, Americans with Disabilities Act)[41](index=41&type=chunk)[42](index=42&type=chunk) [Intellectual Property](index=10&type=section&id=Intellectual%20Property) The company protects its brand through registered trademarks and trade secrets, including recipes and operating procedures - Owns registered trademarks/service marks like 'First Watch the Daytime Cafe,' 'You First,' 'Yeah, It's Fresh!', and maintains recipes and operating procedures as trade secrets[43](index=43&type=chunk) [Competition](index=10&type=section&id=Competition) The company operates in a highly competitive and fragmented restaurant industry, primarily competing with independent breakfast and lunch establishments - Operates in a highly competitive and fragmented restaurant industry, competing on dining experience, food quality, service, price, and location[44](index=44&type=chunk) - Views primary competition as a network of independent breakfast and lunch restaurants, believing there is no comparable offering at scale within its segment[45](index=45&type=chunk) [Seasonality](index=10&type=section&id=Seasonality) Quarterly results are subject to seasonal fluctuations influenced by holidays, weather, and new restaurant openings - Quarterly results are subject to seasonal fluctuations influenced by holidays, weather, and new restaurant openings[46](index=46&type=chunk) [Corporate Information](index=11&type=section&id=Corporate%20Information) Incorporated in Delaware in 2017, the company completed its IPO in October 2021, with common stock trading on Nasdaq under 'FWRG' - Incorporated in Delaware in 2017, changed name to First Watch Restaurant Group, Inc. in 2019, and completed IPO in October 2021, trading on Nasdaq under **'FWRG'**[48](index=48&type=chunk) [Additional Information](index=11&type=section&id=Additional%20Information) The company makes SEC filings, press releases, and investor information available on its investor relations website - Makes SEC filings, press releases, and investor information available on its investor relations website (https://investors.firstwatch.com) for broad public distribution[49](index=49&type=chunk)[50](index=50&type=chunk) [Item 1A. Risk Factors](index=11&type=section&id=Item%201A.%20Risk%20Factors) This section details numerous risks that could materially affect First Watch's business, financial condition, and stock price [Risk Factors Summary](index=11&type=section&id=Risk%20Factors%20Summary) This section summarizes key risk categories including business, industry, IT, intellectual property, employees, legal, regulatory, accounting, financial reporting, and indebtedness - Summarizes key risk categories: Business and Industry, Information Technology and Intellectual Property, Employees and the Workforce, Legal and Regulatory, Accounting and Financial Reporting Matters, and Indebtedness[53](index=53&type=chunk)[54](index=54&type=chunk)[56](index=56&type=chunk)[57](index=57&type=chunk) [Risks Related to Our Business and Industry](index=13&type=section&id=Risks%20Related%20to%20Our%20Business%20and%20Industry) Risks include vulnerability to economic conditions, inability to open new restaurants, rising costs, supply chain disruptions, intense competition, and geographic concentration - Vulnerability to changes in consumer preferences and economic conditions (e.g., inflation, recession, work-from-home trends) can adversely affect sales and profitability[58](index=58&type=chunk) - Inability to successfully open new restaurants, manage growth, or generate same-restaurant sales growth in new and existing markets poses a significant risk to expansion strategy[62](index=62&type=chunk)[67](index=67&type=chunk)[70](index=70&type=chunk) - Significant risks include increases in food and beverage costs (e.g., eggs due to avian influenza), supply chain disruptions, intense competition, and potential adverse effects from food safety concerns or food-borne illnesses[72](index=72&type=chunk)[75](index=75&type=chunk)[81](index=81&type=chunk)[84](index=84&type=chunk) - Geographic concentration in the Southeast U.S. (**41% of system-wide restaurants**, **23% in Florida**) makes the company disproportionately affected by regional conditions[97](index=97&type=chunk) [Risks Related to Information Technology and Intellectual Property](index=21&type=section&id=Risks%20Related%20to%20Information%20Technology%20and%20Intellectual%20Property) Risks involve IT system failures, security breaches, non-compliance with data protection laws, and inability to protect trademarks and intellectual property - Information technology system failures or network security breaches (e.g., phishing, malware) could interrupt operations, lead to data loss, and incur significant remediation costs and legal liabilities[102](index=102&type=chunk)[104](index=104&type=chunk)[105](index=105&type=chunk) - Failure to comply with evolving federal and state laws and regulations related to privacy, data protection (e.g., CCPA, CPRA), advertising, and consumer protection could result in financial penalties and reputational harm[107](index=107&type=chunk)[110](index=110&type=chunk) - Inability to enforce and maintain trademarks and protect other intellectual property (e.g., recipes, operating procedures) could negatively affect brand value and market acceptance, potentially leading to costly litigation[119](index=119&type=chunk)[121](index=121&type=chunk) [Risks Related to Employees and the Workforce](index=25&type=section&id=Risks%20Related%20to%20Employees%20and%20the%20Workforce) Risks include dependence on key personnel, inability to attract and retain employees, wage inflation, maintaining corporate culture, and potential unionization - Dependence on executive officers and key employees means their loss could materially impact business operations and strategy[122](index=122&type=chunk) - Inability to attract, motivate, and retain qualified managers and employees, exacerbated by labor shortages and wage inflation (e.g., post-COVID-19), could slow growth and increase labor costs[123](index=123&type=chunk)[124](index=124&type=chunk) - Failure to maintain corporate culture during growth, potential unionization activities, and non-compliance with evolving ESG expectations could negatively impact operations, reputation, and costs[125](index=125&type=chunk)[126](index=126&type=chunk)[127](index=127&type=chunk) [Legal and Regulatory Risks](index=26&type=section&id=Legal%20and%20Regulatory%20Risks) Extensive legal and regulatory risks include labor laws, litigation from customer complaints, food safety issues, and compliance with environmental and public company regulations - Subject to extensive federal and state labor laws (e.g., minimum wage, overtime, workers' compensation), with potential for class action lawsuits and increased costs from new regulations or unionization[129](index=129&type=chunk)[130](index=130&type=chunk)[131](index=131&type=chunk) - Risks from litigation include customer complaints (illness/injury), food quality issues, and 'dram shop' statutes for alcohol sales, potentially leading to substantial damages, legal expenses, and negative publicity[133](index=133&type=chunk)[138](index=138&type=chunk)[139](index=139&type=chunk) - Compliance with federal, state, and local laws (environmental, zoning, health, food safety like HACCP/FSMA, public company regulations) is costly and complex, with non-compliance risking license revocation, fines, and civil/criminal liability[140](index=140&type=chunk)[142](index=142&type=chunk)[143](index=143&type=chunk)[144](index=144&type=chunk) [Risks Related to Accounting and Financial Reporting Matters](index=29&type=section&id=Risks%20Related%20to%20Accounting%20and%20Financial%20Reporting%20Matters) Risks include changes in GAAP, impairment of assets, and material weaknesses in internal control over financial reporting, potentially leading to misstatements - Changes in GAAP or accounting estimates, and potential impairment in goodwill, indefinite-lived, or definite-lived intangible assets, could materially affect financial condition and results of operations[145](index=145&type=chunk)[146](index=146&type=chunk)[148](index=148&type=chunk) - Identified material weaknesses in internal control over financial reporting, including an ineffective control environment, inadequate period-end financial reporting controls, issues with income tax accounting, and deficiencies in IT general controls[150](index=150&type=chunk)[151](index=151&type=chunk)[152](index=152&type=chunk) - These material weaknesses could result in failure to prevent or detect material misstatements in consolidated financial statements, negatively impacting the market value of common stock[150](index=150&type=chunk)[154](index=154&type=chunk) [Risks Related to Our Indebtedness](index=32&type=section&id=Risks%20Related%20to%20Our%20Indebtedness) High indebtedness limits borrowing capacity, reduces cash flow, increases vulnerability to adverse conditions, and exposes the company to interest rate fluctuations - May require additional capital for growth, but access to capital markets could be volatile, limiting expansion opportunities[157](index=157&type=chunk) - High level of indebtedness (**$98.1 million** as of Dec 25, 2022) could limit borrowing capacity, reduce cash flow for operations, increase vulnerability to adverse conditions, and expose the company to interest rate fluctuations[158](index=158&type=chunk) - Failure to comply with financial covenants under the Credit Agreement (e.g., maximum total rent adjusted net leverage ratio, minimum fixed charge coverage ratio) could result in default and acceleration of borrowings[159](index=159&type=chunk)[160](index=160&type=chunk) [Risks Related to Our Company and Organizational Structure](index=33&type=section&id=Risks%20Related%20to%20Our%20Company%20and%20Organizational%20Structure) Risks include controlling stockholder interests conflicting with public stockholders, reliance on subsidiaries for funds, management's limited public company experience, and anti-takeover provisions - Advent International Corporation, as the controlling stockholder (**70% ownership**), may have interests that conflict with public stockholders, potentially influencing corporate decisions and transactions[161](index=161&type=chunk)[178](index=178&type=chunk) - As a holding company, First Watch Restaurant Group, Inc. relies on its operating subsidiaries for funds, which may be restricted by debt agreements or other conditions[162](index=162&type=chunk) - Management's limited experience with public company obligations and potentially inadequate internal infrastructure could lead to increased compliance costs and diversion of management attention[163](index=163&type=chunk) - Delaware law and organizational documents contain anti-takeover provisions that could impede or discourage a takeover, potentially depriving investors of a premium for their shares[168](index=168&type=chunk)[169](index=169&type=chunk) [Risks Related to Ownership of Our Common Stock](index=35&type=section&id=Risks%20Related%20to%20Ownership%20of%20Our%20Common%20Stock) Risks include dilution from future offerings, concentrated ownership by Advent, no anticipated cash dividends, and market price fluctuations due to seasonal factors or stock sales - Future offerings of debt or equity securities could dilute existing stockholders' economic and voting rights and reduce the market price of common stock[176](index=176&type=chunk)[177](index=177&type=chunk) - High concentration of common stock ownership by Advent (approximately **70%**) may prevent minority stockholders from influencing significant corporate decisions and could lead to conflicts of interest[178](index=178&type=chunk)[180](index=180&type=chunk) - The company does not anticipate paying cash dividends in the foreseeable future, as cash flow is intended for business growth, and dividend payments are restricted by the Credit Agreement[182](index=182&type=chunk) - Quarterly results may fluctuate significantly due to seasonal factors, and sales of substantial amounts of common stock by Advent could negatively affect the market price[183](index=183&type=chunk)[184](index=184&type=chunk)[185](index=185&type=chunk) [Item 1B. Unresolved Staff Comments](index=38&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reported no unresolved staff comments from the SEC - No unresolved staff comments[192](index=192&type=chunk) [Item 2. Properties](index=38&type=section&id=Item%202.%20Properties) First Watch leases all company-owned restaurant facilities, operating 366 company-owned and 108 franchise-owned restaurants across 29 states as of December 25, 2022 - All company-owned restaurant facilities are leased[192](index=192&type=chunk) State | State | Company-owned | Franchise-owned | Total | | :------------ | :------------ | :-------------- | :---- | | Florida | 107 | 4 | 111 | | Texas | 40 | 18 | 58 | | Ohio | 38 | — | 38 | | Arizona | 28 | — | 28 | | **TOTAL (29 states)** | **366** | **108** | **474** | [Item 3. Legal Proceedings](index=38&type=section&id=Item%203.%20Legal%20Proceedings) The company is involved in ordinary course legal claims, but does not anticipate a material adverse effect on its financial position or operations - Involved in various ordinary course legal claims, but does not anticipate a material adverse effect on financial position, results of operations, liquidity, or capital resources[193](index=193&type=chunk) [Item 4. Mine Safety Disclosures](index=38&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) The company reported no mine safety disclosures - No mine safety disclosures[194](index=194&type=chunk) PART II [Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=39&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) First Watch's common stock trades on Nasdaq under 'FWRG,' with no anticipated cash dividends due to growth prioritization and Credit Agreement restrictions - Common stock trades on Nasdaq under the symbol **'FWRG'**[196](index=196&type=chunk) - As of March 3, 2023, there were **32 stockholders of record**[196](index=196&type=chunk) - Does not intend to pay cash dividends on common stock in the foreseeable future, prioritizing cash flow for business growth, and is restricted by the Credit Agreement[197](index=197&type=chunk)[199](index=199&type=chunk) Index | Index | October 1, 2021 | December 25, 2022 | | :-------------------------- | :-------------- | :---------------- | | First Watch Restaurant Group, Inc. | $100.00 | $64.20 | | Nasdaq Composite Index | $100.00 | $72.77 | | S&P Restaurants Index | $100.00 | $67.46 | [Item 6. Reserved](index=40&type=section&id=Item%206.%20Reserved) This item is reserved and contains no content - Item 6 is reserved[202](index=202&type=chunk) [Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=41&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section analyzes First Watch's financial condition and operations for 2020-2022, highlighting revenue growth, strategic expansion, and a shift to profitability - The section contains forward-looking statements subject to risks and uncertainties, and actual results may differ materially[203](index=203&type=chunk)[204](index=204&type=chunk) - First Watch is an award-winning Daytime Dining concept, majority-owned by Advent International Corporation, with common stock trading on Nasdaq under **'FWRG'**[205](index=205&type=chunk) - The company reports financial and operating information in one segment, with fiscal years ending on the last Sunday of each calendar year[206](index=206&type=chunk)[364](index=364&type=chunk) [Overview](index=41&type=section&id=Overview) First Watch is an award-winning Daytime Dining concept, majority-owned by Advent International, operating and franchising restaurants in 29 states - First Watch is an award-winning Daytime Dining concept, majority-owned by Advent International Corporation, operating and franchising restaurants in **29 states**[205](index=205&type=chunk) - Fiscal years are **52 or 53 weeks**, ending on the last Sunday of the calendar year, and financial information is reported in one segment[206](index=206&type=chunk) [Key Performance Indicators](index=41&type=section&id=Key%20Performance%20Indicators) Key performance indicators include new restaurant openings, same-restaurant sales and traffic growth, average unit volume, and system-wide sales and restaurant counts - Key performance indicators include New Restaurant Openings (NROs), Franchise-owned NROs, Same-Restaurant Sales Growth, Same-Restaurant Traffic Growth, Average Unit Volume (AUV), System-wide restaurants, and System-wide sales[208](index=208&type=chunk)[209](index=209&type=chunk)[210](index=210&type=chunk)[211](index=211&type=chunk)[212](index=212&type=chunk)[213](index=213&type=chunk) - Comparable Restaurant Base includes company-owned First Watch branded restaurants open for **18 months or longer**[210](index=210&type=chunk) [Non-GAAP Financial Measures](index=42&type=section&id=Non-GAAP%20Financial%20Measures) The company uses non-GAAP measures like Adjusted EBITDA and Restaurant Level Operating Profit to provide additional operational visibility and aid management decision-making - Uses non-GAAP measures: Adjusted EBITDA, Adjusted EBITDA margin, Restaurant level operating profit, and Restaurant level operating profit margin[214](index=214&type=chunk) - These non-GAAP measures provide additional visibility into operations, facilitate analysis, identify operational trends, and aid management decision-making by excluding nonrecurring or variable items[214](index=214&type=chunk)[215](index=215&type=chunk)[216](index=216&type=chunk) - Adjusted EBITDA represents Net income (loss) before depreciation, amortization, interest, taxes, and other non-core items. Restaurant level operating profit is restaurant sales less direct operating expenses, excluding corporate-level expenses[217](index=217&type=chunk)[219](index=219&type=chunk) [Financial Highlights](index=43&type=section&id=Financial%20Highlights) In 2022, the company achieved strong consumer demand, significant revenue growth, and a return to net income, driven by increased in-restaurant dining and off-premises sales - In 2022, the company captured strong consumer demand, with in-restaurant dining returning to over **90% of 2019 levels** and off-premises sales increasing by **6.3% from 2021**[221](index=221&type=chunk) Metric | Metric | 2022 (in millions) | Change from 2021 | | :-------------------------- | :----------------- | :--------------- | | Total Revenues | $730.2 | +21.5% | | System-wide Sales | $914.8 | +21.9% | | Same-Restaurant Sales Growth | 14.5% | - | | Same-Restaurant Traffic Growth | 7.7% | - | | Average Unit Volume (AUV) | $2.0 | +13.8% | | New Company-Owned NROs AUV | $2.2 | - | | Net Income | $6.9 | From $(2.1)M loss | | Adjusted EBITDA | $69.3 | +4.5% | | System-wide Restaurants Opened | 43 | - | | Total System-wide Restaurants | 474 | - | [Business Trends, Customer and Supply Chain](index=44&type=section&id=Business%20Trends%2C%20Customer%20and%20Supply%20Chain) In-restaurant dining returned to 2019 levels in 2022, while off-premises sales remained strong, with easing staffing constraints and anticipated commodity and labor inflation - In-restaurant dining returned to **2019 levels** in 2022, while off-premises sales remained strong, indicating continued customer demand[224](index=224&type=chunk) Metric | Metric | 2022 | 2023 Expectation | | :-------------------------- | :----- | :--------------- | | Commodity Inflation | ~13.0% | 4.0% - 6.0% | | Restaurant-level Hourly Labor Inflation | ~11.0% | 9.0% - 11.0% | | Menu Price Increase (Jan 2023) | - | 4.1% | - Staffing constraints eased in 2022, with increased job applications and improved staffing levels, supporting increased demand and new restaurant development[226](index=226&type=chunk) [Development Highlights](index=44&type=section&id=Development%20Highlights) The company opened 43 new system-wide restaurants in 2022 and expects to open 48-54 in 2023, aiming for a net increase of 45-51 total system-wide restaurants Metric | Metric | 2022 | 2023 Expectation | | :-------------------------- | :----- | :--------------- | | New System-wide Restaurants Opened | 43 | 48-54 (38-42 company-owned, 10-12 franchise-owned) | | Company-owned Closures | 4 | 3 | | Total System-wide Restaurants (End of Period) | 474 | 519-525 (net new 45-51) | [Selected Operating Data](index=45&type=section&id=Selected%20Operating%20Data) This section presents key operating data for 2020-2022, including system-wide sales, restaurant counts, same-restaurant growth, AUV, and profitability metrics Metric (in thousands) | Metric (in thousands) | 2022 | 2021 | 2020 | | :-------------------------------- | :----- | :----- | :----- | | System-wide sales | $914,816 | $750,674 | $426,303 | | System-wide restaurants | 474 | 435 | 409 | | Same-restaurant sales growth | 14.5% | 63.0% | (29.0)% | | Same-restaurant traffic growth | 7.7% | 52.6% | (33.9)% | | AUV | $2,032 | $1,786 | $1,119 | | Income (Loss) from operations | $16,913 | $22,243 | $(47,222) | | Income (Loss) from operations margin | 2.4% | 3.8% | (14.0)% | | Restaurant level operating profit | $128,936 | $115,404 | $28,236 | | Restaurant level operating profit margin | 17.9% | 19.5% | 8.4% | | Net income (loss) | $6,907 | $(2,107) | $(49,681) | | Net income (loss) margin | 0.9% | (0.4)% | (14.5)% | | Adjusted EBITDA | $69,278 | $66,301 | $(5,744) | | Adjusted EBITDA margin | 9.5% | 11.0% | (1.7)% | [Results of Operations](index=46&type=section&id=Results%20of%20Operations) This section details the company's financial performance for 2021-2022, highlighting revenue growth, changes in operating expenses, and the impact of interest expense reductions Metric (in thousands) | Metric (in thousands) | 2022 | 2021 | Change (%) | | :-------------------------------- | :----- | :----- | :--------- | | Total revenues | $730,162 | $601,193 | 21.5% | | Restaurant sales | $719,181 | $592,343 | 21.4% | | Franchise revenues | $10,981 | $8,850 | 24.1% | | Food and beverage costs (% of restaurant sales) | 24.0% | 22.7% | +1.3% | | Labor and other related expenses (% of restaurant sales) | 33.1% | 31.9% | +1.2% | | Income from operations | $16,913 | $22,243 | (24.0)% | | Net income (loss) | $6,907 | $(2,107) | N/M | | Adjusted EBITDA | $69,278 | $66,301 | 4.5% | - Increase in restaurant sales driven by same-restaurant sales growth (**14.5%**), traffic growth (**7.7%**), increased average check, and higher third-party delivery sales[237](index=237&type=chunk) - Interest expense decreased significantly by **74.0%** due to the full repayment of previous senior credit facilities and replacement with lower outstanding debt and reduced interest rates[272](index=272&type=chunk) [Non-GAAP Financial Measure Reconciliations](index=53&type=section&id=Non-GAAP%20Financial%20Measure%20Reconciliations) This section provides reconciliations of non-GAAP financial measures, including Adjusted EBITDA and Restaurant Level Operating Profit, to their most directly comparable GAAP measures Adjusted EBITDA Reconciliation (in thousands) | Metric | 2022 | 2021 | 2020 | | :-------------------------------- | :----- | :----- | :----- | | Net income (loss) | $6,907 | $(2,107) | $(49,681) | | Depreciation and amortization | 34,230 | 32,379 | 30,725 | | Interest expense | 5,232 | 20,099 | 22,815 | | Income taxes | 5,684 | 2,477 | (19,873) | | EBITDA | 52,053 | 52,848 | (16,014) | | IPO-readiness and strategic transition costs | 2,318 | 2,402 | 4,247 | | Stock-based compensation | 10,374 | 8,596 | 750 | | Loss on extinguishment of debt | — | 2,403 | — | | Transaction expenses (income), net | 2,513 | (1,156) | (258) | | Impairments and loss on disposal of assets | 920 | 381 | 315 | | Recruiting and relocation costs | 681 | 351 | 228 | | Severance costs | 155 | 265 | 239 | | Delaware Voluntary Disclosure Agreement Program | 149 | — | — | | Costs in connection with natural disasters, net of insurance recoveries | 115 | — | — | | COVID-19 related charges | — | 211 | 4,749 | | **Adjusted EBITDA** | **$69,278** | **$66,301** | **$(5,744)** | | Total revenues | $730,162 | $601,193 | $342,388 | | Net income (loss) margin | 0.9% | (0.4)% | (14.5)% | | **Adjusted EBITDA margin** | **9.5%** | **11.0%** | **(1.7)%** | Restaurant Level Operating Profit Reconciliation (in thousands) | Metric | 2022 | 2021 | 2020 | | :-------------------------------- | :----- | :----- | :----- | | Income from operations | $16,913 | $22,243 | $(47,222) | | Less: Franchise revenues | (10,981) | (8,850) | (4,955) | | Add: General and administrative expenses | 84,959 | 70,388 | 46,322 | | Depreciation and amortization | 34,230 | 32,379 | 30,725 | | Transaction expenses (income), net | 2,513 | (1,156) | (258) | | Impairments and loss on disposal of assets | 920 | 381 | 315 | | Costs in connection with natural disasters | 382 | — | — | | COVID-19 related charges | — | 19 | 3,309 | | **Restaurant level operating profit** | **$128,936** | **$115,404** | **$28,236** | | Restaurant sales | $719,181 | $592,343 | $337,433 | | Income from operations margin | 2.4% | 3.8% | (14.0)% | | **Restaurant level operating profit margin** | **17.9%** | **19.5%** | **8.4%** | [Liquidity and Capital Resources](index=54&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains low working capital requirements and believes existing cash, operating cash flow, and credit facilities are sufficient for future liquidity needs Metric (as of Dec 25, 2022) | Metric (as of Dec 25, 2022) | Value (in millions) | | :-------------------------- | :------------------ | | Cash and Cash Equivalents | $49.7 | | Outstanding Debt (Term Facility) | $98.1 | | Revolving Credit Facility Availability | $75.0 | | Estimated 2023 Capital Expenditures | $100.0 - $110.0 | - Working capital requirements are low due to minimal inventory and immediate customer payments[296](index=296&type=chunk) - Cash flow from operations, Credit Agreement availability, and existing cash are believed to be sufficient for liquidity needs for at least the next **12 months**[297](index=297&type=chunk) Summary of Cash Flows (in thousands) | Activity | 2022 | 2021 | | :-------------------------------- | :----- | :----- | | Cash provided by operating activities | $62,937 | $62,971 | | Cash used in investing activities | $(63,111) | $(35,682) | | Cash used in financing activities | $(2,018) | $(14,271) | | Net (decrease) increase in cash and cash equivalents and restricted cash | $(2,192) | $13,018 | [Critical Accounting Policies and Estimates](index=56&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) This section outlines critical accounting policies and estimates for goodwill, intangible assets, long-lived assets, leases, income taxes, and stock-based compensation - Goodwill and indefinite-lived intangibles are tested for impairment annually or when circumstances indicate, using qualitative and quantitative assessments (market approach, discounted cash flow projections, relief-from-royalty method)[306](index=306&type=chunk)[307](index=307&type=chunk)[308](index=308&type=chunk)[309](index=309&type=chunk) - Long-lived assets and definite-lived intangibles are reviewed for impairment when carrying amounts may not be recoverable, comparing carrying value to estimated undiscounted future cash flows[313](index=313&type=chunk)[314](index=314&type=chunk)[315](index=315&type=chunk) - Lease accounting involves significant judgment in determining lease terms, classification (operating/finance), and estimating incremental borrowing rates for lease liabilities and right-of-use assets[316](index=316&type=chunk)[317](index=317&type=chunk) - Income tax accounting uses the asset and liability method, requiring estimates for deferred tax assets/liabilities and valuation allowances, which are sensitive to earnings, tax laws, and audit results[318](index=318&type=chunk)[320](index=320&type=chunk)[321](index=321&type=chunk) - Stock-based compensation expense is based on grant date fair value, estimated using the Black-Scholes model (for options) and PWERM (pre-IPO equity valuation), involving complex assumptions like expected term, volatility, and discount rates[322](index=322&type=chunk)[323](index=323&type=chunk)[325](index=325&type=chunk) [Item 7A. Quantitative and Qualitative Disclosures About Market Risk](index=59&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section details market risks, including commodity price volatility and interest rate exposure from variable-rate debt - Profitability is dependent on managing costs of food, beverages, energy, and other commodities, with 2022 commodity inflation at approximately **13.0%** and 2023 expected at **4.0%-6.0%**[328](index=328&type=chunk)[329](index=329&type=chunk) - The company partially offsets cost increases through menu price adjustments but does not use financial instruments to hedge commodity risk[328](index=328&type=chunk) Metric (as of Dec 25, 2022) | Metric (as of Dec 25, 2022) | Value | Impact of 100 bps increase | | :-------------------------- | :---- | :------------------------- | | Outstanding Variable Rate Debt | $98.1 million | ~$1.8 million increase in annual interest expense | [Item 8. Financial Statements and Supplementary Data](index=60&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This item presents the audited consolidated financial statements, including balance sheets, income statements, equity, cash flows, and notes [Report of Independent Registered Public Accounting Firm](index=61&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) PricewaterhouseCoopers LLP issued an unqualified opinion on the consolidated financial statements, affirming their fair presentation in conformity with GAAP - PricewaterhouseCoopers LLP issued an unqualified opinion, stating the consolidated financial statements present fairly the financial position, results of operations, and cash flows in conformity with GAAP[336](index=336&type=chunk) - The firm has served as the company's auditor since **1999**[340](index=340&type=chunk) [Consolidated Balance Sheets](index=62&type=section&id=Consolidated%20Balance%20Sheets) This section presents the company's consolidated balance sheets, detailing assets, liabilities, and equity as of December 25, 2022, and December 26, 2021 Consolidated Balance Sheet Highlights (in thousands) | Metric | Dec 25, 2022 | Dec 26, 2021 | Change | | :-------------------------------- | :----------- | :----------- | :----- | | Total Assets | $1,104,446 | $1,046,917 | +$57,529 | | Total Liabilities | $581,311 | $542,488 | +$38,823 | | Total Equity | $523,135 | $504,429 | +$18,706 | | Cash and cash equivalents | $49,672 | $51,864 | $(2,192) | | Goodwill | $345,219 | $345,219 | $0 | | Operating lease right-of-use assets | $352,373 | $324,995 | +$27,378 | | Property, fixtures and equipment, net | $195,117 | $164,695 | +$30,422 | | Long-term debt, net | $94,668 | $99,753 | $(5,085) | [Consolidated Statements of Operations and Comprehensive Income (Loss)](index=63&type=section&id=Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Income%20%28Loss%29) This section presents the consolidated statements of operations and comprehensive income (loss) for fiscal years 2020-2022, detailing revenues, expenses, and net income Consolidated Statements of Operations Highlights (in thousands) | Metric | 2022 | 2021 | 2020 | | :-------------------------------- | :----- | :----- | :----- | | Total revenues | $730,162 | $601,193 | $342,388 | | 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) | | Net income (loss) | $6,907 | $(2,107) | $(49,681) | | Net income (loss) per common share - basic | $0.12 | $(0.04) | $(1.10) | | Weighted average common shares outstanding - basic | 59,097,512 | 48,213,995 | 45,013,784 | [Consolidated Statements of Equity](index=64&type=section&id=Consolidated%20Statements%20of%20Equity) This section presents the consolidated statements of equity, detailing changes in total equity, common stock, additional paid-in capital, and accumulated deficit Consolidated Statements of Equity Highlights (in thousands) | Metric | Dec 25, 2022 | Dec 26, 2021 | | :-------------------------- | :----------- | :----------- | | Total Equity | $523,135 | $504,429 | | Common Stock (shares) | 59,211,019 | 59,048,446 | | Additional Paid-In Capital | $620,675 | $608,878 | | Accumulated Deficit | $(98,132) | $(105,039) | | Net income (loss) | $6,907 | $(2,107) | | Stock-based compensation | $10,374 | $8,596 | [Consolidated Statements of Cash Flows](index=65&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) This section presents the consolidated statements of cash flows for fiscal years 2020-2022, detailing cash provided by operating, investing, and financing activities Consolidated Statements of Cash Flows Highlights (in thousands) | Activity | 2022 | 2021 | 2020 | | :-------------------------------- | :----- | :----- | :----- | | Cash provided by operating activities | $62,937 | $62,971 | $(18,364) | | Cash used in investing activities | $(63,111) | $(35,682) | $(26,974) | | Cash used in 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 | | Capital expenditures | $(62,219) | $(35,311) | $(26,749) | | Repayments of long-term debt | $(2,389) | $(291,602) | $(4,286) | - Cash used in investing activities increased significantly in 2022 due to higher capital expenditures for restaurant growth and new restaurant technology[300](index=300&type=chunk) [Notes to Consolidated Financial Statements](index=67&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) This section provides comprehensive notes to the consolidated financial statements, detailing accounting policies, revenue streams, assets, liabilities, and equity - First Watch Restaurant Group, Inc. is a Delaware holding company operating and franchising restaurants in **29 states**, with its outstanding stock purchased by Advent International Corporation in 2017[356](index=356&type=chunk) - Completed its IPO on October 5, 2021, selling **10,877,850 shares** of common stock for net proceeds of **$182.1 million**[358](index=358&type=chunk) - Key accounting policies include revenue recognition (in-restaurant, delivery, gift cards, franchise fees), impairment testing for goodwill and long-lived assets, and stock-based compensation valuation[397](index=397&type=chunk)[400](index=400&type=chunk)[385](index=385&type=chunk)[393](index=393&type=chunk)[410](index=410&type=chunk) [1. Nature of Business and Organization](index=67&type=section&id=1.%20Nature%20of%20Business%20and%20Organization) First Watch Restaurant Group, Inc. is a Delaware holding company operating and franchising 'First Watch' restaurants, which completed its IPO in October 2021 - First Watch Restaurant Group, Inc. is a Delaware holding company, acquired by Advent International Corporation in August **2017**[356](index=356&type=chunk) - Operates and franchises restaurants in **29 states** under the 'First Watch' trade name, focusing on made-to-order breakfast, brunch, and lunch[356](index=356&type=chunk)[357](index=357&type=chunk) - Completed its IPO on October 5, 2021, selling **10,877,850 shares** of common stock for aggregate net proceeds of **$182.1 million**[358](index=358&type=chunk) [2. Summary of Significant Accounting Policies](index=67&type=section&id=2.%20Summary%20of%20Significant%20Accounting%20Policies) This section details the company's significant accounting policies, including fiscal year, GAAP compliance, segment reporting, fair value, leases, impairment, and revenue recognition - Financial statements are prepared in accordance with GAAP, using a **52- or 53-week fiscal year** ending on the last Sunday of each calendar year[359](index=359&type=chunk) - The company has a single operating segment, as the CEO assesses performance and allocates resources at the consolidated level[364](index=364&type=chunk) - Key policies cover fair value measurements (Level 1, 2, 3 hierarchy), cash and restricted cash, accounts receivable (no allowance for credit losses), inventory (lower of cost or net realizable value), and deferred offering costs[367](index=367&type=chunk)[368](index=368&type=chunk)[369](index=369&type=chunk)[372](index=372&type=chunk)[373](index=373&type=chunk)[374](index=374&type=chunk) - Lease accounting distinguishes between operating and finance leases, recognizing right-of-use assets and lease liabilities, with operating lease expense recognized straight-line[375](index=375&type=chunk)[376](index=376&type=chunk)[379](index=379&type=chunk)[382](index=382&type=chunk) - Goodwill and indefinite-lived intangible assets are tested for impairment annually using qualitative or quantitative assessments (market capitalization, income approach, relief-from-royalty method)[385](index=385&type=chunk)[386](index=386&type=chunk)[387](index=387&type=chunk)[389](index=389&type=chunk) - Revenue recognition policies cover in-restaurant, take-out, delivery sales, franchise fees (deferred and recognized over term), and gift card breakage (estimated and recognized over expected redemption period)[397](index=397&type=chunk)[398](index=398&type=chunk)[400](index=400&type=chunk) [3. Revenues](index=74&type=section&id=3.%20Revenues) This section details the company's revenue streams from restaurant sales (in-restaurant, delivery, take-out) and franchise revenues, including deferred gift card and franchise fees Total Revenues (in thousands) | Revenue Type | 2022 | 2021 | 2020 | | :-------------------------- | :----- | :----- | :----- | | Restaurant sales | $719,181 | $592,343 | $337,433 | | 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 | | Franchise revenues | $10,981 | $8,850 | $4,955 | | **Total revenues** | **$730,162** | **$601,193** | **$342,388** | Deferred Gift Card Revenue (in thousands) | Metric | 2022 | 2021 | 2020 | | :-------------------------- | :----- | :----- | :----- | | 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 | Deferred Franchise Fee Revenue (in thousands) | Metric | 2022 | 2021 | 2020 | | :-------------------------- | :----- | :----- | :----- | | 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 | [4. Accounts Receivable](index=75&type=section&id=4.%20Accounts%20Receivable) Accounts receivable primarily consist of amounts due from third-party delivery providers, franchisees, and vendors, with no allowance for credit losses recorded Accounts Receivable (in thousands) | Type | Dec 25, 2022 | Dec 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** | - The company believes all accounts receivable are collectible and has not recorded an allowance for credit losses[372](index=372&type=chunk) [5. Intangible Assets, Net](index=76&type=section&id=5.%20Intangible%20Assets%2C%20Net) Intangible assets primarily comprise indefinite-lived trademarks and definite-lived franchise rights, with total net value of $143.2 million as of December 25, 2022 Intangible Assets, Net (in thousands) | Type | Dec 25, 2022 Net Carrying Value | Dec 26, 2021 Net Carrying Value | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Registered trademarks, trade names, domains, liquor licenses (Indefinite life) | $138,942 | $137,827 | | Franchise rights (9-year weighted average useful life) | $4,209 | $5,173 | | **Total intangible assets, net** | **$143,151** | **$143,000** | Amortization Expense for Definite-Lived Intangible Assets (in thousands) | Year | Amount | | :--- | :----- | | 2022 | $1.0 million | | 2021 | $1.0 million | | 2020 | $1.1 million | [6. Property, Plant and Equipment](index=77&type=section&id=6.%20Property%2C%20Plant%20and%20Equipment) Property, fixtures, and equipment, net, increased to $195.1 million in 2022, with depreciation expense of $33.3 million, and no impairment losses recognized Property, Fixtures and Equipment, Net (in thousands) | Metric | Dec 25, 2022 | Dec 26, 2021 | | :-------------------------------- | :----------- | :----------- | | 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 (in thousands) | Year | Amount | | :--- | :----- | | 2022 | $33.3 million | | 2021 | $31.3 million | | 2020 | $29.6 million | - No impairment losses were recognized for long-lived assets in Fiscal **2022, 2021, or 2020**[427](index=427&type=chunk) [7. Accrued Liabilities](index=77&type=section&id=7.%20Accrued%20Liabilities) Accrued liabilities increased to $22.7 million in 2022, primarily including construction liabilities, sales tax, self-insurance reserves, and utilities Accrued Liabilities (in thousands) | Type | Dec 25, 2022 | Dec 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** | [8. Debt](index=78&type=section&id=8.%20Debt) Total debt, net, was $100.9 million in 2022, primarily a variable-rate Term Facility, with the Revolving Credit Facility undrawn and compliance with all debt covenants Long-Term Debt, Net (in thousands) | Metric | Dec 25, 2022 | Dec 26, 2021 | | :-------------------------------- | :----------- | :----------- | | Term Facility | $98,125 | $100,000 | | 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** | - The Term Facility has a variable interest rate (**5.89%** as of Dec 25, 2022) and the Revolving Credit Facility (**$75.0 million**) was undrawn[431](index=431&type=chunk)[432](index=432&type=chunk)[434](index=434&type=chunk) - In February 2023, the Credit Agreement was amended to replace LIBOR with SOFR[413](index=413&type=chunk)[435](index=435&type=chunk) - The company was in compliance with all debt covenants as of December 25, 2022, and December 26, 2021[443](index=443&type=chunk) [9. Leases](index=79&type=section&id=9.%20Leases) The company leases restaurant facilities and offices, primarily as operating leases, with total lease assets of $353.7 million and liabilities of $406.5 million in 2022 Lease Assets and Liabilities (in thousands) | Metric | Dec 25, 2022 | Dec 26, 2021 | | :-------------------------------- | :----------- | :----------- | | Operating lease right-of-use assets | $352,373 | $324,995 | | Finance lease assets | $1,332 | $1,892 | | **Total lease assets** | **$353,705** | **$326,887** | | Operating lease liabilities | $405,049 | $368,681 | | Finance lease liabilities | $1,433 | $2,017 | | **Total lease liabilities** | **$406,482** | **$370,698** | Total Lease Expense (in thousands) | Year | Operating Lease Expense | Variable Lease Expense | Finance Lease Expense | Total Lease Expense | | :--- | :---------------------- | :--------------------- | :-------------------- | :------------------ | | 2022 | $49,620 | $14,642 | $651 | $64,913 | | 2021 | $44,906 | $12,811 | $717 | $58,434 | | 2020 | $41,813 | $9,692 | $685 | $52,190 | Weighted-Average Lease Terms and Discount Rates (2022) | Lease Type | Remaining Lease Term (years) | Discount Rate | | :-------------------------- | :--------------------------- | :------------ | | Operating leases | 14.6 | 8.6% | | Finance leases | 2.8 | 7.6% | [10. Transaction Expenses (Income), Net](index=81&type=section&id=10.%20Transaction%20Expenses%20%28Income%29%2C%20Net) Transaction expenses, net, were $2.5 million in 2022, primarily due to secondary offering costs, contrasting with a net income in 2021 from a lease termination gain Transaction Expenses (Income), Net (in thousands) | Type | 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) | | Loss (Gain) on restaurant closures/relocations | $391 | $2 | $(36) | | **Total transaction expenses (income), net** | **$2,513** | **$(1,156)** | **$(258)** | - The **$2.0 million** costs in 2022 were incurred in connection with the secondary public offering of common stock by Advent International Corporation and the Registration Statement on Form S-3[454](index=454&type=chunk)[266](index=266&type=chunk) - The 2021 transaction income was primarily due to a **$2.0 million** gain from a lease termination for restaurant redevelopment[456](index=456&type=chunk)[267](index=267&type=chunk) [11. Income Taxes](index=82&type=section&id=11.%20Income%20Taxes) Income tax expense was $5.7 million in 2022, with an effective tax rate of 45.1%, influenced by profitability, FICA credits, and a valuation allowance against deferred tax assets Income Tax (Expense) Benefit (in thousands) | Type | 2022 | 2021 | 2020 | | :-------------------------- | :----- | :----- | :----- | | Current provision | $(1,007) | $(301) | $(118) | | Deferred (provision) benefit | $(4,677) | $(2,176) | $19,991 | | **Income tax (expense) benefit** | **$(5,684)** | **$(2,477)** | **$19,873** | Effective Income Tax Rate Reconciliation | Factor | 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% | — | — | | **Total Effective Tax Rate** | **45.1%** | **669.5%** | **28.6%** | - A valuation allowance of **$41.8 million** (2022) and **$35.9 million** (2021) was recognized against deferred tax assets, primarily for federal tax credit carryforwards not expected to be realized[460](index=460&type=chunk) - The CARES Act provided tax relief, including accelerated tax depreciation and additional interest deductions, and allowed deferral of employer-paid social security taxes[465](index=465&type=chunk) [12. Stockholders' Equity](index=84&type=section&id=12.%20Stockholders%27%20Equity) This section details changes in stockholders' equity, including preferred stock conversion, a secondary offering by Advent, and no cash dividends paid in 2020-2022 - Preferred stock issued in 2020 was automatically converted into **3,156,812 shares** of common stock prior to the October 2021 IPO[466](index=466&type=chunk) - In 2022, Advent International Corporation sold **5,175,000 shares** of common stock in a secondary offering, with proceeds distributed to selling stockholders[469](index=469&type=chunk) - No cash dividends were declared or paid in Fiscal **2022, 2021, and 2020**[470](index=470&type=chunk) [13. Defined Contribution Plan](index=85&type=section&id=13.%20Defined%20Contribution%20Plan) The company sponsors a 401(k) savings plan, matching 25% of the first 6% of employee deferred wages, with contributions totaling $0.6 million in 2022 - Sponsors a 401(k) plan, matching **25% of the first 6%** of employee deferred wages for participants with at least one year of service[472](index=472&type=chunk) Company 401(k) Contributions (in millions) | Year | Amount | | :--- | :----- | | 2022 | $0.6 | | 2021 | $0.5 | | 2020 | $0.3 | [14. Stock-Based Compensation](index=85&type=section&id=14.%20Stock-Based%20Compensation) The company's stock-based compensation plans granted over 1 million time-based stock options in 2022, resulting in $10.4 million expense, with unrecognized expense of $9.6 million for options - Operates 2017 and 2021 Equity Incentive Plans for stock options and other share-based awards to employees and non-employee directors[473](index=473&type=chunk) - In 2022, **1,018,975 non-qualified time-based stock option awards** were granted under the 2021 Equity Plan, vesting over **three years**[474](index=474&type=chunk) Stock-Based Compensation Expense (in millions) | Year | Amount | | :--- | :----- | | 2022 | $10.4 | | 2021 | $8.6 | | 2020 | $0.8 | Unrecognized Stock-Based Compensation Expense (as of Dec 25, 2022, in thousands) | Type | Amount | Remaining Weighted Average Vesting Period (years) | | :-------------------------- | :----- | :--------------------------------------- | | Stock options | $9,602 | 1.6 | | Restricted stock units | $234 | 0.4 | [15. Commitments and Contingencies](index=88&type=section&id=15.%20Commitments%20and%20Contingencies) This section outlines purchase commitments, legal proceedings, and unclaimed property matters, with no material adverse effects anticipated from current claims - Enters into short-term purchase obligations in the ordinary course of business, with one long-term product purchase agreement having a remaining minimum commitment of **$9.1 million** as of December 25, 2022[491](index=491&type=chunk)[492](index=492&type=chunk) - Involved in legal proceedings and claims in the ordinary course of business, but the ultimate liability is not considered material[493](index=493&type=chunk) - Participating in Delaware's Voluntary Disclosure Agreement Program for unclaimed property but believes it is not currently required to remit future unredeemed gift card amounts due to its subsidiary's re-domiciliation in Florida[495](index=495&type=chunk)[496](index=496&type=chunk) [16. Net Income (Loss) Per Common Share](index=89&type=section&id=16.%20Net%20Income%20%28Loss%29%20Per%20Common%20Share) This section provides basic and diluted net income (loss) per common share, with 2022 EPS at $0.12 basic and $0.11 diluted, and prior years showing negative EPS Net Income (Loss) Per Common Share | Metric | 2022 | 2021 | 2020 | | :-------------------------------- | :----- | :----- | :----- | | Net income (loss) (in thousands) | $6,907 | $(2,107) | $(49,681) | | Weighted average common shares outstanding - basic | 59,097,512 | 48,213,995 | 45,013,784 | | Weighted average common shares outstanding - diluted | 60,140,045 | 48,213,995 | 45,013,784 | | Net income (loss) per common share - basic | $0.12 | $(0.04) | $(1.10) | | Net income (loss) per common share - diluted | $0.11 | $(0.04) | $(1.10) | - All stock options were excluded from diluted net loss per common share calculations in **2021 and 2020** due to their anti-dilutive impact[498](index=498&type=chunk) [17. Condensed Financial Information of Registrant (Parent Company Only)](index=90&type=section&id=17.%20Condensed%20Financial%20Information%20of%20Registrant%20%28Parent%20Company%20Only%29) Condensed financial information for the Parent Company Only is presented due to restricted net assets of subsidiaries, with the parent accounting for subsidiaries using the equity method - Condensed financial statements for the Parent Company Only are presented due to restricted net assets of subsidiaries exceeding **25% of consolidated net assets**, as per Rule 12-04 of Regulation S-X[505](index=505&type=chunk) - The parent company accounts for its subsidiaries using the equity method[506](index=506&type=chunk) Parent Company Only Equity (in thousands) | Metric | Dec 25, 2022 | Dec 26, 2021 | | :-------------------------------- | :----------- | :----------- | | Investment in subsidiaries | $523,135 | $504,429 | | Total equity attributable to First Watch Restaurant Group, Inc. | $523,135 | $504,429 | [Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure](index=91&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20With%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company reported no changes in or disagreements with accountants on accounting and financial disclosure - No changes in or disagreements with accountants on accounting and financial disclosure[509](index=509&type=chunk) [Item 9A. Controls and Procedures](index=91&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded disclosure controls were ineffective as of December 25, 2022, due to material weaknesses in internal control over financial reporting - Disclosure controls and procedures were not effective as of December 25, 2022, due to material weaknesses in internal control over financial reporting[512](index=512&type=chunk) - Identified material weaknesses include an ineffective internal control environment (lacking sufficient personnel, formal delegation, segregation of duties), ineffective period-end financial reporting controls, inadequate income tax accounting controls, and deficiencies in IT general controls[514](index=514&type=chunk)[515](index=515&type=chunk)[517](index=517&type=chunk) - Remediation efforts include hiring new financial reporting, accounting, and IT leadership, augmenting staff, establishing formal policies (delegation of authority, IT policies), formalizing roles, and implementing new period-end financial reporting controls[518](index=518&type=chunk)[519](index=519&type=chunk) [Item 9B. Other Information](index=93&type=section&id=Item%209B.%20Other%20Information) The company reported no other information for this item - No other information to report[521](index=521&type=chunk) [Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections](index=93&type=section&id=Item%209C.%20Disclosure%20Regarding%20Foreign%20Jurisdictions%20that%20Prevent%20Inspections) The company reported no disclosures regarding foreign jurisdictions that prevent inspections - No disclosures regarding foreign jurisdictions that prevent inspections[522](index=522&type=chunk) PART III [Item 10. Directors, Executive Officers and Corporate Governance](index=93&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) The company adopted a Code of Ethics for its leadership, with additional governance information incorporated by reference from the Proxy Statement - Adopted a Code of Ethics and Business Conduct for CEO, CFO, and other finance leaders, publicly available on its website[524](index=524&type=chunk) - Further information is incorporated by reference from the Definitive Proxy Statement for the 2023 Annual Meeting of Stockholders[525](index=525&type=chunk) [Item 11. Executive Compensation](index=93&type=section&id=Item%2011.%20Executive%20Compensation) Executive compensation, outstanding equity awards, and director compensation information is incorporated by reference from the Proxy Statement - Executive compensation, outstanding equity awards, and director compensation information is incorporated by reference from the Proxy Statement[527](index=527&type=chunk) [Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=94&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Security ownership information for beneficial owners and management is incorporated by reference from the Proxy Statement - Security ownership information for beneficial owners and management is incorporated by reference from the Proxy Statement[528](index=528&type=chunk) [Item 13. Certain Relationships and Related Transactions, and Director Independence](index=94&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information on certain relationships, related transactions, and director independence is incorporated by reference from the Proxy Statement - Information on certain relationships, related transactions, and director independence is incorporated by reference from the Proxy Statement[529](index=529&type=chunk) [Item 14. Principal Accountant Fees and Services](index=94&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) Information on principal accountant fees, services, and approval policy is incorporated by reference from the Proxy Statement - Information on principal accountant fees and services, and the policy for approval of audit and permitted non-audit services, is incorporated by reference from the Proxy Statement[530](index=530&type=chunk) PART IV [Item 15. Exhibits, Financial Statement Schedules](index=94&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section lists consolidated financial statements and an exhibit index for the Form 10-K, with no financial statement schedules required - Lists consolidated financial statements and a detailed exhibit index as part of the Annual Report on Form 10-K[532](index=532&type=chunk)[53

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 25, 2022 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ Commission file number 001-40866 First Watch Restaurant Group, Inc. (Exact name of registrant as specified in its charter) (State or othe ...

Q2 2022 Performance Highlights - System-wide sales increased by 200% to $2312 million in Q2 2022 from $1926 million in Q2 2021[15] - Total revenues increased 198% to $1845 million in Q2 2022 from $1540 million in Q2 2021[15] - Same-restaurant sales growth was 134% in Q2 2022 (302% relative to Q2 2019)[15] - Same-restaurant traffic growth was 81% in Q2 2022 (74% relative to Q2 2019)[15] - Restaurant level operating profit margin was 182% in Q2 2022 compared to 225% in Q2 2021[15] - Net income was $27 million or $005 per diluted share in Q2 2022 compared to $38 million or $008 per diluted share in Q2 2021[15] - Adjusted EBITDA was $178 million in Q2 2022 compared to $222 million in Q2 2021[15] - The company opened 9 system-wide restaurants (5 company-owned and 4 franchise-owned) across 7 states[15] Fiscal Year 2022 Outlook - Total revenue growth of approximately 200% relative to 2021 is expected[16] - Adjusted EBITDA is projected to be in the range of $700 million to $720 million[16] - Same-restaurant sales growth is expected to be in the range of 130% to 150% with continued positive traffic[16]

Financial Data and Key Metrics Changes - System-wide sales for Q2 2022 reached $231.2 million, an increase of $17.1 million from Q1 2022 and $30.5 million from Q2 2021 [38] - Total revenues were $184.5 million, up $11.3 million from Q1 2022 and $30.5 million from Q2 2021 [38] - Net income for the quarter was $2.7 million, with adjusted EBITDA at $17.8 million and a restaurant level operating profit margin of 18.2% [45] Business Line Data and Key Metrics Changes - Same restaurant sales growth was 13.4% year-over-year and 30.2% compared to 2019, driven primarily by increased customer counts [12] - Same restaurant traffic growth was 8.1% year-over-year and 7.4% compared to 2019 [40] - Franchise revenues grew to $2.8 million due to increased sales from franchise-owned restaurants and the addition of 11 new franchise restaurants [41] Market Data and Key Metrics Changes - Dining room recovery reached 93% compared to 2019, with consistent off-premise sales volumes [40] - Average weekly traffic remained consistent throughout the quarter, with June achieving 4.2% traffic growth year-over-year [14] Company Strategy and Development Direction - The company plans to open between 30 and 35 new company-owned restaurants and 8 to 13 new franchise-owned restaurants in 2022 [50] - The alcohol program rollout is on track, now available in over 75% of the system [29] - The company is focused on enhancing customer experience and operational efficiency through technology, including the kitchen display system (KDS) [30] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the brand's resilience amid economic uncertainty, citing a history of strong performance during downturns [80] - The company raised its guidance for same restaurant sales growth to 13% to 15% for the year, driven by continued positive traffic [49] - Management believes that commodity inflation has peaked and expects costs to normalize moving forward [17][42] Other Important Information - The company has donated $300,000 to pediatric cancer research through a partnership with the V Foundation [32] - Staffing levels are at 93%, with a slight improvement in manager levels to 2.8 managers per restaurant [25] Q&A Session Summary Question: What drove the acceleration in traffic and sales? - Management noted that traffic and sales growth has been consistent across all markets, supported by menu innovation and service focus [56][57] Question: How does the company gauge the durability of current performance? - Management highlighted a long history of traffic growth and consumer demand, indicating confidence in sustaining performance [56] Question: What gives confidence in taking price increases amid macro pressures? - Management believes the pricing power is supported by the brand's value proposition and consumer willingness to spend [70] Question: How is the labor environment affecting operations? - Management indicated that while staffing levels are lower, efficiencies gained through technology and training are helping maintain performance [71][73] Question: What is the outlook for commodity inflation? - Management expects commodity inflation to remain in double digits for the remainder of the year but believes it will not reach the highs seen in Q2 [89]