First Watch Restaurant (FWRG) - 2021 Q3 - Quarterly Report

Part I. Financial Information This part covers the unaudited consolidated financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures Item 1. Consolidated Financial Statements and Notes to Consolidated Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements of First Watch Restaurant Group, Inc. for the period ended September 26, 2021, including balance sheets, statements of operations, equity, and cash flows, along with detailed notes explaining the company's business, significant accounting policies, revenue recognition, debt, leases, stock-based compensation, income taxes, commitments, and subsequent events like the IPO and debt refinancing Consolidated Balance Sheets Consolidated Balance Sheet Highlights (in thousands) | Item | September 26, 2021 | December 27, 2020 | | :-------------------------------- | :------------------- | :------------------ | | Total Assets | $1,038,835 | $1,007,512 | | Total Liabilities | $714,677 | $686,646 | | Total Equity | $324,158 | $320,866 | | Cash and cash equivalents | $51,851 | $38,846 | | Total current assets | $66,721 | $49,038 | | Total current liabilities | $85,024 | $76,532 | - Total assets increased by $31.3 million, driven by an increase in cash and cash equivalents and operating lease right-of-use assets[8] - Total liabilities increased by $28.0 million, primarily due to increases in operating lease liabilities and accrued liabilities[8] Consolidated Statements of Operations and Comprehensive Income (Loss) Consolidated Statements of Operations Highlights (in thousands) | Item | 13 Weeks Ended Sep 26, 2021 | 13 Weeks Ended Sep 27, 2020 | 39 Weeks Ended Sep 26, 2021 | 39 Weeks Ended Sep 27, 2020 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total Revenues | $157,441 | $99,749 | $438,573 | $232,995 | | Income (Loss) from operations | $7,153 | $(8,616) | $23,310 | $(42,493) | | Net income (loss) | $783 | $(11,141) | $2,546 | $(42,563) | | Net income (loss) per common share - basic | $0.02 | $(0.25) | $0.06 | $(0.95) | - Total revenues significantly increased for both the thirteen and thirty-nine-week periods ended September 26, 2021, compared to the prior year, indicating a strong recovery from the COVID-19 pandemic's impact[10] - The company returned to net income and positive income from operations for both periods in 2021, a substantial improvement from losses in 2020[10] Consolidated Statements of Equity Consolidated Statements of Equity Highlights (in thousands) | Item | Balance at Sep 26, 2021 | Balance at Dec 27, 2020 | | :-------------------------- | :---------------------- | :---------------------- | | Total Equity | $324,158 | $320,866 | | Accumulated Deficit | $(100,386) | $(102,932) | | Additional Paid-in Capital | $424,091 | $423,345 | | Net income (39 weeks) | $2,546 | $(42,563) | | Stock-based compensation (39 weeks) | $746 | $571 | - Total equity increased from $320.9 million to $324.2 million, primarily due to net income and stock-based compensation[13] - The accumulated deficit decreased from $(102.9) million to $(100.4) million, reflecting the net income generated in the current period[13] Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows Highlights (in thousands, 39 weeks ended) | Item | September 26, 2021 | September 27, 2020 | | :------------------------------------------ | :------------------- | :------------------- | | Net cash provided by (used in) operating activities | $44,265 | $(20,393) | | Net cash used in investing activities | $(27,424) | $(22,328) | | Net cash (used in) provided by financing activities | $(3,836) | $74,167 | | Net increase in cash and cash equivalents and restricted cash | $13,005 | $31,446 | | Cash and cash equivalents and restricted cash, end of period | $52,102 | $42,567 | - Operating activities generated $44.3 million in cash in 2021, a significant turnaround from a $(20.4) million cash outflow in 2020, primarily due to improved net income[15] - Cash used in investing activities increased to $(27.4) million in 2021, mainly due to higher capital expenditures[15] - Financing activities shifted from providing $74.2 million in 2020 (due to preferred stock issuance and debt proceeds) to using $(3.8) million in 2021 (due to debt repayments and deferred offering costs)[15] Notes to Unaudited Consolidated Financial Statements 1. Nature of Business and Organization - First Watch operates and franchises breakfast, brunch, and lunch restaurants in 28 states. As of September 26, 2021, the company operated 337 company-owned restaurants and 91 franchise-owned restaurants[20] - The company completed its Initial Public Offering (IPO) on October 5, 2021, selling 10,877,850 shares of common stock at $18.00 per share, generating $182.1 million in net proceeds used to repay senior credit facilities[22][23] - Prior to the IPO, a 11.838-for-1 stock split of common stock was effected, and all outstanding preferred stock was converted into 3,156,812 shares of common stock[21][22] 2. Summary of Significant Accounting Policies - The company reports financial information on a 52- or 53-week fiscal year, with 13-week fiscal quarters. The interim financial statements are unaudited and prepared in accordance with GAAP and SEC rules[24] - Deferred offering costs of $3.7 million related to the IPO were capitalized as of September 26, 2021, to be recorded as a reduction of additional paid-in capital upon consummation[26] - Management is evaluating ASU 2020-04, 'Reference Rate Reform,' for its potential impact on contracts and hedging relationships[27] 3. Revenues Deferred Revenues (in thousands) | Item | September 26, 2021 | December 27, 2020 | | :-------------------------- | :------------------- | :------------------ | | Deferred gift card revenue | $2,012 | $4,024 | | Deferred franchise fee revenue - current | $239 | $249 | | Deferred franchise fee revenue - non-current | $2,334 | $2,025 | Revenues Recognized by Type (in thousands) | Revenue Type | 13 Weeks Ended Sep 26, 2021 | 13 Weeks Ended Sep 27, 2020 | 39 Weeks Ended Sep 26, 2021 | 39 Weeks Ended Sep 27, 2020 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | In-restaurant dining sales | $123,311 | $68,853 | $327,147 | $182,814 | | Third-party delivery sales | $15,232 | $15,141 | $52,584 | $19,947 | | Take-out sales | $16,539 | $14,359 | $52,405 | $26,785 | | Total restaurant sales | $155,082 | $98,353 | $432,136 | $229,546 | | Royalty and system fund contributions | $2,300 | $1,342 | $6,254 | $3,167 | | Initial fees | $59 | $54 | $183 | $282 | | Total franchise revenues | $2,359 | $1,396 | $6,437 | $3,449 | | Total revenues | $157,441 | $99,749 | $438,573 | $232,995 | - Deferred gift card revenue decreased from $4.0 million to $2.0 million, while deferred franchise fee revenue (non-current) increased from $2.0 million to $2.3 million[28] - In-restaurant dining sales saw a significant recovery, increasing by 79.1% for the thirteen weeks and 79.0% for the thirty-nine weeks ended September 26, 2021, compared to the prior year[29] 4. COVID-19 Charges COVID-19 Charges (in thousands) | Item | 13 Weeks Ended Sep 26, 2021 | 13 Weeks Ended Sep 27, 2020 | 39 Weeks Ended Sep 26, 2021 | 39 Weeks Ended Sep 27, 2020 | | :------------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Inventory obsolescence and spoilage | $0 | $156 | $0 | $556 | | Compensation for furloughed employees | $0 | $38 | $3 | $1,085 | | Health insurance premiums for furloughed employees | $0 | $68 | $0 | $852 | | Other expenses (restaurant operating) | $0 | $323 | $16 | $802 | | Other expenses (general & administrative) | $0 | $434 | $64 | $1,273 | | Total COVID-19 charges | $0 | $963 | $211 | $4,845 | - COVID-19 related charges significantly decreased in 2021 compared to 2020, reflecting the recovery from the pandemic's initial impact[30] 5. Accounts Receivable Accounts Receivable (in thousands) | Item | September 26, 2021 | December 27, 2020 | | :-------------------------------- | :------------------- | :------------------ | | Receivables from third-party delivery providers | $984 | $1,742 | | Receivables from franchisees | $876 | $591 | | Rebate receivables | $635 | $514 | | Receivables related to gift card sales | $318 | $1,028 | | Total accounts receivable | $2,901 | $3,915 | - Total accounts receivable decreased by $1.0 million, primarily due to a reduction in receivables from third-party delivery providers and gift card sales[31] 6. Accrued Liabilities Accrued Liabilities (in thousands) | Item | September 26, 2021 | December 27, 2020 | | :-------------------------------- | :------------------- | :------------------ | | Sales tax | $3,277 | $2,159 | | Construction liabilities | $3,148 | $4,301 | | Legal services and contingencies | $1,602 | $126 | | Property tax | $1,213 | $424 | | Total accrued liabilities | $17,281 | $13,482 | - Total accrued liabilities increased by $3.8 million, mainly driven by higher sales tax, legal services and contingencies, and property tax accruals[32] 7. Debt Long-term Debt, Net (in thousands) | Item | September 26, 2021 | December 27, 2020 | | :-------------------------------- | :------------------- | :------------------ | | Initial Term Loan | $150,649 | $150,214 | | Initial Delayed Draw Term Loan | $49,138 | $48,992 | | First Amendment Delayed Draw Term Facility | $49,609 | $49,458 | | Second Amendment Delayed Draw Term Facility | $39,491 | $39,369 | | Total debt, net | $291,286 | $289,990 | | Long-term debt, net | $287,660 | $286,400 | - The company's Senior Credit Facilities bore interest rates of 6.75% as of September 26, 2021, down from 8.00% as of December 27, 2020[33] - The estimated fair value of outstanding debt (excluding lease obligations) was $288.9 million as of September 26, 2021, and the company was in compliance with all financial covenants[34] 8. Leases Lease Assets and Liabilities (in thousands) | Item | September 26, 2021 | December 27, 2020 | | :-------------------------------- | :------------------- | :------------------ | | Operating lease right-of-use assets | $318,931 | $307,558 | | Total lease assets | $320,932 | $309,770 | | Operating lease liabilities - non-current | $322,516 | $307,802 | | Total lease liabilities | $364,269 | $350,213 | Total Lease Expense (in thousands) | Period | 13 Weeks Ended Sep 26, 2021 | 13 Weeks Ended Sep 27, 2020 | 39 Weeks Ended Sep 26, 2021 | 39 Weeks Ended Sep 27, 2020 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total lease expense | $14,761 | $13,355 | $43,095 | $38,908 | | Operating cash flows - operating leases | $30,388 (39 weeks) | $13,255 (39 weeks) | $30,388 | $13,255 | - The weighted-average remaining lease term for operating leases was 15.6 years, with a weighted-average discount rate of 9.1% as of September 26, 2021[39] 9. Stock-Based Compensation Stock-Based Compensation Expense (in thousands) | Period | 13 Weeks Ended Sep 26, 2021 | 13 Weeks Ended Sep 27, 2020 | 39 Weeks Ended Sep 26, 2021 | 39 Weeks Ended Sep 27, 2020 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Stock-based compensation expense | $400 | $200 | $700 | $600 | - The 2017 Equity Plan authorizes stock-based option awards, with non-qualified stock options generally vesting over a five-year period[41] - Modifications to performance-based option awards in August and September 2021 changed vesting schedules and waived market conditions, resulting in an increase of $0.3 million to the fair value of certain awards[43][45][46] - Unrecognized stock-based compensation expense was approximately $0.7 million for time-based awards (1.3 years weighted-average period) and $20.5 million for performance-based awards (2.8 years weighted-average period) as of September 26, 2021[47] - A new 2021 Equity Incentive Plan was adopted, reserving 4,034,072 common shares, with an automatic annual increase mechanism[49] 10. Income Taxes Income Tax Expense (Benefit) and Effective Tax Rate (in thousands) | Period | 13 Weeks Ended Sep 26, 2021 | 13 Weeks Ended Sep 27, 2020 | 39 Weeks Ended Sep 26, 2021 | 39 Weeks Ended Sep 27, 2020 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Income (Loss) before income tax expense (benefit) | $1,317 | $(14,403) | $5,190 | $(58,587) | | Income tax expense (benefit) | $534 | $(3,262) | $2,644 | $(16,024) | | Effective tax rate | 40.5% | 22.6% | 50.9% | 27.4% | - The effective income tax rate increased significantly in 2021 compared to 2020, primarily due to changes in the valuation allowance for deferred tax assets, tax credits for FICA taxes on tips, and a shift from pre-tax book loss to income[51][52] - A contingent consideration liability of $1.0 million was recognized as of September 26, 2021, for expected payments to previous stockholders for tax savings from pre-August 2017 loss carryforwards and credits[53] 11. Commitments and Contingencies - The company is subject to legal proceedings and claims in the ordinary course of business, but management believes the liability for these matters was not material as of September 26, 2021[54] 12. Net Income (Loss) Per Common Share Net Income (Loss) Per Common Share | Period | 13 Weeks Ended Sep 26, 2021 | 13 Weeks Ended Sep 27, 2020 | 39 Weeks Ended Sep 26, 2021 | 39 Weeks Ended Sep 27, 2020 | | :------------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income (loss) per common share - basic | $0.02 | $(0.25) | $0.06 | $(0.95) | | Net income (loss) per common share - diluted | $0.02 | $(0.25) | $0.06 | $(0.95) | | Weighted average common shares outstanding - basic | 45,013,784 | 45,013,784 | 45,013,784 | 45,013,784 | | Weighted average common shares outstanding - diluted | 46,085,650 | 45,013,784 | 46,077,196 | 45,013,784 | - Diluted EPS turned positive in 2021 ($0.02 for 13 weeks, $0.06 for 39 weeks) compared to negative EPS in 2020, reflecting the company's return to profitability[56] - Performance-based option awards were excluded from diluted EPS calculations for all periods as the performance condition was not considered probable of being met[57] 13. Subsequent Events - On October 6, 2021, FWR Holding Corporation entered into a new credit agreement providing a $100 million term loan A facility and a $75 million revolving credit facility, both maturing on October 6, 2026[58] - Proceeds from the IPO and new facilities were used to fully repay the outstanding Senior Credit Facilities, resulting in a debt extinguishment loss of approximately $2.4 million to be recorded in Q4 2021[59] - In October 2021, the company also entered into a $3.0 million financing agreement at 2.41% interest, payable monthly through August 2022[60] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides an overview of First Watch's financial performance, recent developments including its IPO, and key operating metrics. It details the results of operations for the thirteen and thirty-nine weeks ended September 26, 2021, compared to the prior year, highlighting significant revenue growth, improved profitability, and the impact of the COVID-19 recovery. It also discusses non-GAAP financial measures, liquidity, capital resources, and critical accounting estimates Overview - First Watch is an award-winning daytime restaurant concept specializing in made-to-order breakfast, brunch, and lunch using fresh ingredients, operating from 7:00 a.m. to 2:30 p.m.[62] - As of September 26, 2021, the company had 428 system-wide restaurants across 28 states, comprising 337 company-owned and 91 franchise-owned locations[62] Recent Developments Financial Highlights (13 Weeks Ended Sep 26, 2021 vs. Sep 27, 2020) | Metric | Sep 26, 2021 | Sep 27, 2020 | Change | | :-------------------------------- | :----------- | :----------- | :----- | | Total revenues | $157.4 million | $99.7 million | +57.8% | | Same-restaurant sales growth | 46.2% | -17.2% | +63.4 pp | | Same-restaurant traffic growth | 40.1% | -24.3% | +64.4 pp | | Income from operations margin | 4.6% | (8.8)% | +13.4 pp | | Restaurant level operating profit margin | 19.5% | 9.9% | +9.6 pp | | Net income (loss) | $0.8 million | $(11.1) million | N/A | | Adjusted EBITDA | $17.0 million | $2.6 million | +$14.4 million | | New restaurant openings | 5 | N/A | N/A | - The company experienced significant recovery momentum in in-restaurant dining sales, leading to substantial increases in total revenues, same-restaurant sales, and traffic growth[63][64] - Profitability metrics, including income from operations margin, restaurant level operating profit margin, net income, and Adjusted EBITDA, showed strong improvements, moving from losses or low margins in 2020 to positive results in 2021[64] Initial Public Offering - On September 30, 2021, the company's IPO registration statement was declared effective, and common stock began trading on Nasdaq on October 1, 2021[66] - The IPO, completed on October 5, 2021, involved the sale of 10,877,850 common shares at $18.00 per share, generating $182.1 million in net proceeds after underwriting discounts[66][67] - All net proceeds from the IPO were used to repay $182.1 million of outstanding borrowings under the company's Senior Credit Facilities[67] Key Performance Indicators - Key performance indicators include new restaurant development, same-restaurant sales growth, same-restaurant traffic growth, average unit volume (AUV), system-wide restaurants, and system-wide sales[68] - The company plans to open over 130 company-owned restaurants from 2022 through 2024, which is expected to drive sales growth but may impact operating profit margins in the initial 12 months[69] - Same-restaurant sales growth is measured for company-owned restaurants open for 18 months or longer, with 270 restaurants in the Comparable Restaurant Base for the periods ended September 26, 2021[72] - Non-GAAP metrics like Restaurant level operating profit and Adjusted EBITDA are used to evaluate performance, excluding corporate-level expenses and non-core operating items[77][79] Selected Operating Data Selected Operating Data (in thousands, except percentages) | Metric | 13 Weeks Ended Sep 26, 2021 | 13 Weeks Ended Sep 27, 2020 | 39 Weeks Ended Sep 26, 2021 | 39 Weeks Ended Sep 27, 2020 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | System-wide sales | $197,409 | $124,718 | $548,005 | $291,008 | | Same-restaurant sales growth | 46.2% | (17.2)% | 75.0% | (34.8)% | | Same-restaurant traffic growth | 40.1% | (24.3)% | 61.6% | (38.7)% | | AUV | $462 | $321 | $1,315 | $771 | | System-wide restaurants | 428 | 402 | 428 | 402 | | Restaurant level operating profit | $30,240 | $9,762 | $86,230 | $14,202 | | Restaurant level operating profit margin | 19.5% | 9.9% | 20.0% | 6.2% | | Adjusted EBITDA | $16,952 | $2,582 | $52,134 | $(9,221) | | Adjusted EBITDA margin | 10.8% | 2.6% | 11.9% | (4.0)% | - System-wide sales, same-restaurant sales growth, and traffic growth showed substantial positive trends in 2021, indicating a strong rebound from the prior year's pandemic-induced declines[81] - AUV increased significantly, reaching $462 thousand for the 13 weeks and $1.315 million for the 39 weeks ended September 26, 2021[81] Results of Operations Restaurant Sales Restaurant Sales (in thousands) | Sales Type | 13 Weeks Ended Sep 26, 2021 | 13 Weeks Ended Sep 27, 2020 | Change | 39 Weeks Ended Sep 26, 2021 | 39 Weeks Ended Sep 27, 2020 | Change | | :-------------------------- | :-------------------------- | :-------------------------- | :----- | :-------------------------- | :-------------------------- | :----- | | In-restaurant dining sales | $123,311 | $68,853 | 79.1% | $327,147 | $182,814 | 79.0% | | Third-party delivery sales | $15,232 | $15,141 | 0.6% | $52,584 | $19,947 | N/M | | Take-out sales | $16,539 | $14,359 | 15.2% | $52,405 | $26,785 | 95.7% | | Total Restaurant sales | $155,082 | $98,353 | 57.7% | $432,136 | $229,546 | 88.3% | - The 57.7% increase in total restaurant sales for the 13 weeks ended September 26, 2021, was driven by 46.2% same-restaurant sales growth (40.1% traffic growth) and $9.3 million from 19 new restaurant openings[88] - Off-premises sales (third-party delivery and take-out) reached $105.0 million for the 39 weeks ended September 26, 2021, up from $46.7 million in the prior year, maintaining strong volumes even as in-restaurant dining rebounded[90] Franchise Revenues Franchise Revenues (in thousands) | Revenue Type | 13 Weeks Ended Sep 26, 2021 | 13 Weeks Ended Sep 27, 2020 | Change | 39 Weeks Ended Sep 26, 2021 | 39 Weeks Ended Sep 27, 2020 | Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :----- | :-------------------------- | :-------------------------- | :----- | | Royalty and system fund contributions | $2,300 | $1,342 | 71.4% | $6,254 | $3,167 | 97.5% | | Initial fees | $59 | $54 | 9.3% | $183 | $282 | (35.1)% | | Total Franchise revenues | $2,359 | $1,396 | 69.0% | $6,437 | $3,449 | 86.6% | - The 69.0% increase in franchise revenues for the 13 weeks ended September 26, 2021, was primarily due to the rapid sales recovery from the COVID-19 pandemic and $0.2 million from 11 new franchise-owned restaurant openings[92] Food and Beverage Costs Food and Beverage Costs (in thousands) | Metric | 13 Weeks Ended Sep 26, 2021 | 13 Weeks Ended Sep 27, 2020 | Change | 39 Weeks Ended Sep 26, 2021 | 39 Weeks Ended Sep 27, 2020 | Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :----- | :-------------------------- | :-------------------------- | :----- | | Food and beverage costs | $35,871 | $22,053 | 62.7% | $96,383 | $53,040 | 81.7% | | As a percentage of restaurant sales | 23.1% | 22.4% | +0.7 pp | 22.3% | 23.1% | (0.8) pp | - Food and beverage costs as a percentage of restaurant sales increased by 70 basis points to 23.1% for the 13 weeks ended September 26, 2021, mainly due to increased pork costs, partially offset by menu price increases[94] - For the 39 weeks, the percentage decreased by 80 basis points to 22.3%, primarily due to menu price increases and the absence of COVID-19 related inventory write-offs seen in 2020[96] Labor and Other Related Expenses Labor and Other Related Expenses (in thousands) | Metric | 13 Weeks Ended Sep 26, 2021 | 13 Weeks Ended Sep 27, 2020 | Change | 39 Weeks Ended Sep 26, 2021 | 39 Weeks Ended Sep 27, 2020 | Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :----- | :-------------------------- | :-------------------------- | :----- | | Labor and other related expenses | $50,587 | $34,115 | 48.3% | $136,586 | $84,127 | 62.4% | | As a percentage of restaurant sales | 32.6% | 34.7% | (2.1)% | 31.6% | 36.6% | (5.0)% | - Labor and other related expenses as a percentage of restaurant sales decreased by 210 basis points for the 13 weeks and 500 basis points for the 39 weeks ended September 26, 2021, primarily due to leveraging increased sales and traffic[99] - The absolute increase in labor costs was driven by same-restaurant sales growth, new restaurant openings, and reduced labor hours in fiscal 2020 due to COVID-19[100][101] Other Restaurant Operating Expenses Other Restaurant Operating Expenses (in thousands) | Metric | 13 Weeks Ended Sep 26, 2021 | 13 Weeks Ended Sep 27, 2020 | Change | 39 Weeks Ended Sep 26, 2021 | 39 Weeks Ended Sep 27, 2020 | Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :----- | :-------------------------- | :-------------------------- | :----- | | Other restaurant operating expenses | $24,185 | $19,881 | 21.6% | $71,000 | $43,163 | 64.5% | | As a percentage of restaurant sales | 15.6% | 20.2% | (4.6)% | 16.4% | 18.8% | (2.4)% | - Other restaurant operating expenses as a percentage of restaurant sales decreased by 460 basis points for the 13 weeks and 240 basis points for the 39 weeks ended September 26, 2021, due to leveraging increased in-restaurant dining sales[104][106] - The absolute increase was primarily due to higher credit card fees, supplies, utilities, repairs, maintenance, insurance, and third-party delivery services fees, partially offset by decreased pre-opening expenses[105][107] Occupancy Expenses Occupancy Expenses (in thousands) | Metric | 13 Weeks Ended Sep 26, 2021 | 13 Weeks Ended Sep 27, 2020 | Change | 39 Weeks Ended Sep 26, 2021 | 39 Weeks Ended Sep 27, 2020 | Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :----- | :-------------------------- | :-------------------------- | :----- | | Occupancy expenses | $14,199 | $13,127 | 8.2% | $41,956 | $38,309 | 9.5% | | As a percentage of restaurant sales | 9.2% | 13.3% | (4.1)% | 9.7% | 16.7% | (7.0)% | - Occupancy expenses increased due to a higher number of company-owned restaurants and commenced leases, but decreased as a percentage of restaurant sales due to sales leveraging[110] - Pre-opening rent expense decreased to $0.2 million for the 13 weeks and $0.9 million for the 39 weeks ended September 26, 2021, from $0.4 million and $1.5 million, respectively, in the prior year[111] General and Administrative Expenses General and Administrative Expenses (in thousands) | Metric | 13 Weeks Ended Sep 26, 2021 | 13 Weeks Ended Sep 27, 2020 | Change | 39 Weeks Ended Sep 26, 2021 | 39 Weeks Ended Sep 27, 2020 | Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :----- | :-------------------------- | :-------------------------- | :----- | | General and administrative expenses | $17,019 | $11,347 | 50.0% | $44,360 | $33,625 | 31.9% | - The 50.0% increase for the 13 weeks was primarily due to a $4.9 million increase in compensation (employee headcount and bonuses), a $1.0 million increase in marketing, and a $1.2 million increase in recruiting/travel, partially offset by a $2.0 million write-off of deferred offering costs in 2020[113] - The 31.9% increase for the 39 weeks was mainly due to a $10.7 million increase in compensation and a $1.7 million increase in marketing, partially offset by reduced consulting costs and the 2020 deferred offering cost write-off[114] Depreciation and Amortization Depreciation and Amortization (in thousands) | Metric | 13 Weeks Ended Sep 26, 2021 | 13 Weeks Ended Sep 27, 2020 | Change | 39 Weeks Ended Sep 26, 2021 | 39 Weeks Ended Sep 27, 2020 | Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :----- | :-------------------------- | :-------------------------- | :----- | | Depreciation and amortization | $8,203 | $7,849 | 4.5% | $23,965 | $22,877 | 4.8% | - The increase in depreciation and amortization was primarily due to incremental depreciation expense associated with new restaurant openings[116] Impairments and Loss on Disposal of Assets Impairments and Loss on Disposal of Assets (in thousands) | Metric | 13 Weeks Ended Sep 26, 2021 | 13 Weeks Ended Sep 27, 2020 | Change | 39 Weeks Ended Sep 26, 2021 | 39 Weeks Ended Sep 27, 2020 | Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :----- | :-------------------------- | :-------------------------- | :----- | | Impairments and loss on disposal of assets | $98 | $27 | N/M | $261 | $282 | (7.4)% | - Loss on disposal of assets increased for the 13-week period but slightly decreased for the 39-week period, related to retirements, replacements, and disposals of fixed assets[118][119] - No impairment losses were recognized on intangible or fixed assets during the reported periods[119] Transaction Expenses (Income), Net Transaction Expenses (Income), Net (in thousands) | Metric | 13 Weeks Ended Sep 26, 2021 | 13 Weeks Ended Sep 27, 2020 | Change | 39 Weeks Ended Sep 26, 2021 | 39 Weeks Ended Sep 27, 2020 | Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :----- | :-------------------------- | :-------------------------- | :----- | | Transaction expenses (income), net | $126 | $(34) | N/M | $752 | $65 | N/M | - Transaction expenses primarily represent the revaluation of contingent consideration payable to previous stockholders for tax savings from pre-August 2017 loss carryforwards and credits[121][123] Income (Loss) from Operations Income (Loss) from Operations (in thousands) | Metric | 13 Weeks Ended Sep 26, 2021 | 13 Weeks Ended Sep 27, 2020 | Change | 39 Weeks Ended Sep 26, 2021 | 39 Weeks Ended Sep 27, 2020 | Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :----- | :-------------------------- | :-------------------------- | :----- | | Income (Loss) from operations | $7,153 | $(8,616) | N/M | $23,310 | $(42,493) | N/M | | As a percentage of restaurant sales | 4.6% | (8.8)% | N/M | 5.4% | (18.5)% | N/M | - The company achieved positive income from operations in 2021, a significant improvement from losses in 2020, driven by increased same-restaurant sales and traffic, and contributions from new restaurant openings[125] Interest Expense Interest Expense (in thousands) | Metric | 13 Weeks Ended Sep 26, 2021 | 13 Weeks Ended Sep 27, 2020 | Change | 39 Weeks Ended Sep 26, 2021 | 39 Weeks Ended Sep 27, 2020 | Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :----- | :-------------------------- | :-------------------------- | :----- | | Interest expense | $6,051 | $5,832 | 3.8% | $18,656 | $16,499 | 13.1% | - The increase in interest expense was primarily due to additional interest incurred from the fourth amendment of the Senior Credit Facilities in August 2020[127] Other Income, Net Other Income, Net (in thousands) | Metric | 13 Weeks Ended Sep 26, 2021 | 13 Weeks Ended Sep 27, 2020 | Change | 39 Weeks Ended Sep 26, 2021 | 39 Weeks Ended Sep 27, 2020 | Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :----- | :-------------------------- | :-------------------------- | :----- | | Other income, net | $215 | $45 | N/M | $536 | $405 | 32.3% | - Other income, net, increased for both periods, representing non-operating items[128][129] Income Tax Expense (Benefit) Income Tax Expense (Benefit) (in thousands) | Metric | 13 Weeks Ended Sep 26, 2021 | 13 Weeks Ended Sep 27, 2020 | Change | 39 Weeks Ended Sep 26, 2021 | 39 Weeks Ended Sep 27, 2020 | Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :----- | :-------------------------- | :-------------------------- | :----- | | Income tax expense (benefit) | $534 | $(3,262) | N/M | $2,644 | $(16,024) | N/M | | Effective tax rate | 40.5% | 22.6% | +17.9 pp | 50.9% | 27.4% | +23.5 pp | - The effective income tax rate increased significantly in 2021, primarily due to changes in the valuation allowance for deferred tax assets, FICA tax credits on tips, and the shift from pre-tax book loss to income[132][133] Net Income (Loss) Net Income (Loss) (in thousands) | Metric | 13 Weeks Ended Sep 26, 2021 | 13 Weeks Ended Sep 27, 2020 | Change | 39 Weeks Ended Sep 26, 2021 | 39 Weeks Ended Sep 27, 2020 | Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :----- | :-------------------------- | :-------------------------- | :----- | | Net income (loss) | $783 | $(11,141) | N/M | $2,546 | $(42,563) | N/M | | As a percentage of total revenues | 0.5% | (11.2)% | N/M | 0.6% | (18.3)% | N/M | - The company achieved net income in 2021, a substantial improvement from net losses in 2020, primarily driven by increased income from operations due to the recovery of in-restaurant dining sales and traffic[135] Non-GAAP Financial Measures Adjusted EBITDA and Adjusted EBITDA margin Adjusted EBITDA and Margin (in thousands) | Metric | 13 Weeks Ended Sep 26, 2021 | 13 Weeks Ended Sep 27, 2020 | Change | 39 Weeks Ended Sep 26, 2021 | 39 Weeks Ended Sep 27, 2020 | Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :----- | :-------------------------- | :-------------------------- | :----- | | Adjusted EBITDA | $16,952 | $2,582 | N/M | $52,134 | $(9,221) | N/M | | Adjusted EBITDA margin | 10.8% | 2.6% | +8.2 pp | 11.9% | (4.0)% | N/M | - Adjusted EBITDA significantly increased for both periods in 2021, moving from a negative value in 2020 for the 39-week period, primarily due to the recovery of in-restaurant dining sales and traffic and contributions from new restaurant openings[139] - Adjusted EBITDA margin improved substantially, reflecting enhanced operating performance[138][139] Restaurant level Operating Profit and Restaurant level Operating Profit Margin Restaurant Level Operating Profit and Margin (in thousands) | Metric | 13 Weeks Ended Sep 26, 2021 | 13 Weeks Ended Sep 27, 2020 | Change | 39 Weeks Ended Sep 26, 2021 | 39 Weeks Ended Sep 27, 2020 | Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :----- | :-------------------------- | :-------------------------- | :----- | | Restaurant level operating profit | $30,240 | $9,762 | N/M | $86,230 | $14,202 | N/M | | Restaurant level operating profit margin | 19.5% | 9.9% | +9.4 pp | 20.0% | 6.2% | +13.7 pp | - Restaurant level operating profit and margin saw substantial increases, driven by the strong recovery of in-restaurant dining sales and traffic and the operations of new restaurants, despite rising food, labor, and other operating costs[137] Liquidity and Capital Resources Liquidity - Primary liquidity sources include cash flow from operations, cash and cash equivalents ($51.9 million as of Sep 26, 2021), credit capacity under new facilities, and IPO proceeds[163][165] - The company used $182.1 million net IPO proceeds and new facility proceeds to repay all outstanding Senior Credit Facilities on October 6, 2021[164] - Capital expenditures are estimated at $30.0 million to $35.0 million for fiscal 2021, primarily funded by operating cash flows[166] - Management believes current liquidity, including new facilities, will be sufficient for at least the next 12 months[167] Senior Credit Facilities and Unused Borrowing Capacity - As of September 26, 2021, the company had $288.9 million in outstanding borrowings under Senior Credit Facilities and $21.1 million in unused borrowing capacity[165][170] - The company was in compliance with all covenants of the Senior Credit Facilities as of September 26, 2021, and December 27, 2020[169] Debt Refinancing - On October 6, 2021, FWR Holding Corporation entered into a new credit agreement for a $100 million term loan A facility and a $75 million revolving credit facility, both maturing on October 6, 2026[172] - The new facilities are guaranteed by FWR's subsidiaries and parent company, secured by substantially all assets, and include principal amortization and interest rates tied to the Total Rent Adjusted Net Leverage Ratio[172][173][174] Summary of Cash Flows Summary of Cash Flows (in thousands, 39 weeks ended) | Activity | September 26, 2021 | September 27, 2020 | | :-------------------------------- | :------------------- | :------------------- | | Cash provided by (used in) operating activities | $44,265 | $(20,393) | | Cash used in investing activities | $(27,424) | $(22,328) | | Cash (used in) provided by financing activities | $(3,836) | $74,167 | | Net increase in cash and cash equivalents and restricted cash | $13,005 | $31,446 | - Operating cash flow significantly improved to a positive $44.3 million in 2021 from a negative $(20.4) million in 2020, driven by increased net income and recovery in restaurant sales[175] - Cash used in investing activities increased due to higher capital expenditures, while financing activities shifted to a net cash outflow due to debt repayments after the IPO[176][177] Contractual Obligations - No material changes to contractual obligations were reported as of September 26, 2021, compared to December 27, 2020, aside from the debt refinancing discussed[178][179] Off-Balance Sheet Arrangements - The company had no off-balance sheet arrangements as of September 26, 2021, or December 27, 2020, except for certain letters of credit for lease security[180] Critical Accounting Estimates - No significant changes to critical accounting policies were reported, which involve management judgments and assumptions affecting reported financial amounts[181] Recently Issued Accounting Pronouncements - Refer to Note 2, Summary of Significant Accounting Policies, for a discussion of recently issued accounting pronouncements[182] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that there have been no material changes to the company's exposure to market risks since the disclosures in its IPO Prospectus - No material changes to market risk exposure were reported compared to the IPO Prospectus[183] Item 4. Controls and Procedures This section details the evaluation of the company's disclosure controls and procedures, concluding they were not effective as of September 26, 2021, due to identified material weaknesses in internal control over financial reporting. It outlines these weaknesses, including issues with the control environment, period-end financial reporting, income tax accounting, and information technology general controls, and describes the ongoing remediation efforts Evaluation of Disclosure Controls and Procedures - Management, including the CEO and CFO, concluded that disclosure controls and procedures were not effective as of September 26, 2021, due to material weaknesses in internal control over financial reporting[186][187] - Despite the material weaknesses, management performed additional analyses and concluded that the consolidated financial statements fairly present the company's financial position, results of operations, and cash flows[187] Material Weaknesses in Internal Control Over Financial Reporting - Material weaknesses identified include an ineffective internal control environment due to insufficient personnel knowledge/experience and lack of formal authority delegation/segregation of duties in finance and accounting[188] - Ineffective controls over the period-end financial reporting process, including account reconciliations, journal entries, and financial statement classification/presentation, led to adjustments in prior fiscal years[189] - Ineffective controls over income tax accounting, specifically deferred income taxes and realization assessment, resulted in adjustments to fiscal 2018 financial statements and immaterial adjustments in fiscal 2017 and 2019[189] - Ineffective information technology general controls, including user access, program change management, computer operations, and program development controls, were identified, potentially impacting all financial statement accounts[189] Remediation Efforts - Remediation efforts include hiring additional personnel, designing and implementing formal procedures for period-end financial reporting, and establishing certain information technology general controls[190] - Ongoing measures involve hiring more IT, finance, and accounting personnel, evaluating the control environment, and augmenting internal controls with new policies and procedures[190] - Remediation is ongoing and requires sufficient time to operate effectively, with potential for additional measures[191] Changes in Internal Control Over Financial Reporting - No material changes in internal control over financial reporting occurred during the fiscal quarter ended September 26, 2021, except for the ongoing remediation efforts[192] Part II. Other Information This part covers legal proceedings, risk factors, unregistered sales of equity securities, defaults, mine safety disclosures, other information, and exhibits Item 1. Legal Proceedings The company is involved in various legal claims and actions in the ordinary course of business, but management does not believe their ultimate resolution will have a material adverse effect on its financial position, results of operations, liquidity, or capital resources - The company is subject to ordinary course legal proceedings, but management assesses the liability as not material[194] Item 1A. Risk Factors This section states that there have been no material changes to the risk factors previously disclosed in the company's IPO Prospectus - No material changes to risk factors were reported compared to the IPO Prospectus[195] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the completion of the company's IPO on October 5, 2021, including the sale of 10,877,850 common shares at $18.00 per share, generating $182.1 million in net proceeds. These proceeds were used to repay outstanding borrowings under the Senior Credit Facilities, with no material change in the planned use of proceeds from the IPO Prospectus - The IPO, completed on October 5, 2021, involved selling 10,877,850 common shares at $18.00 per share, yielding $182.1 million in net proceeds[196] - Net proceeds were used to repay $182.1 million of outstanding borrowings under the Senior Credit Facilities[196] - No material change in the planned use of IPO proceeds was reported[199] Item 3. Defaults Upon Senior Securities This section states that there were no defaults upon senior securities - No defaults upon senior securities were reported[200] Item 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable to the company - Mine safety disclosures are not applicable[200] Item 5. Other Information This section indicates that there is no other information to report - No other information was reported[200] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including the Amended and Restated Certificate of Incorporation and Bylaws, the Credit Agreement, and certifications from the CEO and CFO - Exhibits include the Amended and Restated Certificate of Incorporation and Bylaws, the Credit Agreement, and CEO/CFO certifications[202]