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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 24, 2023
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 001-40866

fw-one-line-black-bbl rk.jpg

First Watch Restaurant Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware
82-4271369
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
8725 Pendery Place, Suite 201, Bradenton, FL 34201
(Address of Principal Executive Offices) (Zip Code)
(941) 907-9800
(Registrants telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par valueFWRG
The Nasdaq Stock Market LLC
(Nasdaq Global Select Market)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No

The registrant had outstanding 59,817,629 shares of common stock as of October 30, 2023.



TABLE OF CONTENTS

2



Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q (“Form 10-Q”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (PSLRA), which are subject to known and unknown risks, uncertainties and other important factors that may cause actual results to be materially different from the statements made herein. All statements other than statements of historical fact are forward-looking statements. Forward-looking statements discuss our current expectations and projections relating to our financial position, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to any historical or current facts. These statements may include words such as “aim,” “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “future,” “intend,” “outlook,” “potential,” “project,” “projection,” “plan,” “seek,” “may,” “could,” “would,” “will,” “should,” “can,” “can have,” “likely,” the negatives thereof and other similar expressions. You should evaluate all forward-looking statements made in this Form 10-Q in the context of the risks and uncertainties disclosed herein, including under Part I. Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II. Item 1A. “Risk Factors”, and in our Annual Report on Form 10-K as of and for the year ended December 25, 2022 (“2022 Form 10-K”), including under Part I. Item 1A. “Risk Factors” and Part II. Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Important factors that could cause actual results to differ materially from those in the forward-looking statements include the following: uncertainty regarding the Russia and Ukraine war, renewed conflict in the Middle East and the related impact on macroeconomic conditions, including inflation, as a result of such conflict or other related events; our vulnerability to changes in economic conditions and consumer preferences; our inability to successfully open new restaurants or establish new markets; our inability to effectively manage our growth; adverse effects of the COVID-19 pandemic or other infectious diseases; potential negative impacts on sales at our and our franchisees’ restaurants as a result of our opening new restaurants; a decline in visitors to any of the retail centers, lifestyle centers, or entertainment centers where our restaurants are located; lower than expected same-restaurant sales growth; unsuccessful marketing programs and limited time new offerings; changes in the cost of food; unprofitability or closure of new restaurants or lower than previously experienced performance in existing restaurants; our inability to compete effectively for customers; unsuccessful financial performance of our franchisees; our limited control over our franchisees’ operations; our inability to maintain good relationships with our franchisees; conflicts of interest with our franchisees; the geographic concentration of our system-wide restaurant base in the southeast portion of the United States; damage to our reputation and negative publicity; our inability or failure to recognize, respond to and effectively manage the accelerated impact of social media; our limited number of suppliers and distributors for several of our frequently used ingredients and shortages or disruptions in the supply or delivery of such ingredients; information technology system failures or breaches of our network security; our failure to comply with federal and state laws and regulations relating to privacy, data protection, advertising and consumer protection, or the expansion of current or the enactment of new laws or regulations relating to privacy, data protection, advertising and consumer protection; our potential liability with our gift cards under the property laws of some states; our failure to enforce and maintain our trademarks and protect our other intellectual property; litigation with respect to intellectual property assets; our dependence on our executive officers and certain other key employees; our inability to identify, hire, train and retain qualified individuals for our workforce; our failure to obtain or to properly verify the employment eligibility of our employees; our failure to maintain our corporate culture as we grow; unionization activities among our employees; employment and labor law proceedings; labor shortages or increased labor costs or health care costs; risks associated with leasing property subject to long-term and non-cancelable leases; risks related to our sale of alcoholic beverages; costly and complex compliance with federal, state and local laws; changes in accounting principles applicable to us; our vulnerability to natural disasters, unusual weather conditions, pandemic outbreaks, political events, war and terrorism; our inability to secure additional capital to support business growth; our level of indebtedness; failure to comply with covenants under our credit facility; and the interests of our majority stockholder may differ from those of public stockholders.

The forward-looking statements included in this Form 10-Q are made only as of the date hereof and are expressly qualified in their entirety by these cautionary statements. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law. All information presented herein is based on our fiscal calendar. Unless otherwise stated, references to particular years, quarters, months or periods refer to our fiscal years and the associated quarters, months and periods of those fiscal years.
3

Part I - Financial Information
Item 1.    Financial Statements (Unaudited)
FIRST WATCH RESTAURANT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(Unaudited)
SEPTEMBER 24, 2023DECEMBER 25, 2022
Assets
Current assets:
Cash and cash equivalents$39,923 $49,672 
Restricted cash326 251 
Accounts receivable4,990 6,164 
Inventory4,791 5,028 
Prepaid expenses4,697 5,800 
Derivative assets, current833  
Other current assets3,005 373 
Total current assets58,565 67,288 
Goodwill356,969 345,219 
Intangible assets, net150,280 143,151 
Operating lease right-of-use assets400,764 352,373 
Property, fixtures and equipment, net of accumulated depreciation of $171,582 and $145,720, respectively
237,527 195,117 
Derivative assets, long-term263  
Other long-term assets1,478 1,298 
Total assets$1,205,846 $1,104,446 
Liabilities and Equity
Current liabilities:
Accounts payable$5,550 $7,590 
Accrued liabilities33,840 22,729 
Accrued compensation 18,258 17,899 
Deferred revenues2,655 5,193 
Current portion of operating lease liabilities42,856 38,936 
Current portion of long-term debt6,891 6,257 
Note payable 1,376 
Total current liabilities110,050 99,980 
Operating lease liabilities420,496 366,113 
Long-term debt, net90,949 94,668 
Deferred income taxes24,003 17,166 
Other long-term liabilities3,257 3,384 
Total liabilities648,755 581,311 
Commitments and contingencies (Note 12)
Equity:
Preferred stock; $0.01 par value; 10,000,000 shares authorized; none issued and outstanding
  
Common stock; $0.01 par value; 300,000,000 shares authorized; 59,794,999 and 59,211,019 shares issued and outstanding at September 24, 2023 and December 25, 2022, respectively
597 592 
Additional paid-in capital631,064 620,675 
Accumulated deficit(75,395)(98,132)
Accumulated other comprehensive income825  
Total equity557,091 523,135 
Total liabilities and equity$1,205,846 $1,104,446 
The accompanying notes are an integral part of these consolidated financial statements.
4

FIRST WATCH RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
 THIRTEEN WEEKS ENDEDTHIRTY-NINE WEEKS ENDED
 SEPTEMBER 24, 2023SEPTEMBER 25, 2022SEPTEMBER 24, 2023SEPTEMBER 25, 2022
Revenues:
Restaurant sales$215,495 $183,978 $636,050 $536,329 
Franchise revenues3,717 2,874 10,868 8,088 
Total revenues219,212 186,852 646,918 544,417 
Operating costs and expenses:
Restaurant operating expenses (exclusive of depreciation and amortization shown below):
Food and beverage costs48,709 44,578 143,028 129,200 
Labor and other related expenses73,137 61,262 212,312 175,091 
Other restaurant operating expenses33,694 29,685 97,572 85,761 
Occupancy expenses17,555 15,091 49,950 44,318 
Pre-opening expenses2,035 1,490 4,323 3,569 
General and administrative expenses25,179 21,689 73,168 63,194 
Depreciation and amortization10,434 8,679 28,992 25,302 
Impairments and loss on disposal of assets185 338 618 572 
Transaction expenses, net546 1,419 2,543 1,976 
Total operating costs and expenses211,474 184,231 612,506 528,983 
Income from operations7,738 2,621 34,412 15,434 
Interest expense(1,848)(1,362)(5,792)(3,494)
Other income, net771 116 1,950 395 
Income before income taxes6,661 1,375 30,570 12,335 
Income tax expense(1,243)(1,329)(7,833)(4,942)
Net income $5,418 $46 $22,737 $7,393 
Net income$5,418 $46 $22,737 $7,393 
Other comprehensive income:
Unrealized gain on derivatives1,257  1,097  
Income tax related to other comprehensive income(272) (272) 
Other comprehensive income, net of tax985  825  
Comprehensive income$6,403 $46 $23,562 $7,393 
Net income per common share - basic$0.09 $ $0.38 $0.13 
Net income per common share - diluted$0.09 $ $0.37 $0.12 
Weighted average number of common shares outstanding - basic59,646,027 59,089,831 59,424,989 59,065,423 
Weighted average number of common shares outstanding - diluted61,562,524 60,464,062 61,016,105 60,088,622 

The accompanying notes are an integral part of these consolidated financial statements.
5

FIRST WATCH RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(Unaudited)
 Common StockAdditional
Paid-in
Capital
Accumulated
Deficit
Accumulated Other Comprehensive (Loss) IncomeTotal
Equity
 SharesAmount
Balance at June 25, 202359,463,950 $594 $626,216 $(80,813)$(160)$545,837 
Net income— — — 5,418 — 5,418 
Stock-based compensation— — 1,764 — — 1,764 
Common stock issued under stock-based compensation plans, net331,049 3 3,084 — — 3,087 
Other comprehensive income, net of tax    985 985 
Balance at September 24, 202359,794,999 $597 $631,064 $(75,395)$825 $557,091 
 Common StockAdditional
Paid-in
Capital
Accumulated
Deficit
Accumulated Other Comprehensive IncomeTotal
Equity
 SharesAmount
Balance at December 25, 2022
59,211,019 $592 $620,675 $(98,132)$ $523,135 
Net income— — — 22,737 — 22,737 
Stock-based compensation— — 5,386 — — 5,386 
Common stock issued under stock-based compensation plans, net583,980 5 5,003 — — 5,008 
Other comprehensive income, net of tax — — — 825 825 
Balance at September 24, 202359,794,999 $597 $631,064 $(75,395)$825 $557,091 
 Common StockAdditional
Paid-in
Capital
Accumulated
Deficit
Total
Equity
 SharesAmount
Balance at June 26, 202259,075,562 $591 $614,223 $(97,692)$517,122 
Net income— — — 46 46 
Stock-based compensation— — 2,719 — 2,719 
Common stock issued under stock-based compensation plans, net41,161  384 — 384 
Balance at September 25, 202259,116,723 $591 $617,326 $(97,646)$520,271 
 Common StockAdditional
Paid-in
Capital
Accumulated
Deficit
Total
Equity
 SharesAmount
Balance at December 26, 2021
59,048,446 $590 $608,878 $(105,039)$504,429 
Net income— — — 7,393 7,393 
Stock-based compensation— — 7,821 — 7,821 
Common stock issued under stock-based compensation plans, net68,277 1 627 — 628 
Balance at September 25, 202259,116,723 $591 $617,326 $(97,646)$520,271 


The accompanying notes are an integral part of these consolidated financial statements.
6

FIRST WATCH RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
THIRTY-NINE WEEKS ENDED
SEPTEMBER 24, 2023SEPTEMBER 25, 2022
Cash flows from operating activities:
Net income $22,737 $7,393 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization28,992 25,302 
Stock-based compensation5,386 7,821 
Non-cash operating lease costs14,132 11,907 
Non-cash portion of gain on lease modifications(123)(84)
Deferred income taxes6,566 4,353 
Amortization of debt discount and deferred issuance costs332 334 
Impairments and loss on disposal of assets618 572 
Gain on insurance proceeds(643) 
Changes in assets and liabilities:
Accounts receivable1,174 1,018 
Inventory458 (93)
Prepaid expenses1,115 1,346 
Other assets, current and long-term(2,758)(2,176)
Accounts payable(2,072)(3,560)
Accrued liabilities and other long-term liabilities4,997 6,032 
Accrued compensation and deferred payroll taxes359 (5,890)
Deferred revenues, current and long-term(3,322)(2,061)
Operating lease liabilities(4,904)(5,570)
Net cash provided by operating activities73,044 46,644 
Cash flows from investing activities:
Capital expenditures(52,770)(44,985)
Acquisitions, net of cash acquired(30,422) 
Purchase of intangible assets(84)(715)
Insurance proceeds643  
Net cash used in investing activities(82,633)(45,700)
Cash flows from financing activities:
Repayments of note payable(1,376)(2,352)
Repayments of long-term debt, including finance lease liabilities(3,519)(1,635)
Proceeds from exercise of stock options, net of employee taxes paid5,008 628 
Contingent consideration payment(198)(78)
Net cash used in financing activities(85)(3,437)
Net decrease in cash and cash equivalents and restricted cash(9,674)(2,493)
Cash and cash equivalents and restricted cash:
Beginning of period49,923 52,115 
End of period$40,249 $49,622 
Supplemental cash flow information:
Cash paid for interest$5,362 $2,800 
Cash paid for income taxes, net of refunds$1,337 $777 
The accompanying notes are an integral part of these consolidated financial statements.
7

FIRST WATCH RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
(IN THOUSANDS)
(Unaudited)
 THIRTY-NINE WEEKS ENDED
 SEPTEMBER 24, 2023SEPTEMBER 25, 2022
Supplemental disclosures of non-cash investing and financing activities:
Leased assets obtained in exchange for new operating lease liabilities$64,660 $37,961 
Leased assets obtained in exchange for new finance lease liabilities$145 $89 
Remeasurements and terminations of operating lease assets and lease liabilities$(1,453)$(1,861)
Remeasurements and terminations of finance lease assets and lease liabilities$(43)$(191)
Increase in liabilities from acquisition of property, fixtures and equipment$6,202 $2,148 



The accompanying notes are an integral part of these consolidated financial statements.
8

FIRST WATCH RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1.    Nature of Business and Organization
First Watch Restaurant Group, Inc. (collectively with its wholly-owned subsidiaries, “the Company,” or “Management”) is a Delaware holding company. The Company operates and franchises restaurants in 29 states operating under the “First Watch” trade name, which are focused on made-to-order breakfast, brunch and lunch. The Company does not operate outside of the United States and all of its assets are located in the United States. As of September 24, 2023, the Company operated 402 company-owned restaurants and 103 franchise-owned restaurants.
2.    Summary of Significant Accounting Policies

Basis of Presentation

The Company reports financial information on a 52- or 53-week fiscal year ending on the last Sunday of each calendar year. The quarters ended September 24, 2023 and September 25, 2022 were 13-week periods. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K as of and for the year ended December 25, 2022 (“2022 Form 10K”).
The accompanying unaudited interim consolidated financial statements have been prepared by the Company in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all the information and notes required by GAAP for complete financial statements. The unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements included in the 2022 Form 10-K and include all adjustments necessary for the fair statement of the consolidated financial statements for the quarterly periods presented. The results of operations for quarterly periods are not necessarily indicative of the results to be expected for other quarterly periods or the entire fiscal year.
Use of Estimates

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

Fair Value of Financial Instruments

Certain assets and liabilities are carried at fair value. Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The carrying amounts of the Companys financial instruments, including cash equivalents, accounts receivable, accounts payable, accrued expenses, note payable and other current liabilities, approximate their fair values due to their short-term maturities.

Interest Rate Swaps

As an element of the Company’s interest rate risk management strategy, Management uses interest rate swaps. The intent of these instruments is to reduce cash flow exposure to variability in expected future interest rates on the Company’s debt. Management has elected to designate and qualify the interest rate swaps as cash flow hedges. As such, the instruments are recorded on the balance sheet at fair value. Thereafter, gains or losses on the instruments are recognized in equity as changes to Other Comprehensive Income and subsequently reclassified into earnings at the time of the Company’s debt- interest payments.

Summary of Recently Issued Accounting Pronouncements
Recent accounting guidance not discussed herein is not applicable, did not have, or is not expected to have a material impact to the Company.
9

FIRST WATCH RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

3. Business Acquisitions
During the thirty-nine weeks ended September 24, 2023, the Company acquired substantially all the assets associated with 17 franchise operated First Watch restaurants. The purchase price was allocated to the fair value of assets acquired and liabilities assumed, which are based on preliminary valuations and are subject to adjustment as additional information is available. The details of each acquisition are as follows:
(dollars in thousands)
Date of acquisitionMay 1, 2023June 26, 2023August 9, 2023
Number of acquired restaurants6 5 6 
Number of acquired restaurants under development  1 
Purchase price (cash) $8,177 $8,656 $14,127 
Transaction costs incurred $362 $334 $373 
Deferred franchise fees recognized as a result of termination of
pre-existing franchise agreement
$78 $123 $200 
Recognized amounts of identifiable assets acquired and liabilities assumed:
Cash$9 $6 $16 
Inventory$57 $62 $102 
Prepaid rent and other assets$67 $33 $89 
Property, fixtures and equipment$1,840 $3,783 $6,364 
Reacquired rights$1,342 $2,304 $4,358 
Goodwill (primarily expected synergies and assembled workforce; tax deductible)$5,272 $2,667 $3,811 
Unfavorable leasehold positions, net$(330)$(70)$(530)
Accounts payable$ $ $(32)
Deferred revenues - gift card liabilities assumed$(80)$(129)$(51)



10

FIRST WATCH RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4.    Revenues
The following tables include a detail of liabilities from contracts with customers:
(in thousands)SEPTEMBER 24, 2023DECEMBER 25, 2022
Deferred revenues:
Deferred gift card revenue$2,370 $4,897 
Deferred franchise fee revenue - current285 296 
Total current deferred revenues$2,655 $5,193 
Other long-term liabilities:
Deferred franchise fee revenue - non-current$1,949 $2,472 
Changes in deferred gift card contract liabilities were as follows:
 THIRTEEN WEEKS ENDEDTHIRTY-NINE WEEKS ENDED
(in thousands)SEPTEMBER 24, 2023SEPTEMBER 25, 2022SEPTEMBER 24, 2023SEPTEMBER 25, 2022
Deferred gift card revenue:
Balance, beginning of period$3,154 $2,805 $4,897 $4,410 
Gift card sales1,185 1,218 5,746 4,796 
Gift card redemptions(1,921)(1,720)(7,726)(6,399)
Gift card breakage(228)(192)(807)(696)
Gift card liabilities assumed through acquisitions180  260  
Balance, end of period$2,370 $2,111 $2,370 $2,111 

Changes in deferred franchise fee contract liabilities were as follows:
 THIRTEEN WEEKS ENDEDTHIRTY-NINE WEEKS ENDED
(in thousands)SEPTEMBER 24, 2023SEPTEMBER 25, 2022SEPTEMBER 24, 2023SEPTEMBER 25, 2022
Deferred franchise fee revenue:
Balance, beginning of period$2,672 $2,637 $2,768 $2,536 
Cash received36 204 175 434 
Franchise revenues recognized(150)(67)(307)(196)
Business combinations - franchise revenues recognized(323) (401) 
Balance, end of period$2,235 $2,774 $2,235 $2,774 










11

FIRST WATCH RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Revenues recognized disaggregated by type were as follows:
 THIRTEEN WEEKS ENDEDTHIRTY-NINE WEEKS ENDED
(in thousands)SEPTEMBER 24, 2023SEPTEMBER 25, 2022SEPTEMBER 24, 2023SEPTEMBER 25, 2022
Restaurant sales:
In-restaurant dining sales$176,696 $147,491 $520,277 $425,222 
Third-party delivery sales22,011 20,105 65,765 60,960 
Take-out sales16,788 16,382 50,008 50,147 
Total restaurant sales$215,495 $183,978 $636,050 $536,329 
Franchise revenues:
Royalty and system fund contributions$3,244 $2,807 $10,160 $7,892 
Initial fees473 67 708 196 
Total franchise revenues$3,717 $2,874 $10,868 $8,088 
Total revenues$219,212 $186,852 $646,918 $544,417 
5.    Accounts Receivable
Accounts receivable consisted of the following:
(in thousands)SEPTEMBER 24, 2023DECEMBER 25, 2022
Receivables from third-party delivery providers$1,414 $974 
Receivables from franchisees1,184 1,076 
Receivables from vendors1,239 920 
Receivables related to gift card sales323 1,565 
Other receivables587 1,629 
Total accounts receivable$4,990 $6,164 
6.    Accrued Liabilities
Accrued liabilities consisted of the following:
(in thousands)SEPTEMBER 24, 2023DECEMBER 25, 2022
Construction liabilities$13,110 $6,908 
Sales tax4,478 3,791 
Self-insurance and general liability reserves1,446 1,529 
Utilities1,840 1,468 
Interest payable1,847 1,506 
Credit card fees1,220 1,043 
Property tax1,355 951 
Contingent rent1,063 811 
Common area maintenance668 680 
Other6,813 4,042 
Total accrued liabilities$33,840 $22,729 
12

FIRST WATCH RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)


7. Debt
Long-term debt, net consisted of the following:
SEPTEMBER 24, 2023DECEMBER 25, 2022
(dollars in thousands)BalanceInterest Rate BalanceInterest Rate
Term Facility$95,000 7.59%$98,125 5.89%
Finance lease liabilities1,1411,433
Financing obligation3,0503,050
Less: Unamortized debt discount and deferred issuance costs(1,351)(1,683)
Total Debt, net 97,840100,925
Less: Current portion of long-term debt(6,891)(6,257)
Long-term debt, net$90,949 $94,668 
Credit Facilities
FWR Holding Corporation (“FWR”), a subsidiary of the Company, is the borrower under the credit agreement dated as of October 6, 2021 (“Credit Agreement”), which provides for (i) a $100.0 million term loan A facility (the “Term Facility”) and (ii) a $75.0 million revolving credit facility (the “Revolving Credit Facility” and, together with the Term Facility, collectively, the “Credit Facilities”). The Revolving Credit Facility was undrawn at September 24, 2023 and December 25, 2022. The Credit Facilities mature on October 6, 2026.
On February 24, 2023, the Company entered into the Amendment No. 1 to the Credit Agreement (the “Amendment”) to replace LIBO Rate (“LIBOR”) with a secured overnight financing rate (“SOFR”). All outstanding borrowings under the Credit Agreement continued to bear interest at LIBOR until March 27, 2023.
Effective March 27, 2023, borrowings under the Credit Facilities bear interest, at the option of FWR at either (i) the alternate base rate plus a margin of between 125 and 200 basis points depending on the total rent adjusted net leverage ratio of FWR and its restricted subsidiaries on a consolidated basis (the “Total Rent Adjusted Net Leverage Ratio”) or (ii) SOFR plus a credit spread adjustment of 10 basis points plus a margin of between 225 and 300 basis points depending on the Total Rent Adjusted Net Leverage Ratio. Refer to Note 8, Interest Rate Swaps, for information about the variable-to-fixed interest rate swap agreements entered into in June 2023.
Fair Value of Debt
The estimated fair value of the outstanding debt, excluding finance lease obligations and financing obligations, is classified as Level 3 in the fair value hierarchy and was estimated using discounted cash flow models, market yield and yield volatility. The estimated fair value of the outstanding debt under the Credit Facilities was $94.9 million and $97.1 million at September 24, 2023 and December 25, 2022, respectively.












13

FIRST WATCH RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)


8. Interest Rate Swaps

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

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

Amounts reported in Other comprehensive income related to the interest rate swaps will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. Over the next 12 months, the Company estimates that $1.0 million will be reclassified as a reduction to interest expense.
14

FIRST WATCH RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
9.    Leases
The following table includes a detail of lease assets and liabilities:
(in thousands)Consolidated Balance Sheets ClassificationSEPTEMBER 24, 2023DECEMBER 25, 2022
Operating lease right-of-use assetsOperating lease right-of-use assets$400,764 $352,373 
Finance lease assetsProperty, fixtures and equipment, net1,062 1,332 
Total lease assets$401,826 $353,705 
Operating lease liabilities (1) - current
Current portion of operating lease liabilities$42,856 $38,936 
Operating lease liabilities - non-currentOperating lease liabilities420,496 366,113 
Finance lease liabilities - currentCurrent portion of long-term debt641 632 
Finance lease liabilities - non-currentLong-term debt, net500 801 
Total lease liabilities$464,493 $406,482 
___________________
(1) Excludes all variable lease expense.
The components of lease expense are as follows:
(in thousands)Consolidated Statements of Operations and Comprehensive Income ClassificationTHIRTEEN WEEKS ENDEDTHIRTY-NINE WEEKS ENDED
SEPTEMBER 24, 2023SEPTEMBER 25, 2022SEPTEMBER 24, 2023SEPTEMBER 25, 2022
Operating lease expenseOther restaurant operating expenses
Occupancy expenses
Pre-opening expenses
General and administrative expenses
$14,492 $12,667 $40,933 $36,843 
Variable lease expenseFood and beverage costs
Occupancy expenses
General and administrative expenses
4,438 3,676 12,444 10,669 
Finance lease expense:
Amortization of leased assetsDepreciation and amortization126 127 380 394 
Interest on lease liabilitiesInterest expense20 25 72 101 
Total lease expense (1)
$19,076 $16,495 $53,829 $48,007 
_________________
(1) Includes contingent rent expense of $0.5 million and $0.4 million during the thirteen weeks ended September 24, 2023 and September 25, 2022, respectively, and $1.4 million and $1.2 million during the thirty-nine weeks ended September 24, 2023 and September 25, 2022, respectively.
Supplemental cash flow information related to leases was as follows:
 THIRTY-NINE WEEKS ENDED
(in thousands)SEPTEMBER 24, 2023SEPTEMBER 25, 2022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows - operating leases$31,707 $30,506 
Operating cash flows - finance leases$72 $101 
Financing cash flows - finance leases$394 $385 
15

FIRST WATCH RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Supplemental information related to leases was as follows:
 THIRTY-NINE WEEKS ENDED
 SEPTEMBER 24, 2023SEPTEMBER 25, 2022
Weighted-average remaining lease term (in years)
Operating leases14.014.8
Finance leases2.73.0
Weighted-average discount rate (1)
Operating leases8.4 %8.6 %
Finance leases7.2 %7.7 %
________________
(1) Based on the Company’s incremental borrowing rate.
As of September 24, 2023, future minimum lease payments for operating and finance leases consisted of the following:
(in thousands)OPERATING LEASESFINANCE LEASES
Fiscal year
2023$11,382 $208 
202447,813 600 
202557,841 254 
202657,555 67 
202756,701 56 
Thereafter589,118 67 
Total future minimum lease payments (1)
820,410 1,252 
Less: imputed interest(357,058)(111)
Total present value of lease liabilities$463,352 $1,141 
_________________
(1) Excludes approximately $76.6 million of executed operating leases that have not commenced as of September 24, 2023.
10. Equity and Stock-Based Compensation
Equity Transactions
During the thirty-nine weeks ended September 24, 2023, funds managed by the Company’s majority owner, Advent International Corporation, (“Advent”) sold 3,500,000 and 3,000,000 shares of the Company’s common stock through underwritten secondary public offerings that were completed on May 18, 2023 and June 13, 2023, respectively. The selling stockholders sold an additional 525,000 and 450,000 shares of common stock on May 18, 2023 and July 3, 2023, respectively, pursuant to the terms of the underwriter’s option associated with each secondary public offering. All net proceeds from the sale of the shares of common stock were distributed to the selling stockholders. The Company incurred approximately $1.0 million of costs in connection with the offerings that were recorded within Transaction expenses, net on the Consolidated Statements of Operations and Comprehensive Income.
During the thirteen weeks ended September 25, 2022, funds managed by Advent, sold 4,500,000 shares of the Company’s common stock through a secondary public offering that was completed on September 19, 2022. The selling stockholders sold an additional 675,000 shares of common stock on October 6, 2022 pursuant to the terms of the underwriters option associated with the secondary offering. All net proceeds from the sale of the shares of common stock were distributed to the selling stockholders. The Company incurred approximately $1.6 million of costs in connection with the offerings that were recorded within Transaction expenses, net on the Consolidated Statements of Operations and Comprehensive Income.

16

FIRST WATCH RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Stock option awards
There were no stock option awards granted under the 2021 Equity Plan during the thirty-nine weeks ended September 24, 2023. A summary of stock option activity during the thirty-nine weeks ended September 24, 2023 is as follows:
NUMBER OF OPTIONSWEIGHTED AVERAGE
EXERCISE PRICE
AGGREGATE INTRINSIC VALUE
(in thousands)
WEIGHTED AVERAGE REMAINING CONTRACTUAL LIFE
(in years)
Outstanding, December 25, 2022
5,115,674 $10.12 $20,981 6.1
Exercised(545,669)$9.18 
Forfeited(126,113)$12.12 
Outstanding, September 24, 2023
4,443,892 $10.18 $34,316 5.4
Exercisable, September 24, 2023
2,706,341 $9.67 $22,277 4.9
The aggregate intrinsic value is based on the difference between the exercise price of the stock option and the closing price of the Company’s common stock on Nasdaq on the last trading day.
A summary of the non-vested stock option activity during the thirty-nine weeks ended September 24, 2023 is as follows:
NUMBER OF OPTIONSWEIGHTED AVERAGE GRANT DATE FAIR VALUE
Nonvested, December 25, 2022
2,324,316 $7.31 
Vested (460,652)$5.59 
Forfeited (126,113)$6.47 
Nonvested, September 24, 2023
1,737,551 $7.83 
Restricted stock units
A summary of activity for restricted stock units during the thirty-nine weeks ended September 24, 2023 is as follows:
RESTRICTED STOCK UNITSWEIGHTED AVERAGE
GRANT DATE FAIR VALUE
AGGREGATE INTRINSIC VALUE
(in thousands)
Outstanding, December 25, 2022
38,311 $14.36 $544 
Granted538,007 $15.67 
Vested(38,311)$14.36 
Forfeited(22,228)$15.52 
Outstanding, September 24, 2023
515,779 $15.67 $9,232 

The aggregate intrinsic value is based on the closing price of the Company’s common stock on Nasdaq of $17.90 and $14.21 on September 22, 2023 and December 23, 2022, the last trading days for the periods, respectively.

Stock-based compensation expense was $1.8 million and $5.4 million during the thirteen and thirty-nine weeks ended September 24, 2023, respectively. Stock-based compensation expense was $2.7 million and $7.8 million during the thirteen and thirty-nine weeks ended September 25, 2022, respectively.

The total related income tax benefit for stock-based compensation expense was $0.8 million and $1.3 million during the thirteen and thirty-nine weeks ended September 24, 2023, respectively. The total related income tax benefit for stock-based compensation expense was less than $0.1 million during the thirteen and thirty-nine weeks ended September 25, 2022.


17

FIRST WATCH RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Unrecognized stock-based compensation expense
The following represents unrecognized stock-based compensation expense and the remaining weighted average vesting period as of September 24, 2023:
UNRECOGNIZED STOCK-BASED COMPENSATION EXPENSE
(in thousands)
REMAINING WEIGHTED AVERAGE
VESTING PERIOD
(in years)
Stock options$4,574 0.8
Restricted stock units $6,549 2.4
11.    Income Taxes
 THIRTEEN WEEKS ENDEDTHIRTY-NINE WEEKS ENDED
(dollars in thousands)SEPTEMBER 24, 2023SEPTEMBER 25, 2022SEPTEMBER 24, 2023SEPTEMBER 25, 2022
Income before income taxes$6,661 $1,375 $30,570 $12,335 
Income tax expense $(1,243)$(1,329)$(7,833)$(4,942)
Effective income tax rate18.7 %96.7 %25.6 %40.1 %

The change in the effective income tax rates for the thirteen and thirty-nine weeks ended September 24, 2023 as compared to the same periods in the prior year was primarily due to (i) the change in the valuation allowance for federal deferred tax assets, (ii) the decrease in the valuation allowance for state net operating loss carryforwards, (iii) the benefit of tax credits for FICA taxes on certain employees’ tips, (iv) impacts of executive stock-based compensation and (v) non-deductible costs associated with sales of the Company’s common stock by funds managed by Advent through secondary public offerings.
The effective income tax rates for the thirteen and thirty-nine weeks ended September 24, 2023 and September 25, 2022 were different than the blended federal and state statutory rate primarily due to (i) the change in the valuation allowance for federal deferred tax assets, (ii) the decrease in the valuation allowance for state net operating loss carryforwards, (iii) the benefit of tax credits for FICA taxes on certain employees’ tips, (iv) impacts of executive stock-based compensation and (v) non-deductible costs associated with sales of the Company’s common stock by funds managed by Advent through secondary public offerings.
Valuation allowance
Management evaluates quarterly whether the resulting deferred tax assets are realizable given the Company’s earnings history. Based on the available evidence, the Company does not meet the more likely than not standard related to the realization of a portion of the deferred tax assets as of September 24, 2023. Accordingly, the Company has established a valuation allowance on the portion of deferred tax assets deemed not realizable, including state charitable contribution carryovers, various state loss carryforwards and various federal tax credit carryforwards.

Management continues to monitor and evaluate the rationale for recording a valuation allowance for deferred tax assets. As the Company’s future taxable earnings increase and deferred tax assets are utilized, it is possible that a portion of the valuation allowance will no longer be needed. Release of any portion of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense in the period of the release. The timing and amount of any release related to future taxable income is currently indeterminable. During the thirty-nine weeks ended September 24, 2023, a release of the valuation allowance related to certain state loss carryforwards decreased income tax expense by approximately $1.0 million.
12.    Commitments and Contingencies

Legal Proceedings

The Company is subject to legal proceedings, claims and liabilities that arise in the ordinary course of business. The amount of the anticipated liability with respect to these matters was not material as of September 24, 2023. In the event any litigation losses become probable and estimable, the Company will recognize any anticipated losses.

18

FIRST WATCH RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Unclaimed Property
The Company is subject to unclaimed or abandoned property (escheat) laws which require it to turn over to state governmental authorities the property of others held by the Company that has been unclaimed for specified periods of time. Property subject to escheat laws generally relates to uncashed checks, trade accounts receivable credits and unredeemed gift card balances. During the first quarter of 2022, the Company received a letter from the Delaware Secretary of State inviting the Company to participate in the Delaware Secretary of State’s Abandoned or Unclaimed Property Voluntary Disclosure Agreement Program to avoid being sent an audit notice by the Delaware Department of Finance. On August 31, 2022, the Company was accepted into Delaware’s Voluntary Disclosure Agreement Program, entitling it to certain benefits and protections offered to participants in the program. The Company intends to work in good faith to complete a review of its books and records related to unclaimed or abandoned property during the periods required under the program. The Company will continue to examine its options regarding the escheat laws of Delaware including completing Delaware’s Voluntary Disclosure Agreement Program or proceeding to audit. Any potential loss, or range of loss, that may result from this matter is not currently reasonably estimable.
As of December 26, 2022, Management believes the Company is not currently required to remit any amounts relating to future unredeemed gift cards to states as the Company’s subsidiary that is the issuer of our gift cards was re-domiciled in Florida, which exempts gift cards from the abandoned and unclaimed property laws.
13.    Net Income Per Common Share
The following table sets forth the computations of basic and diluted net income per common share:
 THIRTEEN WEEKS ENDEDTHIRTY-NINE WEEKS ENDED
(in thousands, except share and per share data)SEPTEMBER 24, 2023SEPTEMBER 25, 2022SEPTEMBER 24, 2023SEPTEMBER 25, 2022
Numerator:
Net income $5,418 $46 $22,737 $7,393 
Denominator:
Weighted average common shares outstanding - basic59,646,027 59,089,831 59,424,989 59,065,423 
Weighted average common shares outstanding - diluted61,562,524 60,464,062 61,016,105 60,088,622 
Net income per common share - basic$0.09 $ $0.38 $0.13 
Net income per common share - diluted$0.09 $ $0.37 $0.12 
Stock options outstanding not included in diluted net income per common share as their effect is anti-dilutive12,552 1,255,089 59,101 1,708,602 
Restricted stock units outstanding not included in diluted net income per share as their effect is anti-dilutive  1,302  
Diluted net income per common share is calculated by adjusting the weighted average shares outstanding for the theoretical effect of potential common shares that would be issued for stock option awards outstanding and unvested as of the respective periods using the treasury method.
19

FIRST WATCH RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

14.    Subsequent Events

On October 13, 2023, the Company executed an asset purchase agreement to acquire from a franchisee six operating restaurants together with other associated assets, including, but not limited to, franchise and development rights for cash of approximately $9.2 million. The close date of the sale is subject to the satisfaction of certain customary closing conditions set forth in the asset purchase agreement.




20

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

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

First Watch is an award-winning Daytime Dining concept serving made-to-order breakfast, brunch and lunch using fresh ingredients. A recipient of hundreds of local “Best Breakfast” and “Best Brunch” accolades, First Watch’s award winning chef-driven menu includes elevated executions of classic favorites for breakfast, brunch and lunch. In 2023, First Watch was named the top restaurant brand in Yelp’s inaugural list of the top 50 most-loved brands in the U.S. 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. The Company is majority owned by Advent International Corporation, (“Advent”), 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 September 24, 2023, the Company had 402 company-owned restaurants and 103 franchise-owned restaurants.
Recent Developments

Financial and operational highlights for the thirteen weeks ended September 24, 2023 (“third quarter of 2023”) as compared to the thirteen weeks ended September 25, 2022 (“third quarter of 2022”) reflect continued success and sustained growth despite a challenging macro environment and include the following:

Total revenues increased 17.3% to $219.2 million in the third quarter of 2023 from $186.9 million in the third quarter of 2022
System-wide sales increased 14.9% to $270.3 million in the third quarter of 2023 from $235.2 million in the third quarter of 2022
Same-restaurant sales growth of 4.8% (+38.8% relative to the third quarter of 2019*)
Same-restaurant traffic decline of 1.9% (+6.5% same-restaurant traffic growth relative to the third quarter of 2019*)
Income from operations margin increased to 3.6% during the third quarter of 2023 from 1.4% in the third quarter of 2022
Restaurant level operating profit margin** increased to 18.7% in the third quarter of 2023 from 17.3% in the third quarter of 2022
Net income increased to $5.4 million, or $0.09 per diluted share, in the third quarter of 2023 from $46.0 thousand in the third quarter of 2022
Adjusted EBITDA** increased to $21.6 million in the third quarter of 2023 from $17.0 million in the third quarter of 2022
Opened 13 system-wide restaurants (10 company-owned and 3 franchise-owned) across 10 states and acquired 11 franchise-owned restaurants resulting in a total of 505 system-wide restaurants (402 company-owned and 103 franchise-owned) across 29 states
___________________
* Comparison to the thirteen weeks ended September 29, 2019 (“third quarter of 2019”) is presented for enhanced comparability due to the economic impact of COVID-19.
** See Non-GAAP Financial Measures Reconciliations section below.
21

Business Trends

In the third quarter of 2023, we benefited from a decline in the average costs of our consolidated market basket combined with price increases, primarily to cover inflation, implemented over the past year.

Our same-restaurant sales grew 4.8% with marginally positive in-restaurant dining traffic growth, though off-premises occasions continued to decline in comparison to last year, similar to industry-wide trends. We continue to believe the decline of our off-premises traffic reflects customers foregoing a comparatively high-ticket dining occasion combined with customers returning to the full experience of our restaurants’ dining room service.

We expect full year commodity deflation to be in the range of negative 1.0% to flat. In addition, we expect hourly labor cost inflation to remain in the range of 9.0% to 11.0%, with overall restaurant-level labor cost inflation to range between 8.0% and 10.0% in 2023.

During the thirty-nine weeks ended September 24, 2023, we acquired 17 operating restaurants and one restaurant under development from our franchisees in continuation of this component of our growth strategy. Furthermore, we continue to execute on our long-term growth associated with new restaurant openings and we are staffed with over 120 managers to lead and operate our future new company-owned restaurants.

Key Performance Indicators

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

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

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

Same-Restaurant Sales Growth: the percentage change in year-over-year restaurant sales (excluding gift card breakage) for the comparable restaurant base, which we define as the number of company-owned First Watch branded restaurants open for 18 months or longer as of the beginning of the fiscal year (“Comparable Restaurant Base”). For the thirteen and thirty-nine weeks ended September 24, 2023, there were 327 restaurants in our Comparable Restaurant Base. For the thirteen and thirty-nine weeks ended September 25, 2022, there were 303 restaurants in our Comparable Restaurant Base. Measuring our same-restaurant sales growth allows management to evaluate the performance of our existing restaurant base. We believe this measure is useful for investors to provide a consistent comparison of restaurant sales results and trends across periods within our core, established restaurant base, unaffected by results of store openings, closings, and other transitional changes.

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

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

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

22

Non-GAAP Financial Measures

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

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

We use Restaurant level operating profit and Restaurant level operating profit margin (i) to evaluate the performance and profitability of each operating restaurant, individually and in the aggregate and (ii) to make decisions regarding future spending and other operational decisions.

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

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

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

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 from operations margin, the most directly comparable GAAP measure.
23

Selected Operating Data
THIRTEEN WEEKS ENDED SEPTEMBER 24, 2023
 Company-ownedFranchise-ownedTotal
Beginning of period
381111492
New restaurants
10313
Acquisitions of franchise-owned restaurants
11(11)— 
End of period
402103505
THIRTY-NINE WEEKS ENDED SEPTEMBER 24, 2023
 Company-ownedFranchise-ownedTotal
Beginning of period
366108474
New restaurant openings
20 12 32
Acquisitions of franchise-owned restaurants
17 (17)— 
Closures
(1)— (1)
End of period
402103505
THIRTEEN WEEKS ENDEDTHIRTY-NINE WEEKS ENDED
(dollars in thousands)SEPTEMBER 24, 2023SEPTEMBER 25, 2022SEPTEMBER 24, 2023SEPTEMBER 25, 2022
System-wide sales $270,291 $235,231 $806,556 $680,588 
Same-restaurant sales growth4.8 %12.0 %8.5 %17.0 %
Same-restaurant traffic growth (decline)(1.9)%3.7 %0.7 %10.6 %
Income from operations $7,738 $2,621 $34,412 $15,434 
Income from operations margin3.6 %1.4 %5.4 %2.9 %
Restaurant level operating profit (1)
$40,365 $31,872 $128,865 $98,390 
Restaurant level operating profit margin (1)
18.7 %17.3 %20.3 %18.3 %
Net income $5,418 $46 $22,737 $7,393 
Net income margin2.5 %— %3.5 %1.4 %
Adjusted EBITDA (2)
$21,629 $17,023 $74,858 $54,176 
Adjusted EBITDA margin (2)
9.9 %9.1 %11.6 %10.0 %
________________
(1) Reconciliations from Income from operations and Income from operations margin, the most comparable GAAP measures, to Restaurant level operating profit and Restaurant level operating profit margin, are set forth in the schedules within the Non-GAAP Financial Measures Reconciliations section below.
(2) Reconciliations from Net income and Net income margin, the most comparable GAAP measures, to Adjusted EBITDA and Adjusted EBITDA margin, are set forth in the schedules within the Non-GAAP Financial Measures Reconciliations section below.


Same-Restaurant Sales Growth (Decline) and Same-Restaurant Traffic Growth (Decline)

THIRTEEN WEEKS ENDEDSAME-RESTAURANT SALES GROWTH SAME-RESTAURANT TRAFFIC GROWTH (DECLINE)COMPARABLE RESTAURANT BASE
September 24, 20234.8 %(1.9)%327 
September 25, 202212.0 %3.7 %303 
September 26, 202146.2 %40.1 %270 

24

Results of Operations
Thirteen and Thirty-Nine Weeks Ended September 24, 2023 Compared to Thirteen and Thirty-Nine Weeks Ended September 25, 2022
The following table summarizes our results of operations and the percentages of certain items in relation to Total revenues or, where indicated, Restaurant sales for the thirteen and thirty-nine weeks ended September 24, 2023 and September 25, 2022:
THIRTEEN WEEKS ENDEDTHIRTY-NINE WEEKS ENDED
(dollars in thousands)SEPTEMBER 24, 2023SEPTEMBER 25, 2022SEPTEMBER 24, 2023SEPTEMBER 25, 2022
Revenues
Restaurant sales$215,495 98.3 %$183,978 98.5 %$636,050 98.3 %$536,329 98.5 %
Franchise revenues3,717 1.7 %2,874 1.5 %10,868 1.7 %8,088 1.5 %
Total revenues219,212 100.0 %186,852 100.0 %646,918 100.0 %544,417 100.0 %
Operating costs and expenses
Restaurant operating expenses (1) (exclusive of depreciation and amortization shown below):
Food and beverage costs48,709 22.6 %44,578 24.2 %143,028 22.5 %129,200 24.1 %
Labor and other related expenses73,137 33.9 %61,262 33.3 %212,312 33.4 %175,091 32.6 %
Other restaurant operating expenses33,694 15.6 %29,685 16.1 %97,572 15.3 %85,761 16.0 %
Occupancy expenses17,555 8.1 %15,091 8.2 %49,950 7.9 %44,318 8.3 %
Pre-opening expenses2,035 0.9 %1,490 0.8 %4,323 0.7 %3,569 0.7 %
General and administrative expenses25,179 11.5 %21,689 11.6 %73,168 11.3 %63,194 11.6 %
Depreciation and amortization10,434 4.8 %8,679 4.6 %28,992 4.5 %25,302 4.6 %
Impairments and loss on disposal of assets185 0.1 %338 0.2 %618 0.1 %572 0.1 %
Transaction expenses, net546 0.2 %1,419 0.8 %2,543 0.4 %1,976 0.4 %
Total operating costs and expenses211,474 96.5 %184,231 98.6 %612,506 94.7 %528,983 97.2 %
Income from operations (1)
7,738 3.6 %2,621 1.4 %34,412 5.4 %15,434 2.9 %
Interest expense(1,848)(0.8)%(1,362)(0.7)%(5,792)(0.9)%(3,494)(0.6)%
Other income, net771 0.4 %116 0.1 %1,950 0.3 %395 0.1 %
Income before income taxes6,661 3.0 %1,375 0.7 %30,570 4.7 %12,335 2.3 %
Income tax expense(1,243)(0.6)%(1,329)(0.7)%(7,833)(1.2)%(4,942)(0.9)%
Net income $5,418 2.5 %$46 — %$22,737 3.5 %$7,393 1.4 %
____________
(1) Percentages are calculated as a percentage of restaurant sales.
25

Restaurant Sales

Restaurant sales represent the aggregate sales of food and beverages, net of discounts, at company-owned restaurants. Restaurant sales in any period are directly influenced by the number of operating weeks in the period, the number of open restaurants, customer traffic and average check. Average check growth is driven by our menu price increases and changes to our menu mix. In both the thirteen and twenty-six week comparative periods in the table below, the trend of declining off-premises occasions is reflected as the change in the relative contribution of the Third-party delivery sales and Take-out sales to the Total Restaurant sales.
THIRTEEN WEEKS ENDEDTHIRTY-NINE WEEKS ENDED
(dollars in thousands)SEPTEMBER 24, 2023SEPTEMBER 25, 2022ChangeSEPTEMBER 24, 2023SEPTEMBER 25, 2022Change
Restaurant sales:
In-restaurant dining sales$176,696 $147,491 19.8 %$520,277 $425,222 22.4 %
Third-party delivery sales22,011 20,105 9.5 %65,765 60,960 7.9 %
Take-out sales16,788 16,382 2.5 %50,008 50,147 (0.3)%
Total Restaurant sales$215,495 $183,978 17.1 %$636,050 $536,329 18.6 %

The increase in total restaurant sales during the thirteen weeks ended September 24, 2023 as compared to the same period in the prior year was primarily due to (i) same-restaurant sales growth of 4.8%, mainly driven by menu price increases, and (ii) $23.3 million from restaurants not in the Comparable Restaurant Base, which included $14.6 million from our 31 NROs between September 25, 2022 and September 24, 2023 and $7.1 million from restaurants we had acquired from our franchisees.

The increase in total restaurant sales during the thirty-nine weeks ended September 24, 2023 as compared to the same period in the prior year was primarily due to (i) same restaurant sales growth of 8.5%, driven by same-restaurant traffic growth of 0.7% and menu price increases and (ii) $57.0 million from restaurants not in the Comparable Restaurant Base, which included $32.6 million from our 31 NROs between September 25, 2022 and September 24, 2023 and $8.9 million from restaurants we had acquired from our franchisees.
Franchise Revenues
Franchise revenues are comprised of sales-based royalty fees, system fund contributions and the amortization of upfront initial franchise fees, which are recognized as revenue on a straight-line basis over the term of the franchise agreement. Franchise revenues in any period are directly influenced by the number of open franchise-owned restaurants.
THIRTEEN WEEKS ENDEDTHIRTY-NINE WEEKS ENDED
(dollars in thousands)SEPTEMBER 24, 2023SEPTEMBER 25, 2022ChangeSEPTEMBER 24, 2023SEPTEMBER 25, 2022Change
Franchise revenues:
Royalty and system fund contributions$3,244 $2,807 15.6 %$10,160 $7,892 28.7 %
Initial fees473 67 
n/m (1)
708 196 
n/m (1)
Total Franchise revenues$3,717 $2,874 29.3 %$10,868 $8,088 34.4 %
___________
(1) Not meaningful.
The increase in franchise revenues during the thirteen and thirty-nine weeks ended September 24, 2023 as compared to the same periods in the prior year was primarily driven by (i) the increase in sales from franchise-owned restaurants and (ii) $0.3 million and $0.8 million, respectively, from 17 franchise-owned NROs between September 25, 2022 and September 24, 2023. The increase was partially offset by $0.3 million and $0.2 million lower franchise fees, respectively, as a result of the acquisitions of restaurants from our franchisees during the thirteen and thirty-nine weeks ended September 24, 2023.
26

Food and Beverage Costs
The components of food and beverage costs at company-owned restaurants are variable by nature, change with sales volume, are impacted by product mix and are subject to increases or decreases in commodity costs.
THIRTEEN WEEKS ENDEDTHIRTY-NINE WEEKS ENDED
(dollars in thousands)SEPTEMBER 24, 2023SEPTEMBER 25, 2022ChangeSEPTEMBER 24, 2023SEPTEMBER 25, 2022Change
Food and beverage costs$48,709 $44,578 9.3 %$143,028 $129,200