UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 26, 2022

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission file number 001-40866

First Watch Restaurant Group, Inc.

(Exact name of registrant as specified in its charter)

Delaware		82-4271369
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
	8725 Pendery Place, Suite 201, Bradenton, FL 34201
	(Address of Principal Executive Offices) (Zip Code)

(941) 907-9800

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	FWRG	The Nasdaq Stock Market LLC (Nasdaq Global Select Market)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

The registrant had outstanding 59,080,348 shares of common stock as of August 5, 2022.

TABLE OF CONTENTS

		Page
Cautionary Note Regarding Forward-Looking Statements		3
Part I. Financial Information
Item 1.	Financial Statements (Unaudited)	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	33
Part II. Other Information
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3.	Defaults Upon Senior Securities	35
Item 4.	Mine Safety Disclosures	35
Item 5.	Other Information	35
Item 6.	Exhibits	36
Signatures		36

2

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q (“Form 10-Q”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”), which are subject to known and unknown risks, uncertainties and other important factors that may cause actual results to be materially different from the statements made herein. All statements other than statements of historical fact are forward-looking statements. Forward-looking statements discuss our current expectations and projections relating to our financial position, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to any historical or current facts. These statements may include words such as “aim,” “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “future,” “intend,” “outlook,” “potential,” “project,” “projection,” “plan,” “seek,” “may,” “could,” “would,” “will,” “should,” “can,” “can have,” “likely,” the negatives thereof and other similar expressions. You should evaluate all forward-looking statements made in this Form 10-Q in the context of the risks and uncertainties disclosed herein, including under Part I. Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II. Item 1A. “Risk Factors,” and in our other filings with the Securities and Exchange Commission (“SEC”), including under Part I. Item 1A. “Risk Factors” in our Annual Report on Form 10-K as of and for the year ended December 26, 2021 (“2021 Form 10-K”) and in Part II. Item 1A. “Risk Factors” in our Quarterly Report on Form 10-Q as of and for the quarter ended March 27, 2022. The forward-looking statements included in this Form 10-Q are made only as of the date hereof and are expressly qualified in their entirety by these cautionary statements. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law. All information presented herein is based on our fiscal calendar. Unless otherwise stated, references to particular years, quarters, months or periods refer to our fiscal years and the associated quarters, months and periods of those fiscal years.

3

Part I - Financial Information

Item 1.    Financial Statements (Unaudited)

FIRST WATCH RESTAURANT GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

(Unaudited)

	JUNE 26, 2022		DECEMBER 26, 2021
Assets
Current assets:
Cash and cash equivalents	$	53,566	$	51,864
Restricted cash	251		251
Accounts receivable	3,869		4,450
Inventory	3,966		4,023
Prepaid expenses	5,542		5,677
Other current assets	2,837		1,432
Total current assets	70,031		67,697
Goodwill	345,219		345,219
Intangible assets, net	142,894		143,000
Operating lease right-of-use assets	343,797		324,995
Property, fixtures and equipment, net of accumulated depreciation of $130,380 and $115,582, respectively	177,025		164,695
Other long-term assets	1,282		1,311
Total assets	$	1,080,248	$	1,046,917
Liabilities and Equity
Current liabilities:
Accounts payable	$	6,986	$	11,060
Accrued liabilities	21,348		15,889
Accrued compensation and deferred payroll taxes	18,973		21,196
Deferred revenues	3,066		4,654
Current portion of operating lease liabilities	37,591		38,186
Current portion of long-term debt	4,395		3,186
Note payable	523		2,352
Total current liabilities	92,882		96,523
Operating lease liabilities	353,777		330,495
Long-term debt, net	97,180		99,753
Deferred income taxes	15,655		12,489
Other long-term liabilities	3,632		3,228
Total liabilities	563,126		542,488
Commitments and contingencies (Note 9)
Equity:
Preferred stock; $0.01 par value; 10,000,000 shares authorized; none issued and outstanding	—		—
Common stock; $0.01 par value; 300,000,000 shares authorized; 59,075,562 and 59,048,446 shares issued and outstanding at June 26, 2022 and December 26, 2021, respectively	591		590
Additional paid-in capital	614,223		608,878
Accumulated deficit	(97,692)		(105,039)
Total equity	517,122		504,429
Total liabilities and equity	$	1,080,248	$	1,046,917

The accompanying notes are an integral part of these consolidated financial statements.

4

FIRST WATCH RESTAURANT GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(Unaudited)

	THIRTEEN WEEKS ENDED				TWENTY-SIX WEEKS ENDED
	JUNE 26, 2022		JUNE 27, 2021		JUNE 26, 2022		JUNE 27, 2021
Revenues:
Restaurant sales	$	181,682	$	151,688	$	352,351	$	277,054
Franchise revenues	2,771		2,275		5,214		4,078
Total revenues	184,453		153,963		357,565		281,132
Operating costs and expenses:
Restaurant operating expenses (exclusive of depreciation and amortization shown below):
Food and beverage costs	45,219		33,596		84,622		60,512
Labor and other related expenses	58,687		45,950		113,829		85,999
Other restaurant operating expenses	28,759		23,423		56,076		45,443
Occupancy expenses	14,844		13,765		29,227		27,066
Pre-opening expenses	1,094		899		2,079		2,063
General and administrative expenses	21,942		15,388		41,505		27,341
Depreciation and amortization	8,400		7,976		16,623		15,762
Impairments and loss on disposal of assets	155		39		234		163
Transaction expenses, net	300		615		557		626
Total operating costs and expenses	179,400		141,651		344,752		264,975
Income from operations	5,053		12,312		12,813		16,157
Interest expense	(1,126)		(6,289)		(2,132)		(12,605)
Other income, net	116		67		279		321
Income before income taxes	4,043		6,090		10,960		3,873
Income tax expense	(1,336)		(2,285)		(3,613)		(2,110)
Net income and total comprehensive income	$	2,707	$	3,805	$	7,347	$	1,763
Net income per common share - basic	$	0.05	$	0.08	$	0.12	$	0.04
Net income per common share - diluted	$	0.05	$	0.08	$	0.12	$	0.04
Weighted average number of common shares outstanding - basic	59,057,991		45,013,784		59,053,219		45,013,784
Weighted average number of common shares outstanding - diluted	59,888,029		45,562,703		59,933,003		45,560,575

The accompanying notes are an integral part of these consolidated financial statements.

5

FIRST WATCH RESTAURANT GROUP, INC.

CONSOLIDATED STATEMENTS OF EQUITY

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

(Unaudited)

	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Total Equity
	Shares	Amount
Balance at March 27, 2022	59,048,446	$	590	$	611,172	$	(100,399)	$	511,363
Net income	—	—		—		2,707		2,707
Stock-based compensation	—	—		2,808		—		2,808
Common stock issued upon exercise of stock options, net	27,116	1		243		—		244
Balance at June 26, 2022	59,075,562	$	591	$	614,223	$	(97,692)	$	517,122

	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Total Equity
	Shares	Amount
Balance at December 26, 2021	59,048,446	$	590	$	608,878	$	(105,039)	$	504,429
Net income	—	—		—		7,347		7,347
Stock-based compensation	—	—		5,102		—		5,102
Common stock issued upon exercise of stock options, net	27,116	1		243		—		244
Balance at June 26, 2022	59,075,562	$	591	$	614,223	$	(97,692)	$	517,122

	Preferred Stock			Common Stock			Additional Paid-in Capital		Accumulated Deficit		Total Equity
	Shares	Amount		Shares	Amount
Balance at March 28, 2021	266,667	$	3	45,013,784	$	450	$	423,474	$	(104,974)	$	318,953
Net income	—	—		—	—		—		3,805		3,805
Stock-based compensation	—	—		—	—		187		—		187
Balance at June 27, 2021	266,667	$	3	45,013,784	$	450	$	423,661	$	(101,169)	$	322,945

	Preferred Stock			Common Stock			Additional Paid-in Capital		Accumulated Deficit		Total Equity
	Shares	Amount		Shares	Amount
Balance at December 27, 2020	266,667	$	3	45,013,784	$	450	$	423,345	$	(102,932)	$	320,866
Net income	—	—		—	—		—		1,763		1,763
Stock-based compensation	—	—		—	—		316		—		316
Balance at June 27, 2021	266,667	$	3	45,013,784	$	450	$	423,661	$	(101,169)	$	322,945

The accompanying notes are an integral part of these consolidated financial statements.

6

FIRST WATCH RESTAURANT GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(Unaudited)

	TWENTY-SIX WEEKS ENDED
	JUNE 26, 2022		JUNE 27, 2021
Cash flows from operating activities:
Net income	$	7,347	$	1,763
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	16,623		15,762
Stock-based compensation	5,102		316
Non-cash operating lease costs	7,730		6,285
Non-cash portion of gain on lease modifications	(62)		(13)
Deferred income taxes	3,166		2,033
Amortization of debt discount and deferred issuance costs	223		639
Impairments and loss on disposal of assets	234		163
Changes in assets and liabilities:
Accounts receivable	581		965
Inventory	57		(332)
Prepaid expenses	135		(1,374)
Deferred offering costs	—		(1,049)
Other assets, current and long-term	(1,376)		(366)
Accounts payable	(4,074)		2,147
Accrued liabilities and other long-term liabilities	3,636		5,567
Accrued compensation and deferred payroll taxes, current and long-term	(2,223)		5,347
Deferred revenues, current and long-term	(1,504)		(1,410)
Operating lease liabilities	(3,783)		(6,015)
Net cash provided by operating activities	31,812		30,428
Cash flows from investing activities:
Capital expenditures	(26,566)		(19,165)
Purchase of intangible assets	(379)		(359)
Net cash used in investing activities	(26,945)		(19,524)
Cash flows from financing activities:
Repayments of note payable	(1,829)		—
Repayments of long-term debt, including finance lease liabilities	(1,502)		(1,717)
Proceeds from exercise of stock options, net of employee taxes paid	244		—
Contingent consideration payment	(78)		—
Net cash used in financing activities	(3,165)		(1,717)
Net increase in cash and cash equivalents and restricted cash	1,702		9,187
Cash and cash equivalents and restricted cash:
Beginning of period	52,115		39,097
End of period	$	53,817	$	48,284
Supplemental cash flow information:
Cash paid for interest	$	1,996	$	9,866
Cash paid for income taxes, net of refunds	$	593	$	31

The accompanying notes are an integral part of these consolidated financial statements.

7

FIRST WATCH RESTAURANT GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS - continued

(IN THOUSANDS)

(Unaudited)

	TWENTY-SIX WEEKS ENDED
	JUNE 26, 2022		JUNE 27, 2021
Supplemental disclosures of non-cash investing and financing activities:
Interest converted to long-term debt	$	—	$	2,198
Leased assets obtained in exchange for new operating lease liabilities	$	27,216	$	19,355
Leased assets obtained in exchange for new finance lease liabilities	$	50	$	143
Remeasurements of operating lease assets and lease liabilities	$	(746)	$	(1,476)
Remeasurements of finance lease assets and lease liabilities	$	(135)	$	7
Increase (Decrease) in liabilities from acquisition of property, fixtures and equipment	$	2,221	$	(475)

The accompanying notes are an integral part of these consolidated financial statements.

8

FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.    Nature of Business and Organization

First Watch Restaurant Group, Inc. (collectively with its wholly-owned subsidiaries, “the Company,” or “Management”) is a Delaware holding company. The Company operates and franchises restaurants in 28 states operating under the “First Watch” trade name, which are focused on made-to-order breakfast, brunch and lunch. The Company does not operate outside of the United States and all of its assets are located in the United States. As of June 26, 2022 and December 26, 2021, the Company operated 350 company-owned restaurants and 341 company-owned restaurants, respectively, and had 99 franchise-owned restaurants and 94 franchise-owned restaurants, respectively.

2.    Summary of Significant Accounting Policies

Basis of Presentation

The Company reports financial information on a 52- or 53-week fiscal year ending on the last Sunday of each calendar year. The Company’s fiscal quarters are comprised of 13 weeks each, except for fiscal years consisting of 53 weeks for which the fourth quarter will consist of 14 weeks, and end on the 13th Sunday of each quarter (14th Sunday of the fourth quarter, when applicable). The quarters ended June 26, 2022 and June 27, 2021 were both 13-week periods. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K as of and for the year ended December 26, 2021 (“2021 Form 10-K”).

The accompanying unaudited interim consolidated financial statements have been prepared by the Company in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all the information and notes required by GAAP for complete financial statements. The unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements included in the 2021 Form 10-K and include all adjustments necessary for the fair statement of the consolidated financial statements for the interim periods presented. The results of operations for interim periods are not necessarily indicative of the results to be expected for other interim periods or the entire fiscal year.

Reclassifications

The Company reclassified certain items in the accompanying unaudited interim consolidated financial statements for the prior periods to be comparable with the classification for the current period. These reclassifications are related to the presentation of Pre-opening expenses on the Consolidated Statements of Operations and Comprehensive Income for the prior periods presented, which were previously included in Other restaurant operating expenses and Occupancy expenses. These reclassifications had no effect on previously reported net income and comprehensive income.

Use of Estimates

The preparation of the unaudited interim consolidated financial statements in accordance with GAAP requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited interim consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from the estimates and such differences could be material.

Fair Value of Financial Instruments

Certain assets and liabilities are carried at fair value. Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The carrying amounts of the Company’s financial instruments, including cash equivalents, accounts receivable, accounts payable, accrued expenses, note payable and other current liabilities, approximate their fair values due to their short-term maturities. At June 26, 2022, the Company’s outstanding debt under the new facilities pursuant to the new credit agreement executed in October 2021 had a fair value of $95.5 million and a carrying value of $98.8 million.

9

FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Summary of Recently Issued Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). The new guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. ASU 2020-04 was effective beginning March 12, 2020 and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. Management is currently evaluating its contracts and the optional expedients provided by the new standard.

Recent accounting guidance not discussed herein is not applicable, did not have, or is not expected to have a material impact to the Company.

10

FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

3.    Revenues

The following tables include a detail of liabilities from contracts with customers:

(in thousands)	JUNE 26, 2022		DECEMBER 26, 2021
Deferred revenues:
Deferred gift card revenue	$	2,805	$	4,410
Deferred franchise fee revenue - current	261		244
Total current deferred revenues	$	3,066	$	4,654
Other long-term liabilities:
Deferred franchise fee revenue - non-current	$	2,376	$	2,292

Changes in deferred gift card contract liabilities were as follows:

	THIRTEEN WEEKS ENDED				TWENTY-SIX WEEKS ENDED
(in thousands)	JUNE 26, 2022		JUNE 27, 2021		JUNE 26, 2022		JUNE 27, 2021
Deferred gift card revenue:
Balance, beginning of period	$	2,752	$	2,670	$	4,410	$	4,024
Gift card sales	2,362		2,153		3,578		3,085
Gift card redemptions	(2,089)		(1,987)		(4,679)		(4,060)
Gift card breakage	(220)		(179)		(504)		(392)
Balance, end of period	$	2,805	$	2,657	$	2,805	$	2,657

Changes in deferred franchise fee contract liabilities were as follows:

	THIRTEEN WEEKS ENDED				TWENTY-SIX WEEKS ENDED
(in thousands)	JUNE 26, 2022		JUNE 27, 2021		JUNE 26, 2022		JUNE 27, 2021
Deferred franchise fee revenue:
Balance, beginning of period	$	2,592	$	2,288	$	2,536	$	2,274
Cash received	110		—		230		82
Franchise revenues recognized	(65)		(56)		(129)		(124)
Balance, end of period	$	2,637	$	2,232	$	2,637	$	2,232

Revenues recognized disaggregated by type were as follows:

	THIRTEEN WEEKS ENDED				TWENTY-SIX WEEKS ENDED
(in thousands)	JUNE 26, 2022		JUNE 27, 2021		JUNE 26, 2022		JUNE 27, 2021
Restaurant sales:
In-restaurant dining sales	$	144,839	$	116,705	$	277,731	$	203,836
Third-party delivery sales	19,829		16,598		40,855		37,352
Take-out sales	17,014		18,385		33,765		35,866
Total restaurant sales	$	181,682	$	151,688	$	352,351	$	277,054
Franchise revenues:
Royalty and system fund contributions	$	2,706	$	2,219	$	5,085	$	3,954
Initial fees	65		56		129		124
Total franchise revenues	$	2,771	$	2,275	$	5,214	$	4,078
Total revenues	$	184,453	$	153,963	$	357,565	$	281,132

11

FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4.    Accounts Receivable

Accounts receivable consisted of the following:

(in thousands)	JUNE 26, 2022		DECEMBER 26, 2021
Receivables from third-party delivery providers	$	1,224	$	1,021
Receivables from franchisees	1,167		927
Receivables from vendors	805		428
Receivables related to gift card sales	617		1,453
Other receivables	56		621
Total accounts receivable	$	3,869	$	4,450

5.    Accrued Liabilities

Accrued liabilities consisted of the following:

(in thousands)	JUNE 26, 2022		DECEMBER 26, 2021
Construction liabilities	$	6,666	$	4,445
Sales tax	3,833		3,337
Self-insurance and general liability reserves	1,548		1,353
Utilities	1,319		1,306
Credit card fees	1,040		940
Property tax	993		638
Contingent rent	687		628
Common area maintenance	592		482
Other	4,670		2,760
Total accrued liabilities	$	21,348	$	15,889

6.    Leases

The following table includes a detail of lease assets and liabilities:

(in thousands)	Consolidated Balance Sheets Classification	JUNE 26, 2022		DECEMBER 26, 2021
Operating lease right-of-use assets	Operating lease right-of-use assets	$	343,797	$	324,995
Finance lease assets	Property, fixtures and equipment, net	1,561		1,892
Total lease assets		$	345,358	$	326,887
Operating lease liabilities (1) - current	Current portion of operating lease liabilities	37,591		38,186
Operating lease liabilities - non-current	Operating lease liabilities	353,777		330,495
Finance lease liabilities - current	Current portion of long-term debt	645		686
Finance lease liabilities - non-current	Long-term debt, net	1,034		1,331
Total lease liabilities		$	393,047	$	370,698

_____________

(1) Excludes all variable lease expense.

12

FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The components of lease expense are as follows:

(in thousands)	Consolidated Statements of Operations and Comprehensive Income Classification	THIRTEEN WEEKS ENDED				TWENTY-SIX WEEKS ENDED
		JUNE 26, 2022		JUNE 27, 2021		JUNE 26, 2022		JUNE 27, 2021
Operating lease expense	Other restaurant operating expenses Occupancy expenses Pre-opening expenses General and administrative expenses	$	12,130	$	11,034	$	24,176	$	21,886
Variable lease expense	Food and beverage costs Occupancy expenses General and administrative expenses	3,594		3,146		6,993		6,092
Finance lease expense:
Amortization of leased assets	Depreciation and amortization	132		135		267		266
Interest on lease liabilities	Interest expense	39		44		76		90
Total lease expense (1)		$	15,895	$	14,359	$	31,512	$	28,334

_____________

(1) Includes contingent rent expense of $0.4 million and $0.3 million during the thirteen weeks ended June 26, 2022 and June 27, 2021, respectively, and $0.8 million and $0.4 million during the twenty-six weeks ended June 26, 2022 and June 27, 2021, respectively.

Supplemental cash flow information related to leases was as follows:

	TWENTY-SIX WEEKS ENDED
(in thousands)	JUNE 26, 2022		JUNE 27, 2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows - operating leases	$	20,229	$	21,617
Operating cash flows - finance leases	$	76	$	90
Financing cash flows - finance leases	$	252	$	244

Supplemental information related to leases was as follows:

	TWENTY-SIX WEEKS ENDED
	JUNE 26, 2022		JUNE 27, 2021
Weighted-average remaining lease term (in years)
Operating leases	15.0		15.8
Finance leases	3.1		3.9
Weighted-average discount rate (1)
Operating leases	8.7	%	9.1	%
Finance leases	7.8	%	8.0	%

____________

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

13

FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

As of June 26, 2022, future minimum lease payments for operating and finance leases consisted of the following:

(in thousands)	OPERATING LEASES		FINANCE LEASES
Fiscal year
2022	$	20,948	$	358
2023	42,053		626
2024	47,979		626
2025	47,872		221
2026	47,772		31
Thereafter	525,270		27
Total future minimum lease payments (1)	731,894		1,889
Less: imputed interest	(340,526)		(210)
Total present value of lease liabilities	$	391,368	$	1,679

_____________

(1) Excludes approximately $40.9 million of executed operating leases that have not commenced as of June 26, 2022.

7. Stock-Based Compensation

Stock-based awards are granted to employees and non-employee directors. The Company has two compensation plans that provide for the granting of stock options and other share-based awards to key employees and non-employee members of the board of directors. The 2017 Omnibus Equity Incentive Plan (the “2017 Equity Plan”) and the 2021 Equity Incentive Plan (the “2021 Equity Plan”) provide for the grant of incentive stock options, non-qualified stock options, restricted stock awards, restricted stock units, stock appreciation rights and stock-based awards. No awards were granted under the 2017 Equity Plan during the thirteen and twenty-six weeks ended June 26, 2022 and the Company does not intend to grant any further awards under the 2017 Equity Plan. At June 26, 2022, a total of 3,002,180 common shares were available to grant under the 2021 Equity Plan.

Stock option awards

A total of 1,002,239 time-based stock option awards were granted under the 2021 Equity Plan during the twenty-six weeks ended June 26, 2022 which vest over a three-year requisite service period from the date of grant and expire 10 years after the grant date.

A summary of stock option activity during the twenty-six weeks ended June 26, 2022 is as follows:

	NUMBER OF OPTIONS	WEIGHTED AVERAGE EXERCISE PRICE		AGGREGATE INTRINSIC VALUE (in thousands)
Outstanding, December 26, 2021	4,409,331	$	9.48	$	28,598
Granted	1,002,239	$	12.58
Forfeited	(71,020)	$	11.95
Exercised	(30,274)	$	9.34
Outstanding, June 26, 2022	5,310,276	$	10.04	$	23,703
Exercisable, June 26, 2022	1,816,706	$	9.10	$	9,806

The aggregate intrinsic value is based on the difference between the exercise price of the stock option and the closing price of the Company’s common stock on the Nasdaq Global Select Market.

14

FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

A summary of the non-vested stock option activity during the twenty-six weeks ended June 26, 2022 is as follows:

	NUMBER OF OPTIONS	WEIGHTED AVERAGE GRANT DATE FAIR VALUE
Nonvested, December 26, 2021	2,633,391	$	7.03
Granted	1,002,239	$	12.58
Vested	(71,040)	$	2.07
Forfeited	(71,020)	$	3.05
Nonvested, June 26, 2022	3,493,570	$	8.80

Fair value of Stock Options

The fair value of stock option awards is estimated on the date of grant using the Black-Scholes valuation model. The assumptions utilized to estimate the grant date fair value of the stock option awards granted during the twenty-six weeks ended June 26, 2022 were as follows:

Expected term (years)	6.5
Expected volatility	52.4	%
Risk-free interest rate	2.6	%
Expected dividend yield	—

The Company does not have sufficient historical stock option exercise activity and therefore Management estimated the expected term of stock options granted using the simplified method, which represents the mid-point between the vesting period and the contractual term for each grant. The expected volatility of stock options is based on the historical volatilities of a set of publicly traded peer companies in a similar industry. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve for time periods approximately equal to the expected term of the stock option award. The expected dividend yield is based on the fact that the Company has never paid cash dividends and does not have intentions of paying dividends in the foreseeable future.

Restricted Stock Units

During the thirteen and twenty-six weeks ended June 26, 2022, a total of 38,311 restricted stock units were granted under the 2021 Equity Plan at the weighted average grant date fair value of $14.36. The restricted stock units will vest over a one-year requisite service period from the date of grant.

Stock-Based Compensation Expense

Stock-based compensation expense was $2.8 million and $5.1 million during the thirteen and twenty-six weeks ended June 26, 2022, respectively. Stock based compensation expense was $0.2 million and $0.3 million during the thirteen and twenty-six weeks ended June 27, 2021, respectively.

Unrecognized Stock-Based Compensation Expense

The following represents unrecognized stock-based compensation expense and the remaining weighted average vesting period as of June 26, 2022:

	UNRECOGNIZED STOCK-BASED COMPENSATION EXPENSE (in thousands)		REMAINING WEIGHTED AVERAGE VESTING PERIOD (in years)
Stock options	$	14,309	1.5
Restricted stock units	$	508	0.9

15

FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

8.    Income Taxes

	THIRTEEN WEEKS ENDED						TWENTY-SIX WEEKS ENDED
(in thousands)	JUNE 26, 2022			JUNE 27, 2021			JUNE 26, 2022			JUNE 27, 2021
Income before income taxes	$	4,043		$	6,090		$	10,960		$	3,873
Income tax expense	$	(1,336)		$	(2,285)		$	(3,613)		$	(2,110)
Effective income tax rate	33.0		%	37.5		%	33.0		%	54.5		%

The change in the effective income tax rates for the thirteen and twenty-six weeks ended June 26, 2022 as compared to the thirteen and twenty-six weeks ended June 27, 2021 was primarily due to (i) the change in the valuation allowance for federal and state deferred tax assets, (ii) the benefit of tax credits for FICA taxes on certain employees’ tips and (iii) permanent items including limitations on deductions of certain compensation.

The Company has a blended federal and state statutory rate of approximately 25.0%. The effective income tax rates for the thirteen and twenty-six weeks ended June 26, 2022 as compared to the thirteen and twenty-six weeks ended June 27, 2021 was primarily due to (i) the change in the valuation allowance for federal and state deferred tax assets, (ii) the benefit of tax credits for FICA taxes on certain employees’ tips and (iii) permanent items including limitations on deductions of certain compensation.

9.    Commitments and Contingencies

Legal Proceedings

The Company is subject to legal proceedings, claims and liabilities that arise in the ordinary course of business. The amount of the ultimate liability with respect to these matters was not material as of June 26, 2022. In the event any litigation losses become probable and estimable, the Company will recognize any anticipated losses.

Unclaimed Property

The Company is subject to unclaimed or abandoned property (escheat) laws which require it to turn over to state governmental authorities the property of others held by the Company that has been unclaimed for specified periods of time. Property subject to escheat laws generally relates to uncashed checks, trade accounts receivable credits and unredeemed gift card balances. During the first quarter of 2022, the Company received a letter from the Delaware Secretary of State inviting the Company to participate in the Delaware Secretary of State’s Abandoned or Unclaimed Property Voluntary Disclosure Agreement Program to avoid being sent an audit notice by the Delaware Department of Finance. On April 22, 2022, the Company entered into Delaware’s Voluntary Disclosure Agreement Program in order to voluntarily comply with Delaware’s abandoned property law in exchange for certain protections and benefits. The Company intends to work in good faith to complete a review of its books and records related to unclaimed or abandoned property during the periods required under the program. The Company will continue to examine its options regarding the escheat laws of Delaware including completing Delaware’s Voluntary Disclosure Agreement Program or proceeding to audit. Any potential loss, or range of loss, that may result from this matter is not currently reasonably estimable.

16

FIRST WATCH RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

10.    Net Income Per Common Share

The following table sets forth the computations of basic and diluted net income per common share:

	THIRTEEN WEEKS ENDED				TWENTY-SIX WEEKS ENDED
(in thousands, except share and per share data)	JUNE 26, 2022		JUNE 27, 2021		JUNE 26, 2022		JUNE 27, 2021
Numerator:
Net income	$	2,707	$	3,805	$	7,347	$	1,763
Denominator:
Weighted average common shares outstanding - basic	59,057,991		45,013,784		59,053,219		45,013,784
Weighted average common shares outstanding - diluted	59,888,029		45,562,703		59,933,003		45,560,575
Net income per common share - basic	$	0.05	$	0.08	$	0.12	$	0.04
Net income per common share - diluted	$	0.05	$	0.08	$	0.12	$	0.04
Stock options outstanding not included in diluted net income per common share as their effect is anti-dilutive	2,213,408		630,195		1,567,102		630,195
Restricted stock units outstanding not included in diluted net income per share as their effect is anti-dilutive	11,185		—		—		—

Diluted net income per common share is calculated by adjusting the weighted average shares outstanding for the theoretical effect of potential common shares that would be issued for preferred stock using the two-class method, as well as for stock options and restricted stock units outstanding and unvested as of the respective periods using the treasury method.

During the thirteen and twenty-six weeks ended June 27, 2021, the performance-based stock options that were granted under the 2017 Equity Plan, certain of which were converted into time-based stock options upon the Company’s IPO, were excluded from the diluted net income per common share calculation as the performance condition was not considered probable of being met.

17

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited interim consolidated financial statements and notes thereto included in Part I, Item 1 of this Form 10-Q and our audited consolidated financial statements as of and for the fiscal year ended December 26, 2021 and notes included in our 2021 Form 10-K. As discussed in “Cautionary Note Regarding Forward-Looking Statements,” the following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may materially differ from those discussed in such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified below and those discussed in “Risk Factors” under Part II, Item 1A in this Form 10-Q, the Form 10-Q for the quarterly period ended March 27, 2022 and in our 2021 Form 10-K, including under “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Overview

First Watch is an award-winning Daytime Dining concept serving made-to-order breakfast, brunch and lunch using fresh ingredients. A recipient of hundreds of local “Best Breakfast” and “Best Brunch” accolades, First Watch’s award winning chef-driven menu includes elevated executions of classic favorites for breakfast, brunch and lunch. In March 2022, First Watch was awarded ADP’s prestigious Culture at Work award. The Company is majority owned by Advent International Corporation, one of the world’s largest private-equity firms. On October 1, 2021, the Company’s common stock began trading on Nasdaq under the ticker symbol “FWRG.”

The Company does not operate outside of the United States. The Company operates and franchises restaurants in 28 states under the “First Watch” trade name and as of June 26, 2022, the Company had 350 company-owned restaurants and 99 franchise-owned restaurants.

Recent Developments

Financial highlights for the thirteen weeks ended June 26, 2022 (“second quarter of 2022”) as compared to the thirteen weeks ended June 27, 2021 (“second quarter of 2021”) reflect continued success and sustained growth despite a challenging macro environment and include the following:

•System-wide sales increased 20.0% to $231.2 million in the second quarter of 2022 from $192.6 million in the second quarter of 2021

•Total revenues increased 19.8% to $184.5 million in the second quarter of 2022 from $154.0 million in the second quarter of 2021

•Same-restaurant sales growth of 13.4% (30.2% relative to the second quarter of 2019*)

•Same-restaurant traffic growth of 8.1% (7.4% relative to the second quarter of 2019*)

•Income from operations margin of 2.8% during the second quarter of 2022 compared to 8.1% in the second quarter of 2021

•Restaurant level operating profit margin** of 18.2% in the second quarter of 2022 as compared to 22.5% in the second quarter of 2021

•Net income of $2.7 million, or $0.05 per diluted share, in the second quarter of 2022 compared to $3.8 million, or $0.08 per diluted share, in the second quarter of 2021

•Adjusted EBITDA** of $17.8 million in the second quarter of 2022 as compared to $22.2 million in the second quarter of 2021

•Opened 9 system-wide restaurants (5 company-owned and 4 franchise-owned) across 7 states resulting in a total of 449 system-wide restaurants (350 company-owned and 99 franchise-owned) across 28 states

___________________

* Comparison to the thirteen weeks ended June 30, 2019 (“second quarter of 2019”) is presented for enhanced comparability due to the economic impact of COVID-19.

** See Non-GAAP Financial Measures section below.

18

Key Performance Indicators

Throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations” we commonly discuss the following key operating metrics which we believe will drive our financial results and long-term growth model. We believe these metrics are useful to investors because management uses these metrics to evaluate performance and assess the growth of our business as well as the effectiveness of our marketing and operational strategies.

New Restaurant Openings (“NROs”): the number of new company-owned First Watch restaurants commencing operations during the period. Management reviews the number of new restaurants to assess new restaurant growth and company-owned restaurant sales.

Franchise-owned New Restaurant Openings (“Franchise-owned NROs”): the number of new franchise-owned First Watch restaurants commencing operations during the period.

Same-Restaurant Sales Growth: the percentage change in year-over-year restaurant sales (excluding gift card breakage) for the comparable restaurant base, which we define as the number of company-owned First Watch branded restaurants open for 18 months or longer as of the beginning of the fiscal year (“Comparable Restaurant Base”). For the thirteen and twenty-six weeks ended June 26, 2022, there were 304 restaurants in our Comparable Restaurant Base. For the thirteen and twenty-six weeks ended June 27, 2021, there were 270 restaurants in our Comparable Restaurant Base. Measuring our same-restaurant sales growth allows management to evaluate the performance of our existing restaurant base. We believe this measure is useful for investors to provide a consistent comparison of restaurant sales results and trends across periods within our core, established restaurant base, unaffected by results of store openings, closings, and other transitional changes.

Same-Restaurant Traffic Growth: the percentage change in traffic counts as compared to the same period in the prior year using the Comparable Restaurant Base. Measuring our same-restaurant traffic growth allows management to evaluate the performance of our existing restaurant base. We believe this measure is useful for investors because an increase in same-restaurant traffic provides an indicator as to the development of our brand and the effectiveness of our marketing strategy.

System-wide restaurants: the total number of restaurants, including all company-owned and franchise-owned restaurants.

System-wide sales: consists of restaurant sales from our company-owned restaurants and franchise-owned restaurants. We do not recognize the restaurant sales from our franchise-owned restaurants as revenue.

19

Non-GAAP Financial Measures

To supplement the consolidated financial statements, which are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), we use non-GAAP measures, which present operating results on an adjusted basis. These are supplemental measures of performance that are not required by or presented in accordance with GAAP include the following: (i) Adjusted EBITDA, (ii) Adjusted EBITDA margin, (iii) Restaurant level operating profit and (iv) Restaurant level operating profit margin. Our presentation of these non-GAAP measures includes isolating the effects of some items that are either nonrecurring in nature or vary from period to period without any correlation to our ongoing core operating performance. Management believes that the use of these non-GAAP measures provides investors with additional transparency of our operations, facilitates analysis and comparisons of our ongoing business operations because they exclude items that may not be indicative of our ongoing operating performance, identifies operational trends and allows for greater transparency with respect to key metrics used by us in our financial and operational decision making. Our non-GAAP measures may not be comparable to similarly titled measures used by other companies and have important limitations as analytical tools. These non-GAAP measures should not be considered in isolation or as substitutes for analysis of our results as reported under GAAP as they may not provide a complete understanding of our performance. These non-GAAP measures should be reviewed in conjunction with our consolidated financial statements prepared in accordance with GAAP.

We use Adjusted EBITDA and Adjusted EBITDA margin (i) as factors in evaluating management’s performance when determining incentive compensation, (ii) to evaluate our operating results and the effectiveness of our business strategies and (iii) internally as benchmarks to compare our performance to that of our competitors.

Restaurant level operating profit and restaurant level operating profit margin are important measures we use to evaluate the performance and profitability of each operating restaurant, individually and in the aggregate and to make decisions regarding future spending and other operational decisions.

Adjusted EBITDA: represents Net income (loss) before depreciation and amortization, interest expense, income taxes, and items that we do not consider in our evaluation of ongoing core operating performance as identified in the reconciliation of Net income (loss), the most directly comparable measure in accordance with GAAP, to Adjusted EBITDA, included in the section Non-GAAP Financial Measures below.

Adjusted EBITDA Margin: represents Adjusted EBITDA as a percentage of total revenues. See Non-GAAP Financial Measures below for a reconciliation to Net income (loss) margin, the most directly comparable GAAP measure.

Restaurant Level Operating Profit: represents restaurant sales, less restaurant operating expenses, which include food and beverage costs, labor and other related expenses, other restaurant operating expenses, pre-opening expenses and occupancy expenses. Restaurant level operating profit excludes corporate-level expenses and other items that we do not consider in the evaluation of the ongoing core operating performance of our restaurants as identified in the reconciliation of Income (Loss) from operations, the most directly comparable GAAP measure, to Restaurant level operating profit, included in the section Non-GAAP Financial Measures below.

Restaurant Level Operating Profit Margin: represents Restaurant level operating profit as a percentage of restaurant sales. See Non-GAAP Financial Measures below for a reconciliation to Income (Loss) from operations margin, the most directly comparable GAAP measure.

20

Selected Operating Data

	THIRTEEN WEEKS ENDED						TWENTY-SIX WEEKS ENDED
	JUNE 26, 2022			JUNE 27, 2021			JUNE 26, 2022			JUNE 27, 2021
System-wide sales (in thousands)	$	231,236		$	192,632		$	445,357		$	350,596
System-wide restaurants	449			423			449			423
Company-owned	350			335			350			335
Franchise-owned	99			88			99			88
Same-restaurant sales growth	13.4		%	403.5		%	19.7		%	95.9		%
Same-restaurant traffic growth	8.1		%	360.9		%	14.4		%	76.3		%
Income from operations (in thousands)	$	5,053		$	12,312		$	12,813		$	16,157
Income from operations margin	2.8		%	8.1		%	3.6		%	5.8		%
Restaurant level operating profit (in thousands) (1)	$	33,079		$	34,066		$	66,518		$	55,990
Restaurant level operating profit margin (1)	18.2		%	22.5		%	18.9		%	20.2		%
Net income (in thousands)	$	2,707		$	3,805		$	7,347		$	1,763
Net income margin	1.5		%	2.5		%	2.1		%	0.6		%
Adjusted EBITDA (in thousands) (2)	$	17,789		$	22,200		$	37,153		$	35,182
Adjusted EBITDA margin (2)	9.6		%	14.4		%	10.4		%	12.5		%

________________

(1) Reconciliations from Income from operations and Income from operations margin, the most comparable GAAP measures to Restaurant level operating profit and Restaurant level operating profit margin, are set forth in the schedules within the Non-GAAP Financial Measures section below.

(2) Reconciliations from Net income and Net income margin, the most comparable GAAP measures to Adjusted EBITDA and Adjusted EBITDA margin, are set forth in the schedules within the Non-GAAP Financial Measures section below.

Same-Restaurant Sales Growth and Same-Restaurant Traffic Growth

THIRTEEN WEEKS ENDED	SAME-RESTAURANT SALES GROWTH		SAME-RESTAURANT TRAFFIC GROWTH		COMPARABLE RESTAURANT BASE
June 26, 2022	13.4	%	8.1	%	304
June 27, 2021	403.5	%	360.9	%	270
June 28, 2020	(75.9)	%	(77.2)	%	212
June 30, 2019	6.2	%	2.4	%	168

21

Results of Operations

Thirteen and Twenty-Six Weeks Ended June 26, 2022 Compared to Thirteen and Twenty-Six Weeks Ended June 27, 2021

The following table summarizes our results of operations and the percentages of certain items in relation to Total revenues or, where indicated, Restaurant sales for the thirteen and twenty-six weeks ended June 26, 2022 and June 27, 2021:

	THIRTEEN WEEKS ENDED								TWENTY-SIX WEEKS ENDED
(in thousands)	JUNE 26, 2022				JUNE 27, 2021				JUNE 26, 2022				JUNE 27, 2021
Revenues
Restaurant sales	$	181,682	98.5	%	$	151,688	98.5	%	$	352,351	98.5	%	$	277,054	98.5	%
Franchise revenues	2,771		1.5	%	2,275		1.5	%	5,214		1.5	%	4,078		1.5	%
Total revenues	184,453		100.0	%	153,963		100.0	%	357,565		100.0	%	281,132		100.0	%
Operating costs and expenses
Restaurant operating expenses (1) (exclusive of depreciation and amortization shown below):
Food and beverage costs	45,219		24.9	%	33,596		22.1	%	84,622		24.0	%	60,512		21.8	%
Labor and other related expenses	58,687		32.3	%	45,950		30.3	%	113,829		32.3	%	85,999		31.0	%
Other restaurant operating expenses	28,759		15.8	%	23,423		15.4	%	56,076		15.9	%	45,443		16.4	%
Occupancy expenses	14,844		8.2	%	13,765		9.1	%	29,227		8.3	%	27,066		9.8	%
Pre-opening expenses	1,094		0.6	%	899		0.6	%	2,079		0.6	%	2,063		0.7	%
General and administrative expenses	21,942		11.9	%	15,388		10.0	%	41,505		11.6	%	27,341		9.7	%
Depreciation and amortization	8,400		4.6	%	7,976		5.2	%	16,623		4.6	%	15,762		5.6	%
Impairments and loss on disposal of assets	155		0.1	%	39		—	%	234		0.1	%	163		0.1	%
Transaction expenses, net	300		0.2	%	615		0.4	%	557		0.2	%	626		0.2	%
Total operating costs and expenses	179,400		97.3	%	141,651		92.0	%	344,752		96.4	%	264,975		94.3	%
Income from operations (1)	5,053		2.8	%	12,312		8.1	%	12,813		3.6	%	16,157		5.8	%
Interest expense	(1,126)		(0.6)	%	(6,289)		(4.1)	%	(2,132)		(0.6)	%	(12,605)		(4.5)	%
Other income, net	116		0.1	%	67		—	%	279		0.1	%	321		0.1	%
Income before income taxes	4,043		2.2	%	6,090		4.0	%	10,960		3.1	%	3,873		1.4	%
Income tax expense	(1,336)		(0.7)	%	(2,285)		(1.5)	%	(3,613)		(1.0)	%	(2,110)		(0.8)	%
Net income and total comprehensive income	$	2,707	1.5	%	$	3,805	2.5	%	$	7,347	2.1	%	$	1,763	0.6	%

_____________

(1) Percentages are calculated as a percentage of restaurant sales.

Restaurant Sales

Restaurant sales represent the aggregate sales of food and beverages, net of discounts, at company-owned restaurants. Restaurant sales in any period are directly influenced by the number of operating weeks in the period, the number of open restaurants, customer traffic and average check. Average check growth is driven by our menu price increases and changes to our menu mix.

	THIRTEEN WEEKS ENDED						TWENTY-SIX WEEKS ENDED
(in thousands)	JUNE 26, 2022		JUNE 27, 2021		Change		JUNE 26, 2022		JUNE 27, 2021		Change
Restaurant sales:
In-restaurant dining sales	$	144,839	$	116,705	24.1	%	$	277,731	$	203,836	36.3	%
Third-party delivery sales	19,829		16,598		19.5	%	40,855		37,352		9.4	%
Take-out sales	17,014		18,385		(7.5)	%	33,765		35,866		(5.9)	%
Total Restaurant sales	$	181,682	$	151,688	19.8	%	$	352,351	$	277,054	27.2	%

The increase in total restaurant sales during the thirteen weeks ended June 26, 2022 as compared to the same period in the prior year was primarily due to (i) same-restaurant sales growth of 13.4%, driven by same-restaurant traffic growth of 8.1%, menu price increases and the increase in off-premises sales in addition to (ii) 18 NROs between June 27, 2021 and June 26, 2022.

22

The increase in total restaurant sales during the twenty-six weeks ended June 26, 2022 as compared to the same period in the prior year was primarily due to (i) same restaurant sales growth of 19.7%, driven by same-restaurant traffic growth of 14.4%, menu price increases and sustained off-premises sales in addition to (ii) 18 NROs between June 27, 2021 and June 26, 2022.

In June 2022, we implemented a menu price increase on third-party delivery sales to compensate for third-party delivery fees and the increased costs of to-go-supplies resulting in a relatively neutral margin on these sales as compared to in-restaurant dining sales. In addition, we increased in-restaurant menu prices 3.9% in late July 2022 to partially offset the continued negative effects of inflationary costs.

Franchise Revenues

Franchise revenues are comprised of sales-based royalty fees, system fund contributions and the amortization of upfront initial franchise fees, which are recognized as revenue on a straight-line basis over the term of the franchise agreement. Franchise revenues in any period are directly influenced by the number of open franchise-owned restaurants.

	THIRTEEN WEEKS ENDED						TWENTY-SIX WEEKS ENDED
(in thousands)	JUNE 26, 2022		JUNE 27, 2021		Change		JUNE 26, 2022		JUNE 27, 2021		Change
Franchise revenues:
Royalty and system fund contributions	$	2,706	$	2,219	21.9	%	$	5,085	$	3,954	28.6	%
Initial fees	65		56		16.1	%	129		124		4.0	%
Total Franchise revenues	$	2,771	$	2,275	21.8	%	$	5,214	$	4,078	27.9	%

The increase in franchise revenues during the thirteen and twenty-six weeks ended June 26, 2022 as compared to the same periods in the prior year was primarily driven by (i) the increase in sales from franchise-owned restaurants and (ii) $0.2 million and $0.3 million, respectively, from 11 franchise-owned NROs between June 27, 2021 and June 26, 2022.

Food and Beverage Costs

The components of food and beverage costs at company-owned restaurants are variable by nature, change with sales volume, are impacted by product mix and are subject to increases or decreases in commodity costs.

	THIRTEEN WEEKS ENDED								TWENTY-SIX WEEKS ENDED
(in thousands)	JUNE 26, 2022			JUNE 27, 2021			Change		JUNE 26, 2022			JUNE 27, 2021			Change
Food and beverage costs	$	45,219		$	33,596		34.6	%	$	84,622		$	60,512		39.8	%
As a percentage of restaurant sales	24.9		%	22.1		%	2.8	%	24.0		%	21.8		%	2.2	%

Food and beverage costs as a percent of restaurant sales increased during the thirteen and twenty-six weeks ended June 26, 2022 as compared to the same periods in the prior year primarily due to inflation across the market basket, partially offset by menu price increases.

Food and beverage costs increased during the thirteen and twenty-six weeks ended June 26, 2022 as compared to the same periods in the prior year primarily as a result of (i) the increase in restaurant sales, (ii) inflation across the market basket and (iii) 18 NROs that have opened between June 27, 2021 and June 26, 2022.

Management currently expects a continuation of cost pressures in our market basket for the balance of the year, with inflation of 15.0% to 17.0%, as well as increases in fuel surcharges associated with our deliveries.

Labor and Other Related Expenses

Labor and other related expenses are variable by nature and include hourly and management wages, bonuses, payroll taxes, workers’ compensation expense and employee benefits. Factors that influence labor costs include minimum wage and

23

payroll tax legislation, health care costs, the number and performance of our company-owned restaurants and increased competition for qualified staff.

	THIRTEEN WEEKS ENDED								TWENTY-SIX WEEKS ENDED
(in thousands)	JUNE 26, 2022			JUNE 27, 2021			Change		JUNE 26, 2022			JUNE 27, 2021			Change
Labor and other related expenses	$	58,687		$	45,950		27.7	%	$	113,829		$	85,999		32.4	%
As a percentage of restaurant sales	32.3		%	30.3		%	2.0	%	32.3		%	31.0		%	1.3	%

Labor and other related expenses as a percentage of restaurant sales increased during the thirteen weeks ended June 26, 2022 as compared to the same period in the prior year primarily as a result of the increase in wages and staffing levels. This increase was partially offset by (i) greater sales leverage driven by the increase in restaurant sales and (ii) retention bonuses recognized during the thirteen weeks ended June 2021.

The increase in labor and other related expenses during the thirteen weeks ended June 26, 2022 as compared to the same period in the prior year was primarily due to (i) the increase in wages and staffing levels and (ii) 18 NROs that have opened between June 27, 2021 and June 26, 2022. This increase was partially offset by retention bonuses recognized during the thirteen weeks ended June 2021.

Labor and other related expenses as a percentage of restaurant sales increased during the twenty-six weeks ended June 26, 2022 as compared to the same period in the prior year primarily as a result of the increase in wages and staffing levels. This increase was partially offset by (i) greater sales leverage driven by the increase in restaurant sales, (ii) rebates from our group health plan and (iii) retention bonuses recognized during the thirteen weeks ended June 2021.

The increase in labor and other related expenses during the twenty-six weeks ended June 26, 2022 as compared to the same period in the prior year was primarily due to (i) the increase in wages and staffing levels and (ii) 18 NROs that have opened between June 27, 2021 and June 26, 2022. This increase was partially offset by (i) rebates from our group health plan and (ii) retention bonuses recognized during the thirteen weeks ended June 2021.

We expect inflation to remain between 8.0% to 10.0% for our restaurant labor cost.

Other Restaurant Operating Expenses

Other restaurant operating expenses consist of marketing and advertising expenses, utilities, insurance and other operating variable expenses incidental to operating company-owned restaurants, such as operating supplies (including paper products, menus and to-go supplies), credit card fees, repairs and maintenance, and third-party delivery services fees.

	THIRTEEN WEEKS ENDED								TWENTY-SIX WEEKS ENDED
(in thousands)	JUNE 26, 2022			JUNE 27, 2021			Change		JUNE 26, 2022			JUNE 27, 2021			Change
Other restaurant operating expenses	$	28,759		$	23,423		22.8	%	$	56,076		$	45,443		23.4	%
As a percentage of restaurant sales	15.8		%	15.4		%	0.4	%	15.9		%	16.4		%	(0.5)	%

The increase in other restaurant operating expenses as a percentage of restaurant sales during the thirteen weeks ended June 26, 2022 as compared to the same period in the prior year was primarily due to the increase in the cost of to-go supplies.

The increase in other restaurant operating expenses during the thirteen weeks ended June 26, 2022 as compared to the same period in the prior year was mainly due to (i) $2.2 million in operating supplies expense primarily driven by inflation and the increase in restaurant sales, (ii) $2.4 million related to credit card fees, utilities, repairs and maintenance and insurance expense primarily driven by the increase in restaurant sales, as well as (iii) $0.4 million in third-party delivery services fees as a result of the increase in off-premises sales.

The decrease in other restaurant operating expenses as a percentage of restaurant sales during the twenty-six weeks ended June 26, 2022 as compared to the same period in the prior year was primarily due to leveraging in-restaurant dining sales, partially offset by the increase in the cost of to-go supplies.

The increase in other restaurant operating expenses during the twenty-six weeks ended June 26, 2022 as compared to the same period in the prior year was mainly due to (i) $4.5 million in operating supplies expense primarily driven by inflation

24

and the increase in restaurant sales, as well as (ii) $5.5 million related to credit card fees, utilities, repairs and maintenance and insurance expense primarily driven by the increase in restaurant sales.

As a percentage of sales, other restaurant operating expenses are expected to trend higher than prior to COVID-19 due principally to the additional cost of to-go supplies associated with off-premises sales.

Occupancy Expenses

Occupancy expenses primarily consist of rent expense, property insurance, common area expenses and property taxes.

	THIRTEEN WEEKS ENDED								TWENTY-SIX WEEKS ENDED
(in thousands)	JUNE 26, 2022			JUNE 27, 2021			Change		JUNE 26, 2022			JUNE 27, 2021			Change
Occupancy expenses	$	14,844		$	13,765		7.8	%	$	29,227		$	27,066		8.0	%
As a percentage of restaurant sales	8.2		%	9.1		%	(0.9)	%	8.3		%	9.8		%	(1.5)	%

As a percentage of restaurant sales, the decrease in occupancy expenses for the thirteen and twenty-six weeks ended June 26, 2022 as compared to the same periods in the prior year was primarily due to sales leverage driven by the increase in restaurant sales.

The increase in occupancy expenses during the thirteen and twenty-six weeks ended June 26, 2022 as compared to the same periods in the prior year was primarily due to the increase in the number of company-owned restaurants.

Pre-opening Expenses

Pre-opening expenses are costs incurred to open new company-owned restaurants. Pre-opening expenses include pre-opening rent expense, which is recognized during the period between the date of possession of the restaurant facility and the restaurant opening date. In addition, pre-opening expenses include manager salaries, recruiting expenses, employee payroll and training costs, which are recognized in the period in which the expense was incurred. Pre-opening expenses can fluctuate from period to period, based on the number and timing of new company-owned restaurant openings.

	THIRTEEN WEEKS ENDED						TWENTY-SIX WEEKS ENDED
(in thousands)	JUNE 26, 2022		JUNE 27, 2021		Change		JUNE 26, 2022		JUNE 27, 2021		Change
Pre-opening expenses	$	1,094	$	899	21.7	%	$	2,079	$	2,063	0.8	%

The increase in pre-opening expenses during the thirteen and twenty-six weeks ended June 26, 2022 as compared to the same periods in the prior year was primarily due to the higher number of restaurants expected to open and the related increase in pre-opening rent. This increase was partially offset by the decrease in other pre-opening costs due to the lower number of NROs during the thirteen and twenty-six weeks ended June 26, 2022.

General and Administrative Expenses

General and administrative expenses primarily consist of costs associated with our corporate and administrative functions that support restaurant development and operations including marketing and advertising costs incurred as well as legal fees, professional fees and stock-based compensation. General and administrative expenses are impacted by changes in our employee headcount and costs related to strategic and growth initiatives. In preparation for and after the consummation of the Company’s initial public offering (“IPO”) in October 2021, we have incurred and we expect to incur in the future significant additional legal, accounting and other expenses associated with being a public company, including costs associated with our compliance with the Sarbanes-Oxley Act.

	THIRTEEN WEEKS ENDED						TWENTY-SIX WEEKS ENDED
(in thousands)	JUNE 26, 2022		JUNE 27, 2021		Change		JUNE 26, 2022		JUNE 27, 2021		Change
General and administrative expenses	$	21,942	$	15,388	42.6	%	$	41,505	$	27,341	51.8	%

The increase in general and administrative expenses during the thirteen weeks ended June 26, 2022 as compared to the same period in the prior year was mainly due to (i) $2.6 million of stock-based compensation expense from certain stock option awards that converted into time-based stock options upon the Company’s IPO in addition to stock options granted under the 2021 Equity Incentive Plan (the “2021 Equity Plan”), (ii) $1.2 million in marketing expense and (iii) $0.9 million related to insurance expense associated with being a public company.

25

The increase in general and administrative expenses during the twenty-six weeks ended June 26, 2022 as compared to the same period in the prior year was mainly due to (i) $4.8 million of stock-based compensation expense from certain stock option awards that converted into time-based stock options upon the Company’s IPO in addition to stock options granted under the 2021 Equity Plan, (ii) $2.2 million in marketing spend, (iii) $1.9 million related to insurance expense associated with being a public company and (iv) $1.6 million in compensation expense.

Depreciation and Amortization

Depreciation and amortization consists of the depreciation of fixed assets, including leasehold improvements, fixtures and equipment and the amortization of definite-lived intangible assets, which are primarily comprised of franchise rights. Franchise rights includes rights which arose from the purchase price allocation in connection with the merger agreement through which the Company was acquired by funds affiliated with or managed by Advent International Corporation in August 2017 as well as reacquired rights from our acquisitions of franchise-owned restaurants.

	THIRTEEN WEEKS ENDED						TWENTY-SIX WEEKS ENDED
(in thousands)	JUNE 26, 2022		JUNE 27, 2021		Change		JUNE 26, 2022		JUNE 27, 2021		Change
Depreciation and amortization	$	8,400	$	7,976	5.3	%	$	16,623	$	15,762	5.5	%

The increase in depreciation and amortization during the thirteen and twenty-six weeks ended June 26, 2022 as compared to the same periods in the prior year was primarily due to incremental depreciation of capital expenditures associated with NROs.

Impairments and Loss on Disposal of Assets

Impairments and loss on disposal of assets include (i) the impairment of long-lived assets and intangible assets where the carrying amount of the asset is not recoverable and exceeds the fair value of the asset, (ii) the write-off of the net book value of assets that have been retired or replaced in the normal course of business and (iii) the write-off of the net book value of assets in connection with restaurant closures.

	THIRTEEN WEEKS ENDED					TWENTY-SIX WEEKS ENDED
(in thousands)	JUNE 26, 2022		JUNE 27, 2021		Change	JUNE 26, 2022		JUNE 27, 2021		Change
Impairments and loss on disposal of assets	$	155	$	39	n/m (1)	$	234	$	163	43.6	%

____________

(1) Not meaningful.

There were no impairment losses recognized on intangible assets or fixed assets during the thirteen and twenty-six weeks ended June 26, 2022 and June 27, 2021. Loss on disposal of assets recognized during the periods indicated were primarily related to retirements, replacements and disposals of fixed assets.

Transaction Expenses, Net

Transaction expenses, net include (i) revaluations of contingent consideration payable to previous stockholders for tax savings generated through the use of federal and state loss carryforwards and general business credits that had been accumulated from operations prior to August 2017, (ii) gains or losses associated with lease or contract terminations, (iii) costs incurred in connection with the acquisition of franchise-owned restaurants, (iv) costs incurred in connection with the conversion of certain restaurants to company-owned restaurants operating under the First Watch trade name and (v) costs related to restaurant closures.

	THIRTEEN WEEKS ENDED						TWENTY-SIX WEEKS ENDED
(in thousands)	JUNE 26, 2022		JUNE 27, 2021		Change		JUNE 26, 2022		JUNE 27, 2021		Change
Transaction expenses, net	$	300	$	615	(51.2)	%	$	557	$	626	(11.0)	%

26

The decrease in Transaction expenses, net during the thirteen weeks ended June 26, 2022 as compared to the same period in the prior year was primarily due to the change in the revaluation of the contingent consideration payable to previous stockholders for tax savings generated through use of federal and state loss carryforwards, partially offset by termination fees recognized in connection with certain service contracts.

The decrease in Transaction expenses, net during the twenty-six weeks ended June 26, 2022 as compared to the same period in the prior year was primarily due to the change in the revaluation of the contingent consideration payable to previous stockholders for tax savings generated through use of federal and state loss carryforwards, partially offset by (i) termination fees recognized in connection with certain service contracts and (ii) the termination fee in connection with the closure of one company-owned restaurant.

Income from Operations

	THIRTEEN WEEKS ENDED								TWENTY-SIX WEEKS ENDED
(in thousands)	JUNE 26, 2022			JUNE 27, 2021			Change		JUNE 26, 2022			JUNE 27, 2021			Change
Income from operations	$	5,053		$	12,312		(59.0)	%	$	12,813		$	16,157		(20.7)	%
As a percentage of restaurant sales	2.8		%	8.1		%	(5.3)	%	3.6		%	5.8		%	(2.2)	%

Income from operations margin decreased during the thirteen and twenty-six weeks ended June 26, 2022 as compared to the same periods in the prior year primarily due to (i) inflation across commodities and supplies, (ii) the increase in restaurant-level wages and staffing and (iii) higher general and administrative expenses mainly due to stock-based compensation expense, marketing and insurance expense. This decrease was partially offset by menu price increases.

Income from operations decreased during the thirteen and twenty-six weeks ended June 26, 2022 as compared to the same periods in the prior year primarily due to (i) inflation across commodities and supplies, (ii) the increase in restaurant-level wages and staffing, (iii) higher operating costs and expenses driven by our restaurant growth and (iv) higher general and administrative expenses mainly due to stock-based compensation expense, marketing and insurance expense. This decrease was partially offset by the increase in restaurant sales and franchise revenues.

Interest Expense

Interest expense primarily consists of interest and fees on our outstanding debt and the amortization expense for debt discount and deferred issuance costs.

	THIRTEEN WEEKS ENDED						TWENTY-SIX WEEKS ENDED
(in thousands)	JUNE 26, 2022		JUNE 27, 2021		Change		JUNE 26, 2022		JUNE 27, 2021		Change
Interest expense	$	1,126	$	6,289	(82.1)	%	$	2,132	$	12,605	(83.1)	%

The decrease in interest expense during the thirteen and twenty-six weeks ended June 26, 2022 as compared to the same periods in the prior year was primarily due to lower outstanding debt and reduced interest rates from the new term loan A facility (“the New Term Facility”) pursuant to our new credit agreement executed in October 2021, (the “New Credit Agreement”).

27

Other Income, Net

Other income, net includes items deemed to be non-operating based on management’s assessment of the nature of the item in relation to our core operations.

	THIRTEEN WEEKS ENDED						TWENTY-SIX WEEKS ENDED
(in thousands)	JUNE 26, 2022		JUNE 27, 2021		Change		JUNE 26, 2022		JUNE 27, 2021		Change
Other income, net	$	116	$	67	73.1	%	$	279	$	321	(13.1)	%

Income Tax Expense

Income tax expense primarily consists of various federal and state taxes.

	THIRTEEN WEEKS ENDED								TWENTY-SIX WEEKS ENDED
(in thousands)	JUNE 26, 2022			JUNE 27, 2021			Change		JUNE 26, 2022			JUNE 27, 2021			Change
Income tax expense	$	(1,336)		$	(2,285)		(41.5)	%	$	(3,613)		$	(2,110)		71.2	%
Effective income tax rate	33.0		%	37.5		%	(4.5)	%	33.0		%	54.5		%	(21.5)	%

The change in the effective income tax rates for the thirteen and twenty-six week period ended June 26, 2022 as compared to the same periods in the prior year was primarily due to (i) the change in the valuation allowance for federal and state deferred tax assets, (ii) the benefit of tax credits for FICA taxes on certain employees’ tips and (iii) permanent items including limitations on deductions of certain compensation.

Net Income

	THIRTEEN WEEKS ENDED								TWENTY-SIX WEEKS ENDED
(in thousands)	JUNE 26, 2022			JUNE 27, 2021			Change		JUNE 26, 2022			JUNE 27, 2021			Change
Net income	$	2,707		$	3,805		(28.9)	%	$	7,347		$	1,763		n/m (1)
As a percentage of total revenues	1.5		%	2.5		%	(1.0)	%	2.1		%	0.6		%	1.5	%

___________

(1) Not meaningful.

The decrease in net income and net income margin during the thirteen weeks ended June 26, 2022 as compared to the same period in the prior year was primarily due to the decrease in income from operations. This decrease was partially offset by (i) lower interest expense and (ii) lower income tax expense.

The increase in net income and net income margin during the twenty-six weeks ended June 26, 2022 as compared to the same period in the prior year was primarily due to the reduction in interest expense. This increase was partially offset by (i) the decrease in income from operations and (ii) higher income tax expense.

28

Restaurant Level Operating Profit and Restaurant level Operating Profit Margin

	THIRTEEN WEEKS ENDED								TWENTY-SIX WEEKS ENDED
(in thousands)	JUNE 26, 2022			JUNE 27, 2021			Change		JUNE 26, 2022			JUNE 27, 2021			Change
Restaurant level operating profit	$	33,079		$	34,066		(2.9)	%	$	66,518		$	55,990		18.8	%
Restaurant level operating profit margin	18.2		%	22.5		%	(4.3)	%	18.9		%	20.2		%	(1.3)	%

Restaurant level operating profit margin during the thirteen and twenty-six weeks ended June 26, 2022 decreased as compared to the same periods in the prior year primarily due to (i) inflation across commodities and supplies and (ii) the increase in restaurant-level wages and staffing. This decrease was partially offset by menu price increases.

Restaurant level operating profit during the thirteen weeks ended June 26, 2022 decreased as compared to the same period in the prior year primarily due to (i) inflation across commodities and supplies, (ii) the increase in restaurant-level wages and staffing and (iii) the increase in operating costs and expenses driven by our restaurant growth. This decrease was partially offset by same-restaurant sales growth, driven by same-restaurant traffic growth, menu price increases and sustained off-premises sales.

Restaurant level operating profit during the twenty-six weeks ended June 26, 2022 increased as compared to the same period in the prior year mainly due to same-restaurant sales growth, driven by same-restaurant traffic growth, menu price increases and sustained off-premises sales, partially offset by (i) inflation across commodities and supplies, (ii) the increase in operating costs and expenses driven by our restaurant growth and (iii) the increase in restaurant-level wages and staffing.

Adjusted EBITDA and Adjusted EBITDA Margin

	THIRTEEN WEEKS ENDED								TWENTY-SIX WEEKS ENDED
(in thousands)	JUNE 26, 2022			JUNE 27, 2021			Change		JUNE 26, 2022			JUNE 27, 2021			Change
Adjusted EBITDA	$	17,789		$	22,200		(19.9)	%	$	37,153		$	35,182		5.6	%
Adjusted EBITDA margin	9.6		%	14.4		%	(4.8)	%	10.4		%	12.5		%	(2.1)	%

Adjusted EBITDA margin during the thirteen and twenty-six weeks ended June 26, 2022 decreased as compared to the same periods in the prior year primarily due to (i) the increase in general and administrative expenses mainly due to marketing and insurance expense and (ii) the decrease in restaurant level operating profit margin.

The decrease in Adjusted EBITDA during the thirteen weeks ended June 26, 2022 as compared to the same period in the prior year was primarily due to (i) the increase in general and administrative expenses mainly due to marketing and insurance expense and (ii) the decrease in restaurant level operating profit.

The increase in Adjusted EBITDA during the twenty-six weeks ended June 26, 2022 as compared to the same period in the prior year was primarily due to the increase in restaurant level operating profit. This increase was partially offset by the increase in general and administrative expenses mainly due to wage increases and additional employee headcount, as well as marketing and insurance expense.

29

Non-GAAP Financial Measures

Adjusted EBITDA and Adjusted EBITDA margin - The following table reconciles Net income and Net income margin, the most directly comparable GAAP measures to Adjusted EBITDA and Adjusted EBITDA margin for the periods indicated:

.

	THIRTEEN WEEKS ENDED						TWENTY-SIX WEEKS ENDED
(in thousands)	JUNE 26, 2022			JUNE 27, 2021			JUNE 26, 2022			JUNE 27, 2021
Net income	$	2,707		$	3,805		$	7,347		$	1,763
Depreciation and amortization	8,400			7,976			16,623			15,762
Interest expense	1,126			6,289			2,132			12,605
Income taxes	1,336			2,285			3,613			2,110
EBITDA	13,569			20,355			29,715			32,240
IPO-readiness and strategic transition costs (1)	721			700			1,171			1,179
Stock-based compensation (2)	2,808			187			5,102			316
Transaction expenses, net (3)	300			615			557			626
Impairments and loss on disposal of assets (4)	155			39			234			163
Recruiting and relocation costs (5)	143			141			219			182
Severance costs (6)	93			—			155			265
COVID-19 related charges (7)	—			163			—			211
Adjusted EBITDA	$	17,789		$	22,200		$	37,153		$	35,182
Total revenues	$	184,453		$	153,963		$	357,565		$	281,132
Net income margin	1.5		%	2.5		%	2.1		%	0.6		%
Adjusted EBITDA margin	9.6		%	14.4		%	10.4		%	12.5		%
Additional information
Deferred rent expense (income) (8)	$	651		$	(808)		$	1,231		$	(1,807)

_____________________________

(1) Represents costs related to the assessment and redesign of our systems and processes. In 2021, the costs also include information technology support and external professional service costs incurred in connection with IPO-readiness efforts. These costs are recorded within General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income.

(2) Represents non-cash, stock-based compensation expense which is recorded within General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income.

(3) Represents (i) revaluations of contingent consideration payable to previous stockholders for tax savings generated through the use of federal and state loss carryforwards and general business credits that had been accumulated from operations prior to August 2017, (ii) gains or losses associated with lease or contract terminations, (iii) costs incurred in connection with the acquisition of franchise-owned restaurants, (iv) costs incurred in connection with the conversion of certain restaurants to company-owned restaurants operating under the First Watch trade name and (v) costs related to restaurant closures.

(4) Represents costs related to the disposal of assets due to retirements, replacements or certain restaurant closures. There were no impairments recognized during the periods presented.

(5) Represents costs incurred for hiring qualified individuals as we assessed the redesign of our systems and processes. These costs are recorded within General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income.

(6) Severance costs are recorded in General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income.

(7) Represents costs incurred in connection with the economic impact of the COVID-19 pandemic.

(8) Represents the non-cash portion of straight-line rent expense recorded within both Occupancy expenses and General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income.

30

Restaurant level operating profit and Restaurant level operating profit margin - The following table reconciles Income from operations and Income from operations margin, the most comparable GAAP measures to Restaurant level operating profit and Restaurant level operating profit margin for the periods indicated:

	THIRTEEN WEEKS ENDED						TWENTY-SIX WEEKS ENDED
(in thousands)	JUNE 26, 2022			JUNE 27, 2021			JUNE 26, 2022			JUNE 27, 2021
Income from operations	$	5,053		$	12,312		$	12,813		$	16,157
Less: Franchise revenues	(2,771)			(2,275)			(5,214)			(4,078)
Add:
General and administrative expenses	21,942			15,388			41,505			27,341
Depreciation and amortization	8,400			7,976			16,623			15,762
Transaction expenses, net (1)	300			615			557			626
Impairments and loss on disposal of assets (2)	155			39			234			163
COVID-19 related charges (3)	—			11			—			19
Restaurant level operating profit	$	33,079		$	34,066		$	66,518		$	55,990
Restaurant sales	$	181,682		$	151,688		$	352,351		$	277,054
Income from operations margin	2.8		%	8.1		%	3.6		%	5.8		%
Restaurant level operating profit margin	18.2		%	22.5		%	18.9		%	20.2		%
Additional information
Deferred rent expense (4)	$	601		$	(796)		$	1,131		$	(1,734)

_____________________________

(1) Represents (i) revaluations of contingent consideration payable to previous stockholders for tax savings generated through the use of federal and state loss carryforwards and general business credits that had been accumulated from operations prior to August 2017, (ii) gains or losses associated with lease or contract terminations, (iii) costs incurred in connection with the acquisition of franchise-owned restaurants, (iv) costs incurred in connection with the conversion of certain restaurants to company-owned restaurants operating under the First Watch trade name and (v) costs related to restaurant closures.

(2) Represents costs related to the disposal of assets due to retirements, replacements or certain restaurant closures. There were no impairments recognized during the periods presented.

(3) Represents costs incurred in connection with the economic impact of the COVID-19 pandemic.

(4) Represents the non-cash portion of straight-line rent expense recorded within Occupancy expenses on the Consolidated Statements of Operations and Comprehensive Income.

Liquidity and Capital Resources

Liquidity

As of June 26, 2022, we had cash and cash equivalents of $53.6 million and $98.8 million in outstanding borrowings, excluding unamortized debt issuance costs and deferred issuance costs. As of June 26, 2022, we had availability of $75.0 million under our revolving credit facility pursuant to our New Credit Agreement. Our principal uses of cash include capital expenditures for the development, acquisition or remodeling of restaurants, lease obligations, debt service payments and strategic infrastructure investments. Our requirements for working capital are not significant because our customers pay for their food and beverage purchases in cash or on debit or credit cards at the time of the sale and we are able to sell many of our inventory items before payment is due to the supplier of such items.

We believe that our cash flow from operations, availability under our New Credit Agreement and available cash and cash equivalents will be sufficient to meet our liquidity needs for at least the next 12 months. We anticipate that to the extent that we require additional liquidity, it will be funded through additional indebtedness, the issuance of equity, or a combination thereof. Although we believe that our current level of total available liquidity is sufficient to meet our short-term and long-term liquidity requirements, we regularly evaluate opportunities to improve our liquidity position in order to enhance financial flexibility. Although we have no specific current plans to do so, if we decide to pursue one or more significant acquisitions, we may incur additional debt or sell additional equity to finance such acquisitions, which would result in additional expenses or dilution.

31

We estimate that our capital expenditures will total approximately $60.0 million to $70.0 million in 2022, which will be invested primarily in new restaurant projects, planned remodels and new in-restaurant technology. We plan to fund the capital expenditures primarily with cash generated from our operating activities as well as with borrowings from our new facilities pursuant to our New Credit Agreement.

Summary of Cash Flows

The following table presents a summary of our cash provided by (used in) operating, investing and financing activities for the twenty-six weeks ended June 26, 2022 and June 27, 2021:

	TWENTY-SIX WEEKS ENDED
(in thousands)	JUNE 26, 2022		JUNE 27, 2021
Cash provided by operating activities	$	31,812	$	30,428
Cash used in investing activities	(26,945)		(19,524)
Cash used in financing activities	(3,165)		(1,717)
Net increase in cash and cash equivalents and restricted cash	$	1,702	$	9,187

Cash provided by operating activities during the twenty-six weeks ended June 26, 2022 increased to $31.8 million from $30.4 million during the twenty-six weeks ended June 27, 2021 primarily due to (i) the increase in net income of $5.6 million and (ii) the impact of non-cash charges of $7.8 million, partially offset by (iii) a net change in operating assets and liabilities of $12.0 million. The increase in the non-cash charges was primarily driven by additional stock-based compensation expense resulting from certain stock option awards that converted into time-based stock option awards upon closing of the IPO as well as new stock option awards issued under the 2021 Equity Plan. The net change of $12.0 million in operating assets and liabilities was primarily a result of (i) higher accrued compensation and (ii) the timing of operational payments.

Cash used in investing activities increased to $26.9 million during the twenty-six weeks ended June 26, 2022 from $19.5 million during the twenty-six weeks ended June 27, 2021 primarily as a result of the increase in capital expenditures to support our restaurant growth and new restaurant technology.

Cash used in financing activities increased to $3.2 million during the twenty-six weeks ended June 26, 2022 from $1.7 million during the twenty-six weeks ended June 27, 2021 primarily due to repayments made on the note payable.

Critical Accounting Estimates

Our discussion and analysis of our financial condition and results of operations is based upon the accompanying unaudited interim consolidated financial statements and notes thereto, which have been prepared in accordance with GAAP. The preparation of these unaudited interim consolidated financial statements and related notes requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, terms of existing contracts, our evaluation of trends in the industry and information available from other outside sources, as appropriate. We evaluate our estimates and judgments on an on-going basis. Our actual results may differ from these estimates. Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions. There have been no significant changes to our critical accounting policies as disclosed in “Critical Accounting Estimates” in the 2021 Form 10-K.

Recently Issued Accounting Pronouncements

For a discussion of recently issued accounting pronouncements, see Note 2, Summary of Significant Accounting Policies, in the accompanying notes to the unaudited interim consolidated financial statements.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to our exposure to market risks as disclosed in the 2021 Form 10-K.

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Item 4.    Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We are responsible for establishing and maintaining disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Disclosure controls and procedures also include, without limitation, controls and procedures that are designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Due to the material weaknesses in our internal control over financial reporting discussed below, which were previously identified and disclosed in connection with our IPO and in our periodic reports filed with the SEC, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 26, 2022, our disclosure controls and procedures were not effective. In light of this fact, our management has performed additional analyses, reconciliations, and other post-closing procedures and has concluded that, notwithstanding the material weaknesses in our internal control over financial reporting, the consolidated financial statements for the periods covered by and included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP.

Previously Reported Material Weaknesses in Internal Control Over Financial Reporting

We identified material weaknesses in our internal control over financial reporting. The material weaknesses we identified were as follows:

We did not design and maintain an effective internal control environment commensurate with the financial reporting requirements of a public company. Specifically, we lacked a sufficient complement of personnel with an appropriate level of knowledge, experience and training in internal control over financial reporting and the reporting requirements of a public company. Additionally, we did not formally delegate authority or establish appropriate segregation of duties in our finance and accounting functions. As a result, we did not perform an effective risk assessment nor did we design and maintain internal controls in response to the risks of material misstatement. These material weaknesses contributed to the following material weaknesses:

•We did not design and maintain effective controls over the period-end financial reporting process, including controls over the preparation and review of account reconciliations and journal entries, and the appropriate classification and presentation of accounts and disclosures in the consolidated financial statements. This material weakness resulted in adjustments to accruals and within the statement of cash flows in our fiscal 2018 consolidated financial statements, which were recorded prior to the issuance of our fiscal 2018 consolidated financial statements.

•We did not design and maintain effective controls over the accounting for income taxes over the recording of deferred income taxes and the assessment of the realization of deferred tax assets. This material weakness resulted in adjustments to the income tax benefit, deferred taxes, goodwill, and liabilities in our fiscal 2018 consolidated financial statements, which were recorded prior to issuance. This material weakness also resulted in immaterial adjustments to the income tax benefit and deferred taxes and related disclosures in the fiscal 2017 and 2019 consolidated financial statements, which were corrected in the fiscal 2019 and 2020 consolidated financial statements, respectively. This material weakness also resulted in adjustments to the income tax expense and deferred taxes in our fiscal 2021 consolidated financial statements, which were recorded prior to issuance.

•We did not design and maintain effective controls over information technology general controls for information systems and applications that are relevant to the preparation of the consolidated financial statements. Specifically, we did not design and maintain: sufficient user access controls to ensure appropriate segregation of duties and adequately restrict user and privileged access to financial applications, programs and data to appropriate Company personnel; program change management controls to ensure that information technology program and data changes

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affecting financial information technology applications and underlying accounting records are identified, tested, authorized and implemented appropriately; computer operations controls to ensure that critical batch jobs are monitored, privileges are appropriately granted, and data backups are authorized and monitored; and testing and approval controls for program development to ensure that new software development is aligned with business and information technology requirements. The deficiencies, when aggregated, could impact our ability to maintain effective segregation of duties, as well as the effectiveness of information technology-dependent controls (such as automated controls that address the risk of material misstatement to one or more assertions, along with the information technology controls and underlying data that support the effectiveness of system-generated data and reports) that could result in misstatements potentially impacting all financial statement accounts and disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. Therefore, we concluded the information technology deficiencies resulted in a material weakness. However, these information technology deficiencies did not result in any misstatements to the consolidated financial statements.

Additionally, each of the aforementioned material weaknesses could result in a misstatement of the consolidated financial statements that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.

Remediation Efforts

We have taken certain measures to remediate the material weaknesses described above, including hiring additional personnel, designing and implementing formal procedures and controls supporting the Company’s period-end financial reporting process, such as controls over the preparation and review of account reconciliations and disclosures in the consolidated financial statements and designing certain information technology general controls. We are in the process of implementing additional measures designed to enable us to meet the requirements of being a public company, improve our internal control over financial reporting and remediate the control deficiencies that led to the material weaknesses, including hiring additional information technology, finance and accounting personnel, evaluating our financial and information technology control environment and augmenting our internal controls with new accounting policies and procedures, and designing and implementing financial reporting controls, income tax controls, and information technology general controls. At this time, we cannot provide an estimate of costs expected to be incurred in connection with implementing a remediation plan; however, these remediation measures will be time consuming and will place significant demands on our financial and operational resources.

While we believe that the efforts taken to date and those planned for remediation will improve the effectiveness of our internal control over financial reporting, these remediation efforts are ongoing and will require a sufficient period of time to operate for management to be able to conclude that the design is effective to address the risks of material misstatement and that such controls are operating effectively through testing of such controls. We may conclude that additional measures are necessary to remediate the material weaknesses in our internal control over financial reporting, which may necessitate additional evaluation and implementation time.

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Part II - Other Information

Item 1.    Legal Proceedings

From time to time, we are involved in various claims and legal actions that arise in the ordinary course of business. We currently do not believe that the ultimate resolution of any of these actions, individually or taken in the aggregate, will have a material adverse effect on our financial position, results of operations, liquidity or capital resources. A significant increase in the number of claims or an increase in amounts owing under successful claims could materially adversely affect our business, financial condition, results of operations and cash flows. See Note 9, Commitments and Contingencies, in the accompanying notes to the unaudited interim consolidated financial statements.

Item 1A. Risk Factors

In addition to the other information discussed in this report, please consider the factors described in Part I, Item 1A., “Risk Factors” in our 2021 Form 10-K and in Part II. Item 1A. “Risk Factors” in our Quarterly Report on Form 10-Q as of and for the quarter ended March 27, 2022 which could materially affect our business, financial condition or future results. There have been no material changes to the risk factors disclosed in our 2021 Form 10-K as updated in our Quarterly Report on Form 10-Q as of and for the quarter ended March 27, 2022, but these are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may adversely affect our business, financial condition or results of operations.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3.    Defaults Upon Senior Securities

None

Item 4.    Mine Safety Disclosures

Not applicable

Item 5.    Other Information

None

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Item 6.    Exhibits

The exhibits listed in the Exhibits index to this Form 10-Q are incorporated herein by reference.

Exhibit No.	Description	FILINGS REFERENCED FOR INCORPORATION BY REFERENCE
31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith
31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith
32.1*	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Furnished herewith
101	The financial information from First Watch Restaurant Group, Inc’s Quarterly Report on Form 10-Q for the second fiscal quarter ended June 26, 2022, filed on August 9, 2022, formatted in Inline Extensible Business Reporting Language (“iXBRL”)	Filed herewith
104	Cover Page Interactive Date File (formatted as iXBRL and contained in Exhibit 101)	Filed herewith

_____________

* This certification is not deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section. This certification will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates them by reference.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on August 9, 2022.

FIRST WATCH RESTAURANT GROUP, INC.
By:	/s/ Christopher A. Tomasso
Name:	Christopher A. Tomasso
Title:	President, Chief Executive Officer and Director (Principal Executive Officer)
By:	/s/ Mel Hope
Name	Mel Hope
Title:	Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

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