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What changed in First Watch Restaurant Group, Inc.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of First Watch Restaurant Group, Inc.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+324 added−346 removedSource: 10-K (2024-03-05) vs 10-K (2023-03-07)

Top changes in First Watch Restaurant Group, Inc.'s 2023 10-K

324 paragraphs added · 346 removed · 251 edited across 8 sections

Item 1. Business

Business — how the company describes what it does

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Biggest changeIn 2022, a five-year longitudinal study of employee surveys on Glassdoor published by William Blair ranked us #1 for work/life balance and we were in the top 10 in overall employee satisfaction, among casual dining concepts.
Biggest changeIn 2023 First Watch was the only restaurant brand recognized. • Recognized with ADP’s Culture at Work Award (2022) • Ranked # 1 in a five-year longitudinal study of employee surveys on Glassdoor published by William Blair for work/life balance and we were in the top 10 in overall employee satisfaction, among casual dining concepts (2022) 4 Table of Contents We also extend our You First culture by giving back to important organizations and causes that are meaningful to our people.
Human Capital “You First” Culture Elevates Employee and Customer Satisfaction First Watch has a simple mission statement based on its “You First.” culture - “Making days brighter at every opportunity.” We have been people-focused from our inception as we have always believed our employees are our greatest asset.
Human Capital “You First” Culture Elevates Employee and Customer Satisfaction First Watch has a simple mission statement based on its “You First” culture—“Making days brighter at every opportunity.” We have been people-focused from our inception as we have always believed our employees are our greatest asset.
This culture was also a key factor in the Company’s achievement of top 50 status in Newsweek’s Top 100 Most Loved Workplaces, a designation that was a result of an assessment of First Watch’s people practices along with an independent survey of approximately 1,000 of our employees.
This culture was also a key factor in the Company’s achievement of top 50 status in Newsweek’s 2023 Top 100 Most Loved Workplaces, a designation that was a result of an assessment of First Watch’s people practices along with an independent survey of approximately 1,000 of our employees.
Our selected vendors undergo inspection to ensure that products purchased conform to our standards. Our Quality Assurance department requires third-party supplier audits or Global Food Safety Initiative certification for all food distributors and manufacturing facilities to ensure good manufacturing practices, food safety, pest control, sanitation, training, regulatory compliance and food defense systems are in place.
Our selected vendors undergo inspections to ensure that products purchased conform to our standards. Our Quality Assurance department requires third-party supplier audits or Global Food Safety Initiative certification for all food distributors and manufacturing facilities to ensure good manufacturing practices, food safety, pest control, sanitation, training, regulatory compliance and food defense systems are in place.
We completed our initial public offering (“IPO”) in October 2021 and our common stock is listed on the Nasdaq Global Select Market (“Nasdaq”) under the symbol “FWRG.” Additional Information Our consumer website is located at www.firstwatch.com, and our investor relations website is located at https://investors.firstwatch.com.
Our corporate website address is www.firstwatch.com. We completed our initial public offering (“IPO”) in October 2021 and our common stock is listed on the Nasdaq Global Select Market (“Nasdaq”) under the symbol “FWRG.” Additional Information Our consumer website is located at www.firstwatch.com, and our investor relations website is located at https://investors.firstwatch.com.
The purpose of the in-depth sessions was to learn more about the issues that matter most to our hourly workforce. As a result of this tour, the Company was able to take swift action on the most meaningful issues.
The purpose of the in-depth sessions was to learn more about the issues most meaningful to our hourly workforce. As a result of this tour, the Company was able to take swift action on the most meaningful issues.
Our growth strategy targets an accelerating pace of new restaurant development with a long-term goal of a percentage increase of system-wide restaurants in the low double digits. In selecting new locations, we evaluate specific market characteristics, demographics, traffic patterns, co-tenants and growth potential.
Our growth strategy targets an accelerating pace of new system-wide restaurant development with a long-term goal of an annual percentage growth in the low double digits. In selecting new locations, we evaluate specific market characteristics, demographics, traffic patterns, co-tenants and growth potential.
We have built our brand on our commitment to operational excellence, our culinary mission centered around a fresh, continuously evolving menu, and our “You First” culture. Our focus on one daytime shift enables us to optimize restaurant operations while generating an average unit volume of $2.0 million per restaurant in 2022 in only 7.5 hours per day.
We have built our brand on our commitment to operational excellence, our culinary mission centered around a fresh, continuously evolving menu, and our “You First” culture. Our focus on one daytime shift enables us to optimize restaurant operations while generating an average unit volume of $2.3 million per restaurant in 2023 in only 7.5 hours per day.
New employee benefits, practices and operational tools have been introduced as a direct result of 8 Table of Contents feedback from each tour, reinforcing the Company’s culture of listening to its employees and taking action on the issues that matter the most to them.
New employee benefits, practices and operational tools have been introduced as a direct result of feedback from each tour, reinforcing the Company’s culture of listening to its employees and taking action on the issues that matter the most to them.
(Race Inclusion and Support Exchange) Council was created to engage high performing diverse leaders in dialogue on how to best advance the Company’s diversity efforts. As a result of ideas that the R.I.S.E.
(Race Inclusion and Support Exchange) Council was created to dialogue with high performing diverse leaders on how to best advance the Company’s diversity efforts. As a result of ideas that the R.I.S.E.
Item 1. Business First Watch Restaurant Group, Inc. is a Delaware holding company that was acquired by funds affiliated with or managed by Advent International Corporation (“Advent”) in August 2017 (the “Advent Acquisition”).
Item 1. Business First Watch Restaurant Group, Inc. is a Delaware holding company that was acquired by funds affiliated with or managed by Advent International L.P. (“Advent”) in August 2017 (the “Advent Acquisition”).
In 2022, CEO and President, Chris Tomasso, Chief People Officer, Laura Sorensen and Chief Operating Officer, Dan Jones, hosted nineteen separate 90 minute calls with hourly employees across the country for their second annual W.H.Y. Tour – their “We Hear You” listening tour.
In 2023, CEO and President, Chris Tomasso, Chief People Officer, Laura Sorensen and Chief Operations Officer, Dan Jones, hosted nineteen separate 90 minute calls with hourly employees across the country for their second annual W.H.Y. Tour – their “We Hear You” listening tour.
In 2021, First Watch was recognized by FSR Magazine as the fastest-growing full-service restaurant company in the United States based on unit growth and in 2022, we continued to realize that potential by opening 43 new company-owned and franchise-owned restaurants, which we collectively refer to as “system-wide” restaurants, across 16 states.
In 2021, First Watch was recognized by FSR Magazine as the fastest-growing full-service restaurant company in the United States based on unit growth and in 2023, we continued to realize that potential by opening 51 new company-owned and franchise-owned restaurants, which we collectively refer to as “system-wide” restaurants, across 19 states.
The initial franchise fee for each restaurant is $35,000 to $40,000. Franchisees are required to pay 4.0%-4.5% of franchised restaurant sales in royalties and contribute 1.0%-3.0% of franchised restaurant sales to a system fund, which is used for advertising, marketing and public relations programs and materials on a system-wide basis. Presently, we are not extending franchise agreements to new franchisees.
The initial franchise fee for each restaurant is $35,000 to $40,000. Franchisees are required to pay 4.0% of franchised restaurant sales in royalties and contribute 1.0%-3.0% of franchised restaurant sales to a system fund, which is used for advertising, marketing and public relations programs and materials on a system-wide basis.
Experienced, Passionate Leadership Team and Deep Bench of Talent Our team is led by passionate executives who have an extensive mix of experience in our brand and with other leading national restaurant concepts and consumer facing businesses. We have a deep bench of talent throughout the organization.
In addition, the program includes a self-assessment and career goal setting workshops. Experienced, Passionate Leadership Team and Deep Bench of Talent Our team is led by passionate executives who have an extensive mix of experience in our brand and with other leading national restaurant concepts and consumer facing businesses. We have a deep bench of talent throughout the organization.
In addition, as part of our overall food quality assurance, we have a process in place to review vendors’ food safety practices to ensure they meet or exceed industry standards. 6 Table of Contents Restaurant Staff As of December 25, 2022, we had approximately 12,000 employees.
In addition, as part of our overall food quality assurance, we have a process in place to review vendors’ food safety practices to ensure they meet or exceed industry standards. Restaurant Staff As of December 31, 2023, we had approximately 14,000 employees.
We focus on increasing our engagement with social media platforms in order to generate brand awareness and also to gather information we can then apply to future marketing efforts. 7 Table of Contents Franchise Program As of December 25, 2022, we had 15 franchisees that operated 108 restaurants and our existing franchisees had 39 total new restaurant development obligations.
We focus on increasing our engagement with social media platforms in order to generate brand awareness and also to gather information we can then apply to future marketing efforts. Franchise Program As of December 31, 2023, we had 11 franchisees that operated 99 restaurants and our existing franchisees had 18 total new restaurant development obligations.
We believe that putting our employees first, in turn, leads them to put customers first. We believe the Company’s culture plays a significant role in higher retention of all employees, as the Company had historically experienced below industry turnover.
We believe that putting our employees first, in turn, leads them to put customers first. We believe the Company’s culture plays a significant role in higher retention of all employees.
More directly, we do not believe there is a comparable offering within our segment that operates at scale as First Watch does and we view our primary competition as a network of independent restaurants that also serve breakfast and lunch in neighborhoods across the United States. Seasonality Our quarterly results of operations are subject to seasonal fluctuations.
More directly, we do not believe there is a comparable offering within our segment that operates at the scale of First Watch 9 Table of Contents and we view our primary competition as a network of independent restaurants that also serve breakfast and lunch in neighborhoods across the United States.
This daytime focus also provides us with a competitive advantage allowing us to attract and retain employees who are passionate about hospitality and drawn to our “No Night Shifts Ever” approach. As of December 25, 2022, we had a total of 474 restaurants across 29 states, 366 of which were company-owned and 108 were franchise-owned. Our Promise: Yeah, It’s Fresh!
This daytime focus also provides us with a competitive advantage allowing us to attract and retain employees who are passionate about hospitality and drawn to our “No Night Shifts Ever” approach, among other attractive benefits. As of December 31, 2023, we had a total of 524 restaurants across 29 states, 425 of which were company-owned and 99 were franchise-owned.
Our alcohol platform is unique and reflects our culinary innovation in combining fresh juices and ingredients with a variety of liquors. We have continued to expand on this strategic initiative and acquire the necessary licenses.
Our alcohol platform is unique and reflects our culinary innovation through combinations of fresh juices and ingredients with a variety of liquors. We have continued to expand on this strategic initiative and acquire the necessary licenses. As of December 31, 2023, our alcohol menu was offered in about 90% of our system-wide restaurants.
These systems are designed to enable functionality, improve operating efficiencies, provide us with timely access to financial and marketing data and reduce restaurant and corporate administrative time and expense. In addition, our in-restaurant systems are used to process customer orders, credit card payments, employee time-keeping and scheduling.
These systems are designed to enable functionality, improve operating efficiencies, provide us with timely access to financial and marketing data and reduce restaurant and corporate administrative time and expense.
Since the establishment of these systems, we have gathered customer information for over 10 million unique customer profiles, 4 million of which are opted into communication. The advancements in these foundational systems have allowed us to learn more about our customers and the behaviors that drive customer lifetime value.
Since implementation of these systems, we have gathered customer information for over 14.6 million unique customer profiles, 6.1 million of whom have opted for direct communication from First Watch. The advances in these foundational systems have allowed us to learn more about our customers and the behaviors that ultimately drive lifetime customer value.
We also work hard to provide an opportunity for limitless growth and meaningful relationships, and we prioritize personal and professional growth so that our people can thrive.
As evidenced by our vision to “Create Amazing Opportunities for Our People,” we also work hard to provide opportunities for advancement and meaningful relationships, and we prioritize personal and professional growth so that our people can thrive.
Our development approach has proven that First Watch has tremendous portability across markets, with new restaurants boasting consistent and a strong average unit volume across all geographies. In 2022, our new company-owned restaurants generated an annualized average unit volume of $2.2 million.
Our development approach has proven that First Watch has tremendous portability across markets, with new restaurants boasting consistent and a strong average unit volume across all geographies. First Watch’s top 10% of restaurants in terms of sales, span 10 states and 20 designated market areas.
Marketing and Advertising We use a variety of marketing channels, including affiliate partnerships, social media interactions, digital marketing, direct mailers, public relations initiatives and local community sponsorships, email communications, promotions and partnerships.
In addition, our in-restaurant systems are used to process customer orders, credit card payments, employee time-keeping and scheduling. 7 Table of Contents Marketing and Advertising We use a variety of marketing channels, including affiliate partnerships, social media interactions, digital marketing, direct mailers, public relations initiatives and local community sponsorships, email communications, promotions and partnerships.
Every morning, we arrive at the crack of dawn to slice and juice fresh fruits and vegetables, bake muffins, brew our fresh coffee and whip up our French Toast batter from scratch.
We “Follow the Sun” Every morning, we arrive at the crack of dawn to slice and juice fresh fruits and vegetables, bake muffins, brew our fresh coffee and whip up our French Toast batter from scratch. Every menu item is made-to-order and prepared with care. We do not use microwave ovens, heat lamps or deep fryers in our kitchens.
First Watch also supports national and international causes we care about, such as our Project Sunrise partnership. Through Project Sunrise we source our coffee beans from women-owned farms in Colombia, and we pay an annual quality incentive bonus to farmers to further support their high-quality production.
Most notably, First Watch is proud of two key efforts to give back in a meaningful way: • Project Sunrise: Through this initiative of passion, we source our coffee beans from women-owned farms in Colombia, and we pay an annual quality incentive bonus to farmers to further support their high-quality production.
By using our first party data, we have been able to identify higher frequency customers and target similar customers with digital media vehicles. These demand generation strategies have aided us to “balance out” our customer base in recent years by growing penetration with Millennial and Gen Z segments. • Additional Platforms and Initiatives.
By using our first party data, we have been able to identify higher frequency customers and target similar customers with digital media vehicles.
This program in turn empowers these women leaders to reinvest in their communities. 4 Table of Contents Growth Strategies New Restaurant Openings We currently believe First Watch has the potential for more than 2,200 restaurants in the continental United States.
Growth Strategies New Restaurant Openings As supported by a third-party study, we believe First Watch has the potential for more than 2,200 restaurants in the continental United States.
We are confident this enduring initiative will continue to create value for First Watch. Operations Quality and Food Safety First Watch emphasizes high food quality and a commitment to food safety in each restaurant through the careful training and supervision of personnel and by following rigorous quality and cleanliness standards.
We see this as a long-term opportunity to drive increased visit frequency as we have the ability to build new customer technology features that elevate the customer experience. 6 Table of Contents Operations Quality and Food Safety First Watch emphasizes high food quality and a commitment to food safety in each restaurant through the careful training and supervision of personnel and by following rigorous quality and cleanliness standards.
See Item 1A.“ Risk Factors ” for discussion of risks related to seasonal and periodic fluctuations. 9 Table of Contents Corporate Information First Watch Restaurant Group, Inc. was incorporated in Delaware on August 10, 2017, under the name AI Fresh Super Holdco, Inc. We changed our name on December 20, 2019 to First Watch Restaurant Group, Inc.
Corporate Information First Watch Restaurant Group, Inc. was incorporated in Delaware on August 10, 2017, under the name AI Fresh Super Holdco, Inc. We changed our name on December 20, 2019 to First Watch Restaurant Group, Inc. Our principal executive offices are located at 8725 Pendery Place, Suite 201, Bradenton, FL 34201 and our telephone number is (941) 907-9800.
Additionally, the timing of holidays, weather conditions and the number of new restaurant openings may affect sales volumes seasonally.
Seasonality Our quarterly results of operations are subject to seasonal fluctuations. Additionally, the timing of holidays, weather conditions and the number of new restaurant openings may affect sales volumes seasonally. See Item 1A.“ Risk Factors ” for discussion of risks related to seasonal and periodic fluctuations.
At December 25, 2022, sixty franchise-owned restaurants are subject to our option to purchase. Drive Restaurant Traffic and Build Sales Our attractive returns on invested capital in each restaurant starts with our focus on traffic and customer frequency in the building of our sales through: • Delivering an Excellent On-Premise Dining Experience.
Drive Restaurant Traffic and Build Sales Our attractive return on invested capital starts with an intention to build sales and traffic through a focus on the core elements of the First Watch experience: serving incredible food, with memorable service, in an inviting atmosphere. • Delivering an Excellent On-Premise Dining Experience.
When it comes to sourcing, we are guided by a core philosophy: “Follow The Sun.” Our five highly anticipated seasonal menus and the introduction of new platforms drive customer frequency and incremental revenue opportunities. This means that we welcome each season into our menu with exceptional ingredients harvested when they are most flavorful and fresh.
We constantly evolve our on-trend menu which highlights our commitment to quality and freshness and is also operationally efficient. When it comes to sourcing, we are guided by a core philosophy: “Follow the Sun.” Our five highly anticipated seasonal menus drive customer frequency.
Our single menu, throughout the day and across all restaurants in our system, streamlines our supply chain and restaurant operations, simplifies our employee training and provides for a consistent and superior customer dining experience. • Continued Menu Innovation. We continuously evolve our on-trend menu which highlights our commitment to quality and freshness and is also operationally efficient.
Our single menu, throughout the day, streamlines our supply chain and restaurant operations, simplifies our employee training and provides for a consistent and superior customer dining experience. • Technology and Increased Accessibility. We believe that technology can continue to elevate the First Watch experience for both our employees and customers.
In addition, successful platform introductions over the past few years, such as our Fresh Juice program and Shareables, add incremental revenue opportunities while enhancing our culinary credibility.
In addition, successful new platform introductions such as our Fresh Juice program, our Shareables, our alcohol program and our premium iced coffees add incremental revenue opportunities and capitalize on growing trends. ◦ Offer Alcohol as Only First Watch Can .
As of December 25, 2022, our alcohol menu was offered in about 85.0% of our system-wide restaurants. 5 Table of Contents • Increasing Our Brand Awareness. For 40 years, our awareness has grown primarily through word-of-mouth as our service, menu and environment created loyal fans.
As we have finalized the initial stage of adding alcohol to the majority of our system, our alcohol platform offers the opportunity to innovate alongside our constantly evolving culinary platforms and seasonal menus. • Increasing Our Brand Awareness. For 40 years, our awareness has grown primarily through word-of-mouth as our service, menu and environment created loyal fans.
Our award-winning chef-driven menu includes elevated executions of classic favorites for breakfast, brunch and lunch, along with First Watch-specific specialties such as our protein-packed Breakfast Quinoa, Farmstand Breakfast Tacos, Avocado Toast, Morning Meditation (juiced in-house daily), our Pomegranate Sunrise, Chickichangas and our famous Million Dollar Bacon. While our menu constantly evolves, our promise of freshness never wavers.
These seasonal items are offered alongside of our award-winning chef-driven menu including elevated executions of classic favorites for breakfast, brunch and lunch, such as our protein-packed Breakfast Quinoa, Farmstand Breakfast Tacos, and Avocado Toast. Our menu also features fresh juices, that we juice each morning, including Morning Meditation and Kale Tonic.
We believe our integrated technology and improvements continue to optimize our customers’ convenience when ordering directly from us as well as our third-party delivery partners. In 2022, our total off-premises sales accounted for 20.6% of our total restaurant sales. Even as our in-restaurant dining sales recovered from the COVID-19 pandemic, off-premises sales remained strong, indicating continued customer demand.
To date we have implemented technologies that have enhanced accessibility by adding the functionality for direct ordering of takeout as well as third party delivery integrations. In 2023 and 2022, our total off-premises sales accounted for 18.3% and 20.6%, respectively, of our total restaurant sales.
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At First Watch, we take a creative approach to Daytime Dining led by our commitment to freshness. Each item is made-to-order and prepared with care. We do not use microwave ovens, heat lamps or deep fryers in our kitchens.
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At First Watch, we are driven by a pursuit of freshness as is highlighted by our culinary and sourcing philosophy to “Follow the Sun.” With this philosophy our menu, which is inspired by the seasons, changes five times per year.
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Also in 2022, First Watch was recognized with ADP’s Culture at Work Award and named a Top 100 Most Loved Workplace ® by Newsweek and the Best Practice Institute. We extend our You First culture by giving to important local organizations and causes in communities where our restaurants operate.
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Our rotating seasonal menu is commonly cited by our customers as a core element of the First Watch experience and has included favorites such as the Sunny Seoul Hash, Strawberry Tres Leches French Toast and the Brooklyn Breakfast Sandwich.
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Acquisitions of Franchise-Owned Restaurants As an element of our growth strategy, from time to time, we have acquired restaurants from our franchisees. We believe there is potential to increase value through strategic acquisitions of our franchise-owned restaurants. As of December 25, 2022, we had 15 franchisees operating 108 restaurants with 39 total new restaurant development obligations.
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As a result, we are proud of the many people-focused awards and accolades we have received over the past few decades, most recently including the following: • Named the top restaurant brand in Yelp’s inaugural list of the top 50 most-loved brands in the U.S (2023) • Named a Top 100 Most Loved Workplace® by Newsweek and the Best Practice Institute (2022 and 2023).
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We have seen the incidences from our Fresh Juice and Shareables platforms rise from 9.6% and 3.4%, respectively, in the fourth fiscal quarter ended December 30, 2018 to 15.4% and 7.1%, respectively, in 2022. • Convenience and Increased Accessibility of Our Off-Premises Offering.
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This program in turn empowers these women leaders to reinvest in their communities. • Pediatric Cancer Research: Through each sale of a First Watch kid’s meal, we donate a portion of proceeds to the V Foundation in order to support and advance pediatric cancer research. To date, we have donated $1.0 million towards these important efforts.
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We see future opportunity to refine and grow this demand largely by focusing on in-restaurant infrastructure, especially in our new restaurant prototypes, which include dedicated make lines and to-go rooms, separate entrances and dedicated parking spots to enhance the experience of both our off-premises and dine-in customers. • Offer Alcohol as Only First Watch Can.
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Acquisitions of Franchise-Owned Restaurants Our long-term growth strategy includes the acquisitions of First Watch restaurants operated by certain of our franchisees. To that end, during 2023, we acquired 23 operating restaurants along with development and territory rights from four franchisees. In addition, shortly following the end of 2023, we announced our agreement to acquire 21 restaurants from our largest franchisee.
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We continue to evolve the First Watch concept and offerings via the implementation of initiatives that include: – Weekday Occasions : We believe that the broad appeal of our menu and the quality of our ingredients give us a competitive advantage over many alternatives that offer breakfast and lunch and provide us with the opportunity to significantly increase market share by driving incremental customer visits during the week.
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See Note 21, Subsequent Events , in the accompanying notes to the consolidated financial statements included in Item 8 of Part II of this Form 10-K for additional information. We believe the Company’s operation of the restaurants acquired from our franchisees as well as development in the reacquired territory provides substantial opportunity to realize new Company value.
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As a result of an evolving consumer landscape, there has been a significant migration of people from urban to suburban areas, where a meaningful portion of our restaurants exist.
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At December 31, 2023, we had 11 franchisees operating 99 restaurants with 18 total new restaurant development obligations. At December 31, 2023, 47 franchise-owned restaurants are subject to our option to purchase.
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This migration, coupled with trending work-from-home flexibility, presents First Watch with an incremental customer opportunity during the weekday business hours which we believe will further propel long-term growth. – Customer Technology & Customer Data: We accelerated the implementation of customer data acquisition systems in order to better inform the habits and behaviors of our customers.
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While these sales channels have corrected from anomalous highs during 2020 and 2021 due to the COVID-19 pandemic, this still reflects a significant portion of our business and has remained elevated relative to 2019 when off-premises sales only reflected 6.7% of our total restaurant sales. 5 Table of Contents ◦ In-restaurant dining sales continue to strengthen indicating continued customer demand for experiences and connection.
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We see this as a long-term opportunity to drive increased visit frequency as we have the ability to build new customer technology features that elevate the customer experience through reduced friction. – Serving More Demand: First Watch has long appreciated significant demand that regularly exceeds our capacity to serve.
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In 2022 we implemented kitchen display screens in all company-owned restaurants to simplify the employee experience and improve back-of house efficiency. Along with many other operational initiatives, processes and procedures, we continue to see opportunity to use technology to elevate the customer experience and simplify tasks for our teams.
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Following 2020, the composition of our sales shifted with the increase in our off-premises sales. Combined with a significant acceleration in our business, we focused on optimizing our back-of-house roles, functions and processes. New technologies, such as the implementation of kitchen display screens in all company-owned restaurants in 2022, have increased our ability to serve more demand during peak hours.
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In February 2024, we completed the roll-out of pay-at-the-table technology at all company-owned restaurants. Through a QR code on our receipts, customers can now seamlessly pay using Apple Pay, Google Pay or a credit or debit card, reducing bottlenecks at host stands, particularly during peak weekend hours. • Continued Menu Innovation.
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This focus has also extended to the front-of-house, where we have implemented new practices to increase table turns, optimize seat utilization and drive improved customer satisfaction scores. This initiative to serve more of our existing demand is highly desirable, given that these additional customers are already visiting our restaurants and do not require investment in customer acquisition.
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This means that we welcome each season into our menu with exceptional ingredients harvested when they are most flavorful and fresh.
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First Watch also introduced a new Vision, Mission and Values statement to all employees to further reinforce its award-winning culture and emphasis on both employee and customer engagement and loyalty. Diversity and Inclusion In 2020, we developed and launched an annual campaign, branded #beabetterhuman, which has taken our people-focused approach to a new level.
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These demand generation strategies have aided us to “balance out” our customer base in recent years by growing penetration with Millennial and Gen Z segments. • Customer Technology & Customer Data: We accelerated the implementation of customer data acquisition systems in order to better inform the habits and behaviors of our customers.
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In order to provide employees with a chance to make a difference, for each employee that participated in all six #beabetterhuman web sessions, First Watch made a donation to Bryan Stevenson’s Equal Justice Initiative (featured in the book and film “Just Mercy”).
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At First Watch, we are committed to making days brighter by creating a culture where our teams and customers feel valued and celebrated for who they are and the differences they bring to the table. We also embrace the fact that diversity goes hand in hand with inclusion.
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In addition, the program includes a self-assessment and career goal setting workshops. In both 2021 and 2022, First Watch also worked with an independent Diversity, Equity, and Inclusion (“DEI”) consultant to track our DEI data, complete a thorough assessment of our current state and benchmark on key metrics.
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With our core belief to “Just Be Kind,” we endeavor to provide our people with the opportunity to contribute at the highest level and we empower diverse voices to ensure everyone can belong, thrive and “follow the sun” to reach their full potential.
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Leveraging this data, along with their analytics and strategy platform, we then identified efforts to prioritize DEI in order to drive impact and took action. First Watch was pleased to achieve solid positioning in the benchmarking results and significant year-over-year improvement.
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We believe in fostering an environment where all employees feel valued and heard, and we provide employees with various channels to provide regular feedback, including surveys, meetings and direct communication.
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Our principal executive offices are located at 8725 Pendery Place, Suite 201, Bradenton, FL 34201 and our telephone number is (941) 907-9800. Our corporate website address is www.firstwatch.com.
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We believe our diverse teams reflect the wide diversity of our customers across the U.S., allowing us to better anticipate market trends and address the needs of our customers. And while our work is ongoing, we’re dedicated to building on our “You First” commitment and unlocking amazing possibilities for each team member and the communities we serve.
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First Watch works with an outside consultant to complete an annual assessment to both build and benchmark our policies, practices and representation.
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This commitment to diversity, inclusion, and fair and equal representation of underrepresented or minority groups is demonstrated throughout all levels of the organization (based on self-reported information as of February 19, 2023): • 50% of the non-employee members of our Board of Directors are women, and our Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee are each chaired by a woman; • 25% of our non-employee directors are from an underrepresented group as it relates to race/ethnicity; • 33% of the members of our executive leadership team are women; • 53% of our workforce are women; and • 57% of our workforce belong to an underrepresented or minority group as it relates to race/ethnicity. 8 Table of Contents In 2020, we developed and launched an annual campaign, branded #beabetterhuman, which has taken our people-focused approach to a new level.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeThese risks include the following: Risks Related to Our Business and Industry • our vulnerability to changes in economic conditions and other factors, many of which are largely outside of our control • our inability to open new restaurants in new and existing markets or to operate them as profitably as we have experienced in the past • our inability to effectively manage our growth • the number of visitors to areas where our restaurants are located may decline • our inability to generate same-restaurant sales growth 10 Table of Contents • our marketing programs and limited-time menu offerings may fail to generate profits • shortages or disruptions in the supply or delivery of frequently used food items or increases in the cost of our frequently used food items • continued adverse effects of the COVID-19 pandemic, including the potential impact of the emergence of COVID-19 variants, or other infectious disease on our financial condition, results of operations, and supply chain • our inability to compete successfully with other breakfast and lunch restaurants • our vulnerability to food safety and food-borne illness concerns • issues with our existing franchisees, including their financial performance, our lack of control over their operations and conflicting business interests • our reliance on a small number of suppliers for a substantial amount of our food and coffee • geographic concentration • damage to our reputation and negative publicity, even if unwarranted • our inability to effectively manage the accelerated impact of social media • our insurance may not provide adequate levels of coverage against claims Risks Related to Information Technology and Intellectual Property • our failure to adequately protect our network security • compliance with federal and state laws and regulations relating to privacy, data protection, advertising and consumer protection • potential state property law liability with our gift cards • our failure to enforce and maintain our trademarks and other intellectual property • adverse litigation outcomes with respect to our intellectual property rights Risks Related to Employees and the Workforce • the loss of our executive officers or other key employees • our inability to identify qualified individuals for our workforce • our failure to maintain our corporate culture • potential unionization activities • our sustainability activities, including ESG matters Legal and Regulatory Risks • compliance with federal and local environmental, labor, employment, food safety, franchise, zoning and other applicable laws and regulations • the distraction and expense of litigation • risks associated with leasing properties subject to long-term and non-cancelable leases • risks related to our sale of alcoholic beverages Risks Related to Accounting and Financial Reporting Matters • changes in accounting principles or estimates • impairment in the carrying value of our goodwill or indefinite-lived intangible assets • our inability to effectively manage our internal control over financial reporting Risks Related to Our Indebtedness • our inability to access additional capital to support business growth • our level of indebtedness and our duty to comply with covenants under our credit agreement 11 Table of Contents Risks Related to Our Company and Organizational Structure • the interests of Advent may differ from those of our public stockholders • our reliance on our operating subsidiaries • our lack of significant experience managing a public company • risks associated with our status as an emerging growth company and a Delaware corporation Risks Related to Ownership of Our Common Stock • the market price of our common stock could be reduced by future offerings of debt or equity securities • risks associated with our status as a controlled company with highly concentrated ownership of common stock • possible significant fluctuations in our quarterly results of operations that could fall below the expectations of securities analysts and investors • dilutive impact from grants under our equity incentive plans Risks Related to Our Business and Industry We are vulnerable to changes in economic conditions and consumer preferences that could have a material adverse effect on our business, financial condition and results of operations.
Biggest changeThese risks include the following: Risks Related to Our Business and Industry • our vulnerability to changes in economic conditions and other factors, many of which are largely outside of our control • our inability to open new restaurants in new and existing markets or to operate them as profitably as we have experienced in the past • our inability to effectively manage our growth • opening new restaurants may adversely impact sales at our and our franchisees’ existing restaurants • the number of visitors to areas where our restaurants are located may decline • our inability to generate same-restaurant sales growth • our marketing programs and limited-time menu offerings may fail to generate profits • shortages or disruptions in the supply or delivery of frequently used food items or increases in the cost of our frequently used food items • our inability to compete successfully with other breakfast and lunch restaurants • our vulnerability to food safety and food-borne illness concerns • issues with our existing franchisees, including their financial performance, our lack of control over their operations and conflicting business interests • our reliance on a small number of suppliers for a substantial amount of our food and coffee • geographic concentration • damage to our reputation and negative publicity, even if unwarranted • our inability to effectively manage the accelerated impact of social media Risks Related to Information Technology and Intellectual Property • our failure to adequately protect our network security • compliance with federal and state laws and regulations relating to privacy, data protection, advertising and consumer protection • potential state property law liability with our gift cards • our failure to enforce and maintain our trademarks and other intellectual property • adverse litigation outcomes with respect to our intellectual property rights Risks Related to Employees and the Workforce • our inability to identify qualified individuals for our workforce • our failure to maintain our corporate culture • potential unionization activities • our sustainability activities, including ESG matters Legal and Regulatory Risks • compliance with federal and local environmental, labor, employment, food safety, franchise, zoning and other applicable laws and regulations • the distraction and expense of litigation • risks associated with leasing properties subject to long-term and non-cancelable leases • compliance with the laws and regulations applicable to public companies • volatility in our results of operations caused by fluctuations in our tax obligations and effective tax rate and realization of our deferred tax assets • risks related to our sale of alcoholic beverages Risks Related to Accounting and Financial Reporting Matters • impairment in the carrying value of our goodwill or indefinite-lived intangible assets • our inability to effectively manage our internal control over financial reporting 11 Table of Contents Risks Related to Our Indebtedness • our level of indebtedness and our duty to comply with covenants under our Credit Agreement Risks Related to Our Company and Organizational Structure • the interests of Advent may differ from those of our public stockholders • our reliance on our operating subsidiaries • our lack of significant experience managing a public company • risks associated with our status as an emerging growth company and a Delaware corporation Risks Related to Ownership of Our Common Stock • the market price of our common stock could be reduced by future offerings of debt or equity securities • risks associated with our status as a controlled company with highly concentrated ownership of common stock • possible significant fluctuations in our quarterly results of operations that could fall below the expectations of securities analysts and investors • dilutive impact from grants under our equity incentive plans General Risk Factors • the loss of our executive officers or other key employees • lack of access to additional capital to support business growth • changes in accounting principles or estimates • inadequate levels of insurance coverage against claims Risks Related to Our Business and Industry We are vulnerable to changes in economic conditions and consumer preferences that could have a material adverse effect on our business, financial condition and results of operations.
Our failure to comply with the covenants under the Credit Agreement for our Facilities or to have sufficient liquidity to make interest and other payments required by our debt could result in a default of such debt and acceleration of our borrowings, which could have a material adverse effect on our business, financial condition and results of operations.
Our failure to comply with the covenants under our Credit Agreement for our debt facilities or to have sufficient liquidity to make interest and other payments required by our debt could result in a default of such debt and acceleration of our borrowings, which could have a material adverse effect on our business, financial condition and results of operations.
While we do not intend to grant any further awards under the 2017 Equity Plan, we may issue all the shares underlying the awards granted under the 2017 Plan and all of the shares authorized for issuance under the 2021 Equity Plan without any action or approval by our stockholders, subject to certain exceptions.
While we do not intend to grant any further awards under the 2017 Equity Plan, we may issue all the shares underlying the awards granted under the 2017 Equity Plan and all of the shares authorized for issuance under the 2021 Equity Plan without any action or approval by our stockholders, subject to certain exceptions.
The restaurant industry has also experienced since the start of the COVID-19 pandemic aggressive competition for talent, wage inflation and pressure to improve benefits and workplace conditions to remain competitive. In addition, our existing wages and benefits programs, combined with the highly competitive wage pressure resulting from the labor shortage, may be insufficient to attract and retain the best talent.
Since the start of the COVID-19 pandemic, the restaurant industry has experienced aggressive competition for talent, wage inflation and pressure to improve benefits and workplace conditions to remain competitive. In addition, our existing wages and benefits programs, combined with the highly competitive wage pressure resulting from the labor shortage, may be insufficient to attract and retain the best talent.
The First Watch ® trademark is also registered in Canada. In addition, the First Watch logo, website domain name and Facebook, Instagram and Twitter accounts are our intellectual property. The success of our business strategy depends on our continued ability to use our existing trademarks and service marks in order to increase brand awareness and develop our branded products.
The First Watch ® trademark is also registered in Canada. In addition, the First Watch logo, website domain name and Facebook and Instagram accounts are our intellectual property. The success of our business strategy depends on our continued ability to use our existing trademarks and service marks in order to increase brand awareness and develop our branded products.
We could also incur additional costs and require additional resources to monitor, report and comply with various ESG practices and regulations, which could increase our operating costs and affect our results of operations and financial condition. In addition, from time to time, we may communicate certain initiatives regarding climate change and other ESG matters.
We could also incur additional costs and require additional resources to monitor, report and comply with various ESG practices, laws and regulations, which could increase our operating costs and affect our results of operations and financial condition. In addition, from time to time, we may communicate certain initiatives regarding climate change and other ESG matters.
These rules and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our Board or our Board committees or as executive officers. Our management and other personnel will devote a substantial amount of time to these compliance initiatives.
These rules and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our Board or our Board committees or as executive officers. Our management and other personnel will continue to devote a substantial amount of time to these compliance initiatives.
We do not expect to declare or pay any cash or other dividends in the foreseeable future on our common stock because we intend to use cash flow generated by operations to grow our business. Our Credit Agreement for our Facilities restricts our ability to pay cash dividends on our common stock.
We do not expect to declare or pay any cash or other dividends in the foreseeable future on our common stock because we intend to use cash flow generated by operations to grow our business. Our Credit Agreement for our debt facilities restricts our ability to pay cash dividends on our common stock.
Any one or more of the factors listed below or described elsewhere in this risk factors section could have a material adverse impact on our business, financial condition and/or results of operations: • increases in real estate costs in certain markets; • inflationary pressures; • disruptions to our supply chain; • changes in governmental rules and approaches to taxation; • adverse outcomes of litigation; • severe weather or other natural or man-made disasters affecting a large market or several closely located markets that may temporarily but significantly impact our restaurant operations in such markets; • changes in climate, including changes to the frequency of severe weather events, that impact the cost and availability of goods and services, energy and other materials throughout our supply chain; and • labor discord or disruption, geopolitical events, war, terrorism, political instability, acts of public violence, boycotts, hostilities and social unrest and other health pandemics that lead to avoidance of public places or restrictions on public gatherings such as in our restaurants.
Any one or more of the factors listed below or described elsewhere in this Risk Factors section could have a material adverse impact on our business, financial condition and/or results of operations: • increases in real estate costs in certain markets; • inflationary pressures; • disruptions to our supply chain; • changes in governmental rules and approaches to taxation; • adverse outcomes of litigation; • severe weather or other natural or man-made disasters affecting a large market or several closely located markets that may temporarily but significantly impact our restaurant operations in such markets; • changes in climate, including changes to the frequency of severe weather events, that impact the cost and availability of goods and services, energy and other materials throughout our supply chain; and • labor discord or disruption, geopolitical events, war, terrorism, political instability, acts of public violence, boycotts, hostilities and social unrest and health pandemics or other outbreaks of infectious disease that lead to avoidance of public places or restrictions on public gatherings such as in our restaurants.
Our ability to operate new restaurants profitably and increase our average unit volume and same-restaurant sales growth will depend on many factors, some of which are beyond our control, including: • consumer awareness and understanding of our brand; • general economic conditions, which can affect restaurant traffic, local labor costs and prices we pay for the food products and other supplies we use; • consumption patterns and food preferences that may differ from region to region; • changes in consumer preferences and discretionary spending; • difficulties obtaining or maintaining adequate relationships with distributors or suppliers in new markets; • increases in prices for commodities; • inefficiency in our labor costs as the staff gains experience; • competition, either from our competitors in the restaurant industry or our own restaurants; • temporary and permanent site characteristics of new restaurants; • changes in government regulation; and • other unanticipated increases in costs, any of which could give rise to delays or cost overruns.
Our ability to operate new restaurants profitably and increase our average unit volume and same-restaurant sales growth will depend on many factors, some of which are beyond our control, including: • consumer awareness and understanding of our brand; • general economic conditions, which can affect restaurant traffic, local labor costs and prices we pay for the food products and other supplies we use; • consumption patterns and food preferences that may differ from region to region; • changes in consumer preferences and discretionary spending; 15 Table of Contents • difficulties obtaining or maintaining adequate relationships with distributors or suppliers in new markets; • increases in prices for commodities; • inefficiency in our labor costs as the staff gains experience; • competition, either from our competitors in the restaurant industry or our own restaurants; • temporary and permanent site characteristics of new restaurants; • changes in government regulation; and • other unanticipated increases in costs, any of which could give rise to delays or cost overruns.
Our profitability depends in part on our ability to anticipate and react to changes in food and beverage costs, including, among other things, pork, coffee, eggs, avocados, potatoes, bread, cheese, fresh fruit and produce items.
Our profitability depends in part on our ability to anticipate and react to changes in food and beverage costs, including, among other things, our costs for pork, coffee, eggs, avocados, potatoes, bread, cheese, fresh fruit and produce items.
We cannot assure that all food items will be properly maintained during transport throughout the supply chain and that our employees will identify all products that may be spoiled and should not be used in our restaurants.
We cannot assure that all food items will be properly maintained during transport throughout the supply chain or that our employees will identify all products that may be spoiled and should not be used in our restaurants.
Among other things, these provisions: • provide for a classified Board with staggered three-year terms; • do not permit cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates; • delegate the sole power of a majority of the Board to fix the number of directors; • provide the power of our Board to fill any vacancy on our Board, whether such vacancy occurs as a result of an increase in the number of directors or otherwise; • authorize the issuance of “blank check” preferred stock without any need for action by stockholders; • eliminate the ability of stockholders to call special meetings of stockholders; and • establish advance notice requirements for nominations for election to our Board or for proposing matters that can be acted on by stockholders at stockholder meetings.
Among other things, these provisions: • provide for a classified Board with staggered three-year terms; 30 Table of Contents • do not permit cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates; • delegate the sole power of a majority of the Board to fix the number of directors; • provide the power of our Board to fill any vacancy on our Board, whether such vacancy occurs as a result of an increase in the number of directors or otherwise; • authorize the issuance of “blank check” preferred stock without any need for action by stockholders; • eliminate the ability of stockholders to call special meetings of stockholders; and • establish advance notice requirements for nominations for election to our Board or for proposing matters that can be acted on by stockholders at stockholder meetings.
Customers, investors, lenders, regulators and other industry stakeholders have placed increasing importance on corporate ESG practices, which could cause us to incur additional costs and changes to our operations.
Certain customers, investors, lenders, regulators and other industry stakeholders have placed increasing importance on corporate ESG practices, which could cause us to incur additional costs and changes to our operations.
As an emerging growth company, we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not 32 Table of Contents limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and of stockholder approval of any golden parachute payments not previously approved.
As an emerging growth company, we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and of stockholder approval of any golden parachute payments not previously approved.
We may not respond quickly enough to the changing demands that our expansion will impose on our management, restaurant teams and existing infrastructure which could have a material adverse effect on our business, financial condition and results of operations. Opening new restaurants in existing markets may negatively impact sales at our and our franchisees’ existing restaurants.
We may not respond quickly enough to the changing demands that our expansion will impose on our management, restaurant teams and existing infrastructure which could have a material adverse effect on our business, financial condition and results of operations. Opening new restaurants in existing markets may adversely impact sales at our and our franchisees’ existing restaurants.
Such incidents or reports could negatively affect our brand and reputation and could have a material adverse effect on our business, financial condition and results of operations. Similar incidents or reports occurring at competitors in our industry unrelated to us could likewise create negative publicity, which could negatively impact consumer behavior towards us.
Such incidents or reports could adversely affect our brand and reputation and could have a material adverse effect on our business, financial condition and results of operations. Similar incidents or reports occurring at competitors in our industry unrelated to us could likewise create negative publicity, which could adversely impact consumer behavior towards us.
One or more instances of food-borne illness in one of our company-owned or franchised restaurants could negatively affect sales at all our restaurants if highly publicized, such as on national media outlets or through social media, especially due to the geographic concentration of many of our restaurants.
One or more instances of food-borne illness in one of our company-owned or franchised restaurants could adversely affect sales at all our restaurants if highly publicized, such as on national media outlets or through social media, especially due to the geographic concentration of many of our restaurants.
If our executive officers were to leave us or become incapacitated, it might negatively impact our planning and execution of business strategy and operations. We believe that our future success will depend on our continued ability to attract and retain highly skilled and qualified executive personnel.
If our executive officers were to leave us or become incapacitated, it might adversely impact our planning and execution of business strategy and operations. We believe that our future success will depend on our continued ability to attract and retain highly skilled and qualified executive personnel.
Food safety and quality concerns may negatively impact our business and profitability, our internal operational controls and standards may not always be met and our employees may not always act professionally, responsibly and in our and our customers’ best interests. Any possible instances of food-borne illness could reduce our restaurant sales.
Food safety and quality concerns may adversely impact our business and profitability, our internal operational controls and standards may not always be met and our employees may not always act professionally, responsibly and in our and our customers’ best interests. Any possible instances of food-borne illness could reduce our restaurant sales.
If our ESG practices or disclosures do not meet stakeholders’ evolving expectations and standards, our customer and employee retention, our access to certain types of capital, and our brand and reputation may be negatively impacted, which could affect our business operations and financial condition.
If our ESG practices or disclosures do not meet stakeholders’ evolving expectations and standards, our customer and employee retention, our access to certain types of capital, and our brand and reputation may be adversely impacted, which could affect our business operations and financial condition.
Our inability or failure to recognize, respond to and effectively manage the accelerated impact of social media could have a material adverse effect on our business, financial condition and results of operations. Our marketing efforts rely heavily on the use of social media.
Our inability or failure to recognize, respond to and effectively manage the accelerated impact of social media or artificial intelligence could have a material adverse effect on our business, financial condition and results of operations. Our marketing efforts rely heavily on the use of social media.
A decline in visitors to any of the retail centers, lifestyle centers, or entertainment centers where our restaurants are located could negatively affect our restaurant sales. Our restaurants are primarily located in high-activity trade areas that often contain retail centers, lifestyle centers, and entertainment centers.
A decline in visitors to any of the retail centers, lifestyle centers, or entertainment centers where our restaurants are located could adversely affect our restaurant sales. Our restaurants are primarily located in high-activity trade areas that often contain retail centers, lifestyle centers, and entertainment centers.
A judgment in excess of our insurance coverage for any claims could have a material adverse effect on our business, financial condition and results of operations. In addition, such allegations could result in adverse publicity and negatively impact our reputation, which could have a material adverse effect on our business, financial condition and results of operations.
A judgment in excess of our insurance coverage for any claims could have a material adverse effect on our business, financial condition and results of operations. In addition, such allegations could result in adverse publicity and adversely impact our reputation, which could have a material adverse effect on our business, financial condition and results of operations.
If we are unable to open new restaurants, or if planned restaurant openings are significantly delayed, it could have a material adverse effect on our business, financial condition and results of operations. Our system-wide restaurants are geographically concentrated in the southeast portion of the United States and we may encounter new challenges as we enter new markets.
If we are unable to open new restaurants, or if planned restaurant openings are significantly delayed, it could have a material adverse effect on our business, financial condition and results of operations. 13 Table of Contents Our system-wide restaurants are geographically concentrated in the southeast portion of the United States and we may encounter new challenges as we enter new markets.
The cancellation of our supply arrangements with any one of these suppliers or the disruption, delay or inability of these suppliers to deliver these major products to our restaurants or distribution centers due to problems in production or distribution, inclement weather, unanticipated demand or other conditions may materially and adversely affect our results of operations while we establish alternative supplier and distribution channels, all of which may materially and adversely affect our results of operations while we establish these alternate supplier and distribution channels.
The cancellation of our supply arrangements with any one of these suppliers or the disruption, delay or inability of these suppliers to deliver these major products to our restaurants or distribution centers due to problems in production or distribution, inclement weather, unanticipated demand or other conditions may materially and adversely affect our results of operations while we establish alternative supplier and distribution channels.
We may not be able to refinance our debt or sell additional debt or equity securities or our assets on favorable terms, if at all, and if we must sell our assets, it may negatively affect our financial condition and results of operations.
We may not be able to refinance our debt or sell additional debt or equity securities or our assets on favorable terms, if at all, and if we must sell our assets, it may adversely affect our financial condition and results of operations.
Generally, our leases are triple-net leases that require us to 26 Table of Contents pay our share of the costs of real estate taxes, utilities, building operating expenses, insurance and other charges in addition to rent. We generally cannot cancel these leases, and additional sites that we lease are likely to be subject to similar long-term non-cancelable leases.
Generally, our leases are triple-net leases that require us to pay our share of the costs of real estate taxes, utilities, building operating expenses, insurance and other charges in addition to rent. We generally cannot cancel these leases, and additional sites that we lease are likely to be subject to similar long-term non-cancelable leases.
In addition, provisions of our amended and restated certificate of incorporation and bylaws may make it more difficult for, or prevent a third party from, acquiring control of us without the approval of our Board.
In addition, provisions of our amended and restated certificate of incorporation and bylaws may make it more difficult to, or prevent a third party from, acquiring control of us without the approval of our Board.
As a result, Advent beneficially owns shares sufficient for majority votes over all matters requiring stockholder votes, including: the election of 34 Table of Contents directors; mergers, consolidations and acquisitions; the sale of all or substantially all of our assets and other decisions affecting our capital structure; amendments to our certificate of incorporation or our bylaws; and our winding up and dissolution.
As a result, Advent beneficially owns shares sufficient for majority votes over all matters requiring stockholder votes, including: the election of directors; mergers, consolidations and acquisitions; the sale of all or substantially all of our assets and other decisions affecting our capital structure; amendments to our certificate of incorporation or our bylaws; and our winding up and dissolution.
We could fail or be perceived to fail to achieve such initiatives, which may negatively affect our reputation. The future adoption of new technology or processes to achieve such initiatives could also result in the impairment of existing assets.
We could fail or be perceived to fail to achieve such initiatives, which may adversely affect our reputation. The future adoption of new technology or processes to achieve such initiatives could also result in the impairment of existing assets.
The significant increase in remote working, particularly for an extended period of time, could increase certain risks to our business, including an increased risk of cybersecurity events, vulnerability of our systems and improper dissemination of confidential or personal information, if our physical and cybersecurity measures or our corporate policies are not effective.
Remote working, particularly for an extended period of time, could increase certain risks to our business, including an increased risk of cybersecurity events, vulnerability of our systems and improper dissemination of confidential or personal information, if our physical and cybersecurity measures or our corporate policies are not effective.
In addition, our employees, franchisees, contractors, or third parties with whom we do business or to whom we outsource business operations may attempt to circumvent our security measures in order to misappropriate regulated, protected, or personally identifiable information, and may purposefully or inadvertently cause a breach involving or compromise of such information.
In addition, our employees, franchisees, contractors, or third parties with whom we do business or to whom we outsource business operations may attempt to circumvent our security measures in order to misappropriate regulated, protected, or personally identifiable information, and may purposefully or inadvertently cause a breach involving or compromising such information.
As a result, we need to continuously innovate and develop our social media strategies in order to maintain broad appeal with customers and brand relevance, particularly given the rise in digital orders by customers at home due to the increased work-from-home customer base.
As a result, we need to continuously innovate and develop our marketing strategies in order to maintain broad appeal with customers and brand relevance, particularly given the rise in digital orders by customers at home due to the increased work-from-home customer base.
We may be unable to increase our menu prices in order to pass future increased labor costs on to our customers, in which case our operating margins would be negatively affected.
We may be unable to increase our menu prices in order to pass future increased labor costs on to our customers, in which case our operating margins would be adversely affected.
To the fullest extent permitted by law, any person or entity purchasing or otherwise acquiring or holding any interest in any shares of our capital stock shall be deemed to have notice of and consented to the forum provision in our amended and restated certificate of incorporation.
Our amended and restated certificate of incorporation includes a forum selection provision. To the fullest extent permitted by law, any person or entity purchasing or otherwise acquiring or holding any interest in any shares of our capital stock shall be deemed to have notice of and consented to the forum selection.
Similar lawsuits have been instituted from time to time alleging violations 25 Table of Contents of various federal and state wage and hour laws regarding, among other things, employee meal deductions, overtime eligibility of managers and failure to pay for all hours worked.
Similar lawsuits have been instituted from time to time alleging violations of various federal and state wage and hour laws regarding, among other things, employee meal deductions, overtime eligibility of managers and failure to pay for all hours worked.
Although First Watch Restaurant Group, Inc. does not expect to pay dividends on its common stock for the foreseeable future, if it is unable to obtain funds from its subsidiaries, it may be unable to, or its board of directors (the “Board”) may exercise its discretion not to, pay dividends.
Although First Watch Restaurant Group, Inc. does not expect to pay dividends on its common stock for the foreseeable future, if it is unable to obtain funds from its subsidiaries, it may be unable to, or its Board may exercise its discretion not to, pay dividends.
Additionally, our limited time menu offerings, which we offer as a key part of our promotional activities from time to time, may not perform as anticipated, which could have an adverse impact on our results of operations for the related period.
Additionally, our limited time menu offerings, which are a key part of our promotional activities from time to time, may not perform as anticipated, which could have an adverse impact on our results of operations for the related period.
Factors such as traffic patterns, weather, fuel prices, local demographics and the type, number and locations of competing restaurants may adversely affect the performances of individual locations. In addition, economic downturns, geopolitical tensions, inflation or increased food or energy costs could harm the restaurant industry in general and our restaurants in particular.
Factors such as traffic patterns, weather, fuel prices, local demographics and the type, number and locations of competing restaurants may adversely affect the performances of individual locations. In addition, economic downturns, geopolitical tensions, inflation or increased food or energy costs have harmed and could continue to harm the restaurant industry in general and our restaurants in particular.
A variety of federal and state laws and regulations govern the collection, use, retention, sharing and 21 Table of Contents security of consumer data, particularly in the context of digital marketing, which we rely upon to attract new customers.
A variety of federal and state laws and regulations govern the collection, use, retention, sharing and security of consumer data, particularly in the context of digital marketing, which we rely upon to attract new customers.
Because these cases often seek punitive damages, which may not be covered by insurance, such litigation could have a material effect on our business, financial condition and results of operations.
Because these cases often seek punitive damages, which may not be covered by insurance, such litigation could 26 Table of Contents have a material effect on our business, financial condition and results of operations.
Compliance with these laws can be costly and may increase our exposure to litigation or governmental investigations or proceedings. Our business is also subject to extensive laws and regulations relating to public company compliance, disclosure and governance matters, including accounting and tax regulations, SEC and Nasdaq disclosure requirements.
Compliance with these laws can be costly and may increase our exposure to litigation or governmental investigations or proceedings. Our business is also subject to extensive laws and regulations relating to public company compliance, disclosure and governance matters, including accounting and tax regulations, SEC and Nasdaq disclosure requirements, as further discussed below.
As a newly public company, we are required to comply with Section 404 of the Sarbanes-Oxley Act (“Section 404”) in accordance with the rules and regulations of the SEC, which requires management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting commencing with our second annual report after our IPO.
As a public company, we are required to comply with Section 404 of the Sarbanes-Oxley Act (“Section 404”) in accordance with the rules and regulations of the SEC, which requires management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting.
Approximately 70.0% of our outstanding common stock is indirectly beneficially owned by Advent, and can be resold into the public markets in the future in accordance with the requirements of Rule 144. The market price of our common stock may decline significantly in connection with any sales by Advent of its common stock.
Approximately 56.9% of our outstanding common stock is indirectly beneficially owned by Advent, and can be resold into the public markets in the future in accordance with the requirements of Rule 144. The market price of our common stock may decline significantly in connection with any sales by Advent of its common stock.
We could remain an emerging growth company for up to five years or until the earliest of (a) the last day of the first fiscal year in which our annual gross revenues exceed $1.07 billion, (b) the date that we become a large accelerated filer as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (c) the date on which we have issued more than $1 billion in non-convertible debt securities in the preceding three-year period.
We could remain an emerging growth company for up to five years after our IPO, which took place in September 2021, or until the earliest of (a) the last day of the first fiscal year in which our annual gross revenues exceed $1.235 billion, (b) the date that we become a large accelerated filer as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (c) the date on which we have issued more than $1.0 billion in non-convertible debt securities in the preceding three-year period.
Consumer recognition of our 13 Table of Contents brand has been important in the success of company-owned and franchise-owned restaurants in our existing markets, and we may find that our concept has limited appeal in new markets.
Consumer recognition of our brand has been important in the success of company-owned and franchise-owned restaurants in our existing markets, and we may find that our concept has limited appeal in new markets.
In the event of cost increases with respect to one or more of our raw ingredients, we may choose to temporarily suspend or permanently discontinue serving menu items rather than pay the increased cost for the ingredients. Any such changes to our available menu could negatively impact our restaurant traffic, business and same-restaurant sales growth during the shortage and thereafter.
In the event of cost increases with respect to one or more of our raw ingredients, we may choose to temporarily suspend or permanently discontinue serving menu items rather than pay the increased cost for the ingredients. Any such changes to our available menu could adversely impact our restaurant traffic, business and same-restaurant sales growth.
Preferred shares could have a preference with respect to liquidating distributions or a preference with respect to dividend payments that could limit our ability to pay dividends to the holders of our common stock.
Preferred shares could have a preference with respect to liquidating distributions or a preference with respect to dividend payments that could limit our ability to pay dividends to the holders of our common 31 Table of Contents stock.
For instance, the Russia-Ukraine conflict could adversely impact, among other things, our raw material, energy and transportation costs, as well as certain of our suppliers, global and local macroeconomic conditions, and cause further supply chain disruptions.
For instance, the Russia-Ukraine war and the Israel-Hamas war could adversely impact, among other things, our raw material, energy and transportation costs, as well as certain of our suppliers, global and local macroeconomic conditions, and cause further supply chain disruptions.
If any of our workers are found to be unauthorized, we could experience adverse publicity that may negatively impact our brand, disrupt our operations, make it more difficult to hire and keep qualified employees, cause temporary increases in our labor costs as we train new employees and result in adverse publicity.
If any of our workers are found to be unauthorized, we could experience adverse publicity that may 24 Table of Contents adversely impact our brand, disrupt our operations, make it more difficult to hire and keep qualified employees, cause temporary increases in our labor costs as we train new employees and result in adverse publicity.
If our 28 Table of Contents remediation of the material weaknesses is not effective, or if we otherwise fail to maintain effective internal control over financial reporting in the future, we may not be able to accurately or timely report our financial condition or results of operations, which, in turn, could negatively impact the market value of our common stock.
If our remediation of the material weaknesses is not effective, or if we otherwise fail to maintain effective internal control over financial reporting in the future, we may not be able to accurately or timely report our financial condition or results of operations, which, in turn, could adversely impact the market value of our common stock.
In the future, results of operations may fall below the expectations of securities analysts and investors. In that event, the price of our common stock could be adversely impacted. The market price of our common stock could be negatively affected by sales of substantial amounts of our common stock in the public markets.
In the future, results of operations may fall below the expectations of securities analysts and investors. In that event, the price of our common stock could be adversely impacted. 32 Table of Contents The market price of our common stock could be adversely affected by sales of substantial amounts of our common stock in the public markets.
No specific United States tax legislation has been proposed at this time and the likelihood of these changes being enacted or implemented is unclear. We are currently unable to predict whether such changes will occur. If such changes are enacted or implemented, we are currently unable to predict the ultimate impact on our business. 36 Table of Contents Item 1B.
No specific United States tax legislation has been proposed at this time and the likelihood of these changes being enacted or implemented is unclear. We are currently unable to predict whether such changes will occur. If such changes are enacted or implemented, we are currently unable to predict the ultimate impact on our business.
We provide training and support to franchisees, and set and monitor operational standards and guidelines, however, because we do not have day-to-day control over the franchisees, we cannot give assurance that the franchisees operate restaurants in a manner consistent with our standards, guidelines and requirements, or hire and train qualified managers and other restaurant personnel.
We provide training and support to franchisees, and set and monitor operational standards and guidelines, however, because we do not have day-to-day control over the franchisees, our franchisees may operate restaurants in a manner that is not consistent with our standards, guidelines and requirements, or hire and train qualified managers and other restaurant personnel.
To achieve compliance with the rules and regulations of the SEC within the prescribed period, we will need to continue to dedicate internal resources, engage outside consultants and continue to execute on a detailed work plan to assess and document the adequacy of our internal control over financial reporting, continue taking steps to improve control processes, as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting.
To comply with the rules and regulations of the SEC, we need to continue to dedicate internal resources, engage outside consultants and continue to execute on a detailed work plan to assess and document the adequacy of our internal control over financial reporting, continue taking steps to improve control processes, as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting.
An unfavorable report on, or reaction to, our menu ingredients, the size of our portions or the nutritional content of our menu items could negatively influence the demand for our menu offerings. Compliance with current and future laws and regulations regarding the ingredients and nutritional content of our menu items may be costly and time-consuming.
An unfavorable report on, or reaction to, our menu ingredients, the size of our portions or the nutritional content of our menu items could adversely influence the demand for our menu offerings. 12 Table of Contents Compliance with current and future laws and regulations regarding the ingredients and nutritional content of our menu items may be costly and time-consuming.
A number of other restaurant chains have experienced incidents related to food-borne illnesses that have had material adverse impacts on their operations, and we cannot assure you that we could avoid a similar impact upon the occurrence of a similar incident at one of our restaurants.
A number of other restaurant chains have experienced incidents related to food-borne illnesses that have had material adverse impacts on their operations, and we could experience a similar impact upon the occurrence of a similar incident at one of our restaurants.
The financial performance of our franchisees can have a material adverse effect on our business, financial condition and results of operations. As 23% and 22% of our system-wide restaurants were franchised as of December 25, 2022 and December 26, 2021, respectively, our results of operations are dependent in part upon the operational and financial success of our franchisees.
The financial performance of our franchisees can have a material adverse effect on our business, financial condition and results of operations. As 19% and 23% of our system-wide restaurants were franchised as of December 31, 2023 and December 25, 2022, respectively, our results of operations are dependent in part upon the operational and financial success of our franchisees.
If these initiatives are not successful, it could result in us incurring expenses without the benefit of higher revenues, which could have a material adverse effect on our business, financial condition and results of operations. Changes in the cost of food could have a material adverse effect on our business, financial condition and results of operations.
If these initiatives are not successful, we could incur expenses without the benefit of higher revenues, which could have a material adverse effect on our business, financial condition and results of operations. Changes in the cost of food could have a material adverse effect on our business, financial condition and results of operations.
Additionally, our suppliers may initiate or otherwise be subject to food recalls that may impact the availability of certain products, result in adverse publicity or require us to take actions that 27 Table of Contents could be costly for us or otherwise impact our business.
Additionally, due to such regulations, our suppliers may initiate or otherwise be subject to food recalls that may impact the availability of certain products, result in adverse publicity or require us to take actions that could be costly for us or otherwise impact our business.
Our restaurants in Florida represented approximately 23.0% of our system-wide restaurants as of December 25, 2022. Adverse changes in demographic, unemployment, economic, regulatory or weather conditions in the southeast portion of the United States have had, and may continue to have, material adverse effects on our business, financial condition and results of operations.
Our restaurants in Florida represented approximately 23% of our system-wide restaurants as of 18 Table of Contents December 31, 2023. Adverse changes in demographic, unemployment, economic, regulatory or weather conditions in the southeast portion of the United States have had, and may continue to have, material adverse effects on our business, financial condition and results of operations.
If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited, which could have a material adverse effect on our business, financial condition and results of operations.
If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited, which could have a material adverse effect on our business, financial condition and results of operations. 33 Table of Contents Changes in accounting principles applicable to us could have a material adverse effect on our financial condition and results of operations.
The costs to us to eliminate any of the foregoing cybersecurity vulnerabilities or to 20 Table of Contents address a cyber-incident could be significant and have a material adverse impact on our business, financial condition and results of operations.
The costs to us to protect against any of the foregoing cybersecurity vulnerabilities or to address a cyber-incident could be significant and have a material adverse impact on our business, financial condition and results of operations.
Our system-wide restaurant base is geographically concentrated in the southeast portion of the United States, and we could be negatively affected by conditions specific to that region. Our restaurants in the southeast portion of the United States represented approximately 41.0% of our system-wide restaurants as of December 25, 2022.
Our system-wide restaurant base is geographically concentrated in the southeast portion of the United States, and we could be adversely affected by conditions specific to that region. Our restaurants in the southeast portion of the United States represented approximately 42% of our system-wide restaurants as of December 31, 2023.
Changes in the price or availability of certain food products could affect our profitability and reputation. While some commodities we purchase are subject to contract pricing, as our contracts expire, we may not be able to successfully re-negotiate terms that protect us from price inflation in the future. International commodities we purchase are also subject to supply shortages or interruptions.
While some commodities we purchase are subject to contract pricing, as our contracts expire, we may not be able to successfully re-negotiate terms that protect us from price inflation in the future. International commodities we purchase are also subject to supply shortages or interruptions.
There can also be no assurance that consumers will continue to regard our menu offerings favorably, that we will be able to develop new menu items that appeal to consumer preferences or that there will not be a drop in consumer demands for restaurant dining during breakfast and lunch dayparts.
It is possible that consumers may no longer regard our menu offerings favorably, that we will no longer be able to develop new menu items that appeal to consumer preferences or that there will be a drop in consumer demands for restaurant dining during breakfast and lunch dayparts.
Unionization activities may disrupt our operations and increase our costs. Although none of our employees are currently covered under collective bargaining agreements, our employees may elect to be represented by labor unions in the future.
Although none of our employees are currently covered under collective bargaining agreements, our employees may elect to be represented by labor unions in the future.
In addition, the negative impact of adverse publicity may extend far beyond the restaurant involved, especially due to the high geographic concentration of many of our restaurants, and affect some or all our other restaurants, including our franchise-owned restaurants.
Negative publicity may adversely affect us, regardless of whether the allegations are valid or whether we are held responsible. In addition, the negative impact of adverse publicity may extend far beyond the restaurant involved, especially due to the high geographic concentration of many of our restaurants, and affect some or all our other restaurants, including our franchise-owned restaurants.
Additionally, negative commentary regarding our restaurants, our food or our service may be posted on our website or social media platforms and may be adverse to our reputation or business. This harm may be immediate, without affording us an opportunity for redress or correction. Our insurance may not provide adequate levels of coverage against claims.
Additionally, negative commentary regarding our restaurants, our food or our service may be posted on our social media platforms and may be adverse to our reputation or business. This harm may be immediate, without affording us an opportunity for redress or correction.
We also compete with a number of non-traditional market participants, such as 16 Table of Contents convenience stores, grocery stores, coffee shops, meal kit delivery services, and “ghost” or dark kitchens, where meals are prepared at separate takeaway premises rather than a restaurant.
We also compete with a number of non-traditional market participants, such as convenience stores, grocery stores, coffee shops, meal kit delivery services, and “ghost” or dark kitchens, where meals are prepared at separate takeaway premises rather than a restaurant. Competition from food delivery services companies has also increased in recent years.
Our operating results have been in the past and will continue to be subject to a number of other factors, many of which are largely outside our control.
Our financial condition and results of operations are subject to, and may be adversely affected by, a number of other factors, many of which are also largely outside of our control. Our operating results have been in the past and will continue to be subject to a number of other factors, many of which are largely outside our control.
Accordingly, although we believe that alternative supply and distribution sources are available, there can be no assurance that we will continue to be able to identify or negotiate with such sources on terms that are commercially reasonable to us.
Accordingly, although we believe that alternative supply and distribution sources are available, we may not be able to identify or negotiate with such sources on terms that are commercially reasonable to us.
There is a high level of competition for experienced, successful executive personnel in our industry. Our inability to meet our executive staffing requirements in the future could have a material adverse effect on our business, financial condition and results of operations.
There is a high level of competition for experienced, successful executive personnel in our industry. Our inability to meet our executive staffing requirements in the future could have a material adverse effect on our business, financial condition and results of operations. We might require additional capital to support business growth and this capital might not be available.
The viability of our franchise business depends on our ability to maintain good relationships with our franchisees.
Our franchisees pay us fees pursuant to our franchise agreements. The viability of our franchise business depends on our ability to maintain good relationships with our franchisees.
Additionally, even if food-borne illnesses were not identified at our restaurants, our restaurant sales could be adversely affected if instances of food-borne illnesses at other restaurant chains were highly publicized. 17 Table of Contents Finally, although we have followed industry standard food safety protocols in the past and have endeavored to continually enhance our food safety procedures to ensure that our food is as safe as it can possibly be, we may still be at a higher risk for food-borne illness occurrences than some competitors due to our greater use of fresh, unprocessed produce and meats, our reliance on employees cooking with traditional methods rather than automation, and our avoidance of frozen ingredients.
Finally, although we have followed industry standard food safety protocols in the past and have endeavored to continually enhance our food safety procedures to ensure that our food is as safe as it can possibly be, we may still be at a higher risk for food-borne illness occurrences than some competitors due to our greater use of fresh, unprocessed produce and meats, our reliance on employees cooking with traditional methods rather than automation, and our avoidance of frozen ingredients.
We believe that we maintain insurance customary for businesses of our size and type. However, there are types of losses we may incur that cannot be insured against or that we believe are not economically reasonable to insure. Such losses could have a material adverse effect on our business, financial condition and results of operations.
However, there are types of losses we may incur that cannot be insured against or that we believe are not economically reasonable to insure. Such losses could have a material adverse effect on our business, financial condition and results of operations. Item 1B. Unresolved Staff Comments None
Furthermore, before and during the COVID-19 pandemic, at various times we have allowed certain of our team members in our corporate headquarters to work from home.
Furthermore, at various times we have allowed certain of our team members in our corporate headquarters to work from home.
We may not be able to effectively respond to changes in consumer health perceptions, comply with further nutrient content disclosure requirements or adapt our menu offerings to trends in eating habits, which could have a material adverse effect on our business, financial condition and results of operations. 12 Table of Contents Our financial condition and results of operations are subject to, and may be adversely affected by, a number of other factors, many of which are also largely outside of our control.
We may not be able to effectively respond to changes in consumer health perceptions, comply with further nutrient content disclosure requirements or adapt our menu offerings to trends in eating habits, which could have a material adverse effect on our business, financial condition and results of operations.
In 2022, we experienced significant increases in the cost of eggs primarily due to an outbreak of avian influenza that is expected to continue into 2023.
In 2022-2023, for example, we experienced significant increases in the cost of eggs, primarily due to an outbreak of avian influenza.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeAs of December 25, 2022, company-owned and franchise-owned restaurants by jurisdiction were: State Company-owned Franchise-owned Total Alabama 4 — 4 Arizona 28 — 28 Arkansas — 3 3 Colorado 18 — 18 Delaware 2 — 2 Florida 107 4 111 Georgia 17 2 19 Illinois 5 — 5 Indiana 4 1 5 Kansas 10 — 10 Kentucky 2 13 15 Louisiana — 1 1 Maryland 9 — 9 Michigan 10 — 10 Mississippi — 1 1 Missouri 16 7 23 Nebraska — 6 6 New Jersey 5 — 5 North Carolina 3 28 31 Ohio 38 — 38 Oklahoma — 1 1 Pennsylvania 17 — 17 South Carolina — 5 5 Tennessee 12 8 20 Texas 40 18 58 Utah — 1 1 Virginia 19 4 23 West Virginia — 1 1 Wisconsin — 4 4 TOTAL 366 108 474
Biggest changeAs of December 31, 2023, company-owned and franchise-owned restaurants by jurisdiction were: State Company-owned Franchise-owned Total Alabama 5 — 5 Arizona 31 — 31 Arkansas — 3 3 Colorado 19 — 19 Delaware 4 — 4 Florida 123 — 123 Georgia 23 — 23 Illinois 7 — 7 Indiana 6 1 7 Kansas 10 — 10 Kentucky 2 14 16 Louisiana — 1 1 Maryland 11 — 11 Michigan 11 — 11 Mississippi — 1 1 Missouri 17 7 24 Nebraska 6 — 6 New Jersey 5 — 5 North Carolina 3 33 36 Ohio 40 — 40 Oklahoma — 1 1 Pennsylvania 19 — 19 South Carolina 4 3 7 Tennessee 12 8 20 Texas 42 21 63 Utah — 1 1 Virginia 20 4 24 West Virginia — 1 1 Wisconsin 5 — 5 TOTAL 425 99 524
Item 2. Properties We lease all our company-owned restaurant facilities. As of December 25, 2022, we had 366 company-owned restaurants and 108 franchise-owned restaurants located in 29 states, including a large presence in Florida, Texas, Ohio and Arizona.
Item 2. Properties We lease all our company-owned restaurant facilities. As of December 31, 2023, we had 425 company-owned restaurants and 99 franchise-owned restaurants located in 29 states, including a large presence in Florida, Texas, Ohio and Arizona.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeA significant increase in the number of claims or an increase in amounts owing under successful claims could materially adversely affect our business, financial condition, results of operations and cash flows. Item 4. Mine Safety Disclosures None 37 Table of Contents Part II
Biggest changeA significant increase in the number of claims or an increase in amounts owing under successful claims could materially adversely affect our business, financial condition, results of operations and cash flows. Item 4. Mine Safety Disclosures None 35 Table of Contents Part II

Item 4. Mine Safety Disclosures

Mine Safety Disclosures — required of mining issuers

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Biggest changeItem 4. Mine Safety Disclosures 37 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 38 Item 6. Reserved 39 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 40 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 58 Item 8.
Biggest changeItem 4. Mine Safety Disclosures 35 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 36 Item 6. Reserved 37 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 38 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 57 Item 8.
Added
Financial Statements and Supplementary Data 57 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 95 Item 9A. Controls and Procedures 96

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeThis graph is not “soliciting material,” is not deemed filed with the SEC and is not to be incorporated by reference in any of our filings under the Securities Act or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing. 38 Table of Contents October 1, 2021 December 25, 2022 First Watch Restaurant Group, Inc. $ 100.00 $ 64.20 Nasdaq Composite Index $ 100.00 $ 72.77 S&P Restaurants Index $ 100.00 $ 67.46
Biggest changeThis graph is not “soliciting material,” is not deemed filed with the SEC and is not to be incorporated by reference in any of our filings under the Securities Act or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing. 36 Table of Contents October 1, 2021 December 26, 2021 December 25, 2022 December 31, 2023 First Watch Restaurant Group, Inc. $ 100.00 $ 72.16 $ 64.20 $ 90.80 Nasdaq Composite Index $ 100.00 $ 107.62 $ 72.77 $ 104.97 S&P Restaurants Index $ 100.00 $ 84.95 $ 67.46 $ 79.93
Issuer Purchases of Equity Securities None Cumulative Stock Performance Graph The following graph compares the cumulative annual stockholders return on our common stock from October 1, 2021, the date our common stock began trading on Nasdaq, through December 25, 2022, to that of the total return index for the Nasdaq Composite Index and the S&P Restaurants Index assuming an investment of $100 on October 1, 2021.
Issuer Purchases of Equity Securities None Cumulative Stock Performance Graph The following graph compares the cumulative annual stockholders return on our common stock from October 1, 2021, the date our common stock began trading on Nasdaq, through December 31, 2023 , to that of the total return index for the Nasdaq Composite Index and the S&P Restaurants Index assuming an investment of $100 on October 1, 2021.
The number of record holders does not include persons who held shares of our common stock in nominee or “street name”accounts through brokers. Dividends We do not currently intend to pay cash dividends on our common stock in the foreseeable future.
The number of record holders does not include persons who held shares of our common stock in nominee or “street name” accounts through brokers. Dividends We do not currently intend to pay cash dividends on our common stock in the foreseeable future.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information Our common stock is traded on Nasdaq under the symbol “FWRG.” Holders As of March 3, 2023, there were 32 stockholders of record of our common stock.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information Our common stock is traded on Nasdaq under the symbol “FWRG.” Holders As of March 1, 2024, there were 25 stockholders of record of our common stock.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

79 edited+36 added−29 removed78 unchanged
Biggest changeFinancial highlights for 2022 include the following: • Total revenues increased 21.5% to $730.2 million from $601.2 million in 2021 • System-wide sales increased 21.9% to $914.8 million from $750.7 million in 2021 • Same-restaurant sales growth of 14.5% (29.6% relative to 2019*) • Same-restaurant traffic growth of 7.7% (6.5% relative to 2019*) • Income from operations of $16.9 million and Income from operations margin of 2.4% compared to Income from operations of $22.2 million and Income from operations margin of 3.8% in 2021 • Restaurant level operating profit ** of $128.9 million and Restaurant level operating profit margin ** of 17.9% compared to Restaurant level operating profit ** of $115.4 million and Restaurant level operating profit margin ** of 19.5% in 2021 • Net income of $6.9 million compared to Net loss of $(2.1) million in 2021 • Adjusted EBITDA ** increased to $69.3 million from $66.3 million in 2021 • Opened 43 system-wide restaurants (29 company-owned and 14 franchise-owned) across 16 states resulting in a total of 474 system-wide restaurants (366 company-owned and 108 franchise-owned) across 29 states ___________________ * Comparison to the fiscal year ended December 29, 2019 (“2019”) is presented for enhanced comparability due to the economic impact of COVID-19. ** See Non-GAAP Financial Measure Reconciliations section below. 42 Table of Contents Business Trends, Customer and Supply Chain Despite surging inflation impacting consumers in 2022, we saw a return of in-restaurant dining levels similar to 2019 levels while our off-premises sales remained strong, indicating continued customer demand.
Biggest changeFinancial highlights 2023, which was a 53-week fiscal year, include the following: • Total revenues increased 22.1% to $891.6 million from $730.2 million in 2022 • System-wide sales increased 20.6% to $1.1 billion from $914.8 million in 2022 • Same-restaurant sales growth of 7.6%* (up 38.9% relative to 2019**) • Same-restaurant traffic growth of 0.2%* (up 7.5% relative to 2019**) • Income from operations increased to $41.3 million from $16.9 million in 2022 • Income from operations margin increased to 4.7% from 2.4% in 2022 • Restaurant level operating profit*** increased to $175.7 million from $128.9 million in 2022 • Restaurant level operating profit margin*** increased to 20.0% from 17.9% in 2022 • Net income increased to $25.4 million from $6.9 million in 2022 • Adjusted EBITDA*** increased to $99.5 million from $69.3 million in 2022 • Opened 51 system-wide restaurants (37 company-owned and 14 franchise-owned) across 19 states resulting in a total of 524 system-wide restaurants (425 company-owned and 99 franchise-owned) across 29 states ___________________ *Comparison to the 53 weeks ended January 1, 2023, is provided for enhanced comparability. **Comparison to the 53 weeks ended January 5, 2020, is provided for enhanced comparability. *** See Non-GAAP Financial Measure Reconciliations section below. 40 Table of Contents Business Trends Throughout 2023 and as compared to the prior year, First Watch continued to see dining room traffic grow.
Transaction Expenses (Income), Net Transaction expenses (income), net include (i) revaluations of contingent consideration payable to previous stockholders for tax savings generated through the use of federal and state loss carryforwards and general business credits that had been accumulated from operations prior to August 2017, (ii) gains or losses associated with lease or contract terminations, (iii) costs incurred in connection with the acquisition of franchise-owned restaurants, (iv) costs related to restaurant closures and (v) costs related to certain equity offerings.
Transaction Expenses, Net Transaction expenses, net include (i) costs incurred in connection with the acquisition of franchise-owned restaurants, (ii) costs related to certain equity offerings, (iii) costs related to restaurant closures, (iv) gains or losses associated with lease or contract terminations and (v) revaluations of contingent consideration payable to previous stockholders for tax savings generated through the use of federal and state loss carryforwards and general business credits that had been accumulated from operations prior to August 2017.
No awards were granted under the 2017 Equity Plan during 2022 and the Company does not intend to grant any further awards under the 2017 Equity Plan. Stock-based compensation expense related to time-based stock option awards issued under the 2021 Equity Plan is recognized on a straight-line basis over the requisite service period.
No awards were granted under the 2017 Equity Plan during 2023 and 2022 and the Company does not intend to grant any further awards under the 2017 Equity Plan. Stock-based compensation expense related to time-based stock option awards issued under the 2021 Equity Plan is recognized on a straight-line basis over the requisite service period.
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 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 acquired by the Company.
The Company does not have sufficient historical stock option exercise activity and therefore we estimated the expected term of stock options granted under the 2021 Plan using the simplified method, which represents the mid-point between the vesting period and the contractual term for each grant.
The Company does not have sufficient historical stock option exercise activity and therefore we estimated the expected term of stock options granted under the 2021 Equity Plan using the simplified method, which represents the mid-point between the vesting period and the contractual term for each grant.
Prior to our IPO and our common stock being listed on Nasdaq, 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. 57 Table of Contents 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.
Prior to our IPO and our common stock being listed on Nasdaq, 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. 56 Table of Contents 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.
Adjusted EBITDA : represents Net income (loss) before depreciation and amortization, interest expense, income taxes, and items that we do not consider in our evaluation of ongoing core operating performance as identified in the reconciliation of 41 Table of Contents Net income (loss), the most directly comparable measure in accordance with GAAP, to Adjusted EBITDA, included in the section Non-GAAP Financial Measure Reconciliations below .
Adjusted EBITDA : represents Net income (loss) before depreciation and amortization, interest expense, income taxes, and items that we do not consider in our evaluation of ongoing core operating performance as identified in the reconciliation of 39 Table of Contents Net income (loss), the most directly comparable measure in accordance with GAAP, to Adjusted EBITDA, included in the section Non-GAAP Financial Measure Reconciliations below .
Management reviews the number of new restaurants to assess new restaurant growth and company-owned restaurant sales. 40 Table of Contents Franchise-owned New Restaurant Openings (“Franchise-owned NROs”): the number of new franchise-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. 38 Table of Contents Franchise-owned New Restaurant Openings (“Franchise-owned NROs”): the number of new franchise-owned First Watch restaurants commencing operations during the period.
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.
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 55 Table of Contents tax basis of assets and liabilities as well as tax credit carryforwards.
(2) Reconciliations from Net income (loss) and Net income (loss) margin, the most comparable GAAP measures to Adjusted EBITDA and Adjusted EBITDA margin, are set forth in the schedules within the Non-GAAP Financial Measure Reconciliations section below. 44 Table of Contents Results of Operations The discussion that follows includes a comparison of our results of operations for 2022 and 2021.
(2) Reconciliations from Net income (loss) and Net income (loss) margin, the most comparable GAAP measures to Adjusted EBITDA and Adjusted EBITDA margin, are set forth in the schedules within the Non-GAAP Financial Measure Reconciliations section below. 42 Table of Contents Results of Operations The discussion that follows includes a comparison of our results of operations for 2023 and 2022.
During 2022 and 2021, we elected to perform a qualitative assessment for our annual impairment review of goodwill and indefinite-lived intangibles.
During 2023 and 2022, we elected to perform a qualitative assessment for our annual impairment review of goodwill and indefinite-lived intangibles.
In 56 Table of Contents addition, our annual effective income tax rate is adjusted as additional information becomes available during the reporting period. 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.
In addition, our annual effective income tax rate is adjusted as additional information becomes available during the reporting period. 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.
Based on the results of the qualitative assessment, Management concluded that impairment of 55 Table of Contents goodwill and its indefinite-lived intangibles was not likely and as a result, management was not required to perform a quantitative assessment.
Based on the results of the qualitative assessment, Management concluded that impairment of goodwill and its indefinite-lived intangibles was not likely and as a result, management was not required to perform a quantitative assessment.
We plan to fund the capital expenditures primarily with cash generated from our operating activities as well as with borrowings from our facilities pursuant to our Credit Agreement.
We plan to fund the capital expenditures and our significant acquisitions primarily with cash generated from our operating activities as well as with borrowings from our facilities pursuant to our Credit Agreement.
(3) Represents (i) revaluations of contingent consideration payable to previous stockholders for tax savings generated through the use of federal and state loss carryforwards and general business credits that had been accumulated from operations prior to August 2017, (ii) gains or losses associated with lease or contract terminations, (iii) costs incurred in connection with the acquisition of franchise-owned restaurants, (iv) costs related to restaurant closures and (v) costs related to secondary offerings of the Company’s common stock.
(2) Represents (i) costs incurred in connection with the acquisition of franchise-owned restaurants, (ii) costs related to certain equity offerings, (iii) costs related to restaurant closures, (iv) gains or losses associated with lease or contract terminations and (v) revaluations of contingent consideration payable to previous stockholders for tax savings generated through the use of federal and state loss carryforwards and general business credits that had been accumulated from operations prior to August 2017.
Franchise rights includes rights which arose from the purchase price allocation in connection with the merger agreement through which the Company was acquired by funds affiliated with or managed by Advent International Corporation in August 2017 as well as reacquired rights from our acquisitions of franchise-owned restaurants.
Franchise rights includes rights which arose from the purchase price allocation in connection with the merger agreement through which the Company was acquired by funds affiliated with or man aged by Advent in August 2017 as well as reacquired rights from our acquisitions of franchise-owned restaurants.
All references to 2022, 2021 and 2020 reflect the results of the 52-week fiscal years ended December 25, 2022, December 26, 2021 and December 27, 2020, respectively. We report financial and operating information in one segment.
All references to 2022 and 2021 reflect the 52-week fiscal years ended December 25, 2022 and December 26, 2021, respectively. We report financial and operating information in one segment.
Other Income (Expense), Net Other income (expense), 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. FISCAL YEAR (in thousands) 2022 2021 Change Other income (expense), net $ 910 $ (1,774) $ 2,684 n/m (1) ____________ (1) Not meaningful.
Other Income, Net Other income (expense), 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. FISCAL YEAR (in thousands) 2023 2022 Change Other income, net $ 2,871 $ 910 $ 1,961 n/m (1) ____________ (1) Not meaningful.
These costs are recorded within General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss). (6) Severance costs are recorded in General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss). (7) Represents professional service costs incurred in connection with the Delaware Voluntary Disclosure Agreement Program related to unclaimed or abandoned property.
(5) Represents estimated probable loss and professional service costs incurred in connection with the Delaware Voluntary Disclosure Agreement Program related to unclaimed or abandoned property. These costs are recorded in General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss).
In considering the qualitative approach related to goodwill, we considered factors including, but not limited to, 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 considered the specific future outlook for the reporting unit.
In considering the qualitative approach related to goodwill, we considered factors including, 54 Table of Contents but not limited to, 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.
Restaurant Level Operating Profit Margin : represents Restaurant level operating profit as a percentage of restaurant sales. See Non-GAAP Financial Measure Reconciliations below for a reconciliation to Income (Loss) from operations margin, the most directly comparable GAAP measure.
Restaurant Level Operating Profit Margin : represents Restaurant level operating profit as a percentage of restaurant sales. See Non-GAAP Financial Measure Reconciliations below for a reconciliation to Income (Loss) from operations margin, the most directly comparable GAAP measure. Financial Highlights The financial results of 2023 reflect the continued growth of the Company.
(10) Represents the non-cash portion of straight-line rent expense recorded within both Occupancy expenses and General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss). 52 Table of Contents Restaurant level operating profit and Restaurant level operating profit margin - The following table reconciles Income from operations and Income from operations margin, the most comparable GAAP measures to Restaurant level operating profit and Restaurant level operating profit margin for the periods indicated: FISCAL YEAR (in thousands) 2022 2021 2020 Income from operations $ 16,913 $ 22,243 $ (47,222) Less: Franchise revenues (10,981) (8,850) (4,955) Add: General and administrative expenses 84,959 70,388 46,322 Depreciation and amortization 34,230 32,379 30,725 Transaction expenses (income), net (1) 2,513 (1,156) (258) Impairments and loss on disposal of assets (2) 920 381 315 Costs in connection with natural disasters (3) 382 — — COVID-19 related charges (4) — 19 3,309 Restaurant level operating profit $ 128,936 $ 115,404 $ 28,236 Restaurant sales $ 719,181 $ 592,343 $ 337,433 Income from operations margin 2.4 % 3.8 % (14.0) % Restaurant level operating profit margin 17.9 % 19.5 % 8.4 % Additional information Deferred rent expense (income) (5) $ 2,219 $ (2,075) $ 10,029 _____________________________ (1) Represents (i) revaluations of contingent consideration payable to previous stockholders for tax savings generated through the use of federal and state loss carryforwards and general business credits that had been accumulated from operations prior to August 2017, (ii) gains or losses associated with lease or contract terminations, (iii) costs incurred in connection with the acquisition of franchise-owned restaurants, (iv) costs related to restaurant closures and (v) costs related to secondary offerings of the Company’s common stock.
(10) Represents the non-cash portion of straight-line rent expense recorded within both Occupancy expenses and General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss). 50 Table of Contents Restaurant level operating profit and Restaurant level operating profit margin - The following table reconciles Income from operations and Income from operations margin, the most comparable GAAP measures to Restaurant level operating profit and Restaurant level operating profit margin for the periods indicated: FISCAL YEAR (in thousands) 2023 2022 2021 Income from operations $ 41,267 $ 16,913 $ 22,243 Less: Franchise revenues (14,459) (10,981) (8,850) Add: General and administrative expenses 103,121 84,959 70,388 Depreciation and amortization 41,223 34,230 32,379 Transaction expenses (income), net (1) 3,147 2,513 (1,156) Impairments and loss on disposal of assets (2) 1,359 920 381 Costs in connection with natural disasters (3) — 382 — COVID-19 related charges (4) — — 19 Restaurant level operating profit $ 175,658 $ 128,936 $ 115,404 Restaurant sales $ 877,092 $ 719,181 $ 592,343 Income from operations margin 4.7 % 2.4 % 3.8 % Restaurant level operating profit margin 20.0 % 17.9 % 19.5 % Additional information Deferred rent expense (income) (5) $ 1,891 $ 2,219 $ (2,075) _____________________________ (1) Represents (i) costs incurred in connection with the acquisition of franchise-owned restaurants, (ii) costs related to certain equity offerings, (iii) costs related to restaurant closures, (iv) gains or losses associated with lease or contract terminations and (v) revaluations of contingent consideration payable to previous stockholders for tax savings generated through the use of federal and state loss carryforwards and general business credits that had been accumulated from operations prior to August 2017.
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.
This increase was partially offset by lower health insurance costs. 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.
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.
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. Business Combinations We account for acquisitions using the purchase method of accounting.
There were 301 restaurants and 269 restaurants in our Comparable Restaurant Base in 2022 and in 2021, respectively. There were 207 restaurants in the three-year Comparable Restaurant Base. Measuring our same-restaurant sales growth allows management to evaluate the performance of our existing restaurant base.
There were 327 restaurants and 301 restaurants in our Comparable Restaurant Base in 2023 and in 2022, respectively. There were 205 restaurants in the four-year Comparable Restaurant Base. Measuring our same-restaurant sales growth allows management to evaluate the performance of our existing restaurant base.
This increase was partially offset by (i) inflation across commodities and supplies, (ii) the increase in restaurant-level wages and staffing and (iii) the increase in operating costs and expenses driven by higher restaurant sales and our restaurant growth.
This was partially offset by the increase in (i) operating costs and expenses driven by our restaurant growth and (ii) restaurant-level staffing and wages.
As it relates to our trade names and trademarks, we evaluate similar factors as the goodwill assessment, in addition to impacts of potential changes to the assumed royalty rate.
Management also considered the specific future outlook for the reporting unit. As it relates to our trade names and trademarks, we evaluate similar factors as the goodwill assessment, in addition to impacts of potential changes to the assumed royalty rate.
Leases We lease our restaurant facilities and corporate offices, as well as certain restaurant equipment under various non-cancelable agreements. At the inception of each lease, we evaluate the expected term which includes reasonably certain renewal options, and the classification as either an operating leases or a finance lease. Lease liabilities represent the present value of future lease payments.
At the inception of each lease, we evaluate the expected term which includes reasonably certain renewal options, and the classification as either an operating leases or a finance lease. Lease liabilities represent the present value of future lease payments.
Refer to Note 15, Commitments and Contingencies, in the accompanying consolidated financial statements for additional information. 54 Table of Contents 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.
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.
Cash used in investing activities increased to $63.1 million during 2022 from $35.7 million during 2021 primarily as a result of the increase in capital expenditures to support our restaurant growth and new restaurant technology.
Cash used in investing activities increased to $123.4 million during 2023 from $63.1 million during 2022 primarily as a result of the increase in capital expenditures to support our restaurant growth and the acquisitions of restaurants from our franchisees.
(2) Represents costs related to the disposal of assets due to retirements, replacements, certain restaurant closures and natural disasters. There were no impairments recognized during the periods presented. (3) Represents costs incurred in connection with Hurricane Ian.
(2) Represents impairment charges and costs related to the disposal of assets due to retirements, replacements, restaurant closures and natural disasters. (3) Represents costs incurred in connection with Hurricane Ian.
The Company’s 52- or 53-week fiscal years end on the last Sunday of each calendar year. Its fiscal quarters are comprised of 13 weeks each and end on the 13th Sunday of each quarter, save for 53-week years during which the fourth quarter ends on the 14th Sunday of the fourth quarter.
Its fiscal quarters are comprised of 13 weeks each and end on the 13th Sunday of each quarter, save for 53-week years during which the fourth quarter ends on the 14th Sunday of the fourth quarter. All references to 2023 reflect the results of the 53-week fiscal year ended December 31, 2023.
Summary of Cash Flows The following table presents a summary of our cash provided by (used in) operating, investing and financing activities for 2022 and 2021: FISCAL YEAR (in thousands) 2022 2021 Cash provided by operating activities $ 62,937 $ 62,971 Cash used in investing activities (63,111) (35,682) Cash used in financing activities (2,018) (14,271) Net (decrease) increase in cash and cash equivalents and restricted cash $ (2,192) $ 13,018 Cash provided by operating activities during 2022 was $62.9 million as compared to $63.0 million during 2021 primarily due to (i) the increase in net income of $9.0 million and (ii) the impact of non-cash charges of $7.4 million, which were offset by (iii) a net change in operating assets and liabilities of $16.4 million.
Summary of Cash Flows The following table presents a summary of our cash provided by (used in) operating, investing and financing activities for 2023 and 2022: FISCAL YEAR (in thousands) 2023 2022 Cash provided by operating activities $ 95,338 $ 62,937 Cash used in investing activities (123,370) (63,111) Cash provided by (used in) financing activities 28,070 (2,018) Net increase (decrease) in cash and cash equivalents and restricted cash $ 38 $ (2,192) 52 Table of Contents Cash provided by operating activities during 2023 was $95.3 million as compared to $62.9 million during 2022 primarily due to (i) the increase in net income of $18.5 million, (ii) the impact of non-cash charges of $10.8 million and (iii) a net change in operating assets and liabilities of $3.2 million.
We believe that our cash flow from operations, availability under our Credit Agreement and available cash and cash equivalents will be sufficient to meet our liquidity needs for at least the next 12 months.
We believe that our cash flows from operations, availability under our Credit Agreement and available cash and cash equivalents will be sufficient to meet our liquidity needs for at least the next 12 months. We anticipate that to the extent that we require additional liquidity, it will be funded first through additional indebtedness and thereafter through the issuance of equity.
This increase was partially offset by higher general and administrative expenses mainly due to legal, accounting, consulting and insurance costs associated with being a public company, costs for strategic initiatives, as well as the increase in marketing expenses. 51 Table of Contents Non-GAAP Financial Measure Reconciliations Adjusted EBITDA and Adjusted EBITDA margin - The following table reconciles Net income (Loss) and Net income (loss) margin, the most directly comparable GAAP measures to Adjusted EBITDA and Adjusted EBITDA margin for the periods indicated: .
This was partially offset by the increase in general and administrative expenses, mainly due to the increase in compensation expense. 49 Table of Contents Non-GAAP Financial Measure Reconciliations Adjusted EBITDA and Adjusted EBITDA margin - The following table reconciles Net income (Loss) and Net income (loss) margin, the most directly comparable GAAP measures to Adjusted EBITDA and Adjusted EBITDA margin for the periods indicated: .
The increase in occupancy expenses during 2022 as compared to 2021 was primarily due to the increase in the number of company-owned restaurants. 47 Table of Contents Pre-opening Expenses Pre-opening expenses are costs incurred to open new company-owned restaurants.
The increase in occupancy expenses during 2023 as compared to 2022 was primarily due to our NROs and the acquired restaurants from our franchisees. Pre-opening Expenses Pre-opening expenses are costs incurred to open new company-owned restaurants.
The following table summarizes our results of operations and the percentages of items in our Consolidated Statements of Operations and Comprehensive Income (Loss) in relation to Total revenues or, where indicated, Restaurant sales for 2022 and 2021: FISCAL YEAR (in thousands) 2022 2021 Revenues Restaurant sales $ 719,181 98.5 % $ 592,343 98.5 % Franchise revenues 10,981 1.5 % 8,850 1.5 % Total revenues 730,162 100.0 % 601,193 100.0 % Operating costs and expenses Restaurant operating expenses (1) (exclusive of depreciation and amortization shown below): Food and beverage costs 172,561 24.0 % 134,201 22.7 % Labor and other related expenses 238,257 33.1 % 189,167 31.9 % Other restaurant operating expenses 114,476 15.9 % 94,847 16.0 % Occupancy expenses 59,919 8.3 % 55,433 9.4 % Pre-opening expenses 5,414 0.8 % 3,310 0.6 % General and administrative expenses 84,959 11.6 % 70,388 11.7 % Depreciation and amortization 34,230 4.7 % 32,379 5.4 % Impairments and loss on disposal of assets 920 0.1 % 381 0.1 % Transaction expenses (income), net 2,513 0.3 % (1,156) (0.2) % Total operating costs and expenses 713,249 97.7 % 578,950 96.3 % Income from operations (1) 16,913 2.4 % 22,243 3.8 % Interest expense (5,232) (0.7) % (20,099) (3.3) % Other income (expense), net 910 0.1 % (1,774) (0.3) % Income before income taxes 12,591 1.7 % 370 0.1 % Income tax expense (5,684) (0.8) % (2,477) (0.4) % Net income (loss) and total comprehensive income (loss) $ 6,907 0.9 % $ (2,107) (0.4) % ____________ (1) Percentages are calculated as a percentage of restaurant sales. 45 Table of Contents Restaurant Sales Restaurant sales represent the aggregate sales of food and beverages, net of discounts, at company-owned restaurants.
The following table summarizes our results of operations and the percentages of items in our Consolidated Statements of Operations and Comprehensive Income (Loss) in relation to Total revenues or, where indicated, Restaurant sales for 2023 and 2022: FISCAL YEAR (in thousands) 2023 2022 Revenues Restaurant sales $ 877,092 98.4 % $ 719,181 98.5 % Franchise revenues 14,459 1.6 % 10,981 1.5 % Total revenues 891,551 100.0 % 730,162 100.0 % Operating costs and expenses Restaurant operating expenses (1) (exclusive of depreciation and amortization shown below): Food and beverage costs 197,374 22.5 % 172,561 24.0 % Labor and other related expenses 294,010 33.5 % 238,257 33.1 % Other restaurant operating expenses 134,477 15.3 % 114,476 15.9 % Occupancy expenses 68,400 7.8 % 59,919 8.3 % Pre-opening expenses 7,173 0.8 % 5,414 0.8 % General and administrative expenses 103,121 11.6 % 84,959 11.6 % Depreciation and amortization 41,223 4.6 % 34,230 4.7 % Impairments and loss on disposal of assets 1,359 0.2 % 920 0.1 % Transaction expenses, net 3,147 0.4 % 2,513 0.3 % Total operating costs and expenses 850,284 95.4 % 713,249 97.7 % Income from operations (1) 41,267 4.7 % 16,913 2.4 % Interest expense (8,063) (0.9) % (5,232) (0.7) % Other income, net 2,871 0.3 % 910 0.1 % Income before income taxes 36,075 4.0 % 12,591 1.7 % Income tax expense (10,690) (1.2) % (5,684) (0.8) % Net income $ 25,385 2.8 % $ 6,907 0.9 % ____________ (1) Percentages are calculated as a percentage of restaurant sales.
FISCAL YEAR (in thousands) 2022 2021 2020 Net income (loss) $ 6,907 $ (2,107) $ (49,681) Depreciation and amortization 34,230 32,379 30,725 Interest expense 5,232 20,099 22,815 Income taxes 5,684 2,477 (19,873) EBITDA 52,053 52,848 (16,014) IPO-readiness and strategic transition costs (1) 2,318 2,402 4,247 Stock-based compensation (2) 10,374 8,596 750 Loss on extinguishment of debt — 2,403 — Transaction expenses (income), net (3) 2,513 (1,156) (258) Impairments and loss on disposal of assets (4) 920 381 315 Recruiting and relocation costs (5) 681 351 228 Severance costs (6) 155 265 239 Delaware Voluntary Disclosure Agreement Program (7) 149 — — Costs in connection with natural disasters, net of insurance recoveries (8) 115 — — COVID-19 related charges (9) — 211 4,749 Adjusted EBITDA $ 69,278 $ 66,301 $ (5,744) Total revenues $ 730,162 $ 601,193 $ 342,388 Net income (loss) margin 0.9 % (0.4) % (14.5) % Adjusted EBITDA margin 9.5 % 11.0 % (1.7) % Additional information Deferred rent expense (income) (10) $ 2,418 $ (2,011) $ 10,087 _____________________________ (1) Represents costs related to the assessment and redesign of our systems and processes.
FISCAL YEAR (in thousands) 2023 2022 2021 Net income (loss) $ 25,385 $ 6,907 $ (2,107) Depreciation and amortization 41,223 34,230 32,379 Interest expense 8,063 5,232 20,099 Income taxes 10,690 5,684 2,477 EBITDA 85,361 52,053 52,848 Stock-based compensation (1) 7,604 10,374 8,596 Transaction expenses (income), net (2) 3,147 2,513 (1,156) Strategic transition costs (3) 892 2,318 2,402 Impairments and loss on disposal of assets (4) 1,359 920 381 Delaware Voluntary Disclosure Agreement Program (5) 1,250 149 — Recruiting and relocation costs (6) 465 681 351 Severance costs (7) 26 155 265 Insurance proceeds in connection with natural disasters, net (8) (621) 115 — Loss on extinguishment of debt — — 2,403 COVID-19 related charges (9) — — 211 Adjusted EBITDA $ 99,483 $ 69,278 $ 66,301 Total revenues $ 891,551 $ 730,162 $ 601,193 Net income (loss) margin 2.8 % 0.9 % (0.4) % Adjusted EBITDA margin 11.2 % 9.5 % 11.0 % Additional information Deferred rent expense (income) (10) $ 2,090 $ 2,418 $ (2,011) _____________________________ (1) Represents non-cash, stock-based compensation expense which is recorded within General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss).
These costs are recorded in General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss). (8) Represents costs incurred, net of insurance recoveries, in connection with Hurricane Ian.
(8) Represents insurance recoveries, net of costs incurred, in connection with Hurricane Ian, which were recorded in Other income, net on the Consolidated Statements of Operations and Comprehensive Income (Loss). (9) Represents costs incurred in connection with the economic impact of the COVID-19 pandemic.
Refer to Note 8, Debt, in the accompanying consolidated financial statements for additional information relating to our long-term debt and Note 9, Leases , in the accompanying consolidated financial statements for additional information related to our operating and financing leases.
Refer to Note 10, Debt, in the accompanying consolidated financial statements for additional information relating to our long-term debt and Note 12, Leases , in the accompanying consolidated financial statements included in Item 8 of Part II of this Annual Report on Form 10-K for additional information related to our operating and financing leases.
The increase in other restaurant operating expenses during 2022 as compared to 2021 was mainly due to (i) $9.6 million related to credit card fees, utilities, repairs and maintenance and insurance primarily driven by the increase in restaurant sales and restaurant growth, (ii) $7.2 million in operating supplies expense primarily driven by inflation and the increase in restaurant sales and restaurant growth, as well as (iii) $1.2 million in third-party delivery services fees.
The increase in other restaurant operating expenses during 2023 as compared to 2022 was driven by the increase in restaurant sales, restaurant growth and restaurant acquisitions from our franchisees resulting in an increase of (i) $11.8 million related to credit card fees, utilities and repairs and maintenance, (ii) $3.9 million related to operating supplies and (iii) $2.2 million related to third-party delivery services fees.
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.
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.
This decrease was partially offset by the increase in restaurant sales and franchise revenues. Interest Expense Interest expense primarily consists of interest and fees on our outstanding debt and the amortization expense for debt discount and deferred issuance costs.
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.
We also plan on closing 3 company-owned restaurants, resulting in a total of 45-51, net new system-wide restaurants in 2023. 43 Table of Contents Selected Operating Data FISCAL YEAR 2022 2021 2020 System-wide sales (in thousands) $ 914,816 $ 750,674 $ 426,303 System-wide restaurants 474 435 409 Company-owned 366 341 321 Franchise-owned 108 94 88 Same-restaurant sales growth 14.5 % 63.0 % (29.0) % Same-restaurant traffic growth 7.7 % 52.6 % (33.9) % AUV (in thousands) $ 2,032 $ 1,786 $ 1,119 Income (Loss) from operations (in thousands) $ 16,913 $ 22,243 $ (47,222) Income (Loss) from operations margin 2.4 % 3.8 % (14.0) % Restaurant level operating profit (in thousands) (1) $ 128,936 $ 115,404 $ 28,236 Restaurant level operating profit margin (1) 17.9 % 19.5 % 8.4 % Net income (loss) (in thousands) $ 6,907 $ (2,107) $ (49,681) Net income (loss) margin 0.9 % (0.4) % (14.5) % Adjusted EBITDA (in thousands) (2) $ 69,278 $ 66,301 $ (5,744) Adjusted EBITDA margin (2) 9.5 % 11.0 % (1.7) % ________________ (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 Non-GAAP Financial Measure Reconciliations section below.
We also plan on closing 1 company-owned restaurant, resulting in a total of 51 to 57, net new system-wide restaurants in 2024. 41 Table of Contents Selected Operating Data FISCAL YEAR 2023 2022 2021 Operating weeks in fiscal year 53 52 52 System-wide restaurants 524 474 435 Company-owned 425 366 341 Franchise-owned 99 108 94 System-wide sales (in thousands) $ 1,103,089 $ 914,816 $ 750,674 Same-restaurant sales growth 7.6 % * 14.5 % 63.0 % Same-restaurant traffic growth 0.2 % * 7.7 % 52.6 % AUV (in thousands) $ 2,250 $ 2,032 $ 1,786 Income from operations (in thousands) $ 41,267 $ 16,913 $ 22,243 Income from operations margin 4.7 % 2.4 % 3.8 % Restaurant level operating profit (in thousands) (1) $ 175,658 $ 128,936 $ 115,404 Restaurant level operating profit margin (1) 20.0 % 17.9 % 19.5 % Net income (loss) (in thousands) $ 25,385 $ 6,907 $ (2,107) Net income (loss) margin 2.8 % 0.9 % (0.4) % Adjusted EBITDA (in thousands) (2) $ 99,483 $ 69,278 $ 66,301 Adjusted EBITDA margin (2) 11.2 % 9.5 % 11.0 % ________________ * Comparison to the 53 weeks ended January 1, 2023, is provided for enhanced comparability.
(5) Represents the non-cash portion of straight-line rent expense recorded within Occupancy expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss).
(5) Represents the non-cash portion of straight-line rent expense recorded within Occupancy expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss). 51 Table of Contents Liquidity and Capital Resources Liquidity As of December 31, 2023, the Company had cash and cash equivalents of $49.6 million.
FISCAL YEAR (in thousands) 2022 2021 Change Pre-opening expenses $ 5,414 $ 3,310 $ 2,104 63.6 % Pre-opening expenses have continued to increase over the last few years, in part due to management’s decision to gain early access to facilities during the build-out phase. Early access improves the Company’s influence over the pace and timing of completion of new restaurants.
FISCAL YEAR (in thousands) 2023 2022 Change Pre-opening expenses $ 7,173 $ 5,414 $ 1,759 32.5 % Pre-opening expenses have continued to increase over the last few years, in part due to management’s decision to gain early access to facilities during the build-out phase.
The change in the effective income tax rates for 2022 as compared to 2021 was mainly due to (i) the Company’s increased profitability, (ii) the benefit of tax credits for FICA taxes on certain employees’ tip wages, (iii) non-deductible costs associated with the Secondary Offering and the Registration Statement on Form S-3 and (iv) impacts of executive stock-based compensation. 50 Table of Contents Net Income (Loss) and Net Income (Loss) Margin FISCAL YEAR (in thousands) 2022 2021 Change Net income (loss) $ 6,907 $ (2,107) n/m (1) Net income (loss) margin 0.9 % (0.4) % n/m (1) ___________ (1) Not meaningful.
FISCAL YEAR (in thousands) 2023 2022 Change Income tax expense $ (10,690) $ (5,684) $ (5,006) 88.1% Effective income tax rate 29.6 % 45.1 % (15.5)% The change in the effective income tax rates for 2023 as compared to 2022 was 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 underwritten secondary public offerings of the Company’s common stock by entities affiliated with our majority owner, Advent International L.P., and the Registration Statement on Form S-3 filed in 2022. 48 Table of Contents Net Income and Net Income Margin FISCAL YEAR (in thousands) 2023 2022 Change Net income $ 25,385 $ 6,907 $ 18,478 n/m (1) Net income margin 2.8 % 0.9 % 1.9% ___________ (1) Not meaningful.
FISCAL YEAR (in thousands) 2022 2021 Change Labor and other related expenses $ 238,257 $ 189,167 $ 49,090 26.0 % As a percentage of restaurant sales 33.1 % 31.9 % 1.2% Labor and other related expenses as a percentage of restaurant sales increased during 2022 as compared to 2021 primarily as a result of the increase in wages and staffing levels.
FISCAL YEAR (in thousands) 2023 2022 Change Labor and other related expenses $ 294,010 $ 238,257 $ 55,753 23.4 % As a percentage of restaurant sales 33.5 % 33.1 % 0.4% Labor and other related expenses as a percentage of restaurant sales increased during 2023 as compared to 2022 primarily as a result of the increase in wages and staffing to serve growing dining room traffic and strategic growth.
On November 7, 2022, we filed a 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. 53 Table of Contents We estimate that our capital expenditures will total approximately $100.0 million to $110.0 million in 2023, which will be invested primarily in new restaurant projects and planned remodels.
On November 7, 2022, we filed a 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.
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 and natural disasters.
FISCAL YEAR (in thousands) 2023 2022 Change Depreciation and amortization $ 41,223 $ 34,230 $ 6,993 20.4 % The increase in depreciation and amortization during 2023 as compared to 2022 was primarily due to incremental depreciation of capital expenditures associated with NROs and the acquired restaurants from our franchisees. 46 Table of Contents 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 and natural disasters.
FISCAL YEAR (in thousands) 2022 2021 Change Occupancy expenses $ 59,919 $ 55,433 $ 4,486 8.1 % As a percentage of restaurant sales 8.3 % 9.4 % (1.1)% The decrease in occupancy expenses as a percentage of restaurant sales during 2022 as compared to 2021 was primarily due to sales leverage driven by increased restaurant sales.
FISCAL YEAR (in thousands) 2023 2022 Change Occupancy expenses $ 68,400 $ 59,919 $ 8,481 14.2 % As a percentage of restaurant sales 7.8 % 8.3 % (0.5)% The decrease in occupancy expenses as a percentage of restaurant sales during 2023 as compared to 2022 was primarily due to leveraging restaurant sales.
In 2022, First Watch was recognized with ADP’s coveted Culture at Work Award and named a Top 100 Most Loved Workplace® by Newsweek and the Best Practice Institute. The Company is majority owned by Advent International Corporation, one of the world’s largest private-equity firms.
In 2023, First Watch was named the top restaurant brand in Yelp’s inaugural list of the top 50 most-loved brands in the United States. In 2023 and 2022, First Watch was named a Top 100 Most Loved Workplace® by Newsweek and the Best Practice Institute. In 2022, First Watch was recognized with ADP’s coveted Culture at Work Award.
Occupancy Expenses Occupancy expenses primarily consist of rent expense, property insurance, common area expenses and property taxes.
The increase was partially offset by lower insurance costs of $0.4 million. Occupancy Expenses Occupancy expenses primarily consist of rent expense, property insurance, common area expenses and property taxes.
FISCAL YEAR (in thousands) 2022 2021 Change Franchise revenues: Royalty and system fund contributions $ 10,683 $ 8,575 $ 2,108 24.6 % Initial fees 298 275 23 8.4 % Total Franchise revenues $ 10,981 $ 8,850 $ 2,131 24.1 % The increase in franchise revenues during 2022 as compared to 2021 was primarily driven by (i) the increase in sales from franchise-owned restaurants and (ii) $0.4 million from 14 franchise-owned NROs.
FISCAL YEAR (in thousands) 2023 2022 Change Franchise revenues: Royalty and system fund contributions $ 13,464 $ 10,683 $ 2,781 26.0 % Initial fees 388 298 90 30.2 % Business combinations - revenues recognized 607 — 607 — % Total Franchise revenues $ 14,459 $ 10,981 $ 3,478 31.7 % The increase in franchise revenues during 2023 as compared to 2022 was primarily driven by (i) the increase in sales from franchise-owned restaurants, (ii) $0.6 million from 14 franchise-owned NROs and (iii) $0.6 million of deferred franchise revenues recognized in connection with the acquisitions of restaurants from our franchisees.
The Company’s common stock trades on Nasdaq under the ticker symbol “FWRG.” The Company operates and franchises restaurants in 29 states under the “First Watch” trade name and as of December 25, 2022, the Company had 366 company-owned restaurants and 108 franchise-owned restaurants. The Company does not operate outside of the United States.
The Company is majority owned by Advent International L.P., one of the world’s largest private-equity firms. The Company’s common stock trades on Nasdaq under the ticker symbol “FWRG.” The Company operates and franchises restaurants in 29 states under the “First Watch” trade name and as of December 31, 2023, the Company had 425 company-owned restaurants and 99 franchise-owned restaurants.
FISCAL YEAR (in thousands) 2022 2021 Change Food and beverage costs $ 172,561 $ 134,201 $ 38,360 28.6 % As a percentage of restaurant sales 24.0 % 22.7 % 1.3% Food and beverage costs as a percent of restaurant sales increased during 2022 as compared to 2021 primarily due to inflation across the market basket, partially offset by menu price increases.
FISCAL YEAR (in thousands) 2023 2022 Change Food and beverage costs $ 197,374 $ 172,561 $ 24,813 14.4 % As a percentage of restaurant sales 22.5 % 24.0 % (1.5)% Food and beverage costs as a percent of restaurant sales decreased during 2023 as compared to 2022 primarily due to (i) lower commodity costs across the market basket, driven mostly by decreases in pork and avocado prices, and (ii) leveraging menu price increases.
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.
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.
See Note 14, Stock-Based Compensation , in the accompanying notes to the consolidated financial statements for additional information.
See Note 17, Stock-Based Compensation , in the accompanying notes to the consolidated financial statements included in Item 8 of Part II of this Annual Report on Form 10-K for additional information.
Net income and Net income margin during 2022 as compared to Net loss and Net loss margin during 2021 was primarily due to (i) lower interest expense and (ii) the loss on extinguishment of debt recognized in 2021.
The increase in net income and net income margin during 2023 as compared to 2022 was primarily due to the increase in income from operations, which was partially offset by higher (i) interest expense and (ii) income tax expense.
This increase was partially offset by the one-time expense of $5.6 million that was recognized in 2021 in connection with the modifications of certain stock option awards. 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.
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.
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 2022 and 2021 and no impairment charges were recorded in 2022 and 2021.
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. Leases We lease our restaurant facilities and corporate offices, as well as certain restaurant equipment under various non-cancelable agreements.
The increase in pre-opening expenses during 2022 as compared to 2021 was primarily due to (i) the higher number of restaurants opened, in addition to (ii) the higher number of restaurants expected to open and the related increase in pre-opening rent.
Early access improves the Company’s influence over the pace and timing of completion of new restaurants. 45 Table of Contents The increase in pre-opening expenses during 2023 as compared to 2022 was primarily due to (i) the higher number of restaurants opened and the increase in staffing and wages, as well as (ii) pre-opening rent expense mainly related to the increase in the number of new restaurant openings and restaurants that are expected to open, in addition to the investment in larger, stand-alone company-owned restaurants.
Restaurant Level Operating Profit and Restaurant level Operating Profit Margin FISCAL YEAR (in thousands) 2022 2021 Change Restaurant level operating profit $ 128,936 $ 115,404 $ 13,532 11.7 % Restaurant level operating profit margin 17.9 % 19.5 % (1.6)% Restaurant level operating profit margin during 2022 decreased as compared to 2021 primarily due to (i) inflation across commodities and supplies and (ii) the increase in restaurant-level wages and staffing.
Adjusted EBITDA and Adjusted EBITDA Margin FISCAL YEAR (in thousands) 2023 2022 Change Adjusted EBITDA $ 99,483 $ 69,278 $ 30,205 43.6 % Adjusted EBITDA margin 11.2 % 9.5 % 1.7% The increase in Adjusted EBITDA and Adjusted EBITDA margin during 2023 as compared to 2022 was primarily due to the increase in restaurant level operating profit and restaurant level operating profit margin.
FISCAL YEAR 2022 Company-owned Franchise-owned Total Beginning of period 341 94 435 New restaurants 29 14 43 Closures/Disenfranchised (4) — (4) End of period 366 108 474 We expect to open 38 to 42 company-owned restaurants and 10 to 12 franchise-owned restaurants during the fiscal year ending December 31, 2023 (“2023”).
FISCAL YEAR 2023 Company-owned Franchise-owned Total Beginning of period 366 108 474 New restaurants 37 14 51 Acquisitions of franchise-owned restaurants 23 (23) — Closures (1) — (1) End of period 425 99 524 We expect to open between 43 to 47 company-owned restaurants and 9 to 11 franchise-owned restaurants during 2024.
The increase in labor and other related expenses during 2022 as compared to 2021 was primarily due to (i) the increase in wages and staffing levels and (ii) $11.0 million from 29 NROs.
This increase was partially offset by lower health insurance costs. 44 Table of Contents The increase in labor and other related expenses during 2023 as compared to 2022 was primarily due to (i) the increase in wages and staffing levels, (ii) 37 NROs and (iii) 23 restaurants we had acquired from our franchisees.
FISCAL YEAR (in thousands) 2022 2021 Change Other restaurant operating expenses $ 114,476 $ 94,847 $ 19,629 20.7 % As a percentage of restaurant sales 15.9 % 16.0 % (0.1)% Other restaurant operating expenses as a percentage of restaurant sales during 2022 was slightly lower as compared to 2021 primarily due to leveraging in-restaurant dining sales, which was partially offset by the increase in the cost of to-go supplies and repairs and maintenance costs.
FISCAL YEAR (in thousands) 2023 2022 Change Other restaurant operating expenses $ 134,477 $ 114,476 $ 20,001 17.5 % As a percentage of restaurant sales 15.3 % 15.9 % (0.6)% Other restaurant operating expenses as a percentage of restaurant sales during 2023 decreased as compared to 2022 primarily due to (i) leveraging restaurant sales, (ii) lower costs of to-go supplies, (iii) lower insurance costs and (iv) lower third-party delivery fees mainly driven from leveraging in-restaurant dining sales.
FISCAL YEAR (in thousands) 2022 2021 Change Impairments and loss on disposal of assets $ 920 $ 381 $ 539 n/m (1) ____________ (1) Not meaningful. In 2022 and 2021, the amounts represent write-off of assets retired as a result of restaurant closures or replacements of assets.
In 2022, the amounts represented write-off of assets retired as a result of restaurant closures or replacements of assets.
Cash used in financing activities decreased to $2.0 million during 2022 from $14.3 million during 2021 primarily as a result of the repayment of our outstanding borrowings under our previous senior credit facilities, which was partially offset by proceeds from our IPO and proceeds from our borrowings under our Credit Agreement in 2021.
Cash provided by financing activities of $28.1 million during 2023 compared to cash used in financing activities of $2.0 million during 2022 was primarily due to proceeds from borrowings on our revolving credit facility, partially offset by the increase in principal repayments on the Term Facility.
This decrease was partially offset by menu price increases.
This decrease was partially offset by higher repairs and maintenance expense.
FISCAL YEAR (in thousands) 2022 2021 Change Restaurant sales: In-restaurant dining sales $ 571,048 $ 452,989 $ 118,059 26.1 % Third-party delivery sales 82,049 70,486 11,563 16.4 % Take-out sales 66,084 68,868 (2,784) (4.0) % Total Restaurant sales $ 719,181 $ 592,343 126,838 21.4 % The increase in total restaurant sales during 2022 as compared to 2021 was primarily due to (i) same-restaurant sales growth of 14.5%, driven by same-restaurant traffic growth of 7.7%, the increase in average check per person and the increase in third-party delivery sales, in addition to (ii) $26.8 million from 29 NROs.
FISCAL YEAR (in thousands) 2023 2022 Change Restaurant sales: In-restaurant dining sales $ 716,960 $ 571,048 $ 145,912 25.6 % Third-party delivery sales 91,433 82,049 9,384 11.4 % Take-out sales 68,699 66,084 2,615 4.0 % Total Restaurant sales $ 877,092 $ 719,181 $ 157,911 22.0 % The increase in total restaurant sales during 2023 as compared to 2022 was primarily due to (i) $53.5 million from same-restaurant sales growth of 7.6%, mainly driven by menu price increases, (ii) $85.1 million from restaurants not in the 43 Table of Contents Comparable Restaurant Base, which included $25.5 million from our 37 NROs and $18.4 million from the 23 restaurants we had acquired from our franchisees and (iii) $19.2 million of restaurant sales during the 53rd week of 2023.
The change in Other income (expense), net in 2022 as compared to 2021 primarily related to (i) the loss on extinguishment of debt recognized in connection with the full repayment of our borrowings under our previous senior credit facilities in 2021 and (ii) approximately $0.4 million of insurance recoveries recognized in connection with Hurricane Ian.
The increase in Other income, net in 2023 as compared to 2022 primarily related to the increase in (i) interest income and (ii) insurance recoveries, net of costs incurred, in connection with Hurricane Ian. Income Tax Expense Income tax expense primarily consists of various federal and state taxes.
Income from operations decreased during 2022 as compared to 2021 primarily due to (i) inflation across commodities and supplies, (ii) the increase in restaurant-level wages and staffing, (iii) higher operating costs and expenses driven by the increase in restaurant sales and restaurant growth, (iv) higher general and administrative expenses mainly due to stock-based compensation expense, public company costs and costs for strategic initiatives, as well as (v) the increase in transaction costs.
This was partially offset by the increase in restaurant-level staffing and wages. 47 Table of Contents Income from operations increased during 2023 as compared to 2022 primarily due to (i) the increase in restaurant sales and franchise revenues and (ii) lower costs for commodities and to-go supplies.
In 2021 and 2020, the costs also include information technology support and external professional service costs incurred in connection with IPO-readiness efforts. These costs are recorded within General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss).
(6) Represents costs incurred for hiring qualified individuals as we assessed the redesign of our systems and processes. These costs are recorded within General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss). (7) Severance costs are recorded in General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss).
This decrease was partially offset by (i) leveraging the increase in restaurant sales and (ii) menu price increases. Restaurant level operating profit during 2022 increased as compared to 2021 primarily due to same-restaurant sales growth, driven by same-restaurant traffic growth, the increase in average check per person and the increase in third-party delivery sales.
Restaurant level operating profit during 2023 increased as compared to 2022 primarily due to (i) same-restaurant sales growth, primarily driven by menu price increases, (ii) 37 NROs, (iii) 23 restaurants acquired from our franchisees and (iv) lower costs for commodities, driven mostly by decreases in pork and avocado prices, and lower costs of to-go supplies.
Food and beverage costs increased during 2022 as compared to 2021 primarily as a result of (i) the increase in restaurant sales, (ii) inflation across the market basket and (iii) $6.8 million from 29 NROs. 46 Table of Contents 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.
Food and beverage costs increased during 2023 as compared to 2022 primarily as a result of (i) the increase in restaurant sales, (ii) 37 NROs and (iii) 23 restaurants we had acquired from our franchisees. The increase was partially offset by lower commodity costs across the market basket, driven mostly by decreases in pork and avocado prices.
Liquidity and Capital Resources Liquidity As of December 25, 2022, the Company had cash and cash equivalents of $49.7 million and outstanding borrowings under the Term Facility of $98.1 million, excluding unamortized debt issuance costs and deferred issuance costs . In addition, availability under our Revolving Credit Facility was $75.0 million.
The Company had $92.5 million of principal amount outstanding of its existing $100.0 million term loan A facility (the “Term Facility”), excluding unamortized debt discount and deferred issuance costs, and the Company had drawn $30.0 million on its existing $75.0 million revolving credit facility (the “Revolving Credit Facility”) as of December 31, 2023.
Purchase obligations also include firm minimum commitments in excess of 12 months for certain supply contracts.
Purchase obligations also include firm minimum commitments in excess of 12 months for certain contracts. Refer to Note 18, Commitments and Contingencies, in the accompanying consolidated financial statements included in Item 8 of Part II of this Annual Report on Form 10-K for additional information.
FISCAL YEAR (in thousands) 2022 2021 Change Interest expense $ (5,232) $ (20,099) $ 14,867 (74.0) % The decrease in interest expense during 2022 as compared to 2021 was primarily due to the full repayment of our borrowings under our previous senior credit facilities in October 2021, which were replaced by lower outstanding debt and reduced interest rates from the Term Facility pursuant to our Credit Agreement.
FISCAL YEAR (in thousands) 2023 2022 Change Interest expense $ (8,063) $ (5,232) $ (2,831) 54.1 % The increase in interest expense during 2023 as compared to 2022 was primarily due to higher interest rates and the increase in outstanding debt.
Income from Operations and Income from Operations Margin FISCAL YEAR (in thousands) 2022 2021 Change Income from operations $ 16,913 $ 22,243 $ (5,330) (24.0) % Income from operations margin 2.4 % 3.8 % (1.4)% 49 Table of Contents Income from operations margin decreased during 2022 as compared to 2021 primar ily due to (i) inflation across commodities and supplies, (ii) the increase in restaurant-level wages and staffing, (iii) higher general and administrative expenses mainly due to stock-based compensation expense, public company costs and costs for strategic initiatives, as well as (iv) the increase in transaction costs.
Income from Operations and Income from Operations Margin FISCAL YEAR (in thousands) 2023 2022 Change Income from operations $ 41,267 $ 16,913 $ 24,354 144.0 % Income from operations margin 4.7 % 2.4 % 2.3% Income from operations margin increased during 2023 as compared to 2022 primarily due to (i) leveraging restaurant sales and (ii) lower costs for pork, avocados and to-go supplies.
Removed
Financial Highlights In 2022, the Company continued to capture strong consumer demand and same-restaurant traffic growth as the dining rooms in the Comparable Restaurant Base returned to more than 90% of 2019 usage levels, while the off-premises channel proved to be a growth vehicle with sales increasing 6.3% from 2021.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

5 edited+2 added−1 removed2 unchanged
Biggest changeSee Note 8, Debt, in the accompanying notes to the consolidated financial statements included in Item 8 of Part II of this Annual Report on Form 10-K for additional information. We currently do not hedge our interest rate exposure and we manage exposure to adverse interest rate changes through our normal operating and financing activities.
Biggest changeRefer to Note 10, Debt, and Note 11, Interest Rate Swaps , in the accompanying notes to the consolidated financial statements included in Item 8 of Part II of this Annual Report on Form 10-K for more information. 57 Table of Contents
Our loans pursuant to our Credit Agreement incur interest at a floating rate and we also pay an unused commitment fee of between 25 and 50 basis points on the undrawn commitments under our revolving credit facility pursuant to our Credit Agreement, depending on the Total Rent Adjusted Net Leverage Ratio, as defined in our Credit Agreement.
Our loans pursuant to our Credit Agreement incur interest at a floating rate and we also pay an unused commitment fee of between 25 and 50 basis points on the undrawn commitments under our Revolving Credit Facility, depending on the Total Rent Adjusted Net Leverage Ratio, as defined in our Credit Agreement.
In 2023, we expect continued cost inflation for our entire market basket in the range of 4.0% 6.0%. In 2023, we have locked prices for approximately 15.0% of our market basket. Other commodities are purchased based upon negotiated price ranges established with vendors and are subject to fixed prices or fixed formulas for 30 to 90 day periods.
In 2024, we expect cost inflation for our entire market basket in the range of 2% to 4%. In 2024, we have locked prices for approximately 32% of our market basket. Other commodities are purchased based upon negotiated price ranges established with vendors and are subject to fixed prices or fixed formulas for 30-to-90 day periods.
However, elevated inflation in commodity markets and substantial increases in costs and expenses could impact our results of operations to the extent that such increases cannot be offset by menu price increases. Currently we do not use financial instruments to hedge our commodity risk. The Company’s market basket experienced cost inflation of approximately 13.0% in 2022.
However, elevated inflation in commodity markets and substantial increases in costs and expenses could impact our results of operations to the extent that such increases cannot be offset by menu price increases. Currently we do not use financial instruments to hedge our commodity risk. The Company’s market basket experienced cost deflation of 50 basis points in 2023.
Interest Rate Risk As of December 25, 2022, we had $98.1 million in outstanding borrowings, excluding unamortized debt discount and deferred issuance costs.
Interest Rate Risk As of December 31, 2023, we had $92.5 million in outstanding borrowings, excluding unamortized debt discount and deferred issuance costs.
Removed
Based on the outstanding variable rate loan balance for the Term Facility at December 25, 2022, a potential change from a hypothetical 100 basis point increase/decrease in short-term interest rates would cause an increase or decrease in interest expense of approximately $1.8 million over the next 12 months. 58 Table of Contents
Added
On June 23, 2023, we entered into a variable-to-fixed interest rate swap agreement with two financial institutions to hedge $90.0 million of the outstanding variable rate debt.
Added
Under the terms of the interest rate swap agreements, 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 secured overnight financing rate.

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