First Watch Restaurant (FWRG) - 2022 Q4 - Annual Report

Cautionary Note Regarding Forward-Looking Statements 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] - 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] PART I. Item 1. Business 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 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][16] 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] Growth Strategies 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] 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 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] - Utilizes digital management information systems for efficient operations, supply chain management, and timely access to financial and marketing data[31] - 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][32] Franchise Program 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] Human Capital 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] - 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][36] - 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][39] Government Regulation 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][42] Intellectual Property 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] 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] - Views primary competition as a network of independent breakfast and lunch restaurants, believing there is no comparable offering at scale within its segment[45] 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] Corporate Information 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] Additional Information 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][50] Item 1A. Risk Factors This section details numerous risks that could materially affect First Watch's business, financial condition, and stock price Risk Factors Summary 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][54][56][57] Risks Related to Our Business and Industry 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] - 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][67][70] - 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][75][81][84] - Geographic concentration in the Southeast U.S. (41% of system-wide restaurants, 23% in Florida) makes the company disproportionately affected by regional conditions[97] Risks Related to Information Technology and Intellectual Property 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][104][105] - 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][110] - 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][121] Risks Related to Employees and the Workforce 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] - 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][124] - 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][126][127] Legal and Regulatory Risks 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][130][131] - 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][138][139] - 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][142][143][144] Risks Related to Accounting and Financial Reporting Matters 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][146][148] - 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][151][152] - 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][154] Risks Related to Our Indebtedness 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] - 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] - 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][160] Risks Related to Our Company and Organizational Structure 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][178] - 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] - 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] - 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][169] Risks Related to Ownership of Our Common Stock 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][177] - 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][180] - 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] - 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][184][185] Item 1B. Unresolved Staff Comments The company reported no unresolved staff comments from the SEC - No unresolved staff comments[192] Item 2. Properties 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] 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 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] Item 4. Mine Safety Disclosures The company reported no mine safety disclosures - No mine safety disclosures[194] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 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] - As of March 3, 2023, there were 32 stockholders of record[196] - 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][199] 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 This item is reserved and contains no content - Item 6 is reserved[202] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 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][204] - First Watch is an award-winning Daytime Dining concept, majority-owned by Advent International Corporation, with common stock trading on Nasdaq under 'FWRG'[205] - The company reports financial and operating information in one segment, with fiscal years ending on the last Sunday of each calendar year[206][364] 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] - 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] Key Performance Indicators 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][209][210][211][212][213] - Comparable Restaurant Base includes company-owned First Watch branded restaurants open for 18 months or longer[210] Non-GAAP Financial Measures 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] - 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][215][216] - 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][219] Financial Highlights 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] 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 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] 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] Development Highlights 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 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 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] - 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] Non-GAAP Financial Measure Reconciliations 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 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] - 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] 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 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][307][308][309] - 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][314][315] - 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][317] - 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][320][321] - 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][323][325] Item 7A. Quantitative and Qualitative Disclosures About Market Risk 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][329] - The company partially offsets cost increases through menu price adjustments but does not use financial instruments to hedge commodity risk[328] 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 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 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] - The firm has served as the company's auditor since 1999[340] Consolidated Balance Sheets 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) 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 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 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] Notes to Consolidated Financial Statements 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] - Completed its IPO on October 5, 2021, selling 10,877,850 shares of common stock for net proceeds of $182.1 million[358] - 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][400][385][393][410] 1. Nature of Business and Organization 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] - Operates and franchises restaurants in 29 states under the 'First Watch' trade name, focusing on made-to-order breakfast, brunch, and lunch[356][357] - Completed its IPO on October 5, 2021, selling 10,877,850 shares of common stock for aggregate net proceeds of $182.1 million[358] 2. Summary of Significant Accounting Policies 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] - The company has a single operating segment, as the CEO assesses performance and allocates resources at the consolidated level[364] - 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][368][369][372][373][374] - Lease accounting distinguishes between operating and finance leases, recognizing right-of-use assets and lease liabilities, with operating lease expense recognized straight-line[375][376][379][382] - 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][386][387][389] - 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][398][400] 3. Revenues 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 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] 5. Intangible Assets, Net 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 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] 7. Accrued Liabilities 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 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][432][434] - In February 2023, the Credit Agreement was amended to replace LIBOR with SOFR[413][435] - The company was in compliance with all debt covenants as of December 25, 2022, and December 26, 2021[443] 9. Leases 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 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][266] - The 2021 transaction income was primarily due to a $2.0 million gain from a lease termination for restaurant redevelopment[456][267] 11. Income Taxes 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] - The CARES Act provided tax relief, including accelerated tax depreciation and additional interest deductions, and allowed deferral of employer-paid social security taxes[465] 12. Stockholders' Equity 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] - In 2022, Advent International Corporation sold 5,175,000 shares of common stock in a secondary offering, with proceeds distributed to selling stockholders[469] - No cash dividends were declared or paid in Fiscal 2022, 2021, and 2020[470] 13. Defined Contribution Plan 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] Company 401(k) Contributions (in millions) | Year | Amount | | :--- | :----- | | 2022 | $0.6 | | 2021 | $0.5 | | 2020 | $0.3 | 14. Stock-Based Compensation 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] - In 2022, 1,018,975 non-qualified time-based stock option awards were granted under the 2021 Equity Plan, vesting over three years[474] 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 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][492] - Involved in legal proceedings and claims in the ordinary course of business, but the ultimate liability is not considered material[493] - 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][496] 16. Net Income (Loss) Per Common Share 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] 17. Condensed Financial Information of Registrant (Parent Company Only) 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] - The parent company accounts for its subsidiaries using the equity method[506] 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 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] Item 9A. Controls and Procedures 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] - 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][515][517] - 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][519] Item 9B. Other Information The company reported no other information for this item - No other information to report[521] Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections The company reported no disclosures regarding foreign jurisdictions that prevent inspections - No disclosures regarding foreign jurisdictions that prevent inspections[522] PART III Item 10. Directors, Executive Officers and Corporate Governance 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] - Further information is incorporated by reference from the Definitive Proxy Statement for the 2023 Annual Meeting of Stockholders[525] Item 11. Executive Compensation 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] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 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] Item 13. Certain Relationships and Related Transactions, and Director Independence 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] Item 14. Principal Accountant Fees and Services 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] PART IV Item 15. Exhibits, Financial Statement Schedules 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][53