First Watch Restaurant Group Inc

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

CONSOLIDATED STATEMENTS OF EQUITY

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

CONSOLIDATED STATEMENTS OF CASH FLOWS - continued

(IN THOUSANDS)

(1)Leased assets and liabilities obtained during the thirteen weeks ended March 31, 2024 include $1.2 million from business acquisitions.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of Business and Organization

First Watch Restaurant Group, Inc. (collectively with its wholly-owned subsidiaries, “the Company,” or “Management”) is a Delaware holding company. The Company operates and franchises restaurants in 30 states operating under the “First Watch” trade name, which are focused on made-to-order breakfast, brunch and lunch. The Company does not operate outside of the United States and all of its assets are located in the United States. As of March 30, 2025, the Company operated 498 company-owned restaurants and had 86 franc hise-owned restaurants.

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 quarters ended March 30, 2025 and March 31, 2024 were 13-week periods. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K as of and for the year ended December 29, 2024 (“2024 Form 10-K”).

The accompanying unaudited interim consolidated financial statements have been prepared by the Company in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all the information and notes required by GAAP for complete financial statements. The unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements included in the 2024 Form 10-K and include all adjustments necessary for the fair statement of the consolidated financial statements for the quarterly periods presented. The results of operations for quarterly periods are not necessarily indicative of the results to be expected for other quarterly periods or the entire fiscal year.

Use of Estimates

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

Fair Value of Financial Instruments

Certain assets and liabilities are carried at fair value. Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The carrying amounts of the Company’s financial instruments, including cash equivalents, accounts receivable, accounts payable, accrued expenses 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 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.

Summary of Recently Issued Accounting Pronouncements

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 amendments are effective for fiscal years beginning after December 15, 2024 and should be applied on a prospective basis, however, retrospective application is permitted. Management is currently evaluating the impact of this new standard and anticipates an expansion in the Company’s annual income tax disclosures.

In November 2024, the FASB issued ASU 2024-03, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures, which establishes new disclosure requirements related to purchases of inventory, employee compensation, selling expenses, depreciation and intangible amortization. The new guidance is effective for fiscal years beginning after December 15, 2026, and interim periods beginning after December 15, 2027 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. Revenues

Revenues recognized disaggregated by type were as follows:

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

Changes in deferred gift card contract liabilities were as follows:

Changes in deferred franchise fee contract liabilities were as follows:

4. Accounts Receivable

Accounts receivable consisted of the following:

5. Accrued Liabilities

Accrued liabilities consisted of the following:

6. Debt

Long-term debt, net consisted of the following:

Credit Facility

FWR Holding Corporation (“FWR”), a subsidiary of the Company, is the borrower under the credit agreement dated October 6, 2021, the terms of which were amended on February 24, 2023 and January 5, 2025, which provides for (i) a $100.0 million term loan A facility (the “Term Facility”), (ii) a$125.0 million revolving credit facility (“the Revolving Credit Facility”) and (iii) a $125.0 million delayed draw term facility (the “Delayed Draw Term Facility”, and together with the Term Facility and the Revolving Credit Facility, the “Credit Facility”).

The Delayed Draw Term Facility is available to FWR for an 18-month period expiring July 5, 2025 and may be used to fund permitted acquisitions and new restaurant capital expenditures. Loans drawn under the Delayed Draw Term Facility will amortize at the same amortization rate per annum as applicable to loans under the Term Facility. The Credit Facility matures on January 5, 2029.

As of March 30, 2025, borrowings under the Credit Facility bear interest at the option of FWR at either (i) the alternate base rate plus a margin of between 150 and 225 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 250 and 325 basis points depending on the Total Rent Adjusted Net Leverage Ratio. Refer to Note 7, Interest Rate Swaps, for information about the variable-to-fixed interest rate swap agreements.

On April 11, 2025 and April 25, 2025, the Company drew $7.0 million and $20.5 million on the Delayed Draw Term Facility. The proceeds were used to fund the acquisitions completed on April 14, 2025 and April 28, 2025 discussed in Note 15, Subsequent Events.

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 dates indicated:

Debt Covenants

The Credit Facility is guaranteed by all of FWR’s wholly-owned subsidiaries and by AI Fresh Parent, Inc., a Delaware corporation and the direct parent company of FWR (“Holdings”), and is 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 subsidiaries are subject to 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 March 30, 2025.

7. Interest Rate Swaps

The Company utilizes interest rate swaps to hedge a portion of the cash flows of the Company’s variable rate debt.

On June 23, 2023, the Company entered intotwo variable-to-fixed interest rate swaps. These 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.

On May 17, 2024, the Company entered intotwo additional variable-to-fixed interest rate swaps. These interest rate swaps have an aggregate notional amount of $60.0 million and mature on June 30, 2027. Under the terms of the interest rate swaps, the Company will pay a weighted average fixed rate of 4.42% 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 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 impact of the credit valuation adjustments was not determined to be significant to the overall valuation. As a result, the derivative was classified as Level 2 in the fair value hierarchy.

Amounts reported in Other comprehensive income (loss) related to the interest rate swaps are reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the thirteen weeks ended March 30, 2025, a total of $0.1 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 an increase to interest expense.

8. Leases

The following table includes detail of lease assets and liabilities:

(1) Excludes all variable lease expense for real estate leases.

The components of lease expense are as follows:

(1) Includes contingent rent expense of $0.5 million and$0.5 million during the thirteen weeks ended March 30, 2025 and March 31, 2024.

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.

9. Deferred Compensation

The Company adopted a non-qualified deferred compensation plan (the “First Watch Deferred Compensation Plan”) effective January 1, 2025. The First Watch Deferred Compensation Plan allows officers and other key employees to defer their compensation within annual limits designated by the Company. Discretionary matching and other credits may be made to the accounts of active participants, which vest based on an employee’s years of service or vest in full upon an active participant’s death, disability or a Company change in control event, as defined in the plan. Participants’ earnings on contributions fluctuate with the actual earnings and losses of available investment choices selected by the participants.

While the First Watch Deferred Compensation Plan is unsecured, the Company has elected to fund certain of these obligations through a rabbi trust, the assets of which consist of Company-owned life insurance policies. The assets held in the rabbi trust are not available for general corporate purposes and are subject to creditor claims in the event of insolvency.

The cash surrender value of the life insurance policies held in the rabbi trust is recorded in other long-term assets. As of March 30, 2025, rabbi trust assets totaled $0.2 million. Changes to the cash surrender value and any increases or decreases to deferred compensation liabilities incurred under the First Watch Deferred Compensation Plan are recorded as general and administrative expenses. As of March 30, 2025, the deferred compensation obligation included in other long-term liabilities totaled $0.3 million.

10. Equity and Stock-Based Compensation

Stock option awards

There were no stock option awards granted during the thirteen weeks ended March 30, 2025. A summary of stock option activity during the thirteen weeks ended March 30, 2025 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 Nasdaq on the last trading day of the period.

A summary of the non-vested stock option activity during the thirteen weeks ended March 30, 2025 is as follows:

Restricted stock units

During the thirteen weeks ended March 30, 2025, a total of 597,737 restricted stock units (“RSUs”) were granted. The grants will vest ratably over a period ofthree years from grant date. A summary of the Company’s RSU activity during the thirteen weeks ended March 30, 2025 is as follows:

The aggregate intrinsic value is based on the closing price of the Company’s common stock on Nasdaq of $16.86 and $18.70 on March 28, 2025 and December 27, 2024, the last trading days of the periods, respectively.

Stock-based compensation expense was $2.3 million and $1.9 million during the thirteen weeks ended March 30, 2025 and March 31, 2024, respectively. The total related income tax benefit for stock-based compensation expense was $1.1 million and $1.3 million during the thirteen weeks ended March 30, 2025 and March 31, 2024, respectively.

Unrecognized stock-based compensation expense

The following represents unrecognized stock-based compensation expense and the remaining weighted average vesting period as of March 30, 2025:

11. Income Taxes

The effective income tax rate for the thirteen weeks ended March 30, 2025 was 46.1% as compared to 28.0% for the thirteen weeks ended March 31, 2024. In the United States, a restaurant company employer may claim a credit against its federal income taxes for FICA taxes paid on certain tipped wages (the “FICA tax credit”). The level of FICA tax credits is primarily driven by restaurant sales and is not impacted by costs incurred that may reduce income before provision for income taxes. The provision for income taxes decreased primarily due to the FICA tax credits, which are subject to a valuation allowance, relative to changes in pre-tax book income.

The effective income tax rates for the thirteen weeks ended March 30, 2025 and March 31, 2024 were different than the blended federal and state statutory rate primarily due to (i) the change in the valuation allowance, (ii) the benefit of tax credits for FICA taxes on certain employees’ tips and (iii) the impacts of executive stock-based compensation.

Valuation allowance

Management evaluates quarterly whether the resulting deferred tax assets are realizable given the Company’s earnings history. Based on the available evidence, the Company does not meet the more likely than not standard related to the realization of a portion of the deferred tax assets as of March 30, 2025. Accordingly, the Company has established a valuation allowance on the portion of deferred tax assets deemed not realizable, including state charitable contribution carryovers, various state loss carryforwards and various federal tax credit carryforwards.

Management continues to assess 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 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.

12. Commitments and Contingencies

Legal Proceedings

The Company is subject to legal proceedings, claims and liabilities that arise in the ordinary course of business. The amount of the anticipated liability with respect to these matters was not material as of March 30, 2025. In the event any litigation losses become probable and estimable, the Company will recognize anticipated losses.

13. Segment Information

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’s CODM uses consolidated net income to evaluate performance and make key operating decisions, such as investments in our long-term growth strategy. This measure is also used to monitor budget against actual results.

Revenue is derived from sales of food and beverage, net of discounts, by our restaurants as well as franchise royalty, system fund and initial franchise fees. The measure of total assets for the reporting segment is reported on the consolidated balance sheets as total assets. The measure of capital expenditures for the reporting segment is reported on the consolidated statements of cash flows.

The following table details consolidated net (loss) income for the segment for the periods indicated:

(1) General and administrative expenses excludes stock-based compensation presented separately.

(2) Other segment items included in segment net (loss) income are primarily transaction expenses, and impairments and loss on disposal of assets.

14. Net (Loss) Income Per Common Share

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

Diluted net (loss) income per common share is calculated by adjusting the weighted average shares outstanding for the theoretical effect of potential common shares that would be issued for stock option awards outstanding and unvested as of the respective periods using the treasury method.

15. Subsequent Events

Business Acquisitions

On April 28, 2025, the Company acquired 16 restaurants from a franchisee, together with other associated assets, including, but not limited to, franchise and development rights for cash of approximately $49.0 million.

On April 14, 2025, the Company acquired three restaurants from a franchisee, together with other associated assets, including, but not limited to, franchise and development rights for cash of approximately $7.0 million.

The purchase price for the acquisitions will be allocated to the assets acquired and liabilities assumed as the information necessary to complete the fair value analysis is obtained. The acquisitions were funded by borrowings under the Credit Facility. See Note 6, Debt.