First Watch Restaurant Group Inc

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 29 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. The Company’s outstanding stock was purchased by funds affiliated with or managed by Advent International L.P. on August 21, 2017 (the “Advent Acquisition”).

The Company operates restaurants through its wholly owned subsidiary, First Watch Restaurants, Inc., and is a franchisor through its wholly owned subsidiary, First Watch Franchise Development Co. As of December 31, 2023 and December 25, 2022, the Company operated 425 company-owned restaurants and 366 company-owned restaurants, respectively, and had 99 franchise-owned restaurants and 108 franchise-owned restaurants, respectively.

Initial Public Offering

The Company completed its initial public offering (“IPO”) on October 5, 2021, in which the Company sold 10,877,850 shares of common stock, which included the underwriters’ full exercise of their option to purchase up to an additional 1,418,850 shares of common stock, at the initial public offering price of $18.00 per share. The Company received aggregate net proceeds of $182.1 million after deducting underwriting discounts and commissions of $13.7 million.

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 fiscal years ended December 31, 2023 (“Fiscal 2023”), December 25, 2022 (“Fiscal 2022”) and December 26, 2021 (“Fiscal 2021”) contained 53 weeks, 52 weeks and 52 weeks, respectively. The accompanying consolidated financial statements of the Company have been prepared by the Company in accordance with generally accepted accounting principles in the United States of America (“GAAP”).

Out of Period Adjustment

Management identified an error relating to the deferred tax asset associated with accrued compensation in Fiscal 2021. This out-of-period adjustment resulted in an increase of approximately $0.4 million in income tax expense on the Consolidated Statements of Operations and Comprehensive Income for Fiscal 2023. Management assessed the materiality of this error on the previously issued consolidated financial statements and concluded that the error was not material to the previously issued consolidated financial statements and the impact of correcting the error in Fiscal 2023 is not material to the consolidated financial statements as of and for the fiscal year ended December 31, 2023.

Principles of Consolidation

The Company’s consolidated financial statements include the accounts of its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

The Company does not hold ownership interests in any franchisee and does not provide financial support to franchisees. As a result, the Company’s franchise relationships are not variable interest entities and are not consolidated.

Use of Estimates

The preparation of 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 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.

Segment Reporting

Management determined the Company’s single operating segment on the basis that the Company’s Chief Operating Decision Maker (the “CODM”), the Chief Executive Officer, assesses performance and allocates resources at the Company's consolidated level. The Company does not have any customer that represents more than 10.0% of total revenues for the periods presented.

Business Combinations

The Company’s business combinations are accounted for using the purchase method of accounting. The consideration transferred in a business combination, identifiable assets acquired and liabilities assumed are measured at their estimated fair value as of the date of the acquisition. Goodwill is recognized for the amount by which the purchase consideration exceeds the fair values of the net assets acquired. Costs incurred in connection with business combinations are expensed as incurred. The results of operations of the businesses that were acquired are included as of their respective dates of acquisition.

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.

Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable inputs and the last is considered unobservable. The classification of a financial asset or liability within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

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.

Interest Rate Swaps

As an element of the Company’s interest rate risk management strategy, Management uses interest rate swaps. The intent of these instruments is to reduce cash flow exposure to variability in expected future interest rates on the Company’s debt. Management has elected to designate and qualify the interest rate swaps as cash flow hedges. As such, the instruments are recorded on the balance sheet at fair value. Thereafter, gains or losses on the instruments are recognized in equity as changes to Other Comprehensive Income (Loss) and subsequently reclassified into earnings at the time of the Company’s debt-interest payments. The Company has elected to record cash flows from interest rate swaps within operating activities, the same category as the items being hedged, in its Consolidated Statements of Cash Flows.

Cash and Cash Equivalents and Restricted Cash

Cash and cash equivalents include all cash balances and highly liquid investments with an original maturity of three months or less. Amounts receivable from credit card processors are considered cash equivalents because they are highly liquid and are typically converted to cash within three business days.

Amounts included in restricted cash represent those required to be set aside by a contractual agreement for the settlement of insurance claims.

Concentrations of Credit Risk

Financial instruments, which potentially subject the Company to concentrations of market and credit risk, are cash and cash equivalents and restricted cash. At times, cash balances may be in excess of the Federal Deposit Insurance Corporation insurance limits. The Company has not experienced any losses to date as a result of these risks. Management periodically assesses the quality of the financial institutions and believes that the risk related to these deposits is minimal.

Accounts Receivable

Accounts receivable consist primarily of receivables from franchisees, receivables from third-party delivery providers, receivables from gift card sales and vendor rebates. The Company believes all amounts to be collectible based on a variety of factors it evaluates, including historical experience, current economic conditions and other factors. Accordingly, no allowance for credit losses or doubtful accounts has been recorded as of December 31, 2023 and December 25, 2022.

Inventory

Inventory consists primarily of food and beverage costs and is stated at the lower of cost (determined by the first-in, first-out method) or net realizable value. Adjustments are not deemed necessary to reduce inventory to net realizable value due to the rapid turnover and utilization of inventory.

Leases

The Company’s restaurant facilities, corporate offices and certain restaurant equipment are leased under various agreements having initial terms expiring between 2024 and 2037. Restaurant facility leases generally have renewal periods offive to 20 years, exercisable at the option of the Company. At the commencement of each lease, an evaluation is performed to determine whether (i) the contract involves the use of property or equipment, (ii) the Company controls the use of the asset and (iii) the Company has the right to direct the use of the asset. Management determines the classification of lease contracts as operating or finance leases. The majority of the Company’s real estate leases are classified as operating leases and the majority of the Company’s equipment leases are classified as finance leases.

For operating leases with lease terms greater than twelve months, a lease liability is recognized for future fixed lease payments and a corresponding right-of-use asset is recognized representing the Company’s right to use the underlying asset during the lease term. The lease liability is initially measured as the present value of the future fixed lease payments that will be made over the lease term using the Company’s incremental borrowing rate as there are no implicit rates provided in the lease contracts. The Company’s incremental borrowing rate is based on a market yield implied by the Company’s outstanding secured term loan interpolated for various maturities using the Company’s synthetic credit rating, which was determined using a regression analysis of rated publicly-traded comparable companies and their financial data. Occupancy expense, which includes the effects of free rent periods and rent escalation clauses within certain of the Company’s leases, is recognized on a straight-line basis over the lease term. Tenant improvement allowances are amortized on a straight-line basis over the term of the lease as a reduction of lease expense. The lease term, which commences on the date the Company has the right to control the use of the property, includes the Company’s options to extend the lease to the extent it is reasonably certain that the renewal options will be exercised.

Leases with indexed rent escalation clauses are recorded using the index that existed at lease commencement or upon the latest modification requiring remeasurement. Subsequent changes in the index are recorded as variable lease expense. Contingent rent payments, which are based on a percentage of sales for certain restaurant facilities, are recorded as variable lease expense when the Company determines that such sales levels will be achieved. In addition to fixed lease payments, certain of the Company’s real estate leases also require payment of a proportionate share of property taxes, insurance and maintenance costs, which are expensed as incurred in the Consolidated Statements of Operations and Comprehensive Income (Loss) and future variable rent obligations are not included within the lease liabilities on the Consolidated Balance Sheets.

The operating lease right-of-use asset is measured at the amount of the lease liability with adjustments for (i) rent prepayments made prior to or at lease commencement, (ii) landlord incentives and (iii) favorable and unfavorable leasehold positions. The depreciable life of an operating lease right-of-use asset is limited by the lease term. The Company’s leases do not contain any material residual value guarantees or material restrictive covenants.

Fixed lease and non-lease components of the Company’s restaurant facility leases are accounted for as a single lease component. Leases with an initial term of 12 months or less are not recorded on the Consolidated Balance Sheets, however, they are recognized on a straight-line basis over the lease term in the Consolidated Statements of Operations and Comprehensive Income (Loss).

Finance lease liabilities and corresponding finance lease assets are recognized at an amount equal to the present value of the minimum lease payments over the lease term. The amortization of finance lease assets is recognized over the shorter of the lease term or useful life of the underlying asset within Depreciation and amortization. The interest expense related to finance leases, including any variable lease payments, is recognized in Interest expense. Finance lease assets are classified in Property, fixtures and equipment, net and current maturities and long-term portions of finance lease liabilities are classified within Current portion of long-term debt and Long-term debt, net, respectively.

Property, Fixtures and Equipment

Property, fixtures and equipment, including capitalized software, are stated at cost less accumulated depreciation. Refurbishments and improvements that increase the productive capacity or extend the useful life of assets are capitalized and depreciated over their estimated useful lives. Repair and maintenance costs are expensed as incurred. Leasehold improvements are depreciated over the shorter of their useful life or the lease term. The carrying amount of assets sold, replaced or retired and the related accumulated depreciation are eliminated at the time of disposal and any resulting gains and losses on disposal are recognized in the Consolidated Statements of Operations and Comprehensive Income (Loss).

Direct internal costs associated with the acquisition, development, design and construction of company-owned restaurants are capitalized as these costs have a future benefit to the Company. Once a restaurant opens, these costs are depreciated and recorded in Depreciation and amortization. Direct internal costs of $1.0 million and $0.7 million were capitalized in Fiscal 2023 and Fiscal 2022, respectively.

Depreciation is computed using the straight-line method over the following estimated useful lives:

Goodwill and Indefinite-lived Intangible Assets

Goodwill and indefinite-lived intangible assets are evaluated 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. The Company hasone reporting unit for goodwill impairment testing purposes.

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.

The fair value of the indefinite-lived intangibles is determined through a relief from royalty method using certain unobservable inputs that fall within Level 3 of the fair value hierarchy. The respective carrying values are compared to the related estimated fair values and an impairment loss is recognized in an amount equal to the excess of the carrying value over estimated fair values.

Management performed a qualitative annual impairment assessment for goodwill and indefinite-lived intangible assets as of the first day of the fourth quarter of Fiscal 2023 and Fiscal 2022 and concluded that impairment of both goodwill and indefinite-lived intangible assets was not more likely than not. As a result, a quantitative assessment was not required.

Definite-Lived Intangible Assets

Intangible assets with definite lives 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 over their estimated useful lives and are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

When evaluating the carrying amount for recoverability, the total future undiscounted net cash flows expected to be generated by the asset are compared to the carrying amount. 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. Fair value is generally estimated using a discounted cash flow model using unobservable inputs that fall within Level 3 of the fair value hierarchy. No impairment loss was recorded for definite-lived intangible assets in Fiscal 2023, Fiscal 2022 and Fiscal 2021.

Impairment Assessment of Long-lived 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.

When circumstances indicate that the carrying value may not be recoverable, an evaluation for impairment is performed at the lowest level of identifiable cash flows, which is at the individual restaurant level. If the total future undiscounted net cash flows are less than the carrying value of the long-lived assets at the individual restaurant level, the fair value is determined based on discounted future net cash flows expected to result from the use and eventual disposition of the assets, which are unobservable inputs that fall within Level 3 of the fair value hierarchy. An impairment loss is recognized in an amount equal to the excess of the carrying value over the estimated fair value.

Insurance Reserves

The Company is self-insured primarily for employee group health claims and for workers’ compensation in Ohio. The Company holds stop-loss insurance which funds individual health claims in excess of $125,000 per occurrence and workers’ compensation claims in Ohio in excess of $500,000 per occurrence annually. The Consolidated Statements of Operations and Comprehensive Income (Loss) include expenses related to the costs of claims reported and an estimate of claims incurred but not reported for health and general liability claims. In addition, the Company’s insurance program includes specific retention levels or per-claim deductibles with respect to general liability.

Estimated unpaid claims and other insurance liabilities of $2.3 million and $1.5 million were recorded within Accrued liabilities and Other long-term liabilities as of December 31, 2023 and December 25, 2022, respectively.

Revenue Recognition

Revenues from food and beverage sales are reported, net of discounts and taxes. For in-restaurant dining and take-out sales, revenues are recognized when payment is tendered. For delivery sales made through the Company’s mobile application and website, the Company controls the delivery services and recognizes revenue, including delivery fees, when the delivery partner transfers the food and beverage to the customer. With respect to sales made through the delivery partner’s mobile application or website, the Company recognizes revenue, excluding delivery fees collected by the delivery partner, when control of the food and beverage is transferred to the delivery partner. Payment is received from the delivery partner subsequent to the transfer of food and beverage and the payment terms are short-term.

Franchise revenues include initial franchise fees and ongoing sales-based royalty and system fund contributions, which are used for advertising, marketing and public relations programs and materials. The license granted to develop and operate a restaurant is the distinct performance obligation that is transferred to the franchisee. Ancillary promised services, such as training, which are not considered distinct within the context of the franchise agreement, are combined with the franchise license and are consideredone distinct performance obligation. Payments for initial franchise fees are received either upon execution of the franchise agreement and/or upon opening of the restaurant. These payments are deferred and recognized as revenue throughout the contractual term of the related franchise agreement. Unamortized deferred franchise fees are recognized as revenue upon the termination of franchise agreements with franchisees. The short-term and long-term unamortized portion of these liabilities are included in Deferred revenues and in Other long-term liabilities, respectively.

Royalty and system fund contributions from franchisees are based on a percentage of sales and are recognized as revenue in the period the sales occurred.

Gift cards are sold at restaurants and certain retail venues. Deferred revenues include liabilities established for the value of the gift cards when sold. Revenue is recognized from gift card sales upon redemption by the customer. Management estimates the amount of gift cards for which the likelihood of redemption is remote, referred to as “breakage,” using historical gift card redemption patterns. The estimated breakage, less an administrative fee, is recognized over the expected period of redemption as the remaining gift card values are redeemed, which is generally over a period oftwo years. Utilizing this method, Management estimates both the breakage and the time period of redemption. If actual redemption patterns vary from these estimates, actual gift card breakage income may differ from the amounts recorded. Estimates of the redemption period and breakage rate applied are updated periodically. Gift card liabilities are included in Deferred revenues.

Food and Beverage Costs

The components of food and beverage costs at company-owned restaurants fluctuate directly with sales volumes and are impacted by changes in commodity prices or promotional activities.

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.

Consideration Received from Vendors

The Company receives consideration from certain vendors for volume rebates and allowances. The Company accounts for consideration from a vendor as a reduction of the purchase price of the goods or services acquired from the vendor.

Advertising Costs

Advertising costs are recognized as incurred or, in the case of advertisements, when the advertisement occurs. Advertising costs were $7.2 million, $6.4 million and $4.8 million during Fiscal 2023, Fiscal 2022 and Fiscal 2021, respectively, and are included in General and administrative expenses, Other restaurant operating expenses and Pre-opening expenses.

Debt Discount and Deferred Issuance Costs

Debt discount and deferred issuance costs incurred in connection with the issuance of long-term debt are recorded as reductions of long-term debt and are amortized over the term of the related debt. Amortization expense of debt discount and deferred issuance costs is included in Interest expense.

Income Taxes

Income taxes are accounted for under the asset and liability method of accounting. 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. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applicable in the years in which the differences are expected to be recovered or settled. Changes in deferred tax assets or liabilities are recognized in Income tax expense.

Deferred tax assets are recognized 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. Realization of deferred tax assets is dependent upon the availability of taxable income and 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. In the assessment for realization of deferred tax assets, Management considers all sources of taxable income including (i) taxable income in any available carry back period, (ii) scheduling of anticipated reversal of taxable temporary differences, (iii) tax-planning strategies and (iv) taxable income expected to be generated in the future other than from reversing temporary differences and carryforwards. Management continues to evaluate the rationale for recording a valuation allowance on its deferred tax assets and as the Company increases earnings and utilizes deferred tax assets, it is possible the valuation allowance could be reduced or eliminated.

Interest and penalties, when incurred, are recognized in Other (expense) income, net.

Stock-Based Compensation

Stock-based compensation expense is recognized for stock option awards granted and is based on the fair value of the stock option awards on the date of grant. The fair value of stock option awards is determined using the Black-Scholes option pricing model. The fair value of performance-based stock option awards is recognized as expense when the achievement of the performance condition is probable. Forfeitures of stock option awards are recognized as they occur. Determining the fair value of stock option awards at the grant date requires judgment, including estimating the expected term that the stock option awards will be outstanding prior to exercise, volatility, dividend yield and risk-free interest rate. Stock-based compensation expense is included in General and administrative expenses. Stock option exercises are settled with authorized but unissued shares of the Company’s common stock.

Fair Value of Common Stock

In Fiscal 2021, prior to the IPO, the Company’s equity value was determined 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 Management 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.

Summary of Recently Issued Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In the first quarter of Fiscal 2023, the Company amended its Credit Agreement to replace the London interbank offer rate (“LIBOR”) with a secured overnight financing rate (“SOFR”) pursuant to the terms and LIBOR fallback language in the Credit Agreement and we adopted the Financial Accounting Standards Board (“FASB”) ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). The guidance provides temporary optional expedients and exceptions to the current guidance on contract modifications and hedge accounting to ease the financial reporting burden related to the expected market transition from LIBOR and other interbank offered rates to alternative reference rates. The adoption of the new guidance did not have a material impact on the Company’s financial statements.

New Accounting Pronouncements

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280), Improvements to Reportable Segment Disclosures, which requires incremental disclosures related to a public entity’s reportable segments but does not change the definition of a segment, the method for determining segments, or the criteria for aggregating operating segments into reportable segments. The new guidance requires that a public entity disclose, on an annual and interim basis, disaggregated expense information that is regularly provided to the chief operating decision maker (“CODM”) and included within each reported measure of segment profit or loss. The disclosures are also required for public entities that have a single reporting segment. The new guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024 and should be adopted retrospectively. Early adoption is permitted. Management is currently evaluating the impact of this new standard.

In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures, which establishes new income tax disclosure requirements including disaggregated information about a reporting entity’s effective tax rate reconciliation as well as disaggregated information on income taxes paid. The new guidance is effective for fiscal years beginning after December 15, 2024 and should be applied on a prospective basis with the option to apply the standard retrospectively. Early adoption is permitted. Management is currently evaluating the impact of this 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.

3. Business Acquisitions

During Fiscal 2023, the Company acquired substantially all the assets associated with 23 franchise operated First Watch restaurants. The purchase price was allocated to the fair value of assets acquired and liabilities assumed, which are based on preliminary valuations and are subject to adjustment as additional information is available. The details of each acquisition are as follows:

4. Revenues

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

Changes in deferred gift card contract liabilities were as follows:

Gift cards are combined in one homogeneous pool and are not separately identifiable. As such, the revenue recognized consists of gift cards that were part of the deferred revenue balance at the beginning of the period as well as gift cards that were issued during the period.

Changes in deferred franchise fee contract liabilities were as follows:

Revenues recognized disaggregated by type were as follows:

Deferred revenues as of December 31, 2023 are expected to be recognized as follows:

5. Accounts Receivable

Accounts receivable consisted of the following:

6. Goodwill

The changes in the carrying value of goodwill were as follows:

7. Intangible Assets, Net

Intangible assets, net consisted of the following:

Total amortization expense related to definite-lived intangible assets was $1.5 million, $1.0 million and $1.0 million in Fiscal 2023, Fiscal 2022 and Fiscal 2021, respectively.

Estimated future amortization of definite-lived intangible assets as of December 31, 2023 is as follows:

8. Property, Plant and Equipment

Depreciation expense was $39.7 million, $33.3 million and $31.3 million during Fiscal 2023, Fiscal 2022 and Fiscal 2021, respectively.

The Company recognized impairment losses of $0.5 million in Fiscal 2023 which primarily related to the long-lived assets of two company-owned restaurants due to their approved closures. In Fiscal 2023, the Company also recognized $0.8 million in loss on disposals primarily related to write-offs of assets retired as a result of replacement of assets.

In Fiscal 2022 and Fiscal 2021, there were no impairment losses recorded. Loss on disposals of assets of $0.9 million and $0.4 million recognized in Fiscal 2022 and Fiscal 2021, respectively, primarily related to the write-off of assets retired as a result of restaurant closures or replacements of assets.

As of December 31, 2023 and December 25, 2022, Property, fixtures and equipment, net included $1.2 million in land related to sale and leaseback transactions accounted for as financing obligations.

9. Accrued Liabilities

Accrued liabilities consisted of the following:

10. Debt

Long-term debt, net consisted of the following:

Credit Facilities

FWR Holding Corporation, (“FWR”), an indirect subsidiary of the Company, is party to that certain Credit Agreement, dated October 6, 2021, by and among FWR, as the borrower, AI Fresh Parent, Inc., a Delaware corporation and indirect subsidiary of the Company (“Holdings”), the lenders party thereto and Bank of America, N.A., as administrative agent and collateral agent (the “Administrative Agent”) which, as of December 31, 2023, provides for (i) a $100.0 million term loan A facility (the “Term Facility”) and (ii) a $75.0 million revolving credit facility (the “Revolving Credit Facility” and, together with the Term Facility, collectively, the “Credit Facilities”). As of December 31, 2023, the Credit Facilities mature on October 6, 2026.

On February 24, 2023, the Company entered into that certain Amendment No. 1 to the Credit Agreement (the “First Amendment”), by and among FWR, the lenders party thereto and the Administrative Agent, which amended the Credit Agreement in order to replace LIBOR with SOFR, and effective as of March 27, 2023, borrowings under the Credit Facilities bear interest, at the option of FWR at either (i) the alternate 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 consolidated basis (the “Total Rent Adjusted Net Leverage Ratio”) or (ii) SOFR plus a credit spread adjustment of 10 basis points plus a margin of between 225 and 300 basis points depending on the Total Rent Adjusted Net Leverage Ratio.

Prior to March 27, 2023, borrowings under the Credit Facilities bore interest at the option of FWR at either (i) the base rate plus a margin of 125 and 200 basis points depending on the Total Rent Adjusted Net Leverage Ratio or (ii) 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 will be paid on the undrawn commitments under the Revolving Credit Facility, also depending on the Total Rent Adjusted Net Leverage Ratio.

As of December 31, 2023, the 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)2.5% of the original principal amount of the term loans in fiscal year ended December 25, 2022, (ii)5.0% of the original principal amount of the term loans in fiscal year ended December 31, 2023, (iii)5.0% of the original principal amount of the term loans in fiscal year ended December 29, 2024, (iv)7.5% of the original principal amount of the term loans in fiscal year ended December 28, 2025 and (v)10.0% 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 Term Facility is payable at the maturity of the Term Facility.

Principal payments due on the outstanding debt, excluding finance lease liabilities and financing obligations, as of December 31, 2023 are as follows:

Refer to Note 21, Subsequent Events, for information about the amendment to the Credit Agreement that was executed on January 5, 2024.

Fair Value of Debt

The estimated fair value of the outstanding debt, excluding finance lease obligations and financing obligations, is classified as Level 3 in the fair value hierarchy and was estimated using discounted cash flow models, market yield and yield volatility. The following table includes the carrying value and fair value of the Company’s debt as of the periods indicated:

Letter of Credit

The Company utilizes standby letters of credit to satisfy workers’ compensation and general liability insurance requirements. The contract amount of the letters of credit approximates fair value. As of December 31, 2023 and December 25, 2022, the open letters of credit totaled approximately $1.1 million and $0.2 million, respectively, and there wereno draws against the letters of credit. The Company pays participation fees for the letters of credit based on a varying percentage of the amount not drawn.

Debt Covenants

The Credit Facilities are guaranteed by all of FWR’s wholly-owned domestic restricted subsidiaries, subject to customary exceptions, and by AI Fresh Parent, Inc., a Delaware corporation and the direct parent company of FWR (“Holdings”), and are secured by associated collateral agreements that pledge a lien on substantially all of FWR’s and each guarantor’s assets, including fixed assets and intangibles, in each case, subject to customary exceptions.

Under the Credit Agreement, FWR (and in certain circumstances, Holdings) and its restricted subsidiaries are subject to customary affirmative, negative and financial covenants, maintenance of certain ratios, restrictions on additional indebtedness and events of default for facilities of this type (with customary grace periods, as applicable, and lender remedies). FWR was in compliance with covenants under the Credit Agreement as of December 31, 2023 and December 25, 2022.

Note Payable

In October 2022, the Company entered into an agreement for the financing of insurance premiums in a total amount of approximately $1.9 million. The note payable bore interest of 6.04% and was payable in monthly installments of $0.2 million through September 30, 2023. The note payable was paid in full in Fiscal 2023.

11. Interest Rate Swaps

On June 23, 2023, the Company entered into variable-to-fixed interest rate swaps to hedge a portion of the cash flows of the Company’s variable rate debt. The interest rate swaps have an aggregate notional amount of $90.0 million and mature on October 6, 2026. Under the terms of the interest rate swaps, the Company will pay a weighted average fixed rate of 4.16% on the notional amount and will receive payments from the counterparties based on the three-month SOFR rate.

The fair value measurement of the interest rate swaps was based on the contractual terms and used observable market-based inputs. The interest rate swaps were valued using a discounted cash flow analysis on the expected cash flows using observable inputs including interest rate curves and credit spreads. Although the majority of the inputs used to value the instruments fall within Level 2 of the fair value hierarchy, the credit valuation adjustments utilized Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and the counterparties. The Company has determined that the impact of the credit valuation adjustments was not significant to the overall valuation. As a result, the derivative was classified as Level 2 of the fair value hierarchy.

Amounts reported in Other comprehensive income (loss) related to the interest rate swaps will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the fiscal year ended December 31, 2023, a total of $0.5 million was reclassified from Other comprehensive income (loss) as a reduction to interest expense. Over the next 12 months, the Company estimates that $0.5 million will be reclassified as a reduction to interest expense.

12. Leases

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

(1) Excludes all variable lease expense.

The components of lease expense were as follows:

(1) Includes contingent rent expense of $2.1 million and $1.6 million and $1.1 million during Fiscal 2023, Fiscal 2022 and Fiscal 2021, respectively.

Supplemental cash flow information related to leases was as follows:

Supplemental information related to leases was as follows:

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

As of December 31, 2023, future minimum lease payments for operating and finance leases consisted of the following:

(1) Excludes approxim ately $109.5 million of exec uted operating leases that have not commenced as of December 31, 2023.

Sale-Leaseback Transactions

In 2015, Management entered into an agreement relating to the sale and leaseback of the land for use in restaurant operations and received cash proceeds of $3.1 million. As the Company had continuing involvement with the property, the sale of the land did not qualify for sale accounting. As a result, the cash proceeds were recorded as a financing obligation. The balance of the financing obligation was $3.1 million as of December 31, 2023 and December 25, 2022.

13. Transaction Expenses (Income), Net

Transaction expenses (income), net consisted of the following:

During Fiscal 2023, $2.1 million of costs were incurred in connection with the acquisition of certain franchise-owned restaurants, which was partially offset by the gain recognized from the lease modification ofone company-owned restaurant.

During Fiscal 2023, $1.0 million of costs were incurred by the Company in connection with underwritten secondary public offerings of the Company’s common stock by entities affiliated with our majority owner, Advent International L.P., (“Secondary Offerings”). During Fiscal 2022, total costs of $2.0 million were incurred by the Company in connection with Secondary Offerings as well as for the Registration Statement on Form S-3 that allows the Company to sell up to 5,000,000 shares of common stock from time to time in one or more offerings.

The Company revalued the contingent consideration liability initially recognized in connection with the Advent Acquisition (see Note 14, Income Taxes, for additional information) and recorded losses of $0.2 million and $0.8 million in Fiscal 2022 and Fiscal 2021, respectively. There was no revaluation adjustment recorded for the contingent liability in Fiscal 2023.

A gain on lease modification of $2.0 million was recognized in Fiscal 2021 in connection with a lease termination for the redevelopment of a restaurant facility by a landlord. Pursuant to the agreement, the Company received $1.0 million in December 2021 and received an additional $1.0 million after vacating the leased restaurant facility in December 2022.

14. Income Taxes

Income tax expense consisted of the following:

A reconciliation of the federal statutory income tax rate to the Company’s effective income tax rate is as follows:

The effective income tax rate for Fiscal 2023, Fiscal 2022 and Fiscal 2021 was different than the blended federal and state statutory rate mainly due to (i) the change in the valuation allowance, (ii) the benefit of tax credits for FICA taxes on certain employees’ tips, (iii) impacts of executive stock-based compensation and (iv) non-deductible costs associated with the Secondary Offerings and the Registration Statement on Form S-3.

The effective income tax rate for Fiscal 2021 was also different than the blended federal and state statutory rate as a result of the pre-vesting forfeiture of performance-based stock option awards for which the market condition was not satisfied upon the Company’s IPO (see Note 17, Stock-Based Compensation, for additional information).

The components of deferred tax assets and liabilities were as follows:

Tax Carryforwards

The amount and expiration dates of tax carryforwards as of December 31, 2023 are as follows:

The Company also has state net operating loss carryforwards of $26.0 million.

There were certain federal loss carryforward, state loss carryforward and general business credits that were accumulated from operations prior to the Advent Acquisition in August 2017. To the extent that these are utilized to reduce taxes payable, the Company is required to pay the previous stockholders an amount equal to tax savings. This requirement lapses with respect to any tax year, or portion thereof, beginning after December 31, 2024, or if a change in control event occurs. In connection with the Advent Acquisition, a contingent consideration liability of $1.2 million was initially recognized for expected payments to be made to the previous stockholders. As of December 31, 2023, the contingent consideration liability was $0.9 million, of which $0.7 million was recorded within Accrued liabilities and $0.2 million was recorded within Other long-term liabilities. As of December 25, 2022, the contingent consideration liability was $1.2 million, of which $0.6 million was recorded within Accrued liabilities and $0.6 million was recorded within Other long-term liabilities.

Valuation Allowance

Based upon an evaluation of the Company's deferred tax assets, Management has recognized a valuation allowance of $48.1 million and $41.8 million as of December 31, 2023 and December 25, 2022, respectively. The valuation allowance primarily relates to the Company’s federal tax credit carryforwards that are not expected to be realized prior to the statutory expiration of the carryforward.

Management continues to monitor and evaluate the rationale for recording a valuation allowance for deferred tax assets. As the Company’s future taxable earnings increase and deferred tax assets are utilized, it is possible that a portion of the valuation allowance will no longer be needed. Release of any portion of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense in the period of the release. The timing and amount of any release related to future taxable income is currently indeterminable. During the year ended December 31, 2023, a release of the valuation allowance related to certain state loss carryforwards decreased income tax expense by approximately $1.2 million.

Changes in the deferred tax asset valuation allowance were as follows:

The Company is subject to examination by federal, state and local jurisdictions, where applicable. As of December 31, 2023, the tax years that remain subject to examination by major tax jurisdictions under the statute of limitations are from the year 2013 and forward.

15. Stockholders’ Equity

The Company is authorized to issue 300,000,000 common stock shares with a par value of $0.01 per share and 10,000,000 preferred stock shares with a par value of $0.01 per share pursuant to the Company’s Amended and Restated Certificate of Incorporation.

Each share of common stock entitles the holder toone vote for each share of common stock held and common stockholders will not have cumulative voting rights. Common stockholders are entitled to receive dividends, as and if declared by the board of directors. In addition, all common stockholders are entitled to share equally on a share-for-share basis in any assets available for distribution to common stockholders upon liquidation, dissolution, or winding up of the Company after payment is made to the preferred stockholders.

During Fiscal 2023, funds managed by Advent International L.P. sold 3,500,000 and 3,000,000 shares through Secondary Offerings that were completed on May 18, 2023 and June 13, 2023, respectively. The selling stockholders sold an additional 525,000 and 450,000 shares of common stock on May 18, 2023 and July 3, 2023, respectively, pursuant to the terms of the underwriter’s option associated with each secondary public offering. All net proceeds from the sale of the shares of common stock were distributed to the selling stockholders.

During Fiscal 2022, funds managed by Advent sold 4,500,000 shares of the Company’s common stock through a Secondary Offering. The selling stockholders sold an additional 675,000 shares of common stock on October 6, 2022 pursuant to the terms of the underwriters option associated with the Secondary Offering. All net proceeds from the sale of the shares of common stock were distributed to the selling stockholders.

No cash dividends were declared or paid in Fiscal 2023, Fiscal 2022 and Fiscal 2021.

16. Defined Contribution Plan

The Company sponsors a defined contribution 401(k) savings plan (“401(k) Plan”) which requires the Company to match contributions for participants.

In Fiscal 2023 and Fiscal 2022,50% and 25%, respectively, of the first 6% of the employees’ wages are contributed by the Company into the 401(k) Plan.

The 401(k) Plan also allows for additional profit-sharing contributions by the Company at the sole discretion of Management.

All Company contributions vest over afive-year period. Total expense for the Company’s contributions to the 401(k) Plan was $1.1 million, $0.6 million and $0.5 million in Fiscal 2023, Fiscal 2022 and Fiscal 2021, respectively.

17. Stock-Based Compensation

Stock Option Awards

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.

2021 Equity Plan

The number of shares of common stock reserved for issuance under the 2021 Equity Plan is 5,218,292 common shares (“Share Reserve”) at December 31, 2023. The number of shares of common stock that may be issued under the 2021 Equity Plan will automatically increase on the first day of each fiscal year, beginning on December 26, 2022 and continuing for each fiscal year until, and including, the fiscal year ending on (and including) December 29, 2030, equal to the least of (i)2.0% of the total number of shares of common stock actually issued and outstanding on the last day of the preceding fiscal year, (ii) a number of shares of common stock determined by the board of directors; and (iii) the number of shares of common stock equal to the Share Reserve. If any award granted under the 2021 Equity Plan is cancelled, expired, forfeited, or surrendered without consideration or otherwise terminated without delivery of the shares to the participant, then such unissued shares will be returned to the 2021 Equity Plan and be available for future awards under the 2021 Equity Plan. Shares that are withheld from any award in payment of the exercise, base or purchase price or taxes related to such an award, not issued or delivered as a result of the net settlement of any award, or repurchased by the Company on the open market with the proceeds of a stock option will be deemed to have been delivered under the 2021 Equity Plan and will not be available for future awards under the 2021 Equity Plan. There were no stock option awards granted under the 2021 Equity Plan during Fiscal 2023. The stock option awards granted in Fiscal 2022 vest over athree-year requisite service period from the date of grant and expire 10 years after the grant date. A total of 543,270 restricted stock units (“RSU”) were granted, at a value equal to the market price of the Company’s common stock on the date of grant, which will vest ratably over a period of 1 to 3 years from grant date. Stock-based compensation expense is recognized on a straight-line recognition method over the requisite service period.

2017 Equity Plan

The 2017 Equity Plan authorizes stock-based awards to be granted for up to 6,138,240 shares of common stock. The awards granted under the 2017 Equity Plan consisted of non-qualified stock options that generally vest based over afive-year requisite service period from the date of grant (the “time-based option awards”), as well as upon the occurrence of certain events and if certain market conditions were achieved, the (“performance-based option awards”). Stock-based compensation expense related to the stock option awards issued under the 2017 Plan is recognized on an accelerated recognition method over the requisite service period. All stock options have an exercisable life of no more than 10 years from the date of grant. No awards were granted under the 2017 Equity Plan during Fiscal 2023 and Fiscal 2022 and the Company does not intend to grant any further awards under the 2017 Equity Plan.

Modification of Performance-Based Option Awards - 2017 Equity Plan

On August 31, 2021, the Company’s board of directors amended the 2017 Equity Plan such that the performance-based option awards that convert into time-based option awards upon an initial public offering no longer vest over a period ofthree years, but instead vest one-third (1/3rd) on each of the firsttwo anniversaries of an initial public offering and one-third (1/3rd) on the 273rd day following the second anniversary of an initial public offering. This was accounted for as a modification, resulting in a new fair value for all the performance-based option awards using an option-pricing model as of the modification date.

On September 19, 2021, the Company’s board of directors modified performance-based option awards that contained a market condition granted under the 2017 Equity Plan, such that the vesting terms for one such tranche were amended to waive the market condition. Accordingly, upon the Company’s IPO, such tranche converted into time-based option awards and vest one-third (1/3rd) on each of the firsttwo anniversaries of the Company’s IPO and one-third (1/3rd) on the 273rd day following the second anniversary of the Company’s IPO. This was accounted for as a modification resulting in a new fair value using the option-pricing model for such performance-based option awards as of the modification date.

On September 19, 2021, the Company’s board of directors modified the terms of performance-based option awards granted under the 2017 Equity Plan to the Company’s Chairman Emeritus. The modification accelerated the vesting period of the performance-based option awards that convert into time-based option awards upon an initial public offering such that they no longer vest one-third (1/3rd) on each of the firsttwo anniversaries of an initial public offering and one-third (1/3rd) on the 273rd day following the second anniversary of an initial public offering, but instead will vest on August 1, 2022. Additionally, the exercise period of these time-based and performance-based vested option awards was modified such that any vested option may be exercised at any time prior to the 10th anniversary of the original grant date. These actions were accounted for as modifications and resulted in an increase of $0.3 million to the fair value of these awards.

Upon the consummation of the Company’s IPO in October 2021, certain performance-based option awards converted into time-based option awards and stock compensation expense of $2.4 million was recognized in the fourth quarter of Fiscal 2021. The remaining expense is being recognized on an accelerated recognition method over the remaining service period. An immediate one-time charge of $5.6 million was recognized upon closing of the IPO, which included (i) the expense from the date of the modifications through the IPO date and (ii) the expense related to performance-based option awards for which the market condition was not satisfied upon the IPO.

A summary of stock option activity during Fiscal 2023 is as follows:

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.

A summary of the non-vested stock option activity during Fiscal 2023 is as follows:

The weighted average grant date fair value of options granted during Fiscal 2022 and Fiscal 2021 was $6.81 and $6.35, respectively. The total fair value of stock options vested during Fiscal 2023, Fiscal 2022 and Fiscal 2021 was $7.1 million, $7.4 million and $0.9 million, respectively.

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 were as follows:

The Company does not have sufficient historical stock option exercise activity and therefore the expected term of stock options granted in Fiscal 2022 was estimated using the simplified method, which represents the mid-point between the vesting period and the contractual term for each grant. In Fiscal 2021, the expected term of stock option awards had been determined based on data from publicly traded companies. For Fiscal 2022 and Fiscal 2021, the expected volatility of stock options is based on the historical volatilities of a set of publicly traded peer companies in a similar industry as the Company lacks company-specific historical or implied volatility information. 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

Stock-Based Compensation Expense

Stock-based compensation expense was $7.6 million, $10.4 million and $8.6 million during Fiscal 2023, Fiscal 2022 and Fiscal 2021, respectively.

The total related income tax benefit for stock-based compensation expense was $0.6 million, $2.1 million and $0.9 million for Fiscal 2023, Fiscal 2022 and Fiscal 2021, respectively.

Cash received from stock options exercised was $5.8 million and $1.4 million for Fiscal 2023 and Fiscal 2022, respectively. The tax benefit realized from stock option exercises and vesting of restricted stock units was $1.6 million and $0.3 million in Fiscal 2023 and Fiscal 2022, respectively. The total intrinsic value of stock options exercised was $5.7 million and $1.1 million during Fiscal 2023 and Fiscal 2022, respectively. There wereno stock option exercises in Fiscal 2021. The total intrinsic value of restricted stock units that vested in Fiscal 2023 was $0.7 million.

Unrecognized Stock-Based Compensation Expense

The following represents unrecognized stock-based compensation expense and the remaining weighted average vesting period as of December 31, 2023:

18. Commitments and Contingencies

Purchase Commitments

We enter into various purchase obligations in the ordinary course of business, generally of a short-term nature. These purchase obligations include commitments for inventory purchases, marketing-related contracts, corporate sponsorships, software/license commitments and service contracts. We also enter into long-term, exclusive contracts with vendors to supply us with certain goods and services, however, they generally do not include firm minimum purchase commitments.

Unconditional Purchase obligations

The Company has entered into certain off–balance sheet commitments that require the future purchase of goods or services

(“unconditional purchase obligations”). The Company’s unconditional purchase obligations primarily consist of payments for subscriptions and marketing-related platforms. Future payments under noncancellable unconditional purchase obligations with a remaining term in excess of one year as of December 31, 2023, are as follows:

In July 2022, Management entered into an agreement with a vendor to purchase product. The agreement will remain in effect through the later of (i) the purchase of 585,940 gallons of product or (ii)5 years from the effective date of the agreement. The remaining minimum purchase commitment as of December 31, 2023 was approximately $7.7 million.

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 December 31, 2023. 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 August 31, 2022, the Company was accepted into Delaware’s Voluntary Disclosure Agreement Program, entitling it to certain benefits and protections offered to participants in the program. 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. In the fourth quarter of 2023, the Company recorded $0.8 million in General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss) for estimated probable losses that might arise from this matter. The Company may ultimately be subject to greater losses resulting from this matter.

As of the beginning of Fiscal 2023, Management believes the Company is not currently required to remit any amounts relating to future unredeemed gift cards to states as the Company’s subsidiary that is the issuer of our gift cards was re-domiciled in Florida, which exempts gift cards from the abandoned and unclaimed property laws.

19. Net Income (Loss) Per Common Share

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

Diluted net income (loss) 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.

All stock option awards outstanding were excluded from the calculation of diluted net loss per common share because of their anti-dilutive impact for Fiscal 2021. As a result, there was no difference between basic and diluted net loss per common share attributable to First Watch Restaurant Group, Inc. during Fiscal 2021.

20. Condensed Financial Information of Registrant (Parent Company Only)

(PARENT COMPANY ONLY)

CONSOLIDATED BALANCE SHEETS

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

Statements of cash flows have not been presented as First Watch Restaurant Group, Inc. did not have any cash as of, or for Fiscal 2023, Fiscal 2022 and Fiscal 2021.

Basis of Presentation

The Company is a holding company without any operations of its own (the “Parent Company”). Pursuant to the terms of the Credit Agreement discussed in Note 10, Debt, the Company and certain subsidiaries of the Company have restrictions on their ability to, among other things, (i) incur additional indebtedness, pay dividends or make certain intercompany loans and advances, and (ii) exceed a maximum total rent adjusted net leverage ratio or fall below a minimum fixed charge coverage ratio. As a result of these restrictions, these parent company financial statements have been prepared in accordance with Rule 12-04 of Regulation S-X, as restricted net assets of the Company’ssubsidiaries (as defined in Rule 4-08(e)(3) of Regulation S-X) exceed 25% of the Company’s consolidated net assets as of December 31, 2023 and December 25, 2022.

These condensed financial statements have been prepared on a “parent-only” basis. These condensed parent company financial statements have been prepared using the same accounting principles and policies described in the notes to the Company’s consolidated financial statements, with the only exception being that the parent company accounts for its subsidiaries using the equity method. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. The accompanying financial information should be read in conjunction with the accompanying Company’s consolidated financial statements and related notes thereto.

21. Subsequent Events

Business Acquisitions

On January 5, 2024, the Company executed an asset purchase agreement to acquire from a franchisee 21 operating restaurants, together with other associated assets, including, but not limited to, franchise and development rights for cash of approximately $75.0 million. The close date of the sale is subject to the satisfaction of certain customary closing conditions set forth in the asset purchase agreement.

On January 22, 2024, the Company acquiredone restaurant from a franchisee, together with associated assets, pursuant to an executed purchase agreement in December 2023 for cash of approximately $3.0 million.

Amendment to Credit Agreement

On January 5, 2024, (the “Closing Date”), FWR entered into that certain Amendment No. 2 to Credit Agreement (the “Amendment”), by and among FWR, as borrower, AI Fresh Parent, Inc., a Delaware corporation and indirect subsidiary of the Company (“Holdings”), the subsidiaries of FWR party thereto as guarantors, the lenders party thereto and Bank of America, N.A., as administrative agent and collateral agent (in such capacities, the “Administrative Agent”), which amended its credit agreement, dated as of October 6, 2021, (as previously amended, and as amended by the Amendment, the “Credit Agreement”), by and among FWR, Holdings, the lenders from time to time party thereto and the Administrative Agent.

Pursuant to the terms of the Amendment, (i) the existing $100.0 million Term Facility was replaced with a new $100.0 million term loan A facility, (the “New Term Facility”), on terms substantially identical to the Term Facility, (ii) the $75.0 million Revolving Credit Facility was replaced with a new $75.0 million revolving credit facility (the “New Revolving Credit Facility”) on terms substantially identical to the Revolving Credit Facility, (iii) a new $125.0 million incremental delayed draw term loan facility, (the “New Delayed Draw Term Facility”), was established that will be available to FWR in one or more draws of at least $5.0 million each for a period of 18 months following the Closing Date, and (iv) the New Revolving Credit Facility was increased by $50.0 million in new revolving credit commitments bringing the aggregate committed amount under the New Revolving Credit Facility to $125.0 million. Commitments in respect of the New Delayed Draw Term Facility may be reduced, in whole or in part, at any time prior to 18 months following the Closing Date in the sole discretion of FWR. Loans under the New Term Facility and, once funded, under the New Delayed Draw Term Facility will constitute the same class of term loans for all purposes under the Amendment.

The New Term Facility, the New Revolving Credit Facility and the New Delayed Draw Term Facility mature on January 5, 2029. The proceeds of the New Delayed Draw Term Facility may be used by FWR to directly or indirectly finance permitted acquisitions (including working capital, earn-outs and/or purchase price adjustments) of franchisees, directly or indirectly finance new restaurant capital expenditure, repay revolving loans and/or replenish balance sheet cash, in each case, used for such permitted acquisitions or capital expenditures, and to pay related fees and expenses.

Commencing on the last day of the first fiscal quarter ending after the date on which 50.0% or more of the New Delayed Draw Term Facility has been funded (the “First DDTL Term Out Date”), loans drawn under the New Delayed Draw Term Facility on or before the First DDTL Term out Date will amortize in equal quarterly installments at the same amortization rate per annum as then applicable to loans under the New Term Facility. Commencing on the last day of the first fiscal quarter ending after the earlier of (i) the date on which 100.0% of the commitments in respect of the New Delayed Draw Term Facility have been funded and (ii)18 months following the Closing Date (such earlier date, the “Second DDTL Term Out Date”), loans drawn under the New Delayed Draw Term Facility after the First DDTL Term Out Date and on or before the Second DDTL Term Out Date, will amortize in equal quarterly installments at the same amortization rate per annum then applicable to loans under the New Term Facility.