First Watch Restaurant Group, Inc. (FWRG) FY 2021 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This section and other parts of this Annual Report on Form 10-K contain 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 industry outlook, our expectations for the future of our business and our liquidity and capital resources as well as other non-historical statements. You can identify forward-looking statements by the fact that they do not relate strictly to 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. Our actual results may differ materially from those contained in or implied by these forward-looking statements.

These statements are based on current expectations and are subject to numerous risks and uncertainties. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. You should evaluate all forward-looking statements made in this Annual Report on Form 10-K in the context of the risks and uncertainties disclosed in Part I, Item 1A of this Annual Report on Form 10-K under the heading “Risk Factors” and in this Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The forward-looking statements included in this Annual Report on Form 10-K are made only as of the date hereof. We undertake no obligation to publicly update any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law. If we do update one or more forward-looking statements, no inference should be made that we will make additional updates with respect to those or other forward-looking statements.

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, lunch and brunch. In 2021, First Watch was recognized as FSR Magazine’s Best Menu and as the fastest-growing full-service restaurant company based on unit growth. The Company is majority owned by Advent, one of the world’s largest private-equity firms.

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 December 26, 2021, the Company had 341 company-owned restaurants and 94 franchise-owned restaurants. On October 1, 2021, the Company’s common stock began trading on Nasdaq under the ticker symbol “FWRG.”

We use a 52- or 53-week fiscal year ending on the last Sunday of each calendar year. Our 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). All references to 2021, 2020, and 2019 reflect the results of the 52-week fiscal years ended December 26, 2021, December 27, 2020 and December 29, 2019, respectively. We report financial and operating information in one segment.

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

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open for 18 months or longer as of the beginning of the fiscal year (“Comparable Restaurant Base”). For the fiscal years ended December 26, 2021, December 27, 2020 and December 29, 2019 there were 269, 212 and 168 restaurants in our Comparable Restaurant Base, respectively. There were 210 restaurants in the two-year Comparable Restaurant Base. An increase in same-restaurant sales growth is the result of increased restaurant traffic, increased average customer check or a combination of the two. We gather daily sales data and regularly analyze the customer traffic counts and the mix of menu items sold to aid in developing menu pricing, product offerings and promotional strategies designed to produce sustainable same-restaurant sales growth. 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.

Average Unit Volume (“AUV”): the total restaurant sales (excluding gift card breakage) recognized in the Comparable Restaurant Base, divided by the number of restaurants in the Comparable Restaurant Base during the period. This measurement allows management to assess changes in consumer spending patterns at our restaurants and the overall performance of our restaurant base.

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. See Note 2, Summary of Significant Accounting Policies, in the accompanying notes to the consolidated financial statements for a description of our revenue recognition policy.

Adjusted EBITDA: represents Net income (loss) before depreciation and amortization, interest expense and 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 accounting principles generally accepted in the United States of America (“GAAP”) measure, to Adjusted EBITDA, included in the section Non-GAAP Financial Measures, herein.

Adjusted EBITDA Margin: represents Adjusted EBITDA as a percentage of total revenues.

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, herein.

Restaurant Level Operating Profit Margin: represents Restaurant level operating profit as a percentage of restaurant sales.

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Financial Highlights

During 2021, we experienced recovery of our in-restaurant dining sales and continued to build on the strength of our operating performance generating an increase in same-restaurant sales growth driven primarily by same-restaurant traffic growth.

Financial highlights for 2021 include the following:

•Total revenues grew to $601.2 million in 2021 from $342.4 million in 2020 ($436.4 million in 2019)

•System-wide sales increased 76.1% to $750.7 million in 2021 from $426.3 million in 2020 ($558.4 million in 2019)

•Same-restaurant sales growth of 63.0% relative to 2020 (14.3% relative to 2019)

•Same-restaurant traffic growth of 52.6% relative to 2020 ((0.5)% relative to 2019)

•Income from operations margin of 3.8% in 2021 compared to Loss from operations margin of (14.0)% in 2020 (Loss from operations margin of (8.7)% in 2019)

•Restaurant level operating profit margin(*) increased to 19.5% in 2021 from 8.4% in 2020 (17.4% in 2019)

•Net loss improved to $(2.1) million in 2021 compared to $(49.7) million in 2020 ($(45.5) million in 2019)

•Adjusted EBITDA(*) increased to $66.3 million in 2021 from $(5.7) million in 2020 ($38.1 million in 2019)

•Opened 31 system-wide restaurants in 2021, resulting in a year-end count of 435 system-wide restaurants (341 company-owned and 94 franchise-owned) across 28 states

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* See “Non-GAAP Financial Measures,” herein

Customer and Supply Chain Developments

Total revenues in 2021 reflect the rapid pace at which customers returned to our restaurants. The year began with dining rooms that were approximately 62% utilized in January 2021, relative to 2019 levels. By the fourth quarter of 2021, our dining rooms were frequented by customers at a rate of nearly 90% of 2019 levels alongside increased off-premises sales. Furthermore, we generated average annual sales volumes of $1.8 million per restaurant as compared to $1.1 million in 2020 and $1.6 million in 2019. The result was same-restaurant sales growth of 63.0%, which was driven by same-restaurant traffic growth of 52.6%, Restaurant level operating profit of $115.4 million and Adjusted EBITDA of $66.3 million in 2021. During 2021, we also opened 31 new system-wide restaurants in 12 states.

The uneven recovery of the nation’s supply chain has, at times, threatened to interrupt the scheduled deliveries to our restaurants and the costs of certain of our raw materials experienced inflation. The Company is working closely with our suppliers and distribution partners to secure inventory and ensure these conditions do not materially impact our operations. During 2021, as a result of these measures, we were successful in offering our full menu throughout the year. Additionally, the hourly labor market has become increasingly competitive. First Watch continues to see the strength of our “You First” culture and the great appeal of our single-shift operating hours for employees.

Business Trends

First Watch’s operating model and distinctive menu offerings position the Company to capitalize on attractive long-term consumer trends, including:

•Increasing demand for fresh and healthy food – Our freshly made food, with high-quality, protein-rich ingredients, such as cage-free eggs and quinoa, aligns well with consumer trends towards healthier menus factoring into consumer restaurant choices.

•The rise of “on-demand” dining – The rise of the “gig” economy, flexible work hours and the growth of remote work, trends magnified by the COVID-19 pandemic, are enhancing demand for fast and flexible Daytime Dining for which traditional rigid breakfast and lunch dayparts were not designed.

•Increasing morning meal occasions – We believe that migration from dense urban to suburban areas, where most of our restaurants are located, and continued work-from-home routines will provide enhanced opportunities for increased traffic and brand awareness.

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Our restaurant operations have been affected by COVID-19 related employee absences, as well as changes in the availability and cost of labor. In addition, we remain in regular contact with our key suppliers and to date we have not experienced significant disruptions in our supply chain; however, inflationary pressures and temporary shortages in equipment and other goods could increase and/or spread to more categories as the impacts of COVID-19, the Russia-Ukraine conflict, global unrest, and other factors continue to impact the global supply chain. Looking forward to 2022, we believe benefits from pricing actions and operating leverage from revenue growth and technology initiatives should offset, to some extent, inflationary pressures and potential increased costs.

Development Highlights

During 2021, the Company had a total of 31 new system-wide restaurants in 12 states. In addition, we relocated a company-owned restaurant and in the fourth quarter of 2021, we accelerated a planned closure of a company-owned restaurant which was nearing the end of the lease term. Furthermore, Management elected to terminate an agreement with a franchisee that owned three restaurants. At December 26, 2021, the Company had a total of 435 restaurants, which included both company-owned and franchise-owned restaurants.

We expect to open 30 to 35 company-owned restaurants and 8 to 13 franchise-owned restaurants during the fiscal year ending December 25, 2022 (“2022”).

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Results of Operations

The discussion that follows includes a comparison of our results of operations and liquidity and capital resources for 2021 and 2020. For a comparison of our results of operations and financial condition for 2020 and 2019, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our final prospectus for our IPO filed on September 30, 2021.

The following table summarizes our results of operations and the percentages of items in our Consolidated Statements of Operations and Comprehensive Loss in relation to Total revenues or Restaurant sales for 2021 and 2020:

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(1) As a percentage of Restaurant sales

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Selected Operating Data

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

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

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.

The increase in restaurant sales during 2021 as compared to 2020 was mainly due to (i) $185.7 million of sales from the Comparable Restaurant Base, driven by same-restaurant traffic growth of 52.6% and an increase in average check per person, (ii) $69.6 million of sales from restaurants that are not in the Comparable Restaurant Base, of which $27.0 million was from our 22 NROs, (iii) menu price increases on third-party delivery sales.

During 2020, we enabled off-premises sales occasions (third-party delivery and take-out) with new availability and access to online ordering. Off-premises sales increased from $80.4 million 2020 to $139.4 million in 2021. Our off-premises sales of $34.4 million during the fourth quarter of 2021 was higher than our off-premises sales of $33.7 million during the same period in 2020, even as our in-restaurant dining traffic increased 49.1% compared to the same period in 2020 and rebounded to nearly 90% of pre-pandemic levels. Given that this volume of off-premises sales emerged during the COVID-19 pandemic, and the fact that our in-restaurant dining room occasions have not fully returned to pre-pandemic levels, we cannot be certain that similar volumes of off-premises occasions will continue. Menu price increases were

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implemented on third-party delivery sales to compensate for third-party delivery fees resulting in a relatively neutral margin on these sales as compared to in-restaurant dining sales.

Management did not raise menu prices for in-restaurant dining during 2021. However, we increased in-restaurant menu prices 3.9% in the first quarter of 2022 to partially offset the 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.

The increase in franchise revenues during 2021 as compared to 2020 was primarily due to the increase in sales as we continued to recover from the COVID-19 pandemic. Franchise revenues in 2021 includes $0.3 million recognized from nine Franchise-owned NROs.

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.

Food and beverage costs increased during 2021 as compared to the prior year primarily as a result of (i) increased restaurant sales and traffic as we continued to recover from the COVID-19 pandemic and (ii) $6.4 million of food and beverage costs from our 22 NROs, partially offset by (iii) COVID-19-related inventory write-offs of $0.6 million recognized in 2020.

Our commodity costs were relatively stable through the third quarter of 2021. However, late in the fourth quarter of 2021, we experienced increasing inflation in our market basket by more than 11.0%. In 2022, we anticipate inflation of 10.0% to 13.0% primarily driven by the increase in fuel costs as well as a few key items in our market basket, including bread, bacon and avocado.

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

As a percentage of restaurant sales, the decrease in labor and other related expenses during 2021 to 31.9% from 35.7% during 2020 was primarily due to (i) leveraging of labor and other related expenses as restaurant sales and traffic increased,

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combined with COVID-19 related employee absences and changes in the availability of labor and (ii) health insurance costs for furloughed employees, net of employee retention credits, incurred in 2020, partially offset by (iii) restaurant wage rate increases.

The significant factors contributing to the increase in labor and other related expenses in 2021 as compared to 2020 were (i) the increase in restaurant sales and traffic, (ii) $9.7 million from our 22 NROs, (iii) $2.7 million from performance-related and discretionary bonuses and (iv) restaurant wage rate increases, partially offset by (v) $1.8 million in compensation expense and health insurance costs for furloughed employees, net of employee retention credits, incurred in 2020.

In 2022, we anticipate inflation of 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.

Other restaurant operating expenses as a percentage of restaurant sales was 2.3% lower than the prior year primarily due to leveraging increased restaurant sales.

The increase in other restaurant operating expenses during 2021 as compared to 2020 was primarily due to (i) the increase in credit card fees, supplies (including take-out packaging), utilities, repairs and maintenance and insurance expense totaling approximately $24.5 million driven by the increase in restaurant sales and traffic, as well as (ii) the increase in third-party delivery services fees of $7.7 million as a result of increased off-premises sales.

Occupancy Expenses

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

The increase in occupancy expenses during 2021 as compared to 2020 was primarily due to the increase in the number of company-owned restaurants and the number of leases that had commenced during the respective periods.

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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.

The decrease in pre-opening expenses in 2021 as compared to 2020 was primarily due to additional pre-opening rent expense resulting from the curtailment of new restaurant construction and delayed restaurant openings in 2020 in response to the COVID -19 pandemic.

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 IPO, 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.

The increase in general and administrative expenses during 2021 as compared to 2020 was primarily driven by (i) the increase of $10.5 million in compensation expense resulting from the increase in employee headcount and discretionary performance-related bonuses as compared to 2020 when there were furloughs, (ii) $8.0 million of stock-based compensation expense, of which $2.4 million resulted from certain performance-based option awards that converted into time-based option awards and $5.6 million of one-time expense that was recognized upon closing of the IPO (see Note 16, Stock Based Compensation, in the accompanying notes to the consolidated financial statements for additional information), (iii) additional marketing spend of $3.3 million, (iv) an additional $2.5 million in recruiting, training and travel expenses and (v) an increase of $1.1 million related to insurance expense, partially offset by (vi) the write off of $2.0 million of deferred offering costs as a result of halting our public registration of equity in 2020 and (vii) $1.4 million costs incurred in connection with the COVID-19 pandemic in 2020.

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 include 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 in August 2017 as well as reacquired rights from our acquisitions of franchise-owned restaurants.

The increase in depreciation and amortization during 2021 as compared to 2020 was primarily due to incremental depreciation of capital expenditures associated with NROs.

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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.

There were no impairment losses recognized on intangible assets or fixed assets in 2021 and 2020. Loss on disposals of assets recognized during the periods indicated were related to retirements, replacements and disposals of fixed assets.

Transaction Income, Net

Transaction income, net includes (i) revaluations of contingent consideration payable to previous stockholders for tax savings generated through 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 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.

(1) Not meaningful

The increase in transaction income, net during 2021 as compared to 2020 was primarily due to (i) the gain of $2.0 million recognized related to an executed agreement to terminate the lease for one company-owned restaurant (see Note 12, Transaction (Income) Expenses, Net, in the accompanying notes to the consolidated financial statements for additional information), partially offset by (ii) the change of $1.1 million related to the revaluation of the contingent consideration payable to previous stockholders for tax savings generated through use of federal and state loss carryforwards and general business credits that had been accumulated from operations prior to August 2017 (see Note 13, Income Taxes, in the accompanying notes to the consolidated financial statements for additional information).

Income (Loss) from Operations

(1) Not meaningful

Income from operations during 2021 as compared to Loss from operations during 2020 was primarily due to (i) the increase in restaurant sales, driven by the increase in traffic, as well as the increase in off-premises sales and (ii) the operations of our 22 NROs, partially offset by (iii) the increase in general and administrative expenses mainly due to the increase in employee headcount, performance-related and discretionary bonuses, additional stock compensation expense as a result of the Company’s IPO and increased marketing, insurance, recruiting, training and travel expenses.

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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.

The decrease in interest expense in 2021 as compared to 2020 was primarily due to the extinguishment of our Senior Credit Facilities, which were replaced by lower outstanding debt and reduced interest rates from our New Facilities (see Note 10, Debt, in the accompanying notes to the consolidated financial statements for additional information).

Other (Expense) Income, Net

Other (expense) 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.

(1) Not meaningful

The change in Other (expense) income, net in 2021 as compared to 2020 was primarily related to the $2.4 million loss on extinguishment of debt recognized in connection with the full repayment of the Senior Credit Facilities.

Income Tax (Expense) Benefit

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

(1) Not meaningful

The effective income tax rate was 669.5% in 2021 as compared to 28.6% for 2020. The change in the effective income tax rate in 2021 as compared to 2020 was mainly due to (i) the change in the valuation allowance, (ii) the benefit of the tax credits for FICA taxes on certain employee tips and (iii) the pre-vesting forfeiture of the performance-based option stock option awards for which the market condition was not satisfied upon the Company’s IPO.

The Company has a blended federal and state statutory rate of approximately 25.0%. The effective income tax rates for 2021 and 2020 were different than the blended federal and state statutory rate primarily due to (i) the change in the valuation allowance for federal and state deferred tax assets, (ii) the benefit of the tax credits for FICA taxes on certain employee tips and (iii) the pre-vesting forfeiture of the performance-based option stock option awards for which the market condition was not satisfied upon the Company’s IPO.

Net Loss

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Net loss during 2021 improved as compared to 2020 primarily due to (i) income from operations and (ii) the decrease in interest expense, partially offset by (iii) income tax expense and (iv) the $2.4 million loss on extinguishment of debt recorded in connection with the full repayment of the Senior Credit Facilities.

Restaurant level Operating Profit and Restaurant level Operating Profit Margin

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(1) Not meaningful

The increase in Restaurant level operating profit during 2021 as compared to 2020 was primarily due to the (i) the increase in restaurant sales, driven by the increase in traffic, and off-premises sales as well as (ii) the operations of the 22 NROs.

Adjusted EBITDA and Adjusted EBITDA Margin

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(1) Not meaningful

The increase in Adjusted EBITDA during 2021 as compared to 2020 was primarily due to (i) the increase in restaurant level operating profit, partially offset by (ii) the increase in general and administrative expenses mainly due to the increase in employee headcount, performance-related and discretionary bonuses, as well as, marketing spend, insurance, recruiting, training and travel expenses.

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Non-GAAP Financial Measures

To supplement the consolidated financial statements, which are prepared in accordance with 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.

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

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

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

(3) The amount in 2021 includes a gain of $2.0 million related to an executed agreement to terminate the lease for one company-owned restaurant (see Note 12, Transaction (Income) Expenses, Net in the accompanying notes to the consolidated financial statements). The amounts for the periods presented also include (i) the revaluation of the contingent consideration payable to previous stockholders for tax savings generated through use of federal and state loss carryforwards and general business credits that had been accumulated from operations prior to August 2017 (see Note 13, Income Taxes, in the accompanying notes to the consolidated financial statements), (ii) costs incurred in connection with the acquisition of certain franchise-owned restaurants, (iii) costs incurred in connection with the conversion of certain restaurants to company-owned restaurants operating under the First Watch trade name and (iv) costs related to restaurant closures.

(4) Includes impairments recognized on intangible assets and fixed assets as well as costs related to the disposal of assets due to retirements, replacements or certain restaurant closures.

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

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

(7) Consists of costs incurred in connection with the economic impact of the COVID-19 pandemic (see Note 4, COVID-19 Charges, in the accompanying notes to the consolidated financial statements).

(8) Consists of the non-cash portion of straight-line rent expense included in Occupancy expenses and General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Loss.

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The following table reconciles Income (Loss) from operations and Income (Loss) from operations margin, the most directly comparable GAAP financial measure, to Restaurant level operating profit and Restaurant level operating profit margin for the periods presented:

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(1) The amount in 2021 includes a gain of $2.0 million related to an executed agreement to terminate the lease for one company-owned restaurant (see Note 12, Transaction (Income) Expenses, Net in the accompanying notes to the consolidated financial statements). The amounts for the periods presented also include (i) the revaluation of the contingent consideration payable to previous stockholders for tax savings generated through use of federal and state loss carryforwards and general business credits that had been accumulated from operations prior to August 2017 (see Note 13, Income Taxes, in the accompanying notes to the consolidated financial statements for additional information), (ii) costs incurred in connection with the acquisition of certain franchise-owned restaurants, (iii) costs incurred in connection with the conversion of certain restaurants to company-owned restaurants operating under the First Watch trade name and (iv) costs related to restaurant closures.

(2) Includes impairments recognized on intangible assets and fixed assets as well as costs related to the disposal of assets due to retirements, replacements or certain restaurant closures.

(3) Consists of costs incurred in connection with the economic impact of the COVID-19 pandemic (see Note 4, COVID-19 Charges, in the accompanying notes to the consolidated financial statements for additional information).

(4) Consists of the non-cash portion of straight-line rent expense included in Occupancy expenses on the Consolidated Statements of Operations and Comprehensive Loss.

Liquidity and Capital Resources

Liquidity

On October 5, 2021, the Company completed its IPO, pursuant to which 10,877,850 shares of common stock were sold at the IPO price of $18.00 per share, which included the full exercise by the underwriters of their option to purchase up to an additional 1,418,850 shares of common stock. We received aggregate net proceeds of $182.1 million.

On October 6, 2021, FWR Holding Corporation (“FWR”), one of our indirect subsidiaries, entered into the New Credit Agreement, with Bank of America, N.A., which provides for (i) a $100.0 million term loan A facility that was drawn in full on October 6, 2021, and (ii) a $75.0 million revolving credit facility which was undrawn at December 26, 2021. The loans under the New Facilities mature on October 6, 2026. The New Term Facility is subject to amortization of principal, payable in quarterly installments on the last business day of each fiscal quarter, commencing on March 27, 2022, equal to (i) 2.50% of the original principal amount of the term loans in 2022, (ii) 5.00% of the original principal amount of the term loans in fiscal year ended December 31, 2023, (iii) 5.00% of the original principal amount of the term loans in fiscal year ended December 29, 2024, (iv) 7.50% of the original principal amount of the term loans in fiscal year ended December 28, 2025 and (v) 10.00% of the original principal amount of the term loans in fiscal year ended December 27, 2026. The remaining aggregate principal amount outstanding (together with accrued and unpaid interest on the principal amount) under the New Term Facility is payable at the maturity of the New Term Facility.

Borrowings under the New Facilities bear interest, at the option of FWR at either (i) the base rate plus a margin of between 125 and 200 basis points depending on the total rent adjusted net leverage ratio of FWR and its restricted subsidiaries on a

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consolidated basis (the “Total Rent Adjusted Net Leverage Ratio”) or (ii) the London interbank offer rate (“LIBOR”) plus a margin of between 225 and 300 basis points depending on the Total Rent Adjusted Net Leverage Ratio. In addition, an unused commitment fee of between 25 and 50 basis points on the undrawn commitments under the New Revolving Credit Facility will be paid, also depending on the Total Rent Adjusted Net Leverage Ratio of FWR and its restricted subsidiaries on a consolidated basis. The New Credit Agreement contains LIBOR fallback language, pursuant to which the New Credit Agreement may be amended to replace LIBOR with a secured overnight financing rate or another alternate benchmark rate upon the occurrence of certain LIBOR cessation events. See Note 10, Debt, in the accompanying notes to the consolidated financial statements for additional information.

The aggregate net proceeds from our IPO, the proceeds from the New Term Facility and cash on hand were used to repay in full the outstanding borrowings under our previous senior credit facilities, which were comprised of the Initial Term Loan Facility, Initial Delayed Draw Term Loan Facility, First Amendment Delayed Draw Term Facility, Second Amendment Delayed Draw Term Facility and Revolving Credit Facility (collectively, “Senior Credit Facilities”). A loss on debt extinguishment of $2.4 million was recorded in the fourth quarter of 2021 as a result of this repayment.

Our primary sources of liquidity are cash flow from operations, cash and cash equivalents, credit capacity under our New Facilities and proceeds from equity offerings, including our IPO. As of December 26, 2021, we had cash and cash equivalents of $51.9 million and $100.0 million in outstanding borrowings, excluding unamortized debt issuance costs and deferred issuance costs. As of December 26, 2021, we had unused borrowing capacity under our New Revolving Credit Facility of $75.0 million.

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 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.

We believe that our cash flow from operations, availability under our New Facilities 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.

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Summary of Cash Flows

The following table presents a summary of our cash provided (used in) by operating, investing and financing activities for 2021 and 2020:

Cash provided by operating activities increased during 2021 as compared to 2020 primarily due to the decrease in net loss of $47.6 million, which included an increase in the impact of non-cash charges of $34.3 million and the net decrease in operating assets and liabilities of $0.5 million. The increase in the impact of the non-cash charges was primarily driven by (i) the increase in stock based compensation expense, (ii) the loss on extinguishment of debt and (iii) the deferred income taxes provision. In addition, the net increase in operating assets and liabilities was as a result of (i) the timing of operational receipts and payments, (ii) higher accrued wages and (iii) the increase in gift card deferred revenues, partially offset by (iv) the payments for rent deferrals.

The increase in cash used in investing activities during 2021 as compared to 2020 was primarily as a result of curtailing new restaurant construction during the first half of 2020 due to the COVID-19 pandemic.

Cash used in financing activities during 2021 was primarily comprised of (i) the repayment of our outstanding Senior Credit Facilities of $291.1 million and (ii) payments of IPO costs of $4.9 million, partially offset by (iii) proceeds from our IPO, net of underwriting discounts and commissions of $182.1 million and (iv) proceeds from our New Facilities of $100.0 million. Cash provided by financing activities during 2020 was comprised of (i) proceeds from an offering of preferred shares totaling $40.0 million and (ii) the issuance of long-term debt, net of repayments made on our Senior Credit Facilities of $33.7 million.

Contractual Obligations

Material contractual obligations arising in the normal course of business primarily consist of operating and finance lease obligations, long-term debt, and purchase obligations. The timing and nature of these commitments are expected to have an impact on our liquidity and capital requirements in future periods. Refer to Note 10, Debt, in the accompanying consolidated financial statements for additional information relating to our long-term debt and Note 11, Leases, in the accompanying consolidated financial statements for additional information related to our operating and financing leases.

Purchase obligations include agreements related to the construction or remodeling of restaurant facilities, the purchase of food, beverages, paper goods and other supplies, equipment purchases, marketing-related contracts, software license commitments, technology and other service contracts in the normal course of business. These obligations are generally pursuant to short-term purchase orders at prevailing market prices and are recorded as liabilities when the related goods are received or services rendered. These commitments are cancellable and there are no material financial penalties associated with these commitments in the event of early termination.

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Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K, which have been prepared in accordance with GAAP. The preparation of these 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, 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. The accounting policies and estimates that we believe to be the most critical to an understanding of our financial condition and results of operations and that require the most complex and subjective management judgments are discussed below.

Goodwill and Indefinite-lived Intangibles

Goodwill and indefinite-lived intangibles are tested for impairment annually, on the first day of the fourth quarter of the fiscal year, or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Significant judgments are used to determine if an indicator of impairment has occurred. Such indicators could include negative operating performance of our restaurants, economic and restaurant industry trends, legal factors, significant competition or changes in our business strategy. Any adverse change in these factors could have a significant impact on the recoverability of our goodwill and indefinite-lived intangible assets and could have a material impact on our consolidated financial statements.

We have identified one reporting unit to which we have attributed goodwill. Management may elect to perform a qualitative assessment to determine whether it is more likely than not that the reporting unit and/or asset group is impaired. If the qualitative assessment is not performed, or if it is not more likely than not that the estimated fair value of the reporting unit and indefinite-lived intangible assets exceeds the respective carrying value, a quantitative analysis is required.

If the qualitative assessment is not performed or if we determine that it is not more likely than not that the fair value of the reporting unit exceeds the carrying value, the fair value of the reporting unit is calculated using the best information available, including market information (also referred to as the market approach) and discounted cash flow projections (also referred to as the income approach). The market approach estimates fair value by applying projected cash flow earnings multiples to the reporting unit’s operating performance. The multiples are derived from comparable publicly-traded companies with similar operating and investment characteristics. The income approach uses internal future cash flow estimates, which are influenced by revenue growth rates and operating margins, that are discounted using a weighted-average cost of capital that reflects current market conditions. We recognize an impairment loss when the carrying value of the reporting unit exceeds the estimated fair value.

In performing the quantitative assessment for indefinite-lived intangibles, we estimate the fair value of trade names and trademarks using the relief-from-royalty method, which requires assumptions related to projected sales, assumed royalty rates that could be payable if we did not own the trademarks and a discount rate. We recognize an impairment loss when the carrying value of the asset exceeds the estimated fair value.

During 2021, we elected to perform a qualitative assessment for our annual impairment review of goodwill and indefinite-lived intangibles to determine whether or not indicators of impairment exist. In considering the qualitative approach related to goodwill, we evaluated factors including, but not limited to, the COVID-19 pandemic, macro-economic conditions, market and industry conditions, the competitive environment, results of prior impairment tests, operational stability, the overall financial performance of the reporting unit and the impacts of the discount rates. Management also considers the specific future outlook for the reporting unit. As it relates to our trade names and trademarks, we evaluate similar factors from the goodwill assessment, in addition to impacts of potential changes to the assumed royalty rate. Based on the results of the qualitative assessment, which considered the financial performance, as well as the improved overall operating environment as compared to the previous quantitative assessment, no indicators of impairment were identified. Management concluded that impairment of goodwill and its indefinite-lived intangibles was not likely and as a result, was not required to perform a quantitative assessment. Changes in circumstances existing at the measurement date or at other times in the future, or in the numerous estimates associated with management’s judgments and assumptions made in

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assessing the fair value of our goodwill and indefinite-lived intangibles, could result in an impairment loss of a portion or all of our goodwill or indefinite-lived intangibles. We do not anticipate recording significant impairment charges in the next 12 months.

Long-lived assets and definite-lived intangible assets

Long-lived assets deployed at company-owned restaurants include (i) property, fixtures and equipment, (ii) operating lease right-of-use asset, net of the related operating lease liability and (iii) reacquired rights to the extent the restaurant had been previously acquired by the Company. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability is measured by a comparison of the carrying amount of an asset group to the estimated undiscounted future cash flows expected to be generated by the asset group. The comparison is performed at the lowest level of identifiable cash flows, which is primarily at the individual restaurant level. Significant judgement is used to determine the expected useful lives of long-lived assets and the estimated future cash flows, including projected sales growth and operating margins. If the carrying amount of the asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized.

Definite-lived intangible assets consist of franchise rights which arose from the purchase price allocation in connection with the Advent Acquisition and also include reacquired rights from the Company’s acquisitions of franchised restaurants. Definite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives and are also reviewed for impairment whenever events or change in circumstances indicate that the carrying amount of an asset may not be recoverable. Significant judgments are used to determine if an indicator of impairment has occurred. Such indicators may include, among others: negative operating performance of our restaurants, economic and restaurant industry trends, legal factors, significant competition or changes in our business strategy. Any adverse change in these factors could have a significant impact on the recoverability of these assets and the resulting impairment charge could have a material impact on our consolidated financial statements.

Recoverability of definite-lived intangible assets is measured by a comparison of the carrying amount of the asset group to the estimated undiscounted future cash flows expected to be generated by the asset group. If the total future undiscounted net cash flows are less than the carrying amount, this may be an indicator of impairment. An impairment loss is recognized when the asset’s carrying value exceeds its estimated fair value, which is generally estimated using discounted future cash flows expected from future use of the asset group. Management did not identify any triggering events in 2021 and no impairment charges were recorded in 2021.

Leases

We lease our restaurant facilities and corporate offices, as well as certain restaurant equipment under various non-cancelable agreements. At contract inception, we evaluate our leases to estimate their expected term which includes reasonably certain renewal options, and their classification as either operating leases or finance leases. Lease liabilities represent the present value of lease payments not yet paid. To determine the present value of the lease liability, we estimate the incremental borrowing rates corresponding to the reasonably certain lease term as our leases do not provide an implicit rate. Assumptions used in determining our incremental borrowing rate include a market yield implied by our outstanding secured term loans interpolated for various maturities using our synthetic credit rating, which is determined using a regression analysis of rated publicly-traded comparable companies and their financial data.

We assess the impairment of the right-of-use asset at the asset group level whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. Changes in these assumptions and management judgments may produce materially different amounts in the recognition of the right-of-use assets and lease liabilities.

Income Taxes

We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets or liabilities are recognized for the estimated future tax effects attributable to temporary differences between the carrying value and the tax basis of assets and liabilities as well as tax credit carryforwards. The estimates we make under this method include, among other items, depreciation and amortization expense allowable for tax purposes, credits for items such as taxes paid on reported employee tip income, effective rates for state and local income taxes and the deductibility of certain items. In addition, our annual effective income tax rate is adjusted as additional information becomes available during the reporting period.

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We recognize deferred tax assets for all deductible temporary differences to the extent that it is probable that taxable income will be available against which the deductible temporary differences can be utilized. A valuation allowance for deferred tax assets is provided when it is more likely than not that a portion of the deferred tax assets will not be realized. Potential for recovery of deferred tax assets is evaluated by estimating the future taxable profits expected, scheduling of anticipated reversal of taxable temporary differences, and considering prudent and feasible tax planning strategies. We continue to monitor and evaluate the rationale for recording a valuation allowance against deferred tax assets. As we increase earnings and utilize deferred tax assets, it is possible the valuation allowance could be reduced or eliminated.

Fair value of Common Stock and Stock-Based Compensation

Stock-based compensation expense is measured based on the award’s grant date fair value. Stock-based compensation expense related to time-based stock option awards is recognized as stock-based compensation expense on an accelerated recognition method over the requisite service period. Prior to our IPO, we had not recognized any stock-based compensation expense for our performance-based stock option awards as the satisfaction of the performance conditions were not considered probable. Upon consummation of the Company’s IPO in October 2021, certain performance-based stock option awards for which the performance and market conditions were satisfied as a result of the Company’s IPO, converted into time-based stock option awards with the related stock-based compensation expense to be recognized on an accelerated recognition method over the remaining service period. The performance-based stock option awards that did not convert into time-based stock option awards were canceled and unrecognized compensation expense for those canceled performance-based stock option awards was recognized on the date of the Company’s IPO. We account for forfeitures as they occur. See Note 16, Stock-Based Compensation, in the accompanying notes to the consolidated financial statements for additional information.

After the completion of the IPO, the fair value of our common stock and our stock-based awards’ grant date fair value is determined based on the Nasdaq closing price.

Prior to our IPO, given the absence of a public trading market for our common stock, the estimated fair value had been determined with input from management exercising reasonable judgment and considering several objective and subjective factors including: (i) third-party valuations of our common stock, (ii) a combination of the income approach and the market approach and (iii) general economic outlook including economic growth, inflation and interest rates.

In 2021, prior to the IPO, we determined the Company’s equity value using the probability weighted expected return method (“PWERM”), or the hybrid method. Under the hybrid method, multiple valuation approaches are used and then combined into a single probability weighted valuation using a PWERM, which considers the probability of an initial public offering and sale scenarios. The results of the valuation approaches were weighted based on a variety of factors, including: the current macroeconomic environment, current industry conditions and length of time since arms-length market transaction events. Additionally, a discount for lack of marketability was applied to account for the lack of access to an active public market. The resulting value was then allocated to outstanding equity using an option-pricing model. This process involved the use of estimates, judgments, and assumptions that are highly complex and subjective, such as those regarding our expected future revenue, expenses and future cash flows, discount rates, market multiples, the selection of comparable companies, and the probability of possible future events. The assumptions underlying these valuations represented management’s best estimate, which involved inherent uncertainties and the application of management’s judgment. As a result, if we had used significantly different assumptions or estimates, the fair value of our common stock and our stock-based compensation expense could have been materially different.

We estimated the fair value of stock option awards using the Black-Scholes valuation model, which requires certain assumptions and judgments. We based our volatility assumptions on the historical volatility of the selected peer group and we determined our expected term using the historical information of the selected peer group. These assumptions represented management’s best estimate, which involved inherent uncertainties and the application of management’s judgment. As a result, if we had used significantly different assumptions or estimates, the fair value of our common stock and our stock-based compensation expense could have been materially different.

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 consolidated financial statements included in Item 8 of Part II of this Annual Report on Form 10-K.

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