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 June 27, 2021
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 001-38250
FAT Brands Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 82-1302696 | |
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
9720 Wilshire Blvd., Suite 500
Beverly Hills, CA 90212
(Address of principal executive offices, including zip code)
(310) 319-1850
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Common Stock, par value $0.0001 per share | FAT | The Nasdaq Stock Market LLC | ||
| Series B Cumulative Preferred Stock, par value $0.0001 per share | FATBP | The Nasdaq Stock Market LLC | ||
| Warrants to purchase Common Stock | FATBW | The Nasdaq Stock Market LLC |
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| 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 Exchange Act Rule 12b-2). Yes ☐ No ☒
As of August 2, 2021, there were 14,653,961 shares of common stock outstanding.
FAT BRANDS INC.
QUARTERLY REPORT ON FORM 10-Q
June 27, 2021
TABLE OF CONTENTS
| PART I. | FINANCIAL INFORMATION | 3 |
| Item 1. | Condensed Consolidated Financial Statements (Unaudited) | 3 |
| FAT Brands Inc. and Subsidiaries: | ||
| Condensed Consolidated Balance Sheets (Unaudited) | 3 | |
| Condensed Consolidated Statements of Operations (Unaudited) | 4 | |
| Condensed Consolidated Statements of Changes in Stockholders’ Deficit (Unaudited) | 5 | |
| Condensed Consolidated Statements of Cash Flows (Unaudited) | 7 | |
| Notes to Condensed Consolidated Financial Statements (Unaudited) | 8 | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 28 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 34 |
| Item 4. | Controls and Procedures | 34 |
| PART II. | OTHER INFORMATION | 35 |
| Item 1. | Legal Proceedings | 35 |
| Item 1A. | Risk Factors | 36 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 36 |
| Item 3. | Defaults Upon Senior Securities | 36 |
| Item 4. | Mine Safety Disclosures | 36 |
| Item 5. | Other Information | 36 |
| Item 6. | Exhibits | 37 |
| SIGNATURES | 38 | |
| 2 |
PART I — FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
FAT BRANDS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
| June 27, 2021 | December 27, 2020 | ||||||||
| Unaudited | |||||||||
| Assets | |||||||||
| Current assets | |||||||||
| Cash | $ | 48,124 | $ | 3,944 | |||||
| Restricted cash | 4,096 | 2,867 | |||||||
| Accounts receivable, net of allowance for doubtful accounts of $816 and $739, as of June 27, 2021 and December 27, 2020, respectively | 5,583 | 4,208 | |||||||
| Trade and other notes receivable, net of allowance for doubtful accounts of $103 as of June 27, 2021 and December 27, 2020 | 217 | 208 | |||||||
| Assets classified as held for sale | 7,735 | 10,831 | |||||||
| Other current assets | 2,486 | 2,365 | |||||||
| Total current assets | 68,241 | 24,423 | |||||||
| Noncurrent restricted cash | 1,800 | 400 | |||||||
| Notes receivable – noncurrent, net of allowance for doubtful accounts of $271, as of June 27, 2021 and December 27, 2020 | 1,583 | 1,622 | |||||||
| Deferred income tax asset, net | 33,555 | 30,551 | |||||||
| Operating lease right of use assets | 4,913 | 4,469 | |||||||
| Goodwill | 9,706 | 10,909 | |||||||
| Other intangible assets, net | 46,950 | 47,711 | |||||||
| Other assets | 2,420 | 1,059 | |||||||
| Total assets | $ | 169,168 | $ | 121,144 | |||||
| Liabilities and Stockholders’ Deficit | |||||||||
| Liabilities | |||||||||
| Current liabilities | |||||||||
| Accounts payable | $ | 8,410 | $ | 8,625 | |||||
| Accrued expenses and other liabilities | 21,235 | 19,833 | |||||||
| Deferred income, current portion | 1,684 | 1,887 | |||||||
| Accrued advertising | 1,980 | 2,160 | |||||||
| Accrued interest payable | 1,473 | 1,847 | |||||||
| Dividend payable on preferred shares | 1,397 | 893 | |||||||
| Liabilities related to assets classified as held for sale | 7,131 | 9,892 | |||||||
| Current portion of operating lease liability | 929 | 748 | |||||||
| Current portion of preferred shares, net | 7,980 | 7,961 | |||||||
| Current portion of long-term debt | 913 | 19,314 | |||||||
| Other | 18 | 17 | |||||||
| Total current liabilities | 53,150 | 73,177 | |||||||
| Deferred income – noncurrent | 9,691 | 9,099 | |||||||
| Acquisition purchase price payable | 776 | 2,806 | |||||||
| Operating lease liability, net of current portion | 4,508 | 4,011 | |||||||
| Long-term debt, net of current portion | 146,140 | 73,852 | |||||||
| Other liabilities | 58 | 82 | |||||||
| Total liabilities | 214,323 | 163,027 | |||||||
| Commitments and contingencies (Note 19) | - | - | |||||||
| Stockholders’ deficit | |||||||||
| Preferred stock, $.0001 par value; 5,000,000 shares authorized; 1,643,272 and 1,183,272 shares issued and outstanding at June 27, 2021 and December 27, 2020, respectively; liquidation preference $25 per share | 29,092 | 21,788 | |||||||
| Common stock, $.0001 par value; 25,000,000 shares authorized; 12,491,528 and 11,926,264 shares issued and outstanding at June 27, 2021 and December 27, 2020, respectively (1) | (45,086 | ) | (42,775 | ) | |||||
| Accumulated deficit | (29,254 | ) | (20,896 | ) | |||||
| Stockholders’ deficit attributable to FAT Brands Inc. | (45,248 | ) | (41,883 | ) | |||||
| Noncontrolling interests | 93 | - | |||||||
| Total stockholders’ deficit | (45,155 | ) | (41,883 | ) | |||||
| Total liabilities and stockholders’ deficit | $ | 169,168 | $ | 121,144 | |||||
| (1) | Issued and outstanding share count excludes 86,463 common shares committed, but unissued as of June 27, 2021. |
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 3 |
FAT BRANDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share data)
For the Thirteen and Twenty-six Weeks Ended June 27, 2021 and June 28, 2020 (Unaudited)
| June 27, 2021 | June 28, 2020 | June 27, 2021 | June 28, 2020 | |||||||||||||
| Thirteen Weeks Ended | Twenty-six Weeks Ended | |||||||||||||||
| June 27, 2021 | June 28, 2020 | June 27, 2021 | June 28, 2020 | |||||||||||||
| Revenue | ||||||||||||||||
| Royalties | $ | 6,161 | $ | 2,213 | $ | 11,057 | $ | 5,522 | ||||||||
| Franchise fees | 482 | 273 | 1,022 | 449 | ||||||||||||
| Advertising fees | 1,370 | 613 | 2,560 | 1,544 | ||||||||||||
| Restaurant sales | 234 | - | 234 | - | ||||||||||||
| Management fees and other income | 35 | 8 | 58 | 15 | ||||||||||||
| Total revenue | 8,282 | 3,107 | 14,931 | 7,530 | ||||||||||||
| Costs and expenses | ||||||||||||||||
| General and administrative expense | 5,483 | 4,104 | 10,408 | 7,636 | ||||||||||||
| Restaurant operating expenses | 244 | - | 244 | - | ||||||||||||
| Impairment of assets | - | 3,174 | - | 3,174 | ||||||||||||
| Refranchising (gain) loss | (856 | ) | 1,006 | (429 | ) | 1,544 | ||||||||||
| Advertising expense | 1,367 | 613 | 2,560 | 1,544 | ||||||||||||
| Total costs and expenses | 6,238 | 8,897 | 12,783 | 13,898 | ||||||||||||
| Income (loss) from operations | 2,044 | (5,790 | ) | 2,148 | (6,368 | ) | ||||||||||
| Other income (expense), net | ||||||||||||||||
| Interest expense, net of interest income of $836 and $1,554 due from affiliates during the thirteen and twenty-six weeks ended June 28, 2020, respectively. There was no interest income due from affiliates in 2021. | (2,406 | ) | (289 | ) | (4,866 | ) | (1,911 | ) | ||||||||
| Interest expense related to preferred shares | (264 | ) | (476 | ) | (552 | ) | (928 | ) | ||||||||
| Net loss on extinguishment of debt | (6,405 | ) | - | (6,405 | ) | - | ||||||||||
| Change in fair value of derivative liability | - | 1,264 | - | 1,264 | ||||||||||||
| Other expense, net | (892 | ) | (49 | ) | (809 | ) | (64 | ) | ||||||||
| Total other (expense) income, net | (9,967 | ) | 450 | (12,632 | ) | (1,639 | ) | |||||||||
| Loss before income tax expense | (7,923 | ) | (5,340 | ) | (10,484 | ) | (8,007 | ) | ||||||||
| Income tax benefit | (1,992 | ) | (1,089 | ) | (2,121 | ) | (1,386 | ) | ||||||||
| Net loss | (5,931 | ) | (4,251 | ) | (8,363 | ) | (6,621 | ) | ||||||||
| Less: Net loss attributable to noncontrolling interest | (5 | ) | - | (5 | ) | - | ||||||||||
| Net loss attributable to FAT Brands Inc. | $ | (5,926 | ) | $ | (4,251 | ) | $ | (8,358 | ) | $ | (6,621 | ) | ||||
| Basic and diluted loss per common share | $ | (0.48 | ) | $ | (0.36 | ) | $ | (0.69 | ) | $ | (0.56 | ) | ||||
| Basic and diluted weighted average shares outstanding | 12,275,370 | 11,886,182 | 12,122,938 | 11,877,507 | ||||||||||||
| Cash dividends declared per common share | $ | 0.26 | $ | - | $ | 0.26 | $ | - | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 4 |
FAT BRANDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
(dollars in thousands, except share data, unaudited)
For the Twenty-six Weeks Ended June 27, 2021
|
Common Stock Par |
Common Stock Additional paid-in |
Total Common Stock |
Preferred Stock Par |
Preferred Stock Additional paid-in |
Total Preferred |
Non- controlling |
Accum-
ulated |
Total | ||||||||||||||||||||||||||||||||||||
| Common Stock | Preferred Stock | |||||||||||||||||||||||||||||||||||||||||||
| Par |
Additional paid-in |
Total Common |
Par |
Additional paid-in |
Total Preferred |
Non- controlling |
Accum-
ulated |
|||||||||||||||||||||||||||||||||||||
| Shares | value | capital | Stock | Shares | value | capital | Stock | interest | deficit | Total | ||||||||||||||||||||||||||||||||||
| Balance at December 27, 2020 – audited | 11,926,264 | $ | 1 | $ | (42,776 | ) | $ | (42,775 | ) | 1,183,272 | $ | - | $ | 21,788 | $ | 21,788 | $ | - | $ | (20,896 | ) | $ | (41,883 | ) | ||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | - | (5 | ) | (8,358 | ) | (8,363 | ) | ||||||||||||||||||||||||||||||
| Issuance of common stock through exercise of warrants (1) | 265,264 | - | 1,140 | 1,140 | - | - | 243 | 243 | - | - | 1,383 | |||||||||||||||||||||||||||||||||
| Issuance of preferred stock | - | - | - | - | 460,000 | - | 8,281 | 8,281 | - | - | 8,281 | |||||||||||||||||||||||||||||||||
| Share-based compensation | 300,000 | - | 230 | 230 | - | - | - | - | - | - | 230 | |||||||||||||||||||||||||||||||||
| Measurement period adjustment in accordance with ASU 2015-16 | - | - | (1,451 | ) | (1,451 | ) | - | - | - | - | - | - | (1,451 | ) | ||||||||||||||||||||||||||||||
| Stock contracted for issue in payment of debt (2) | - | - | 816 | 816 | - | - | - | - | - | - | 816 | |||||||||||||||||||||||||||||||||
| Sale of interest in operating restaurant | 151 | 151 | 98 | 249 | ||||||||||||||||||||||||||||||||||||||||
| Dividends declared on common stock | - | - | (3,197 | ) | (3,197 | ) | - | - | - | - | - | - | (3,197 | ) | ||||||||||||||||||||||||||||||
| Dividends declared on Series B preferred stock | - | - | - | - | - | - | (1,220 | ) | (1,220 | ) | - | - | (1,220 | ) | ||||||||||||||||||||||||||||||
| Issuance of common stock in lieu of cash directors fees payable | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in lieu of cash directors fees payable | ||||||||||||||||||||||||||||||||||||||||||||
| Fair value of derivative liability | ||||||||||||||||||||||||||||||||||||||||||||
| Correction of recorded conversion rights associated with Series A-1 preferred shares | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 27, 2021 | 12,491,528 | $ | 1 | $ | (45,087 | ) | $ | (45,086 | ) | 1,643,272 | $ | - | $ | 29,092 | $ | 29,092 | $ | 93 | $ | (29,254 | ) | $ | (45,155 | ) | ||||||||||||||||||||
| (1) | Share count excludes 23,963 common shares committed, but unissued as of June 27, 2021. |
| (2) | Share count excludes 62,500 common shares committed, but unissued as of June 27, 2021. |
For the Twenty-six Weeks Ended June 28, 2020
| Common Stock | Preferred Stock | |||||||||||||||||||||||||||||||||||||||||||
| Par |
Additional paid-in |
Par |
Additional paid-in |
Total Preferred |
Non- controlling |
Accumulated | ||||||||||||||||||||||||||||||||||||||
| Shares | value | capital | Total | Shares | value | capital | Stock | interest | deficit | Total | ||||||||||||||||||||||||||||||||||
| Balance at December 29, 2019 - audited | 11,860,299 | $ | 1 | $ | 11,413 | $ | 11,414 | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | $ | (6,036 | ) | $ | 5,378 | ||||||||||||
| Net loss | - | - | - | - | (6,621 | ) | (6,621 | ) | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock in lieu of cash directors’ fees payable | 34,596 | - | 135 | 135 | - | - | - | - | - | - | 135 | |||||||||||||||||||||||||||||||||
| Share-based compensation | - | - | 16 | 16 | - | 16 | ||||||||||||||||||||||||||||||||||||||
| Fair value of derivative liability | - | - | (2,406 | ) | (2,406 | ) | (2,406 | ) | ||||||||||||||||||||||||||||||||||||
| Correction of recorded conversion rights associated with Series A-1 preferred shares | - | - | (90 | ) | (90 | ) | - | (90 | ) | |||||||||||||||||||||||||||||||||||
| Balance at June 28, 2020 | 11,894,895 | $ | 1 | $ | 9,068 | $ | 9,069 | - | - | - | - | - | $ | (12,657 | ) | $ | (3,588) | |||||||||||||||||||||||||||
For the Thirteen Weeks Ended June 27, 2021
| 5 |
| Common Stock | Preferred Stock | |||||||||||||||||||||||||||||||||||||||||||
| Par |
Additional paid-in |
Total Common |
Par |
Additional paid-in |
Total Preferred |
Non- controlling |
Accum- ulated |
|||||||||||||||||||||||||||||||||||||
| Shares | value | capital | Stock | Shares | value | capital | Stock | interest | deficit | Total | ||||||||||||||||||||||||||||||||||
| Balance at March 28, 2021 | 12,029,264 | $ | 1 | $ | (43,516 | ) | $ | (43,515 | ) | 1,183,272 | $ | - | $ | 21,267 | $ | 21,267 | $ | - | $ | (23,328 | ) | $ | (45,576 | ) | ||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | - | (5 | ) | (5,926 | ) | (5,931 | ) | ||||||||||||||||||||||||||||||
| Issuance of common stock through exercise of warrants (1) | 162,264 | - | 714 | 714 | - | - | 154 | 154 | - | - | 868 | |||||||||||||||||||||||||||||||||
| Issuance of preferred stock | - | - | - | - | 460,000 | - | 8,281 | 8,281 | - | - | 8,281 | |||||||||||||||||||||||||||||||||
| Share-based compensation | 300,000 | - | 193 | 193 | - | - | - | - | - | - | 193 | |||||||||||||||||||||||||||||||||
| Measurement period adjustment in accordance with ASU 2015-16 | - | - | (248 | ) | (248 | ) | - | - | - | - | - | - | (248 | ) | ||||||||||||||||||||||||||||||
| Stock contracted for issue in payment of debt (2) | - | - | 816 | 816 | - | - | - | - | - | - | 816 | |||||||||||||||||||||||||||||||||
| Sale of interest in operating restaurant | 151 | 151 | 98 | 249 | ||||||||||||||||||||||||||||||||||||||||
| Dividends declared on common stock | - | - | (3,197 | ) | (3,197 | ) | - | - | - | - | - | - | (3,197 | ) | ||||||||||||||||||||||||||||||
| Dividends declared on Series B preferred stock | - | - | - | - | - | - | (610 | ) | (610 | ) | - | - | (610 | ) | ||||||||||||||||||||||||||||||
| Balance at June 27, 2021 | 12,491,528 | $ | 1 | $ | (45,087 | ) | $ | (45,086 | ) | 1,643,272 | $ | - | $ | 29,092 | $ | 29,092 | $ | 93 | $ | (29,254 | ) | $ | (45,155 | ) | ||||||||||||||||||||
| (1) | Share count excludes 23,963 common shares committed, but unissued as of June 27, 2021. |
| (2) | Share count excludes 62,500 common shares committed, but unissued as of June 27, 2021. |
For the Thirteen Weeks Ended June 28, 2020
| Common Stock | Preferred Stock | |||||||||||||||||||||||||||||||||||||||||||
| Par |
Additional paid-in |
Par |
Additional paid-in |
Total Preferred |
Non- controlling |
Accumulated | ||||||||||||||||||||||||||||||||||||||
| Shares | value | capital | Total | Shares | value | capital | Stock | interest | deficit | Total | ||||||||||||||||||||||||||||||||||
| Balance at March 29, 2020 | 11,876,659 | $ | 1 | $ | 11,413 | $ | 11,414 | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | $ | (8,406 | ) | $ | 3,008 | |||||||||||||
| Net loss | - | - | - | - | (4,251 | ) | (4,251 | ) | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock in lieu of cash directors’ fees payable | 18,236 | - | 60 | 60 | - | - | - | - | - | - | 60 | |||||||||||||||||||||||||||||||||
| Share-based compensation | - | - | 1 | 1 | - | 1 | ||||||||||||||||||||||||||||||||||||||
| Fair value of derivative liability | (2,406 | ) | (2,406 | ) | (2,406 | ) | ||||||||||||||||||||||||||||||||||||||
| Balance at June 28, 2020 | 11,894,895 | $ | 1 | $ | 9,068 | $ | 9,069 | - | - | - | - | - | - | - | $ | (12,657 | ) | $ | (3,588 | ) | ||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 6 |
FAT BRANDS INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(dollars in thousands, unaudited)
For the Twenty-six Weeks Ended June 27, 2021 and June 28, 2020
| 2021 | 2020 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | (8,363 | ) | $ | (6,621 | ) | ||
| Adjustments to reconcile net loss to net cash used in operations: | ||||||||
| Deferred income taxes | (3,003 | ) | (1,524 | ) | ||||
| Net loss on extinguishment of debt | 4,859 | - | ||||||
| Depreciation and amortization | 784 | 500 | ||||||
| Share-based compensation | 230 | 16 | ||||||
| Change in operating right of use assets | 1,065 | 399 | ||||||
| Accretion of loan fees and interest | 696 | 412 | ||||||
| Accretion of preferred shares | 47 | 38 | ||||||
| Accretion of purchase price liability | 20 | 255 | ||||||
| Gain on sale of refranchised assets | (1,119 | ) | (165 | ) | ||||
| Change in fair value of derivative liability | - | (1,264 | ) | |||||
| Impairment of assets | - | 3,174 | ||||||
| Provision for bad debts | 23 | 1,069 | ||||||
| Change in: | ||||||||
| Accounts receivable | (1,395 | ) | 856 | |||||
| Accrued interest receivable from affiliate | - | (1,554 | ) | |||||
| Tax Sharing Agreement liability | - | (154 | ) | |||||
| Other current assets | (783 | ) | (102 | ) | ||||
| Deferred income | 388 | 33 | ||||||
| Accounts payable | (395 | ) | 386 | |||||
| Accrued expense | 2,014 | - | ||||||
| Accrued advertising | (180 | ) | (220 | ) | ||||
| Accrued interest payable | (374 | ) | (462 | ) | ||||
| Dividend payable on preferred shares | 533 | 889 | ||||||
| Other | 21 | 45 | ||||||
| Total adjustments | 3,431 | 2,627 | ||||||
| Net cash used in operating activities | (4,932 | ) | (3,994 | ) | ||||
| Cash flows from investing activities | ||||||||
| Change in due from affiliates | - | (7,040 | ) | |||||
| Payments received on loans receivable | - | 68 | ||||||
| Net proceeds from sale of refranchised restaurants | 1,442 | 698 | ||||||
| Purchases of property and equipment | (1,258 | ) | (52 | ) | ||||
| Other | 37 | - | ||||||
| Net cash provided by (used in) investing activities | 221 | (6,326 | ) | |||||
| Cash flows from financing activities | ||||||||
| Proceeds from borrowings, net of issuance costs | 140,789 | 38,803 | ||||||
| Repayments of borrowings | (92,613 | ) | (24,224 | ) | ||||
| Issuance of preferred shares, net | 8,281 | - | ||||||
| Change in operating lease liabilities | (798 | ) | (296 | ) | ||||
| Payments made on acquisition purchase price liability | (1,075 | ) | (500 | ) | ||||
| Exercise of warrants | 1,382 | - | ||||||
| Dividends paid in cash on common shares | (3,197 | ) | - | |||||
| Dividends paid in cash on preferred shares | (1,249 | ) | - | |||||
| Net cash provided by financing activities | 51,520 | 13,783 | ||||||
| Net increase in cash and restricted cash | 46,809 | 3,463 | ||||||
| Cash and restricted cash at beginning of the period | 7,211 | 25 | ||||||
| Cash and restricted cash at end of the period | $ | 54,020 | $ | 3,488 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for interest | $ | 4,619 | $ | 2,526 | ||||
| Cash paid for income taxes | $ | 400 | $ | 17 | ||||
| Supplemental disclosure of non-cash financing and investing activities: | ||||||||
| Director fees converted to common stock | $ | - | $ | 135 | ||||
| Income taxes receivable included in amounts due from affiliates | $ | - | $ | (154 | ) | |||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 7 |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND RELATIONSHIPS
Organization and Nature of Business
FAT Brands Inc. (the “Company or FAT”) is a leading multi-brand restaurant franchising company that develops, markets and acquires primarily quick-service, fast casual and casual dining restaurant concepts around the world. Organized in March 2017 as a wholly owned subsidiary of Fog Cutter Capital Group, Inc. (“FCCG”), the Company completed an initial public offering on October 20, 2017 and issued additional shares of common stock representing 20 percent of its ownership. During the fourth quarter of 2020, the Company completed a transaction in which FCCG merged into a wholly owned subsidiary of FAT (the “Merger”) and FAT became the indirect parent company of FCCG.
As of June 27, 2021, the Company owns and franchises nine restaurant brands through various wholly owned subsidiaries: Fatburger, Johnny Rockets, Buffalo’s Cafe, Buffalo’s Express, Hurricane Grill & Wings, Ponderosa Steakhouses, Bonanza Steakhouses, Yalla Mediterranean and Elevation Burger. Combined, these brands have approximately 700 locations, including units under construction, and more than 200 under development.
Each franchising subsidiary licenses the right to use its brand name and provides franchisees with operating procedures and methods of merchandising. Upon signing a franchise agreement, the franchisor is committed to provide training, some supervision and assistance and access to operations manuals. As needed, the franchisor will also provide advice and written materials concerning techniques of managing and operating the restaurants.
With minor exceptions, the Company’s operations are comprised exclusively of franchising a growing portfolio of restaurant brands. This growth strategy is centered on expanding the footprint of existing brands and acquiring new brands through a centralized management organization which provides substantially all executive leadership, marketing, training and corporate accounting services. As part of its ongoing franchising efforts, the Company will, from time to time, make opportunistic acquisitions of operating restaurants in order to convert them to franchise locations. During the refranchising period, the Company will generally operate the restaurants and classifies the operational activities as refranchising gains or losses and the assets and associated liabilities as held-for sale.
COVID-19
In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic, which continues to spread throughout the United States and other countries. As a result, Company franchisees temporarily closed some retail locations, modified store operating hours, adopted a “to-go” only operating model or a combination of these actions. These actions reduced consumer traffic, all resulting in a negative impact to franchisee and Company revenue. While the disruption to our business from the COVID-19 pandemic is currently expected to be temporary, there is still a great deal of uncertainty around the severity and duration of the disruption. We may experience longer-term effects on our business and economic growth and changes in consumer demand in the U.S. and worldwide. The effects of COVID-19 may materially adversely affect our business, results of operations, liquidity and ability to service our existing debt, particularly if these effects continue in place for a significant amount of time.
Liquidity
The Company recognized income from operations of $2.1 million during the twenty-six weeks ended June 27, 2021 compared to a loss from operations of $6.4 million for the twenty-six weeks ended June 28, 2020. The Company recognized a net loss of $8.4 million during the twenty-six weeks ended June 27, 2021 compared to a net loss of $6.6 million during the twenty-six weeks ended June 28, 2020. A one-time net charge of $6.4 million relating to the refinance of the Company’s debt was included in the net loss for 2021. Net cash used in operations totaled $4.9 million for the twenty-six weeks ended June 27, 2021 compared to $4.0 million for twenty-six weeks ended June 28, 2020. As of June 27, 2021, the Company’s total liabilities exceeded total assets by $45.2 million compared to $41.9 million as of December 27, 2020.
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In the Company’s 2020 Annual Report on Form 10-K (“2020 Form 10-K”), the Company disclosed that the combination of the operating performance during the twelve months ended December 27, 2020 and the Company’s financial position as of December 27, 2020 raised substantial doubt about the Company’s ability to continue as a going concern as assessed under the framework of FASB’s Accounting Standard Codification (“ASC”) 205 for the twelve months following the date of the issuance of the 2020 Form 10-K.
On April 26, 2021, the Company completed the issuance and sale in a private offering (the “Offering”) of three tranches of fixed rate secured notes. Proceeds of the Offering were used to repay in full its 2020 Securitization Notes as well as fees and expenses related to the Offering, resulting in net proceeds to the Company of approximately $57 million (see Note 11).
The Company utilized a portion of the net proceeds from the Offering to repay approximately $12.5 million of indebtedness assumed as a result of the Merger (see Note 11).
The change in the Company’s financial position reflects operating improvements as the effects of COVID-19 began to stabilize. In addition to the liquidity provided by the successful completion of the Offering, the Company has experienced improvement in its operating performance subsequent to December 27, 2020 as COVID-19 vaccinations have become more prevalent in the United States and federal, state and local restrictions have eased in many of the markets where its franchisees operate. Management believes that the Company will be in compliance with its debt covenants and has sufficient sources of cash to meet its liquidity needs for the next twelve months.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation – The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. The operations of Johnny Rockets have been included since its acquisition on September 21, 2020 and the operations of FCCG have been included since the merger on December 24, 2020. All intercompany accounts and transactions have been eliminated in consolidation. The Company operates its business as one operating and reportable segment.
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. In the opinion of the Company, all adjustments considered necessary for the fair presentation of the Company’s results of operations, financial position and cash flows for the periods presented have been included and are of a normal, recurring nature.
Fiscal year – The Company operates on a 52-week calendar and its fiscal year ends on the last Sunday of the calendar year. Consistent with industry practice, the Company measures its stores’ performance based upon 7-day work weeks. Using the 52-week cycle ensures consistent weekly reporting for operations and ensures that each week has the same days since certain days are more profitable than others. The use of this fiscal year means a 53rd week is added to the fiscal year every 5 or 6 years. In a 52-week year, all four quarters are comprised of 13 weeks. In a 53-week year, one extra week is added to the fourth quarter.
Use of estimates in the preparation of the condensed consolidated financial statements – The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Financial statement reclassification – Certain account balances from prior periods have been reclassified in these condensed consolidated financial statements to conform to current period classifications including measurement period adjustments to the preliminary purchase price allocations relating to the acquisition of Johnny Rockets and the Merger in accordance with ASU 2015-16. During the first half of 2021, adjustments were made to provisional amounts reclassifying $1.5 million between goodwill and additional paid in capital on the condensed consolidated balance sheet. These adjustments did not impact the Company’s condensed consolidated statement of operations during the current or prior periods.
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Recently Issued Accounting Standards
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326)-Measurement of Credit Losses on Financial Instruments, and later amended the ASU in 2019, as described below. This guidance replaces the current incurred loss impairment methodology. Under the new guidance, on initial recognition and at each reporting period, an entity is required to recognize an allowance that reflects its current estimate of credit losses expected to be incurred over the life of the financial instrument based on historical experience, current conditions and reasonable and supportable forecasts.
In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates (“ASU 2019-10”). The purpose of this amendment is to create a two-tier rollout of major updates, staggering the effective dates between larger public companies and all other entities. This granted certain classes of companies, including Smaller Reporting Companies (“SRCs”), additional time to implement major FASB standards, including ASU 2016-13. Larger public companies will have an effective date for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All other entities are permitted to defer adoption of ASU 2016-13, and its related amendments, until the earlier of fiscal periods beginning after December 15, 2022. Under the current SEC definitions, the Company meets the definition of an SRC and is adopting the deferral period for ASU 2016-13. The guidance requires a modified retrospective transition approach through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company does not expect the adoption of this standard will have a material impact on its condensed consolidated financial statements.
NOTE 3. MERGERS AND ACQUISITIONS
Merger with Fog Cutter Capital Group Inc.
On December 10, 2020, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with FCCG, Fog Cutter Acquisition, LLC, a Delaware limited liability company and wholly owned subsidiary of the Company (“Merger Sub”), and Fog Cutter Holdings, LLC, a Delaware limited liability company (“Holdings”).
Pursuant to the Merger Agreement, FCCG agreed to merge with and into Merger Sub, with Merger Sub surviving as a wholly owned subsidiary of the Company (the “Merger”). Upon closing of the Merger, the former stockholders of FCCG became direct stockholders of the Company holding, in the aggregate, 9,679,288 shares of the Company’s common stock (the same number of shares of common stock held by FCCG immediately prior to the Merger) and received certain limited registration rights with respect to the shares received in the Merger. As a result of the Merger, FCCG and certain of its wholly owned subsidiaries, Homestyle Dining, LLC, Fog Cap Development LLC, Fog Cap Acceptance Inc. and BC Canyon LLC, became indirect wholly owned subsidiaries of the Company (the “Merged Entities”).
Under the Merger Agreement, Holdings has agreed to indemnify the Company for breaches of FCCG’s representations and warranties, covenants and certain other matters specified in the Merger Agreement, subject to certain exceptions and qualifications. Holdings has also agreed to hold a minimum fair market value of shares of Common Stock of the Company to ensure that it has assets available to satisfy such indemnification obligations if necessary.
In connection with the Merger, the Company declared a special stock dividend (the “Special Dividend”) payable on the record date to holders of our Common Stock, other than FCCG, consisting of 0.2319998077 shares of the Company’s 8.25% Series B Cumulative Preferred Stock (liquidation preference $25.00 per share) (the “Series B Preferred Stock”) for each outstanding share of Common Stock held by such stockholders, with the value of any fractional shares of Series B Preferred Stock being paid in cash. FCCG did not receive any portion of the Special Dividend, which had a record date of December 21, 2020 and payment date of December 23, 2020. The Special Dividend was expressly conditioned upon the satisfaction or valid waiver of the conditions to closing of the Merger set forth in the Merger Agreement. The Special Dividend was intended to reflect consideration for the potential financial impact of the Merger on the common stockholders other than FCCG, including the assumption of certain debts and obligations of FCCG by the Company by virtue of the Merger.
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The Company undertook the Merger primarily to simplify its corporate structure and eliminate limitations that restrict the Company’s ability to issue additional Common Stock for acquisitions and capital raising. FCCG holds a substantial amount of net operating loss carryforwards (“NOLs”), which could only be made available to the Company as long as FCCG owned at least 80% of FAT Brands. With the Merger, the NOLs will be held directly by the Company, which will then have greater flexibility in managing its capital structure. In addition, after the Merger the Company will no longer be required to compensate FCCG for utilizing its NOLs under the Tax Sharing Agreement previously in effect between the Company and FCCG.
The Merger is treated under ASC 805-50-30-6, which provides that when there is a transfer of assets or exchange of shares between entities under common control, the receiving entity shall recognize those assets and liabilities at their net carrying amounts at the date of transfer. As such, on the date of the Merger, all of the transferred assets and assumed liabilities of the Merged Entities were recorded on the Company’s books at the Merged Entities’ book value. The consolidation of the operations of the Merged Entities with the Company is presented on a prospective basis from the date of transfer.
The Merger resulted in the following assets and liabilities being included in the condensed consolidated financial statements of the Company as of the Merger date (in thousands):
SCHEDULE OF ALLOCATION OF TANGIBLE AND INTANGIBLE ASSETS ACQUIRED
| Dec 10, 2020 | ||||
| Prepaid assets | $ | 33 | ||
| Cash | ||||
| Accounts receivable | ||||
| Assets held for sale | ||||
| Goodwill | ||||
| Other intangible assets | ||||
| Deferred tax assets | 20,402 | |||
| Other assets | 100 | |||
| Accounts payable | (926 | ) | ||
| Accrued expense | (7,094 | ) | ||
| Current portion of debt | (12,486 | ) | ||
| Litigation reserve | (3,980 | ) | ||
| Due to affiliates | (43,653 | ) | ||
| Deferred franchise fees | ||||
| Operating lease liability | ||||
| Other liabilities | ||||
| Total net identifiable liabilities (net deficit) | $ | (47,604 | ) |
Proforma Information
The table below presents the proforma revenue and net loss of the Company for the thirteen and twenty-six weeks ended June 28, 2020, assuming the Merger had occurred on December 30, 2019 (the beginning of the Company’s 2020 fiscal year), pursuant to ASC 805-10-50 (in thousands). This proforma information does not purport to represent what the actual results of operations of the Company would have been had the Merger occurred on that date, nor does it purport to predict the results of operations for future periods.
SCHEDULE OF PROFORMA REVENUE AND NET (LOSS) INCOME
|
Thirteen Weeks Ended June 28, 2020 |
Twenty-six Weeks Ended June 28, 2020 |
|||||||
| Revenue | $ | 3,107 | $ | 7,530 | ||||
| Net loss | $ | (5,673 | ) | $ | (10,285 | ) | ||
The proforma information above reflects the combination of the Company’s results as disclosed in the accompanying condensed consolidated statements of operations for the thirteen and twenty-six weeks ended June 28, 2020, together with the results of the Merged Entities for the thirteen and twenty-six weeks ended June 28, 2020, with the following adjustment:
| ● | FCCG historically made loan advances to Andrew A. Wiederhorn, its CEO and significant stockholder (the “Stockholder Loan”). Prior to the Merger, the Stockholder Loan was cancelled, and the balance recorded as a loss by FCCG on forgiveness of loan to stockholder. Had the Merger been completed as of the assumed proforma date of December 30, 2019 (the beginning of the Company’s 2020 fiscal year), the Stockholder Loan would have been cancelled prior to that date and there would have been no further advances made. As a result, the proforma information above eliminates the loss by FCCG on forgiveness of loan to stockholder and the related interest income recorded by FCCG in its historical financial statements. |
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Acquisition of Johnny Rockets
On September 21, 2020, the Company completed the acquisition of Johnny Rockets Holding Co., a Delaware corporation (“Johnny Rockets”) for a cash purchase price of approximately $24.7 million. The transaction was funded with proceeds from an increase in the Company’s securitization facility (See Note 11).
Immediately following the closing of the acquisition of Johnny Rockets, the Company contributed the franchising subsidiaries of Johnny Rockets to FAT Royalty I, LLC pursuant to a Contribution Agreement. (See Note 11).
The preliminary assessment of the fair value of the net assets and liabilities acquired by the Company through the acquisition of Johnny Rockets was estimated at $24.7 million. This preliminary assessment of fair value of the net assets and liabilities as well as the final purchase price were estimated at closing and are subject to change. Under Sections 382 and 383 of the Internal Revenue Code, if an ownership change occurs with respect to a “loss corporation”, as defined, there are annual limitations on the amount of the NOLs and certain other deductions and credits which are available to the Company (the “Section 382 and 383 Limitations”). The portion of the NOLs and other tax benefits accumulated by Johnny Rockets prior to the Acquisition are subject to these Section 382 and 382 Limitations. Analysis of these Section 382 and 383 Limitations are ongoing. The preliminary allocation of the consideration to the preliminary valuation of net tangible and intangible assets acquired is presented in the table below (in thousands):
SCHEDULE OF ALLOCATION OF TANGIBLE AND INTANGIBLE ASSETS ACQUIRED
| Cash | $ | 812 | ||
| Accounts receivable | 1,452 | |||
| Assets held for sale | 10,765 | |||
| Goodwill | 258 | |||
| Other intangible assets | 26,900 | |||
| Deferred tax assets | 4,039 | |||
| Other assets | 438 | |||
| Accounts payable | (1,113 | ) | ||
| Accrued expenses | (3,740 | ) | ||
| Deferred franchise fees | (4,988 | ) | ||
| Operating lease liability | (10,028 | ) | ||
| Other liabilities | (65 | ) | ||
| Total net identifiable assets | $ | 24,730 |
The values of goodwill and other intangible assets were initially considered as of the acquisition date. Descriptions of the Company’s subsequent assessments of impairment of the goodwill and other intangible assets acquired in this acquisition related to COVID-19 are in Note 6.
Proforma Information
The table below presents the proforma revenue and net (loss) income of the Company for the thirteen and twenty-six weeks ended June 28, 2020, assuming the acquisition of Johnny Rockets had occurred on December 30, 2019 (the beginning of the Company’s 2020 fiscal year), pursuant to ASC 805-10-50 (in thousands). This proforma information does not purport to represent what the actual results of operations of the Company would have been had the acquisition of Johnny Rockets occurred on this date nor does it purport to predict the results of operations for future periods.
SCHEDULE OF PROFORMA REVENUE AND NET (LOSS) INCOME
|
Thirteen Weeks Ended June 28, 2020 |
Twenty-six Weeks Ended June 28, 2020 |
|||||||
| Revenue | $ | 3,923 | $ | 11,597 | ||||
| Net loss | $ | (5,158 | ) | $ | (7,515 | ) | ||
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The proforma information above reflects the combination of the Company’s unaudited results as disclosed in the accompanying condensed consolidated statements of operations for the thirteen and twenty-six weeks ended June 28, 2020, together with the unaudited results of Johnny Rockets for the thirteen and twenty-six weeks ended June 28, 2020, with the following adjustments:
| ● | Revenue – The unaudited proforma revenue and net (loss) income present franchise fee revenue and advertising revenue in accordance with ASC 606 in a manner consistent with the Company’s application thereof. As a non-public company, Johnny Rockets had not yet been required to adopt ASC 606. | |
| ● | Overhead allocations from the former parent company have been adjusted to the estimated amount the Company would have allocated for the thirteen and twenty-six weeks ended June 28, 2020. | |
| ● | Former parent company management fees have been eliminated from the proforma. | |
| ● | Amortization of intangible assets has been adjusted to reflect the preliminary fair value at the assumed acquisition date. | |
| ● | Depreciation on assets treated as held for sale by the Company has been eliminated. | |
| ● | The proforma adjustments include advertising expenses in accordance with ASC 606. | |
| ● | The proforma interest expense has been adjusted to exclude actual Johnny Rockets interest expense incurred prior to the acquisition. All interest-bearing liabilities were paid off at closing. | |
| ● | The proforma interest expense has been adjusted to include proforma interest expense that would have been incurred relating to the acquisition financing obtained by the Company. | |
| ● | Non-recurring gains and losses have been eliminated from the proforma statements. |
nOTE 4. REFRANCHISING
As part of its ongoing franchising efforts, the Company may, from time to time, make opportunistic acquisitions of operating restaurants in order to convert them to franchise locations or acquire existing franchise locations to resell to another franchisee across all of its brands.
The Company meets all of the criteria requiring that acquired assets used in the operation of certain restaurants be classified as held for sale. As a result, the following assets have been classified as held for sale on the accompanying condensed consolidated balance sheets as of June 27, 2021 and December 27, 2020 (in thousands):
SCHEDULE OF REMAINING ASSETS CLASSIFIED AS HELD FOR SALE
|
June 27, 2021 |
December 27,
2020 |
|||||||
| Property, plant and equipment | $ | 1,025 | $ | 1,352 | ||||
| Operating lease right of use assets | 6,710 | 9,479 | ||||||
| Total | $ | 7,735 | $ | 10,831 | ||||
Operating lease liabilities related to the assets classified as held for sale in the amount of $7.1 million and $9.9 million have been classified as current liabilities on the accompanying condensed consolidated balance sheets as of June 27, 2021 and December 27, 2020, respectively.
Refranchising gains in the first half of 2021 were comprised of $1.1 million in net gains related to refranchised restaurants, partially offset by $0.7 million of restaurant operating costs, net of food sales. Refranchising losses in the first half of 2020 were comprised of $1.7 million of restaurant operating costs, net of food sales, less $0.2 million in net gains related to refranchised restaurants.
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Refranchising gains in the second quarter of 2021 were comprised of $1.1 million in net gains related to refranchised restaurants, partially offset by $0.2 million of restaurant operating costs, net of food sales. Refranchising losses in the second quarter of 2020 were comprised of restaurant operating costs, net of food sales.
During the thirteen weeks ended June 27, 2021, one restaurant location was sold to an entity which is 49% owned by a subsidiary of the Company. The 51% owner of the entity is not affiliated with the Company. In addition to its significant equity interest in the restaurant, the Company provides virtually all of the management functions associated with the operation of the business. As a result, the assets, liabilities and operating results of the restaurant are included in the Company’s condensed consolidated financial statements, subject to the noncontrolling interests of the non-affiliated investor.
Note 5. NOTE RECEIVABLE
The Elevation Buyer Note was funded in connection with the purchase of Elevation Burger in 2019. The Company loaned $2.3 million in cash to the Seller under a subordinated promissory note bearing interest at 6.0% per year and maturing in August 2026. The balance owing to the Company under the Elevation Buyer Note may be used by the Company to offset amounts owing to the Seller under the Elevation Note under certain circumstances (See Note 11). As part of the total consideration for the Elevation acquisition, the Elevation Buyer Note was recorded at a carrying value of $1.9 million, which was net of a discount of $0.4 million. As of June 27, 2021 and December 27, 2020, the balance of the Elevation Note was $1.8 million, which was net of discounts of $0.2 million and $0.3 million, respectively. During the thirteen and twenty-six weeks ended June 27, 2021, the Company recognized $50,000 and $102,000 in interest income on the Elevation Buyer Note, respectively. During the thirteen and twenty-six weeks ended June 28, 2020, the Company recognized $53,000 and $106,000, respectively, in interest income on the Elevation Buyer Note.
Note 6. GOODWILL
Goodwill consisted of the following (in thousands):
SCHEDULE OF GOODWILL
|
June 27, 2021 |
December 27, 2020 |
|||||||
| Goodwill: | ||||||||
| Fatburger | $ | 529 | $ | 529 | ||||
| Buffalo’s | 5,365 | 5,365 | ||||||
| Hurricane | 2,772 | 2,772 | ||||||
| Yalla | 261 | 261 | ||||||
| Elevation Burger | 521 | 521 | ||||||
| Johnny Rockets | 258 | 1,461 | ||||||
| Total goodwill | $ | 9,706 | $ | 10,909 | ||||
A review of the carrying value of goodwill as of June 27, 2021 did not result in any impairment charges for the twenty-six weeks ended as of that date. When considering the available facts, assessments and judgments, as of June 28, 2020, the Company recorded goodwill impairment charges of $1.5 million relating to the Ponderosa and Bonanza brands for the twenty-six weeks ended as of that date.
Because of the risks and uncertainties related to the COVID-19 pandemic events, the negative effects on the operations of the Company’s franchisees could prove to be worse than currently estimated and result in the need to record additional goodwill impairment charges in future periods.
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Note 7. OTHER INTANGIBLE ASSETS
Other intangible assets consist of trademarks and franchise agreements that were classified as identifiable intangible assets at the time of the brands’ acquisition by the Company or by FCCG prior to FCCG’s contribution of the brands to the Company at the time of the initial public offering (in thousands):
SCHEDULE OF INTANGIBLE ASSETS
|
June 27, 2021 |
December 27, 2020 |
|||||||
| Trademarks: | ||||||||
| Fatburger | $ | 2,135 | $ | 2,135 | ||||
| Buffalo’s | 27 | 27 | ||||||
| Hurricane | 6,840 | 6,840 | ||||||
| Ponderosa | 300 | 300 | ||||||
| Yalla | 776 | 776 | ||||||
| Elevation Burger | 4,690 | 4,690 | ||||||
| Johnny Rockets | 20,300 | 20,300 | ||||||
| Total trademarks | 35,068 | 35,068 | ||||||
| Franchise agreements: | ||||||||
| Hurricane – cost | 4,180 | 4,180 | ||||||
| Hurricane – accumulated amortization | (965 | ) | (804 | ) | ||||
| Ponderosa – cost | 1,477 | 1,477 | ||||||
| Ponderosa – accumulated amortization | (388 | ) | (337 | ) | ||||
| Elevation Burger – cost | 2,450 | 2,450 | ||||||
| Elevation Burger – accumulated amortization | (1,010 | ) | (761 | ) | ||||
| Johnny Rockets – cost | 6,600 | 6,600 | ||||||
| Johnny Rockets – accumulated amortization | (462 | ) | (162 | ) | ||||
| Total franchise agreements | 11,882 | 12,643 | ||||||
| Total Other Intangible Assets | $ | 46,950 | $ | 47,711 | ||||
The Company reviewed the carrying value of its other intangible assets as of June 27, 2021 and June 28, 2020. During the twenty-six weeks ended June 27, 2021, no impairment charges for other intangible assets were deemed necessary. When considering the available facts, assessments and judgments as of June 28, 2020, the Company recorded non-cash tradename impairment charges of $1.7 million relating to the Ponderosa and Bonanza brands for the twenty-six weeks ended as of that date.
Because of the risks and uncertainties related to the COVID-19 pandemic events, the negative effects on the operations of the Company’s franchisees could prove to be worse than currently estimated and result in the need to record additional other intangible asset impairment charges in future periods.
The expected future amortization of the Company’s franchise agreements as of June 27, 2021 is as follows (in thousands):
SCHEDULE OF FUTURE AMORTIZATION
| Fiscal year: | ||||
| Remaining 2021 | $ | 761 | ||
| 2022 | 1,522 | |||
| 2023 | 1,522 | |||
| 2024 | 1,217 | |||
| 2025 | 1,023 | |||
| Thereafter | 5,837 | |||
| Total | $ | 11,882 |
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Note 8. DEFERRED INCOME
Deferred income was as follows (in thousands):
SCHEDULE OF DEFERRED INCOME
|
June 27, 2021 |
December 27, 2020 |
|||||||
| Deferred franchise fees | $ | 10,548 | $ | 10,003 | ||||
| Deferred royalties | 189 | 291 | ||||||
| Deferred vendor incentives | 638 | 692 | ||||||
| Total | $ | 11,375 | $ | 10,986 | ||||
Note 9. INCOME TAXES
The following table presents the Company’s benefit for income taxes (in thousands):
SCHEDULE OF BENEFIT FOR INCOME TAXES
| June 27, 2021 | June 28, 2020 | June 27, 2021 | June 28, 2020 | |||||||||||||
| Thirteen Weeks Ended | Twenty-six Weeks Ended | |||||||||||||||
| June 27, 2021 | June 28, 2020 | June 27, 2021 | June 28, 2020 | |||||||||||||
| Benefit for income taxes | $ | (1,992 | ) | $ | (1,089 | ) | $ | (2,121 | ) | $ | (1,386 | ) | ||||
| Effective tax rate | 25.1 | % | 20.4 | % | 20.2 | % | 17.3 | % | ||||||||
The difference between the statutory tax rate of 21% and the effective tax rate in the thirteen weeks ended June 27, 2021 was primarily due to the impact of state income taxes and the forgiveness of loans under the Paycheck Protection Program (the “PPP Loans”) (see Note 11).
NOTE 10. LEASES
As of June 27, 2021, the Company has twelve operating leases for corporate offices, two Company owned stores and for certain restaurant properties that are in the process of being refranchised. The leases have remaining terms ranging from 2.3 to 7.9 years. The Company recognized lease expense of $0.7 million and $0.4 million for the thirteen weeks ended June 27, 2021 and June 28, 2020, respectively. For the twenty-six weeks ended June 27, 2021 and June 28, 2020, the Company recognized lease expense of $1.5 million and $0.7 million, respectively. The weighted average remaining lease term of the operating leases as of June 27, 2021 was 5.5 years.
Operating lease right of use assets and operating lease liabilities relating to the operating leases are as follows (in thousands):
SUMMARY OF OPERATING LEASE RIGHT OF USE ASSETS AND OPERATING LEASE LIABILITIES RELATING TO OPERATING LEASES
|
June 27, 2021 |
December 27, 2020 |
|||||||
| Right of use assets | $ | 11,623 | $ | 13,948 | ||||
| Lease liabilities | $ | 12,568 | $ | 14,651 | ||||
The weighted average discount rate used to calculate the carrying value of the right of use assets and lease liabilities was 9.3% which is based on the Company’s incremental borrowing rate at the time the lease is acquired.
The contractual future maturities of the Company’s operating lease liabilities as of June 27, 2021, including anticipated lease extensions, are as follows (in thousands):
SCHEDULE OF CONTRACTUAL FUTURE MATURITIES OF OPERATING LEASE LIABILITIES
| Fiscal year: | ||||
| 2021 | $ | 1,491 | ||
| 2022 | 3,059 | |||
| 2023 | 3,148 | |||
| 2024 | 3,007 | |||
| 2025 | 2,656 | |||
| Thereafter | 2,693 | |||
| Total lease payments | 16,054 | |||
| Less imputed interest | 3,486 | |||
| Total | $ | 12,568 |
Supplemental cash flow information for the twenty-six weeks ended June 27, 2021 related to leases was as follows (in thousands):
SUMMARY OF SUPPLEMENTAL CASH FLOW INFORMATION RELATED TO LEASES
| Cash paid for amounts included in the measurement of operating lease liabilities: | ||||
| Operating cash flows from operating leases | $ | 1,296 | ||
| Operating lease right of use assets obtained in exchange for new lease obligations: | ||||
| Operating lease liabilities | $ | - |
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Note 11. DEBT
Securitization
On April 26, 2021 (the “Closing Date”), FAT Brands Royalty I, LLC, a Delaware limited liability company (“FB Royalty”), a special purpose, wholly-owned subsidiary of FAT Brands, completed the Offering of three tranches of fixed rate senior secured notes (collectively, the “2021 Securitization Notes”) as follows:
SCHEDULE OF SECURITIZATION OF NOTES
|
Closing Date |
Class | Seniority |
Principal Balance |
Coupon |
Weighted Average Life (Years) |
Non-Call Period (Months) |
Anticipated Call Date |
Final Legal Maturity Date |
||||||||||||||||||
| 4/26/2021 | A-2 | Senior | $ | 97,104,000 | 4.75 | % | 2.25 | 6 | 7/25/2023 | 4/25/2051 | ||||||||||||||||
| 4/26/2021 | B-2 | Senior Subordinated | $ | 32,368,000 | 8.00 | % | 2.25 | 6 | 7/25/2023 | 4/25/2051 | ||||||||||||||||
| 4/26/2021 | M-2 | Subordinated | $ | 15,000,000 | 9.00 | % | 2.25 | 6 | 7/25/2023 | 4/25/2051 | ||||||||||||||||
Net proceeds from the issuance of the 2021 Securitization Notes totaled $140.8 million, which consisted of the combined face amount of $144.5 million (net of debt offering costs of $3.0 million and original issue discount of $0.7 million). As of June 27, 2021, the carrying value of the 2021 Securitization Notes was $140.9 million (net of debt offering costs of $2.9 million and original issue discount of $0.7 million). The Company recognized interest expense on the 2021 Securitization Notes of $1.6 million for the thirteen and twenty-six weeks ended June 27, 2021, which includes $0.1 million for amortization of debt offering costs and $34,000 for amortization of the original issue discount. The average annualized effective interest rate of the 2021 Securitization Notes, including the amortization of debt offering costs and original issue discount, was 6.7% for the time the debt was outstanding during the twenty-six weeks ended June 27, 2021.
The 2021 Securitization Notes require that the principal and interest obligations have first priority and amounts are segregated weekly to ensure appropriate funds are reserved to pay the quarterly principal and interest amounts due. The amount of weekly cash flow that exceeds the required weekly interest reserve is generally remitted to the Company. Interest payments are required to be made on a quarterly basis and, unless repaid on or before July 25, 2023, additional interest equal to 1.0% per annum will accrue on each tranche. The material terms of the 2021 Securitization Notes also include, among other things, the following financial covenants: (i) debt service coverage ratio, (ii) leverage ratio and (iii) senior leverage ratio. As of June 27, 2021, we were in compliance with these covenants.
The 2021 Securitization Notes are generally secured by a security interest in substantially all the assets of FB Royalty and its subsidiaries.
| 17 |
A portion of the proceeds of the 2021 Securitization Notes were used to repay and retire the following notes issued in 2020 under the Base Indenture:
| Note |
Public Rating |
Seniority | Issue Amount | Coupon | First Call Date | Final Legal Maturity Date | ||||||||||
| Series A-2 | BB | Senior | $ | 20,000,000 | 6.50 | % | 4/27/2021 | 4/27/2026 | ||||||||
| Series B-2 | B | Senior Subordinated | $ | 20,000,000 | 9.00 | % | 4/27/2021 | 4/27/2026 | ||||||||
| Series M-2 | N/A | Subordinated | $ | 40,000,000 | 9.75 | % | 4/27/2021 | 4/27/2026 | ||||||||
The payoff amount totaled $83.7 million, which included principle of $80.0 million, accrued interest of $2.2 million and prepayment premiums of $1.5 million. FB Royalty recognized a loss on extinguishment of debt of $7.8 million in connection with the refinance.
The Company recognized interest expense on the 2020 Securitization Notes of $0.5 million and $0.9 million for the thirteen weeks ended June 27, 2021 and June 28, 2020, respectively. The Company recognized interest expense related to the 2020 Securitization Notes of $2.6 million and $1.2 million for the twenty-six weeks ended June 27, 2021 and June 28, 2020, respectively.
Elevation Note
On June 19, 2019, the Company completed the acquisition of Elevation Burger. A portion of the purchase price included the issuance to the Seller of a convertible subordinated promissory note (the “Elevation Note”) with a principal amount of $7.5 million, bearing interest at 6.0% per year and maturing in July 2026. The Elevation Note is convertible under certain circumstances into shares of the Company’s common stock at $12.00 per share. In connection with the valuation of the acquisition of Elevation Burger, the Elevation Note was recorded on the condensed consolidated financial statements of the Company at $6.2 million (net of a loan discount of $1.3 million and debt offering costs of $30,000).
As of June 27, 2021, the carrying value of the Elevation Note was $5.9 million (net of the loan discount of $0.7 million and debt offering costs of $51,000). As of December 27, 2020, the carrying value of the Elevation Note was $5.9 million (net of the loan discount of $0.9 million and debt offering costs of $56,000). The Company recognized interest expense relating to the Elevation Note during the thirteen and twenty-six weeks ended June 27, 2021 in the amount of $169,000 and $340,000, respectively, which included amortization of the loan discount of $64,000 and $130,000, and amortization of $3,000 and $5,000 in debt offering costs, respectively. The Company recognized interest expense relating to the Elevation Note during the thirteen and twenty-six weeks ended June 28, 2020 in the amount of $175,000 and $364,000, respectively, which included amortization of the loan discount of $70,000 and $141,000, and amortization of $2,000 and $5,000 in debt offering costs, respectively.
The annualized effective interest rate for the Elevation Note during the twenty-six weeks ended June 27, 2021 was 11.4%.
The Elevation Note is a general unsecured obligation of Company and is subordinated in right of payment to all senior indebtedness of the Company.
Assumed Debt from Merger
In connection with the Merger, certain debts of FCCG totaling $12.5 million (the “FCCG Debt”) were assumed by Fog Cutter Acquisition LLC.
During the thirteen weeks ended June 27, 2021, the FCCG Debt was paid in full in the amount of $12.5 million, including accrued interest. The Company recognized interest expense relating to the FCCG Debt of $78,000 and $241,000 during the thirteen and twenty-six weeks ended July 27, 2021, respectively.
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The FCCG Debt as of December 27, 2020 was as follows (in thousands):
SCHEDULE OF FCCG MERGER
| December 27, 2020 | ||||
| Note payable to a private lender. The note bore interest at a fixed rate of 12% per annum and was unsecured. Interest was due monthly in arrears. The note was scheduled to mature on May 21, 2021. | $ | 1,977 | ||
| Note payable to a private lender. The note bore interest at a fixed rate of 12% per annum and was unsecured. Interest was due monthly in arrears. The note was scheduled to mature on May 21, 2021. | 2,871 | |||
| Note payable to a private lender. The note bore interest at a fixed rate of 15% per annum. The note was scheduled to mature May 21, 2021. | 17 | |||
| Note payable to a private lender. The note bore interest at a fixed rate of 12% per annum. Interest was due monthly in arrears. The note was scheduled to mature May 21, 2021. | 762 | |||
| Consideration payable to former FCCG stockholders issued in redemption of fractional shares of FCCG’s stock. The consideration was unsecured and non-interest bearing and was due and payable on May 21, 2021. | 6,864 | |||
| Total | $ | 12,491 | ||
Loan and Security Agreement
On January 29, 2019, the Company as borrower, and its subsidiaries and affiliates as guarantors, entered into the Loan and Security Agreement with The Lion Fund, L.P (“Lion”). Pursuant to the Loan and Security Agreement, the Company borrowed $20.0 million from Lion, and utilized the proceeds to repay the existing $16.0 million term loan from FB Lending, LLC plus accrued interest and fees, and provide additional general working capital to the Company.
The term loan under the Loan and Security Agreement was due to mature on June 30, 2020. Interest on the term loan accrued at an annual fixed rate of 20.0% and was payable quarterly.
The Loan and Security Agreement was subsequently amended several times which allowed the Company to increase its borrowing by $3.5 million in connection with the acquisition of Elevation Burger; extended the exercise date of the Lion Warrant to June 30, 2020; extended the due date for certain quarterly payments and imposed associated extension and other loan fees.
On March 6, 2020, the Company repaid the Lion Loan and Security Agreement in full by making a total payment of approximately $26.8 million. This consisted of $24.0 million in principle, approximately $2.1 million in accrued interest and $0.7 million in penalties and fees.
The Company recognized interest expense on the Loan and Security Agreement of $1.8 million for the twenty-six weeks ended June 28, 2020, which includes $0.2 million for amortization of all unaccreted debt offering costs at the time of the repayment and $0.7 million in penalties and fees.
Paycheck Protection Program Loans
During 2020, the Company received loan proceeds in the amount of approximately $1.5 million under the PPP Loans and Economic Injury Disaster Loan Program (the “EIDL Loans”). The Paycheck Protection Program, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loans and accrued interest are forgivable after eight weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the eight-week period.
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At inception, the PPP Loans and EIDL Loans related to FAT Brands Inc. and five restaurant locations that were part of the Company’s refranchising program. As of December 27, 2020, the balance remaining on the PPP Loans and EIDL Loans had been reduced to $1.2 million due to the closure or refranchising of the five restaurant locations during the second and third quarters of 2020. During the thirteen weeks ended June 27, 2021, the Company received confirmation that the entire balance remaining on the PPP Loans, plus accrued interest, had been forgiven under the terms of the program. The Company recognized interest expense of $4,000 and a gain on extinguishment of debt in the amount of $1.2 million relating to the PPP Loans and EIDL Loans during the twenty-six weeks ended June 27, 2021.
Note 12. PREFERRED STOCK
Series B Cumulative Preferred Stock
On July 13, 2020, the Company entered into an underwriting agreement (the “Underwriting Agreement”) to issue and sell in a public offering (the “Offering”) 360,000 shares of 8.25% Series B Cumulative Preferred Stock (“Series B Preferred Stock”) and 1,800,000 warrants to purchase common stock at $5.00 per share, plus 99,000 additional warrants pursuant to the underwriter’s overallotment option (the “2020 Series B Offering Warrants”).
The Offering closed on July 16, 2020 with net proceeds to the Company of $8.1 million (net of $0.9 million in underwriting and offering costs).
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In addition to the shares issued in the Offering, the Company concurrently engaged in the following transactions:
| ● | The holders of the outstanding 57,140 shares of Original Series B Preferred became subject to the new terms of the Certificate of Designation and received an additional 3,537 shares of Series B Preferred stock in payment of previously accrued dividends. | |
| ● | The Company entered into an agreement to exchange 15,000 shares of Series A Fixed Rate Cumulative Preferred Stock owned by FCCG, including accrued dividends thereon, for 74,449 shares of Series B Preferred Stock. | |
| ● | The Company exchanged all of the outstanding shares of Series A-1 Fixed Rate Cumulative Preferred Stock for 168,001 shares of Series B Preferred Stock. |
In December 2020, in connection with the acquisition of FCCG by the Company, the Company declared a special stock dividend (the “Special Dividend”) payable only to holders of the Company’s Common Stock, other than FCCG, on the record date, consisting of 0.2319998077 shares of Series B Cumulative Preferred Stock for each outstanding share of Common Stock held by such stockholders. The Special Dividend was paid on December 23, 2020 and resulted in the issuance of 520,145 additional shares of Series B Preferred Stock with a market value on the payment date of approximately $8.9 million.
On June 22, 2021, the Company closed a second underwritten public offering of 460,000 shares of 8.25% Series B Cumulative Preferred Stock at a price to the public of $20.00 per share. The net proceeds to the Company totaled $8.3 million (net of $0.9 million in underwriting discounts and other offering expenses).
As of June 27, 2021, the Series B Preferred Stock consisted of 1,643,272 shares outstanding with a balance of $29.1 million. The Company paid preferred dividends to the holders of the Series B Preferred Stock totaling $0.6 million and $1.2 million during the thirteen weeks and twenty-six weeks ended June 27, 2021.
Series A Fixed Rate Cumulative Preferred Stock
On June 8, 2018, the Company filed a Certificate of Designation of Rights and Preferences of Series A Fixed Rate Cumulative Preferred Stock (“Series A Preferred Stock”) with the Secretary of State of the State of Delaware (the “Certificate of Designation”), designating a total of 100,000 shares of Series A Preferred Stock.
The Company issued 100,000 shares of Series A Preferred stock in the following two transactions:
| (i) | On June 7, 2018, the Company entered into a Subscription Agreement for the issuance and sale (the “Series A Offering”) of 800 units (the “Units”), with each Unit consisting of (i) 100 shares of the Company’s newly designated Series A Fixed Rate Cumulative Preferred Stock (the “Series A Preferred Stock”) and (ii) warrants (the “Series A Warrants”) to purchase 127 shares of the Company’s common stock at $7.83 per share. The sales price of each Unit was $10,000, resulting in gross proceeds to the Company from the initial closing of $8.0 million and the issuance of 80,000 shares of Series A Preferred Stock and Series A Warrants to purchase 102,125 shares of common stock (the “Subscription Warrants”). |
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| (ii) | On June 27, 2018, the Company entered into a Note Exchange Agreement, as amended, under which it agreed with FCCG to exchange $2.0 million of the remaining balance of the Company’s outstanding Promissory Note issued to the FCCG on October 20, 2017 for 200 Units consisting of 20,000 shares of Series A Fixed Rate Cumulative Preferred Stock of the Company at $100 per share and Series A Warrants to purchase 25,530 of the Company’s common stock at an exercise price of $7.83 per share (the “Exchange Warrants”). |
On July 13, 2020, the Company entered into the following transactions pertaining to the outstanding Series A Preferred Stock:
| 1. | The Company entered into an agreement to redeem 80,000 outstanding shares of the Series A Preferred Stock, plus accrued dividends thereon, held by Trojan Investments, LLC pursuant to a Stock Redemption Agreement that provides for the redemption at face value of a portion of such shares for cash from the proceeds of the Offering and the balance to be redeemed in $2 million tranches every six months, with the final payment due by December 31, 2021. | |
| 2. | The Company redeemed 5,000 outstanding shares of Series A Preferred Stock, plus accrued dividends thereon, held by Ridgewood Select Value Fund LP and its affiliate at face value for cash from the proceeds of the Offering. | |
| 3. | The Company exchanged 15,000 outstanding shares of Series A Preferred Stock, plus accrued dividends thereon, held by FCCG at face value for shares of Series B Preferred Stock. |
The Company classifies the Series A Preferred Stock as debt.
As of June 27, 2021, there were 80,000 shares of Series A Preferred Stock outstanding, with a balance of $8.0 million.
The Company recognized interest expense on the Series A Preferred Stock of $264,000 and $354,000 for the thirteen weeks ended June 27, 2021 and June 28, 2020, respectively. The Company recognized interest expense on the Series A Preferred Stock of $552,000 and $708,000 for the twenty-six weeks ended June 27, 2021 and June 28, 2020. The year-to-date effective interest rate for the Series A Preferred Stock for 2021 was 13.9%.
Derivative Liability Relating to the Conversion Feature of the Series A Preferred Stock
Holders of Series A Preferred Stock had the option to cause the Company to redeem all or any portion of their shares of Series A Preferred Stock beginning any time after the two-year anniversary of the initial issuance date for an amount equal to $100.00 per share plus any accrued and unpaid dividends, which amount could be settled in cash or common stock of the Company, at the option of the holder (the “Conversion Option”). If a holder elected to receive common stock, the shares would be issued based on the 20-day volume weighted average price of the common stock immediately preceding the date of the holder’s redemption notice.
On June 8, 2020, the Conversion Option became exercisable. As of that date, the Company calculated the estimated fair value of the Conversion Option to be $2.4 million and recorded a derivative liability in that amount, together with an offsetting reduction in Additional Paid-In Capital. As of June 28, 2020, the Company calculated the estimated fair value of the Conversion Option to be $1.1 million and adjusted the carrying value of the derivative liability accordingly and recognized income of $1.3 million from the change in the fair market value of the derivative liability.
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On July 13, 2020, the Company entered into agreements with each of the holders of the Series A Preferred Stock regarding the redemption of their shares. Holders of 85,000 of the outstanding shares agreed to a full redemption in cash payments. Fog Cutter Capital Group Inc., the holder of the remaining 15,000 outstanding shares, agreed to redeem its Series A Preferred Stock in exchange for newly issued Series B Preferred Stock of the Company. As a result of these agreements, the Conversion Option was terminated as of July 13, 2020.
NOTE 13. ACQUISITION PURCHASE PRICE PAYABLE
On June 21, 2021, the Company settled in full, the acquisition purchase price payable relating to the acquisition of Yalla Mediterranean. At the time of the settlement, the payable had a book value of $2.1 million. The Company paid cash of $1.1 million and agreed to issue 62,500 shares of its common stock, with a market value of $0.8 million ($13.05 per share) in satisfaction of the obligation. The Company recognized a gain on the extinguishment of the debt in the amount of $0.2 million during the thirteen weeks ended June 27, 2021.
Note 14. RELATED PARTY TRANSACTIONS
During the twenty-six weeks ended June 27, 2021, there were no reportable related party transactions. For the twenty-six weeks ended June 28, 2020, the Company reported the following:
Due from Affiliates
On April 24, 2020, the Company entered into an Intercompany Revolving Credit Agreement with FCCG (“Intercompany Agreement”). The Company had previously extended credit to FCCG pursuant to a certain Intercompany Promissory Note (the “Original Note”), dated October 20, 2017, with an initial principal balance of $11.9 million. Subsequent to the issuance of the Original Note, the Company and certain of its direct or indirect subsidiaries made additional intercompany advances. Pursuant to the Intercompany Agreement, the revolving credit facility bears interest at a rate of 10% per annum, has a five-year term with no prepayment penalties, and has a maximum capacity of $35.0 million. All additional borrowings under the Intercompany Agreement are subject to the approval of the Board of Directors, in advance, on a quarterly basis and may be subject to other conditions as set forth by the Company. The initial balance under the Intercompany Agreement totaled $21.1 million including the balance of the Original Note, borrowings subsequent to the Original Note, accrued and unpaid interest income and other adjustments through December 29, 2019. As of June 28, 2020, the balance receivable under the Intercompany Agreement was $29.5 million.
During the twenty-six weeks ended June 28, 2020, the Company recorded a receivable from FCCG in the amount of $0.2 million under the Tax Sharing Agreement, which was added to the intercompany receivable.
Effective July 5, 2018, the Company made a preferred capital investment in Homestyle Dining LLC, a Delaware limited liability corporation (“HSD”) in the amount of $4.0 million (the “Preferred Interest”). FCCG owns all of the common interests in HSD. The holder of the Preferred Interest is entitled to a 15% per annum priority return on the outstanding balance of the investment (the “Preferred Return”). Any available cash flows from HSD on a quarterly basis are to be distributed to pay the accrued Preferred Return and repay the Preferred Interest until fully retired. On or before the five-year anniversary of the investment, the Preferred Interest is to be fully repaid, together with all previously accrued but unpaid Preferred Return. FCCG has unconditionally guaranteed repayment of the Preferred Interest in the event HSD fails to do so. As of June 28, 2020, the balance receivable, including accrued and unpaid interest income, under the Preferred Interest was $5.2 million.
Note 15. STOCKHOLDERS’ EQUITY
As of June 27, 2021 and December 27, 2020, the total number of authorized shares of common stock was 25,000,000, and there were 12,491,528 and 11,926,264 shares of common stock issued and outstanding, respectively.
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Below are the changes to the Company’s common stock during the twenty-six weeks ended June 27, 2021:
| ● | Warrants to purchase 289,227 shares of common stock were exercised during the twenty-six weeks ended June 27, 2021. The proceeds to the Company from the exercise of the warrants totaled $1.1 million. | |
| ● | Between April 6, 2021 and May 18, 2021, the Company granted 300,000 restricted shares of common stock to certain senior executives of the Company. The shares vest over three years in equal installments at the anniversary date of grant. The value of the restricted stock grant was $2.8 million and will be amortized as expense over the vesting period. | |
| ● | On June 21, 2021, the Company entered into an agreement to issue 62,500 shares of common stock with a market value of $0.8 million in partial payment of the acquisition purchase price payable relating to the acquisition of Yalla Mediterranean (See Note 13). The shares were issued on June 30, 2021. | |
| ● | On April 20, 2021, the Board of Directors declared a cash dividend of $0.13 per share of common stock, payable on May 7, 2021 to stockholders of record as of May 3, 2021, for a total of $1.6 million. | |
| ● | On June 1, 2021, the Board of Directors declared a cash dividend of $0.13 per share of common stock, payable on June 21, 2021 to stockholders of record as of June 14, 2021, for a total of $1.6 million. |
Note 16. SHARE-BASED COMPENSATION
Effective September 30, 2017, the Company adopted the 2017 Omnibus Equity Incentive Plan (the “Plan”). The Plan is a comprehensive incentive compensation plan under which the Company can grant equity-based and other incentive awards to officers, employees and directors of, and consultants and advisers to, FAT Brands Inc. and its subsidiaries. The Plan provides a maximum of 1,021,250 shares available for grant.
The Company has periodically issued stock options under the Plan. All of the stock options issued by the Company to date have included a vesting period of three years, with one-third of each grant vesting annually. As of June 27, 2021, there were 656,105 stock options outstanding with a weighted average exercise price of $9.34 per share.
During the thirteen weeks ended June 27, 2021 the Company granted a total of 300,000 shares of its common stock to three employees (the “Grant Shares”). The Grant Shares vest one-third each year on the anniversary date of the grant. The grantees are entitled to any common dividends relating to the Grant Shares during the vesting period. The Grant Shares were valued at $2.8 million as of the date of grant. The related compensation expense will be recognized over the vesting period.
The Company recognized share-based compensation expense in the amount of $0.2 million and $1,000, during the thirteen weeks ended June 27, 2021 and June 28, 2020, respectively. The Company recognized share-based compensation expense in the amount of $0.2 million and $16,000, during the twenty-six weeks ended June 27, 2021 and June 28, 2020, respectively. As of June 27, 2021, there remains $2.7 million of related share-based compensation expense relating to non-vested grants, which will be recognized over the remaining vesting period, subject to future forfeitures.
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Note 17. WARRANTS
The Company’s warrant activity for the thirteen weeks ended June 27, 2021 was as follows:
SUMMARY OF WARRANT ACTIVITY
|
Number of Shares |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Life (Years) |
|||||||||||
| Warrants outstanding at December 27, 2020 | 2,273,533 | $ | 5.68 | 3.8 | |||||||||
| Grants | - | $ | - | - | |||||||||
| Exercised | (300,437 | ) | $ | (5.05 | ) | (4.0 | ) | ||||||
| Warrants outstanding at June 27, 2021 | 1,973,096 | $ | 5.57 | 3.7 | |||||||||
| Warrants exercisable at June 27, 2021 | 1,954,106 | $ | 5.58 | 3.7 | |||||||||
Note 18. DIVIDENDS ON COMMON STOCK
On April 20, 2021, the Board of Directors declared a cash dividend of $0.13 per share of common stock, payable on May 7, 2021 to stockholders of record as of May 3, 2021, for a total of $1.6 million.
On June 1, 2021, the Board of Directors declared a cash dividend of $0.13 per share of common stock, payable on June 21, 2021 to stockholders of record as of June 14, 2021, for a total of $1.6 million.
Note 19. COMMITMENTS AND CONTINGENCIES
Litigation
James Harris and Adam Vignola v. Squire Junger, James Neuhauser, Edward Rensi, Andrew Wiederhorn, Fog Cutter Holdings, LLC, and Fog Cutter Capital Group, Inc., and FAT Brands Inc., nominal defendant (Delaware Chancery Court, Case No. 2021-0511)
On June 10, 2021, plaintiffs James Harris and Adam Vignola, putative stockholders of the Company, filed a derivative action in Delaware nominally on the Company’s behalf against the Company’s current directors and our current and former majority stockholders alleging claims of breach of fiduciary duty, unjust enrichment and waste arising out of the Company’s December 2020 merger with Fog Cutter Capital Group, Inc. Mr. Vignola was previously involved in litigation against the Company, having filed a putative class action lawsuit relating to the Company’s 2017 initial public offering, which lawsuit was voluntarily dismissed by stipulation in 2020. The defendants dispute the allegations of the new lawsuit and intend to vigorously defend against the claims. However, this matter is in the early stages and we cannot predict the outcome of this lawsuit. Subject to certain limitations, we are obligated to indemnify our directors in connection with the lawsuit and any related litigation or settlements amounts, which may be time-consuming, result in significant expense and divert the attention and resources of our management. An unfavorable outcome may exceed coverage provided under our insurance policies, could have an adverse effect on our financial condition and results of operations and could harm our reputation.
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Stratford Holding LLC v. Foot Locker Retail Inc. (U.S. District Court for the Western District of Oklahoma, Case No. 5:12-cv-00772-HE)
In 2012 and 2013, two property owners in Oklahoma City, Oklahoma sued numerous parties, including Foot Locker Retail Inc. and our subsidiary Fog Cutter Capital Group Inc. (now known as Fog Cutter Acquisition, LLC), for alleged environmental contamination on their properties, stemming from dry cleaning operations on one of the properties. The property owners seek damages in the range of $12 million to $22 million. From 2002 to 2008, a former Fog Cutter subsidiary managed a lease portfolio, which included the subject property. Fog Cutter denies any liability, although it did not timely respond to one of the property owners’ complaints and several of the defendants’ cross-complaints and thus is in default. The parties are currently conducting discovery, and the matter is scheduled for trial for November 2021. The Company is unable to predict the ultimate outcome of this matter, however, reserves have been recorded on the balance sheet relating to this litigation. There can be no assurance that the defendants will be successful in defending against these actions.
SBN FCCG LLC v FCCGI (Los Angeles Superior Court, Case No. BS172606)
SBN FCCG LLC (which we refer to as “SBN”) filed a complaint against Fog Cutter Capital Group, Inc. (which we refer to as “FCCG”) in New York state court for an indemnification claim (which we refer to as the “NY case”) stemming from an earlier lawsuit in Georgia regarding a certain lease portfolio formerly managed by a former FCCG subsidiary. In February 2018, SBN obtained a final judgment in the NY case for a total of $0.7 million, which included $0.2 million in interest dating back to March 2012. SBN then obtained a sister state judgment in Los Angeles Superior Court, Case No. BS172606 (which we refer to as the “California case”), which included the $0.7 million judgment from the NY case, plus additional statutory interest and fees, for a total judgment of $0.7 million. In May 2018, SBN filed a cost memo, requesting an additional $12,411 in interest to be added to the judgment in the California case, for a total of $0.7 million. In May 2019, the parties agreed to settle the matter for $0.6 million, which required the immediate payment of $0.1 million, and the balance to be paid in August 2019. FCCG wired $0.1 million to SBN in May 2019, but has not yet paid the remaining balance of $0.5 million. The parties have not entered into a formal settlement agreement and they have not yet discussed the terms for the payment of the remaining balance.
The Company is involved in other claims and legal proceedings from time-to-time that arise in the ordinary course of business. The Company does not believe that the ultimate resolution of these actions will have a material adverse effect on its business, financial condition, results of operations, liquidity or capital resources.
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Note 20. GEOGRAPHIC INFORMATION AND MAJOR FRANCHISEES
Revenue by geographic area was as follows (in thousands):
SCHEDULE OF REVENUES BY GEOGRAPHIC AREA
| Thirteen Weeks Ended | Twenty-six Weeks Ended | |||||||||||||||
| June 27, 2021 | June 28, 2020 | June 27, 2021 | June 28, 2020 | |||||||||||||
| United States | $ | 6,316 | $ | 2,564 | $ | 11,146 | $ | 6,273 | ||||||||
| Other countries | 1,966 | 543 | 3,785 | 1,257 | ||||||||||||
| Total revenue | $ | 8,282 | $ | 3,107 | $ | 14,931 | $ | 7,530 | ||||||||
Revenue is shown based on the geographic location of our franchisees’ restaurants. All assets are located in the United States.
During the twenty-six weeks ended June 27, 2021 and June 28, 2020, no individual franchisee accounted for more than 10% of the Company’s revenue.
NOTE 21. SUBSEQUENT EVENTS
Management has evaluated all events and transactions that occurred subsequent to June 27, 2021 through the date of issuance of these condensed consolidated financial statements. During this period, the Company did not have any significant subsequent events, except as follows:
Acquisition of Global Franchise Group
On July 22, 2021, the Company completed the acquisition of LS GFG Holdings Inc. (“GFG”), a franchisor and operator of a portfolio of five quick service restaurant concepts (Round Table Pizza, Great American Cookies, Hot Dog on a Stick, Marble Slab Creamery and Pretzelmaker), for a total purchase price of $442.5 million, comprised of $350.0 million in cash, $67.5 million in shares of the Company’s Series B Cumulative Preferred Stock and $25.0 million in shares of the Company’s Common Stock, subject to certain customary adjustments, including with respect to working capital, to be finalized no later than 90 days after closing.
In connection with the acquisition of GFG, on July 22, 2021, FAT Brands GFG Royalty I, LLC, a Delaware limited liability company (“GFG Royalty”), a special purpose, wholly-owned subsidiary of the Company, completed the issuance and sale in a private offering (the “GFG Offering”) of three tranches of fixed rate senior secured notes. The GFG notes were issued in a securitization transaction in which substantially all of the franchising and operating assets of GFG are pledged as collateral to secure the GFG Notes and have the following terms:
SCHEDULE OF SECURITIZATION TRANSACTION OF NOTES
|
Closing Date |
Class | Seniority |
Principal Balance |
Coupon |
Weighted Average Life (Years) |
Non-Call Period (Months) |
Anticipated Call Date |
Final Legal Maturity Date |
||||||||||||||||||
| 7/22/2021 | A-2 | Senior | $ | 209,000,000 | 6.00 | % | 2.01 | 6 | 7/25/2023 | 7/25/2051 | ||||||||||||||||
| 7/22/2021 | B-2 | Senior Subordinated | $ | 84,000,000 | 7.00 | % | 2.01 | 6 | 7/25/2023 | 7/25/2051 | ||||||||||||||||
| 7/22/2021 | M-2 | Subordinated | $ | 57,000,000 | 9.50 | % | 2.01 | 6 | 7/25/2023 | 7/25/2051 | ||||||||||||||||
In connection with the acquisition of GFG, on July 22, 2021, the Company issued 3,089,245 and 1,964,865 shares of Series B Cumulative Preferred Stock and Common Stock, respectively. Additionally, on July 22, 2021, the Company entered into a put/call agreement with the GFG sellers, pursuant to which the Company may purchase or the GFG Sellers may require the Company to purchase 3,089,245 shares of Series B Cumulative Preferred Stock for $67.5 million plus accrued but unpaid dividends on or before April 22, 2022.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our results of operations, financial condition and liquidity and capital resources should be read in conjunction with our financial statements and related notes for the twenty-six weeks ended June 27, 2021 and June 28, 2020, as applicable. Certain statements made or incorporated by reference in this report and our other filings with the Securities and Exchange Commission, in our press releases and in statements made by or with the approval of authorized personnel constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and are subject to the safe harbor created thereby. Forward-looking statements reflect intent, belief, current expectations, estimates or projections about, among other things, our industry, management’s beliefs and future events and financial trends affecting us. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will” and variations of these words or similar expressions are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Although we believe the expectations reflected in any forward-looking statements are reasonable, such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors, including but not limited to, COVID-19. These differences can arise as a result of the risks described in the section entitled “Item 1A. Risk Factors” in our Annual Report on Form 10-K filed on March 29, 2021 “Item 1A. Risk Factors” and elsewhere in this report, as well as other factors that may affect our business, results of operations, or financial condition. Forward-looking statements in this report speak only as of the date hereof, and forward-looking statements in documents incorporated by reference speak only as of the date of those documents. Unless otherwise required by law, we undertake no obligation to publicly update or revise these forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks and uncertainties, we cannot assure you that the forward-looking statements contained in this report will, in fact, transpire.
COVID-19
In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a pandemic, which continues to spread throughout the United States and other countries. As a result, Company franchisees temporarily closed some retail locations, reduced or modified store operating hours, adopted a “to-go” only operating model, or a combination these actions. These actions reduced consumer traffic, all resulting in a negative impact to Company revenue. While the disruption to our business from the COVID-19 pandemic is currently expected to be temporary, there is a great deal of uncertainty around the severity and duration of the disruption, and also the longer-term effects on our business and economic growth and consumer demand in the U.S. and worldwide. The effects of COVID-19 may materially adversely affect our business, results of operations, liquidity and ability to service our existing debt, particularly if these effects continue in place for a significant amount of time. If additional information becomes available regarding the potential impact and the duration of the negative financial effects of the current pandemic, the Company may determine that additional impairment adjustment to the recorded value of trademarks, goodwill and other intangible assets may be necessary.
Executive Overview
Business overview
FAT Brands Inc. is a leading multi-brand restaurant franchising company that develops, markets and acquires primarily quick-service, fast casual and casual dining concepts restaurant concepts around the world. Organized in March 2017 as a wholly owned subsidiary of Fog Cutter Capital Group, Inc. (“FCCG”), we completed our initial public offering on October 20, 2017 and issued additional shares of common stock representing 20 percent of our ownership upon completion of the offering. During the fourth quarter of 2020, we completed a transaction in which FCCG merged into a wholly owned subsidiary of ours, and we became the parent company of FCCG.
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As a franchisor, we generally do not own or operate restaurant locations, but rather generate revenue by charging franchisees an initial franchise fee as well as ongoing royalties. This asset light franchisor model provides the opportunity for strong profit margins and an attractive free cash flow profile while minimizing restaurant operating company risk, such as long-term real estate commitments or capital investments. Our scalable management platform enables us to add new stores and restaurant concepts to our portfolio with minimal incremental corporate overhead cost, while taking advantage of significant corporate overhead synergies. The acquisition of additional brands and restaurant concepts as well as expansion of our existing brands are key elements of our growth strategy.
As of June 27, 2021, the Company owns nine restaurant brands: Fatburger, Johnny Rockets, Buffalo’s Cafe, Buffalo’s Express, Hurricane Grill & Wings, Ponderosa and Bonanza Steakhouses, Elevation Burger and Yalla Mediterranean. Combined, these brands franchise approximately 700 restaurant locations, including units under construction.
Results of Operations
We operate on a 52-week or 53-week fiscal year ending on the last Sunday of the calendar year. In a 52-week fiscal year, each quarter contains 13 weeks of operations. In a 53-week fiscal year, each of the first, second and third quarters includes 13 weeks of operations and the fourth quarter includes 14 weeks of operations, which may cause our revenue, expenses and other results of operations to be higher due to an additional week of operations.
Results of Operations of FAT Brands Inc.
The following table summarize key components of our condensed consolidated results of operations for the thirteen and twenty-six weeks ended June 27, 2021 and June 28, 2020.
(In thousands)
| Thirteen Weeks Ended | Twenty-six Weeks Ended | |||||||||||||||
|
June 27, 2021 |
June 28, 2020 |
July 27, 2021 |
June 28, 2020 |
|||||||||||||
| Statements of operations data: | ||||||||||||||||
| Revenue | ||||||||||||||||
| Royalties | $ | 6,161 | $ | 2,213 | $ | 11,057 | $ | 5,522 | ||||||||
| Franchise fees | 482 | 273 | 1,022 | 449 | ||||||||||||
| Advertising fees | 1,370 | 613 | 2,560 | 1,544 | ||||||||||||
| Restaurant sales | 234 | - | 234 | - | ||||||||||||
| Management fees and other income | 35 | 8 | 58 | 15 | ||||||||||||
| Total revenue | 8,282 | 3,107 | 14,931 | 7,530 | ||||||||||||
| Costs and expenses | ||||||||||||||||
| General and administrative expense | 5,483 | 4,104 | 10,408 | 7,636 | ||||||||||||
| Restaurant operating expenses | 244 | - | 244 | - | ||||||||||||
| Advertising expenses | 1,367 | 613 | 2,560 | 1,544 | ||||||||||||
| Impairment of assets | - | 3,174 | - | 3,174 | ||||||||||||
| Refranchising restaurant (gain) loss | (856 | ) | 1,006 | (429 | ) | 1,544 | ||||||||||
| Total costs and expenses | 6,238 | 8,897 | 12,783 | 13,898 | ||||||||||||
| Income (loss) from operations | 2,044 | (5,790 | ) | 2,148 | (6,368 | ) | ||||||||||
| Other (expense) income, net | (9,967 | ) | 450 | (12,632 | ) | (1,639 | ) | |||||||||
| Loss before income tax expense | (7,923 | ) | (5,340 | ) | (10,484 | ) | (8,007 | ) | ||||||||
| Income tax benefit | (1,992 | ) | (1,089 | ) | (2,121 | ) | (1,386 | ) | ||||||||
| Net loss | (5,931 | ) | (4,251 | ) | (8,363 | ) | (6,621 | ) | ||||||||
| Less: Net loss attributable to noncontrolling interest | (5 | ) | - | (5 | ) | - | ||||||||||
| Net loss attributable to FAT Brands Inc. | $ | (5,926 | ) | $ | (4,251 | ) | $ | (8,358 | ) | $ | (6,621 | ) | ||||
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For the twenty-six weeks ended June 27, 2021 and June 28, 2020:
Revenue - Revenue consists of royalties, franchise fees, advertising fees, restaurant sales and other revenue. Total revenue increased $7.4 million, or 98.3%, in the first two quarters of 2021, to $14.9 million compared to $7.5 million in the same period of 2020. The increase reflects revenue from Johnny Rockets, which was acquired during the third quarter of 2020, and the recovery from the negative effects of the COVID-19 pandemic on royalties from restaurant sales.
Costs and Expenses – Costs and expenses consist primarily of general and administrative costs, advertising expense impairment charges and refranchising restaurant losses. Costs and expenses decreased $1.1 million, or 8.0%, in the first two quarters of 2021 to $12.8 million compared to the prior year period.
General and administrative expenses increased $2.8 million, or 36.3%, in the first two quarters of 2021 compared to the prior year period, primarily due to higher compensation cost as we filled out the management team and increased professional fees.
Advertising expenses increased $1.0 million, or 65.8%, in the first half of 2021 compared to the prior year. These expenses vary in relation to the advertising revenue and have been affected by the acquisition of Johnny Rockets and the increase in customer activity as the recovery from COVID continues.
We recorded non-cash goodwill and tradename impairment charges of $1.5 million and $1.7 million, respectively, relating to the Ponderosa and Bonanza brands during the first half of 2020. There were no impairment charges recorded during the first half of 2021.
Refranchising gains in the first half of 2021 were comprised of $1.1 million in net gains related to refranchised restaurants, partially offset by restaurant operating costs, net of food sales, of $0.7 million. Refranchising losses in the first half of 2020 were comprised of restaurant operating costs, net of food sales, of $1.7 million, net of $0.2 million in net gains related to refranchised restaurants.
Other (Expense) Income – Other expense for the first half of 2021 was $12.6 million and consisted primarily of $5.4 million in net interest expense and a $6.4 million net loss on the extinguishment of debt. Other expense for the first two quarters of 2020 was $1.6 million and consisted primarily of $2.8 million of net interest expense, partially offset by a $1.3 million change in fair value of the derivative liability relating to the conversion feature of the Series A Preferred Stock.
Income Tax Benefit – The effective rate was 20.2% for the first two quarters of 2021 compared to 17.3% for the comparable period in 2020.
For the thirteen weeks ended June 27, 2021 and June 28, 2020:
Revenue – Total revenue increased $5.2 million, or 166.6%, in the second quarter of 2021, to $8.3 million compared to $3.1 million in the same period of 2020. The increase reflects revenue from Johnny Rockets, which was acquired during the third quarter of 2020, and the recovery from the negative effects of the COVID-19 pandemic on royalties from restaurant sales.
Costs and Expenses – Costs and expenses decreased $2.7 million, or 30.0%, to $6.2 million in the second quarter of 2021 compared to the prior year period.
General and administrative expenses increased $1.4 million, or 33.6%, in the second quarter of 2021 compared to the prior year period, primarily due to higher compensation as we filled out the management team and increased professional fees.
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Advertising expenses increased $0.8 million, or 123.0%, in the second quarter of 2021 compared to the prior year. These expenses vary in relation to the advertising revenue and have been affected by the acquisition of Johnny Rockets and the increase in customer activity as the recovery from COVID continues.
We recorded non-cash goodwill and tradename impairment charges of $1.5 million and $1.7 million, respectively, relating to the Ponderosa and Bonanza brands during the first half of 2020. There were no impairment charges recorded during the first half of 2021.
Refranchising gains in the second quarter of 2021 were comprised of $1.1 million in net gains related to refranchised restaurants, partially offset by restaurant operating costs, net of food sales, of $0.2 million. Refranchising losses in the second quarter of 2020 were comprised of restaurant operating costs, net of food sales.
Other (Expense) Income – Other expense for the second quarter of 2021 was $10.0 million and consisted primarily of interest expense of $2.7 million and a $6.4 million net loss on the extinguishment of debt. Other income for the second quarter of 2020 was $0.5 million and consisted primarily of a $1.3 million change in fair value of the derivative liability relating to the conversion feature of the Series A Preferred Stock, partially offset by net interest expense of $0.8 million.
Income Tax Benefit – The effective tax rate was 25.1% for the second quarter of 2021 compared to 20.4% for the comparable period in 2020.
Liquidity and Capital Resources
Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund business operations, acquisitions and expansion of franchised restaurant locations and for other general business purposes. Our primary sources of funds for liquidity during the twenty-six weeks ended June 27, 2021 consisted of net proceeds from financing activities.
We are involved in a world-wide expansion of franchise locations, which will require significant liquidity, primarily from our franchisees. If real estate locations of sufficient quality cannot be located and either leased or purchased, the timing of restaurant openings may be delayed. Additionally, if we or our franchisees cannot obtain capital sufficient to fund this expansion, the extent of or timing of restaurant openings may be reduced or delayed.
We also plan to acquire additional restaurant concepts. These acquisitions typically require capital investments in excess of our normal cash on hand. We would expect that future acquisitions will necessitate financing with additional debt or equity transactions. If we are unable to obtain acceptable financing, our ability to acquire additional restaurant concepts likely would be negatively impacted.
On April 26, 2021, we completed the issuance and sale in a private offering (the “Offering”) of three tranches of fixed rate secured notes. Proceeds of the Offering were used to repay in full its 2020 Securitization Notes as well as fees and expenses related to the Offering, resulting in net proceeds to the Company of approximately $57 million.
On June 22, 2021, we closed a second underwritten public offering of 460,000 shares of 8.25% Series B Cumulative Preferred Stock at a price to the public of $20.00 per share. The net proceeds to the Company totaled $8.3 million, after deducting $0.9 million in underwriting discounts and other offering expenses.
In addition to the liquidity provided by these capital market transactions, we have seen improvement in our operating performance subsequent to December 27, 2020, as COVID-19 vaccinations have become more prevalent in the United States and federal, state and local restrictions have eased in many, but not all, of the markets where our franchisees operate. We believe that we will be in compliance with our debt covenants and have sufficient sources of cash to meet our liquidity needs for the next twelve months.
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Comparison of Cash Flows
Our cash and restricted cash balance was $54.0 million as of June 27, 2021, compared to $7.2 million as of December 27, 2020.
The following table summarize key components of our condensed consolidated cash flows for the twenty-six weeks ended June 27, 2021 and June 28, 2020:
For the Twenty-six Weeks Ended
(In thousands)
| June 27, 2021 | June 28, 2020 | |||||||
| Net cash used in operating activities | $ | (4,932 | ) | $ | (3,994 | ) | ||
| Net cash provided by (used in) investing activities | 221 | (6,326 | ) | |||||
| Net cash provided by financing activities | 51,520 | 13,783 | ||||||
| Increase in cash flows | $ | 46,809 | $ | 3,463 | ||||
Operating Activities
Net cash used in operating activities increased $1.0 million in the first half of 2021 compared to 2020. There were variations in the components of the cash from operations between the two periods. Our net loss in 2021 was $10.5 million compared to $6.6 million in 2020. The net positive adjustments to reconcile these net losses to net cash used in operations were $3.3 million in 2021 compared to $2.6 million in 2020. The primary components of the adjustments to reconcile the net loss to net cash used in operations for each year were as follows:
| For the first two quarters of 2021: |
| ● | A positive adjustment to reconcile cash used in operations due to a net loss on extinguishment of debt in the amount of $4.9 million, | |
| ● | A negative adjustment to reconcile cash used in operations due to an increase in deferred income taxes of $3.0 million, | |
| ● | A positive adjustment to reconcile cash used in operations due to an increase in accrued expense of $2.1 million, | |
| ● | A negative adjustment to reconcile cash used in operations due to a recognized gain on sale of refranchised assets in the amount of $1.1 million and | |
| ● | A negative adjustment to reconcile cash used in operations due to an increase in accounts receivable of $1.4 million. |
| For the first two quarters of 2020: |
| ● | A positive adjustment to reconcile cash used in operations due to non-cash impairment charges in the amount of $3.2 million, | |
| ● | A negative adjustment to reconcile cash used in operations due to an increase in accrued interest receivable from affiliates in the amount of $1.6 million, | |
| ● | A positive adjustment to reconcile cash used in operations due to a provision for bad debt in the amount of $1.1 million, | |
| ● | A negative adjustment to reconcile cash used in operations due to the decrease in the fair value of a derivative liability in the amount of $1.3 million and | |
| ● | A negative adjustment to reconcile cash used in operations due to an increase in deferred tax assets of $1.5 million. |
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Investing Activities
Net cash provided by investing activities was $0.2 million in the first half of 2021, compared to net cash used in investing activities of $6.3 million in the first half of 2020. This was primarily due to a decrease in the advances to non-consolidated affiliates.
Financing Activities
Net cash from financing activities was $51.5 million in the first two quarters of 2021, primarily comprised of $140.8 million in net proceeds from the issuance of the 2021-1 Securitization Notes and $8.3 million in net proceeds from the issuance of Series B Preferred Shares, partially offset by the repayment of $92.6 million of prior debt, $4.4 million of common and preferred stock dividends and $1.1 million of cash payments to repay acquisition purchase price payables.
Dividends
On April 20, 2021, the Board of Directors declared a cash dividend of $0.13 per share of common stock, payable on May 7, 2021 to stockholders of record as of May 3, 2021. The amount of the dividend totaled $1.6 million.
On June 1, 2021, the Board of Directors declared a cash dividend of $0.13 per share of common stock, payable on June 21, 2021 to stockholders of record as of June 14, 2021, for a total of $1.6 million.
The declaration and payment of future dividends, as well as the amount thereof, are subject to the discretion of our Board of Directors. The amount and size of any future dividends will depend upon our future results of operations, financial condition, capital levels, cash requirements and other factors. There can be no assurance that we will declare and pay dividends in future periods.
Securitization
On April 26, 2021 (the “Closing Date”), FAT Brands Royalty I, LLC, a Delaware limited liability company (“FB Royalty”), a special purpose, wholly-owned subsidiary of FAT Brands, completed the Offering of three tranches of fixed rate senior secured notes (collectively, the “2021 Securitization Notes”) as follows:
|
Closing Date |
Class | Seniority |
Principal Balance |
Coupon |
Weighted Average Life (Years) |
Non-Call Period (Months) |
Anticipated Call Date |
Final Legal Maturity Date |
||||||||||||||||
| 4/26/2021 | A-2 | Senior | $ | 97,104,000 | 4.75 | % | 2.25 | 6 | 7/25/2023 | 4/25/2051 | ||||||||||||||
| 4/26/2021 | B-2 | Senior Subordinated | $ | 32,368,000 | 8.00 | % | 2.25 | 6 | 7/25/2023 | 4/25/2051 | ||||||||||||||
| 4/26/2021 | M-2 | Subordinated | $ | 15,000,000 | 9.00 | % | 2.25 | 6 | 7/25/2023 | 4/25/2051 | ||||||||||||||
Net proceeds from the issuance of the 2021 Securitization Notes totaled $140.8 million, which consisted of the combined face amount of $144.5 million (net of debt offering costs of $3.0 million and original issue discount of $0.7 million).
The 2021 Securitization Notes require that the principal and interest obligations have first priority and amounts are segregated weekly to ensure appropriate funds are reserved to pay the quarterly principal and interest amounts due. The amount of weekly cash flow that exceeds the required weekly interest reserve is generally remitted to the Company. Interest payments are required to be made on a quarterly basis and, unless repaid on or before July 25, 2023, additional interest equal to 1.0% per annum will accrue on each tranche. The material terms of the 2021 Securitization Notes also include, among other things, the following financial covenants: (i) debt service coverage ratio, (ii) leverage ratio and (iii) senior leverage ratio. As of June 27, 2021, we were in compliance with these covenants.
The 2021 Securitization Notes are generally secured by a security interest in substantially all the assets of FB Royalty and its subsidiaries.
A portion of the proceeds of the 2021 Securitization Notes were used to repay and retire the following notes issued in 2020 under the Base Indenture:
| Note |
Public
Rating |
Seniority | Issue Amount | Coupon | First Call Date | Final Legal Maturity Date | ||||||||||
| Series A-2 | BB | Senior | $ | 20,000,000 | 6.50 | % | 4/27/2021 | 4/27/2026 | ||||||||
| Series B-2 | B | Senior Subordinated | $ | 20,000,000 | 9.00 | % | 4/27/2021 | 4/27/2026 | ||||||||
| Series M-2 | N/A | Subordinated | $ | 40,000,000 | 9.75 | % | 4/27/2021 | 4/27/2026 | ||||||||
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Capital Expenditures
As of June 27, 2021, we do not have any material commitments for capital expenditures.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements and accompanying notes are prepared in accordance with GAAP. Preparing consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by the application of our accounting policies. Our significant accounting policies are described in our Annual Report on Form 10-K for the year ended December 27, 2020. Critical accounting estimates are those that require application of management’s most difficult, subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. While we apply our judgment based on assumptions believed to be reasonable under the circumstances, actual results could vary from these assumptions. It is possible that materially different amounts would be reported using different assumptions. Our critical accounting estimates are identified and described in our annual consolidated financial statements and the related notes included in our Annual Report on Form 10-K for our fiscal year ended December 27, 2020.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Required.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
Our Chief Executive Officer and our Chief Financial Officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities and Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of June 27, 2021, have concluded that, in regard to the segregation of duties and the financial close process, our disclosure controls and procedures were not effective.
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Recognizing these deficiencies, we are continuing to review our compensating controls and implement additional procedures in our efforts to remediate the above-mentioned weaknesses as well as identifying additional financial accounting staff and third-party consultants to help remedy the weaknesses outlined above.
Changes in internal control over financial reporting
There were no significant changes in our internal control over financial reporting in connection with an evaluation that occurred during the twenty-six weeks ended June 27, 2021 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
Inherent Limitations Over Internal Controls
We do not expect that our disclosure controls and procedures will prevent all error and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedures are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
James Harris and Adam Vignola v. Squire Junger, James Neuhauser, Edward Rensi, Andrew Wiederhorn, Fog Cutter Holdings, LLC, and Fog Cutter Capital Group, Inc., and FAT Brands Inc., nominal defendant (Delaware Chancery Court, Case No. 2021-0511)
On June 10, 2021, plaintiffs James Harris and Adam Vignola, putative stockholders of the Company, filed a derivative action in Delaware nominally on the Company’s behalf against the Company’s current directors and our current and former majority stockholders alleging claims of breach of fiduciary duty, unjust enrichment and waste arising out of the Company’s December 2020 merger with Fog Cutter Capital Group, Inc. Mr. Vignola was previously involved in litigation against the Company, having filed a putative class action lawsuit relating to the Company’s 2017 initial public offering, which lawsuit was voluntarily dismissed by stipulation in 2020. The defendants dispute the allegations of the new lawsuit and intend to vigorously defend against the claims. However, this matter is in the early stages and we cannot predict the outcome of this lawsuit. Subject to certain limitations, we are obligated to indemnify our directors in connection with the lawsuit and any related litigation or settlements amounts, which may be time-consuming, result in significant expense and divert the attention and resources of our management. An unfavorable outcome may exceed coverage provided under our insurance policies, could have an adverse effect on our financial condition and results of operations and could harm our reputation.
Stratford Holding LLC v. Foot Locker Retail Inc. (U.S. District Court for the Western District of Oklahoma, Case No. 5:12-cv-00772-HE)
In 2012 and 2013, two property owners in Oklahoma City, Oklahoma sued numerous parties, including Foot Locker Retail Inc. and our subsidiary Fog Cutter Capital Group Inc. (now known as Fog Cutter Acquisition, LLC), for alleged environmental contamination on their properties, stemming from dry cleaning operations on one of the properties. The property owners seek damages in the range of $12 million to $22 million. From 2002 to 2008, a former Fog Cutter subsidiary managed a lease portfolio, which included the subject property. Fog Cutter denies any liability, although it did not timely respond to one of the property owners’ complaints and several of the defendants’ cross-complaints and thus is in default. The parties are currently conducting discovery, and the matter is scheduled for trial for November 2021. The Company is unable to predict the ultimate outcome of this matter, however, reserves have been recorded on the balance sheet relating to this litigation. There can be no assurance that the defendants will be successful in defending against these actions.
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SBN FCCG LLC v FCCGI (Los Angeles Superior Court, Case No. BS172606)
SBN FCCG LLC (which we refer to as “SBN”) filed a complaint against Fog Cutter Capital Group, Inc. (which we refer to as “FCCG”) in New York state court for an indemnification claim (which we refer to as the “NY case”) stemming from an earlier lawsuit in Georgia regarding a certain lease portfolio formerly managed by a former FCCG subsidiary. In February 2018, SBN obtained a final judgment in the NY case for a total of $0.7 million, which included $0.2 million in interest dating back to March 2012. SBN then obtained a sister state judgment in Los Angeles Superior Court, Case No. BS172606 (which we refer to as the “California case”), which included the $0.7 million judgment from the NY case, plus additional statutory interest and fees, for a total judgment of $0.7 million. In May 2018, SBN filed a cost memo, requesting an additional $12,411 in interest to be added to the judgment in the California case, for a total of $0.7 million. In May 2019, the parties agreed to settle the matter for $0.6 million, which required the immediate payment of $0.1 million, and the balance to be paid in August 2019. FCCG wired $0.1 million to SBN in May 2019, but has not yet paid the remaining balance of $0.5 million. The parties have not entered into a formal settlement agreement, and they have not yet discussed the terms for the payment of the remaining balance.
The Company is involved in other claims and legal proceedings from time-to-time that arise in the ordinary course of business. The Company does not believe that the ultimate resolution of these actions will have a material adverse effect on its business, financial condition, results of operations, liquidity or capital resources.
ITEM 1A. RISK FACTORS
You should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” and elsewhere in our Annual Report on Form 10-K filed on March 29, 2021, which could materially affect our business, financial condition, cash flows or future results. There have been no material changes in such factors discussed in our Annual Report. The risks described in our Annual Report are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On June 21, 2021, the Company agreed to issue 62,500 shares of common stock in partial satisfaction of the purchase price for the acquisition of Yalla Mediterranean. Such issuance of securities was exempt from registration under the Securities Act of 1933, as amended, in reliance on Section 4(a)(2) thereunder and Rule 506 promulgated under Regulation D thereunder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| FAT BRANDS INC. | ||
| August 6, 2021 | By | /s/ Kenneth J. Kuick |
| Kenneth J. Kuick | ||
| Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
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