Fat Brands, Inc 10-Q for FY2021 Q1
Fat Brands, Inc (FATAQ)
About this 10-Q
Fat Brands, Inc filed this 10-Q on May 12, 2021, covering the quarter ended March 28, 2021 (FY2021 Q1).
Headline figures
Quarter ended March 28, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $6.65M
- up 50.3% from $4.42M a year earlier
- Net loss
- $2.43M
- compared with a net loss of $2.37M a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 28, 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 [X] 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 [X] 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 | [X] | Smaller reporting company | [X] |
| Emerging growth company | [X] |
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. [X]
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
As of May 7, 2021, there were 12,229,479 shares of common stock outstanding.
FAT BRANDS INC.
QUARTERLY REPORT ON FORM 10-Q
March 28, 2021
TABLE OF CONTENTS
| PART I. | FINANCIAL INFORMATION | 3 |
| Item 1. | Consolidated Financial Statements (Unaudited) | 3 |
| FAT Brands Inc. and Subsidiaries: | ||
| Consolidated Balance Sheets (Unaudited) | 3 | |
| Consolidated Statements of Operations (Unaudited) | 4 | |
| Consolidated Statements of Stockholders’ Equity (Unaudited) | 5 | |
| Consolidated Statements of Cash Flows (Unaudited) | 6 | |
| Notes to Consolidated Financial Statements (Unaudited) | 7 | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 31 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 38 |
| Item 4. | Controls and Procedures | 39 |
| PART II. | OTHER INFORMATION | 40 |
| Item 1. | Legal Proceedings | 40 |
| Item 1A. | Risk Factors | 40 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 40 |
| Item 3. | Defaults Upon Senior Securities | 40 |
| Item 4. | Mine Safety Disclosures | 40 |
| Item 5. | Other Information | 40 |
| Item 6. | Exhibits | 41 |
| SIGNATURES | 42 | |
| 2 |
PART I — FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
FAT BRANDS INC.
(dollars in thousands, except share data)
| March 28, 2021 | December 27, 2020 | |||||||
| (Audited) | ||||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash | $ | 1,163 | $ | 3,944 | ||||
| Restricted cash | 3,352 | 2,867 | ||||||
| Accounts receivable, net of allowance for doubtful accounts of $762 and $739, as of March 28, 2021 and December 27, 2020, respectively | 4,467 | 4,208 | ||||||
| Trade and other notes receivable, net of allowance for doubtful accounts of $103 as of March 28, 2021 and December 27, 2020 | 210 | 208 | ||||||
| Assets classified as held for sale | 10,570 | 10,831 | ||||||
| Other current assets | 1,968 | 2,365 | ||||||
| Total current assets | 21,730 | 24,423 | ||||||
| Noncurrent restricted cash | 400 | 400 | ||||||
| Notes receivable – noncurrent, net of allowance for doubtful accounts of $271, as of March 28, 2021 and December 27, 2020 | 1,640 | 1,622 | ||||||
| Deferred income tax asset, net | 31,546 | 30,551 | ||||||
| Operating lease right of use assets | 4,125 | 4,469 | ||||||
| Goodwill | 9,706 | 10,909 | ||||||
| Other intangible assets, net | 47,331 | 47,711 | ||||||
| Other assets | 1,615 | 1,059 | ||||||
| Total assets | $ | 118,093 | $ | 121,144 | ||||
| Liabilities and Stockholders’ Deficit | ||||||||
| Liabilities | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | 8,684 | $ | 8,625 | ||||
| Accrued expenses and other liabilities | 19,912 | 19,833 | ||||||
| Deferred income, current portion | 1,782 | 1,887 | ||||||
| Accrued advertising | 1,978 | 2,160 | ||||||
| Accrued interest payable | 1,876 | 1,847 | ||||||
| Dividend payable on preferred shares | 1,143 | 893 | ||||||
| Liabilities related to assets classified as held for sale | 9,656 | 9,892 | ||||||
| Current portion of operating lease liability | 777 | 748 | ||||||
| Current portion of preferred shares, net | 7,970 | 7,961 | ||||||
| Current portion of long-term debt | 22,104 | 19,314 | ||||||
| Other | 17 | 17 | ||||||
| Total current liabilities | 75,899 | 73,177 | ||||||
| Deferred income – noncurrent | 9,537 | 9,099 | ||||||
| Acquisition purchase price payable | 2,829 | 2,806 | ||||||
| Operating lease liability, net of current portion | 3,864 | 4,011 | ||||||
| Long-term debt, net of current portion | 71,464 | 73,852 | ||||||
| Other liabilities | 76 | 82 | ||||||
| Total liabilities | 163,669 | 163,027 | ||||||
| Commitments and contingencies (Note 18) | ||||||||
| Stockholders’ deficit | ||||||||
| Preferred stock, $.0001 par value; 5,000,000 shares authorized; 1,183,272 shares issued and outstanding at March 28, 2021 and December 27, 2020; liquidation preference $25 per share | 21,267 | 21,788 | ||||||
| Common stock, $.0001 par value; 25,000,000 shares authorized; 12,029,264 and 11,926,264 shares issued and outstanding at March 28, 2021 and December 27, 2020, respectively | (43,515 | ) | (42,775 | ) | ||||
| Accumulated deficit | (23,328 | ) | (20,896 | ) | ||||
| Total stockholders’ deficit | (45,576 | ) | (41,883 | ) | ||||
| Total liabilities and stockholders’ deficit | $ | 118,093 | $ | 121,144 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| 3 |
FAT BRANDS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share data)
For the Thirteen Weeks Ended March 28, 2021 and March 29, 2020
| 2021 | 2020 | |||||||
| Revenue | ||||||||
| Royalties | $ | 4,898 | $ | 3,309 | ||||
| Franchise fees | 540 | 175 | ||||||
| Advertising fees | 1,188 | 931 | ||||||
| Other operating income | 23 | 8 | ||||||
| Total revenue | 6,649 | 4,423 | ||||||
| Costs and expenses | ||||||||
| General and administrative expense | 4,926 | 3,531 | ||||||
| Refranchising loss | 427 | 539 | ||||||
| Advertising fees | 1,192 | 931 | ||||||
| Total costs and expenses | 6,545 | 5,001 | ||||||
| Income (loss) from operations | 104 | (578 | ) | |||||
| Other expense, net | ||||||||
| Interest expense, net of interest income of $0 and $718 due from affiliates during the thirteen weeks ended March 28, 2021 and March 29, 2020, respectively | (2,460 | ) | (1,622 | ) | ||||
| Interest expense related to preferred shares | (288 | ) | (452 | ) | ||||
| Other income (expense), net | 83 | (16 | ) | |||||
| Total other expense, net | (2,665 | ) | (2,090 | ) | ||||
| Loss before income tax benefit | (2,561 | ) | (2,668 | ) | ||||
| Income tax benefit | (129 | ) | (298 | ) | ||||
| Net loss | $ | (2,432 | ) | $ | (2,370 | ) | ||
| Basic and diluted loss per common share | $ | (0.20 | ) | $ | (0.20 | ) | ||
| Basic and diluted weighted average shares outstanding | 11,970,505 | 11,868,842 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 4 |
FAT BRANDS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
(dollars in thousands, except share data)
For the Thirteen Weeks Ended March 28, 2021
| Common Stock | Preferred Stock | |||||||||||||||||||||||||||||||||||||||
| Additional | Total | Additional | Total | |||||||||||||||||||||||||||||||||||||
| Par | paid-in | Common | Par | paid-in | Preferred | Accumulated | ||||||||||||||||||||||||||||||||||
| Shares | value | capital | Stock | Shares | value | capital | Stock | deficit | Total | |||||||||||||||||||||||||||||||
| Balance at December 27, 2020 | 11,926,264 | $ | 1 | $ | (42,776 | ) | $ | (42,775 | ) | 1,183,272 | $ | - | $ | 21,788 | $ | 21,788 | $ | (20,896 | ) | $ | (41,883 | ) | ||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | - | (2,432 | ) | (2,432 | ) | ||||||||||||||||||||||||||||
| Issuance of common stock through exercise of warrants | 103,000 | - | 426 | 426 | - | - | 89 | 89 | - | 515 | ||||||||||||||||||||||||||||||
| Share-based compensation | - | - | 37 | 37 | - | - | - | - | - | 37 | ||||||||||||||||||||||||||||||
| Measurement period adjustment in accordance with ASU 2015-16 | - | - | (1,203 | ) | (1,203 | ) | - | - | - | - | - | (1,203 | ) | |||||||||||||||||||||||||||
| Dividends declared on Series B preferred stock | - | - | - | - | - | - | (610 | ) | (610 | ) | - | (610 | ) | |||||||||||||||||||||||||||
| Balance at March 28, 2021 | 12,029,264 | $ | 1 | $ | (43,516 | ) | $ | (43,515 | ) | 1,183,272 | $ | - | $ | 21,267 | $ | 21,267 | $ | 23,328 | $ | (45,576 | ) | |||||||||||||||||||
For the Thirteen Weeks Ended March 29, 2020
| Common Stock | ||||||||||||||||||||||||
| Additional | ||||||||||||||||||||||||
| Par | paid-in | Accumulated | ||||||||||||||||||||||
| Shares | value | capital | Total | deficit | Total | |||||||||||||||||||
| Balance at December 29, 2019 | 11,860,299 | $ | 1 | $ | 11,413 | $ | 11,414 | $ | (6,036 | ) | $ | 5,378 | ||||||||||||
| Net loss | - | - | - | - | (2,370 | ) | (2,370 | ) | ||||||||||||||||
| Issuance of common stock in lieu of director fees payable | 16,360 | - | 75 | 75 | - | 75 | ||||||||||||||||||
| Share-based compensation | - | - | 15 | 15 | - | 15 | ||||||||||||||||||
| Correction of recorded conversion rights associated with Series A-1 preferred shares | - | - | (90 | ) | (90 | ) | - | (90 | ) | |||||||||||||||
| Balance at March 29, 2020 | 11,876,659 | $ | 1 | $ | 11,413 | $ | 11,414 | $ | (8,406 | ) | $ | 3,008 | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 5 |
FAT BRANDS INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(dollars in thousands)
For the Thirteen Weeks Ended March 28, 2021 and March 29, 2020
| 2021 | 2020 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | (2,432 | ) | $ | (2,370 | ) | ||
| Adjustments to reconcile net loss to net cash used in operations: | ||||||||
| Deferred income taxes | (995 | ) | (318 | ) | ||||
| Depreciation and amortization | 398 | 232 | ||||||
| Share-based compensation | 37 | 15 | ||||||
| Change in operating right of use assets | 605 | 183 | ||||||
| Accretion of loan fees and interest | 364 | 241 | ||||||
| Accretion of preferred shares | 10 | 7 | ||||||
| Accretion of purchase price liability | 24 | 130 | ||||||
| Provision for bad debts | - | 162 | ||||||
| Change in: | ||||||||
| Accounts receivable | (258 | ) | 44 | |||||
| Accrued interest receivable from affiliate | - | (718 | ) | |||||
| Prepaid expenses | 397 | (33 | ) | |||||
| Deferred income | 332 | 339 | ||||||
| Accounts payable | 59 | (71 | ) | |||||
| Accrued expense | 83 | (599 | ) | |||||
| Accrued advertising | (187 | ) | (8 | ) | ||||
| Accrued interest payable | 47 | (973 | ) | |||||
| Dividend payable on preferred shares | 278 | 444 | ||||||
| Other | (8 | ) | (78 | ) | ||||
| Total adjustments | 1,186 | (1,001 | ) | |||||
| Net cash used in operating activities | (1,246 | ) | (3,371 | ) | ||||
| Cash flows from investing activities | ||||||||
| Change in due from affiliates | - | (5,091 | ) | |||||
| Payments received on loans receivable | - | 46 | ||||||
| Proceeds from sale of refranchised restaurants | - | 1,650 | ||||||
| Purchases of property and equipment | (573 | ) | (18 | ) | ||||
| Net cash used in investing activities | (573 | ) | (3,413 | ) | ||||
| Cash flows from financing activities | ||||||||
| Proceeds from borrowings and associated warrants, net of issuance costs | - | 37,271 | ||||||
| Repayments of borrowings | - | (24,149 | ) | |||||
| Change in operating lease liabilities | (353 | ) | (149 | ) | ||||
| Payments made on acquisition purchase price liability | - | (500 | ) | |||||
| Exercise of warrants | 515 | - | ||||||
| Dividends paid in cash | (639 | ) | - | |||||
| Net cash (used in) provided by financing activities | (477 | ) | 12,473 | |||||
| Net (decrease) increase in cash and restricted cash | (2,296 | ) | 5,689 | |||||
| Cash and restricted cash at beginning of the period | 7,211 | 25 | ||||||
| Cash and restricted cash at end of the period | $ | 4,915 | $ | 5,714 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for interest | $ | 1,969 | $ | 1,571 | ||||
| Cash paid for income taxes | $ | 211 | $ | 13 | ||||
| Supplemental disclosure of non-cash financing and investing activities: | ||||||||
| Director fees converted to common stock | $ | - | $ | 75 | ||||
| Income taxes (receivable) payable included in amounts due from affiliates | $ | - | $ | (121 | ) | |||
The accompanying notes are an integral part of these consolidated financial statements.
| 6 |
NOTES TO 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 March 28, 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 may 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 revenues. 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 $104,000 during the thirteen weeks ended March 28, 2021 compared to a loss from operations of $578,000 for the thirteen weeks ended March 29, 2020. The Company recognized a net loss of $2,432,000 during the thirteen weeks ended March 28, 2021 compared to a net loss of $2,370,000 during the thirteen weeks ended March 29, 2020. Net cash used in operations totaled $1,246,000 for the thirteen weeks ended March 28, 2021 compared to $3,371,000 for thirteen weeks ended March 29, 2020. As of March 28, 2021, the Company’s total liabilities exceeded total assets by $45,576,000 compared to $41,883,000 as of December 27, 2020. The change in the Company’s financial position reflects operating improvements as the effects of COVID-19 began to stabilize offset by the assumption of certain liabilities related to the Merger in December 2020.
| 7 |
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.
Subsequent to the reporting period ended March 28, 2021, 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 (see Note 21). 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 Offering alleviated the substantial doubt about the Company’s ability to continue as a going concern that was disclosed in the 2020 Form 10-K.
The Company utilized a portion of the net proceeds from the Offering to repay a portion of indebtedness assumed as a result of the Merger (see Notes 11 and 21).
In addition to the liquidity provided by the successful completion of the Offering, the Company has experienced significant 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. As a result, the Company believes that its liquidity position will be sufficient for the twelve months of operations following the issuance of this Form 10-Q.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operations – The Company operates on a 52-week calendar and its fiscal year ends on the last Sunday of the calendar year. Consistent with the 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. The first reporting period for each of fiscal years 2020 and 2021 were 13 weeks.
Principles of consolidation – The accompanying 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. Intercompany accounts have been eliminated in consolidation.
Use of estimates in the preparation of the consolidated financial statements – The preparation of the 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the determination of fair values of intangibles for which there is no active market, the allocation of basis between assets acquired, sold or retained, valuation allowances for notes and accounts receivable, and deferred tax assets. Estimates and assumptions also affect the reported amounts of revenues 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 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 quarter of 2021, adjustments were made to provisional amounts reclassifying $1,203,000 between goodwill and additional paid in capital on the consolidated balance sheet. These adjustments did not impact the Company’s consolidated statement of operations during the current period or during prior periods.
Credit and Depository Risks – Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. Management reviews each of its franchisee’s financial condition prior to entry into a franchise or other agreement, as well as periodically through the term of the agreement, and believes that it has adequately provided for exposures to potential credit losses. As of March 28, 2021 and December 27, 2020, accounts receivable, net of allowance for doubtful accounts, totaled $4,466,000 and $4,208,000, with no franchisee representing more than 10% of that amount at either date.
The Company maintains cash deposits in national financial institutions. From time to time the balances for these accounts exceed the Federal Deposit Insurance Corporation’s (“FDIC”) insured amount. Balances on interest bearing deposits at banks in the United States are insured by the FDIC up to $250,000 per account. As of March 28, 2021 and December 27, 2020, the Company had uninsured deposits in the amount of $3,931,238 and $6,047,299, respectively.
| 8 |
Restricted Cash – The Company has restricted cash consisting of funds required to be held in trust in connection with the Company’s securitized debt. The current portion of restricted cash as of March 28, 2021 and December 27, 2020 consisted of $3,353,000 and $2,867,000, respectively. Non-current restricted cash of $400,000 as of March 28, 2021 and December 27, 2020, represents interest reserves required to be set aside for the duration of the securitized debt.
Accounts receivable – Accounts receivable are recorded at the invoiced amount and are stated net of an allowance for doubtful accounts. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the existing accounts receivable. The allowance is based on historical collection data and current franchisee information. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. As of March 28, 2021 and December 27, 2020, accounts receivable was stated net of an allowance for doubtful accounts of $762,000 and $739,000, respectively.
Assets classified as held for sale – Assets are classified as held for sale when the Company commits to a plan to sell the asset, the asset is available for immediate sale in its present condition and an active program to locate a buyer at a reasonable price has been initiated. The sale of these assets is generally expected to be completed within one year. The combined assets are valued at the lower of their carrying amount or fair value, net of costs to sell and included as current assets on the Company’s consolidated balance sheet. Assets classified as held for sale are not depreciated. However, interest attributable to the liabilities associated with assets classified as held for sale and other related expenses are recorded as expenses in the Company’s consolidated statement of operations.
Goodwill and other intangible assets – Intangible assets are stated at the estimated fair value at the date of acquisition and include goodwill, trademarks, and franchise agreements. Goodwill and other intangible assets with indefinite lives, such as trademarks, are not amortized but are reviewed for impairment annually or more frequently if indicators arise. All other intangible assets are amortized over their estimated weighted average useful lives, which range from nine to twenty-five years. Management assesses potential impairments to intangible assets at least annually, or when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. Judgments regarding the existence of impairment indicators and future cash flows related to intangible assets are based on operational performance of the acquired businesses, market conditions and other factors.
Fair Value Measurements - The Company determines the fair market values of its financial assets and liabilities, as well as non-financial assets and liabilities that are recognized or disclosed at fair value on a recurring basis, based on the fair value hierarchy established in U.S. GAAP. As necessary, the Company measures its financial assets and liabilities using inputs from the following three levels of the fair value hierarchy:
| ● | Level 1 inputs are quoted prices in active markets for identical assets or liabilities. |
| ● | Level 2 inputs are observable for the asset or liability, either directly or indirectly, including quoted prices in active markets for similar assets or liabilities. |
| ● | Level 3 inputs are unobservable and reflect the Company’s own assumptions. |
Other than a derivative liability that existed during part of 2020 and the contingent consideration payable liabilities incurred in connection with the acquisition of certain of our brands, the Company does not have a material amount of financial assets or liabilities that are required to be measured at fair value on a recurring basis under U.S. GAAP (See Note 12). None of the Company’s non-financial assets or non-financial liabilities are required to be measured at fair value on a recurring basis.
Income taxes – Effective October 20, 2017, the Company entered into a Tax Sharing Agreement with FCCG that provides that FCCG would, to the extent permitted by applicable law, file consolidated federal, California and Oregon (and possibly other jurisdictions where revenue is generated, at FCCG’s election) income tax returns with the Company and its subsidiaries. The Company would pay FCCG the amount that its tax liability would have been had it filed a separate return. As such, prior to the Merger, the Company accounted for income taxes as if it filed separately from FCCG. The Tax Sharing Agreement was cancelled in connection with the Merger.
The Company accounts for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on the differences between financial reporting and tax reporting bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Realization of deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain.
| 9 |
A two-step approach is utilized to recognize and measure uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon tax authority examination, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon the ultimate settlement.
Franchise Fees: The franchise arrangement is documented in the form of a franchise agreement. The franchise arrangement requires the Company to perform various activities to support the brand that do not directly transfer goods and services to the franchisee, but instead represent a single performance obligation, which includes the transfer of the franchise license. The services provided by the Company are highly interrelated with the franchise license and are considered a single performance obligation. Franchise fee revenue from the sale of individual franchises is recognized over the term of the individual franchise agreement on a straight-line basis. Unamortized non-refundable deposits collected in relation to the sale of franchises are recorded as deferred franchise fees.
The franchise fee may be adjusted at management’s discretion or in a situation involving store transfers between franchisees. Deposits are non-refundable upon acceptance of the franchise application. In the event a franchisee does not comply with their development timeline for opening franchise stores, the franchise rights may be terminated, at which point the franchise fee revenue is recognized for non-refundable deposits.
Royalties – In addition to franchise fee revenue, the Company collects a royalty calculated as a percentage of net sales from our franchisees. Royalties range from 0.75% to 6% and are recognized as revenue when the related sales are made by the franchisees. Royalties collected in advance of sales are classified as deferred income until earned.
Advertising – The Company requires advertising payments from franchisees based on a percent of net sales. The Company also receives, from time to time, payments from vendors that are to be used for advertising. Advertising funds collected are required to be spent for specific advertising purposes. Advertising revenue and associated expense is recorded on the Company’s consolidated statement of operations. Assets and liabilities associated with the related advertising fees are reflected in the Company’s consolidated balance sheet.
Share-based compensation – The Company has a stock option plan which provides for options to purchase shares of the Company’s common stock. Options issued under the plan may have a variety of terms as determined by the Board of Directors including the option term, the exercise price and the vesting period. Options granted to employees and directors are valued at the date of grant and recognized as an expense over the vesting period in which the options are earned. Cancellations or forfeitures are accounted for as they occur. Stock options issued to non-employees as compensation for services are accounted for based upon the estimated fair value of the stock option. The Company recognizes this expense over the period in which the services are provided. Management utilizes the Black-Scholes option-pricing model to determine the fair value of the stock options issued by the Company. See Note 15 for more details on the Company’s share-based compensation.
Earnings per share – The Company reports basic earnings or loss per share in accordance with FASB ASC 260, “Earnings Per Share”. Basic earnings per share is computed using the weighted average number of common shares outstanding during the reporting period. Diluted earnings per share is computed using the weighted average number of common shares outstanding plus the effect of dilutive securities during the reporting period. Any potentially dilutive securities that have an anti-dilutive impact on the per share calculation are excluded. During periods in which the Company reports a net loss, diluted weighted average shares outstanding are equal to basic weighted average shares outstanding because the effect of the inclusion of all potentially dilutive securities would be anti-dilutive. As of March 28, 2021 and March 29, 2020, there were no potentially dilutive securities considered in the calculation of diluted loss per common share due to losses for each period.
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.
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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 is currently evaluating the impact of the adoption of ASU 2016-13 on its consolidated financial statements but does not expect that the adoption of this standard will have a material impact on its 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 will receive certain limited registration rights with respect to the shares received in the Merger. As a result of the Merger, FCCG’s 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 only 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.
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.
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The Merger is treated under ASC 805-50-30-6 which indicates 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 FCCG and the Merged Entities are recorded on the Company’s books at FCCG’s book value. The consolidation of the operations of FCCG and the Merged Entities with the Company is presented on a prospective basis from the date of transfer as there has not been a change in the reporting entity.
The Merger resulted in the following assets and liabilities being included in the consolidated financial statements of the Company as of the Merger date (in thousands):
| Prepaid assets | $ | 33 | ||
| Deferred tax assets | 20,402 | |||
| Other assets | 100 | |||
| Accounts payable | (926 | ) | ||
| Accrued expense | (6,846 | ) | ||
| Current portion of debt | (12,486 | ) | ||
| Litigation reserve | (3,980 | ) | ||
| Due to affiliates | (43,653 | ) | ||
| Total net identifiable liabilities (net deficit) | $ | (47,356 | ) |
A net loss of $432,000 attributed to the Merged Entities is included in the accompanying consolidated statements of operations for the thirteen weeks ended March 28, 2021. There were no revenues attributed to the Merged Entities during the period.
Proforma Information
The table below presents the proforma revenue and net loss of the Company for the thirteen weeks ended March 29, 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.
| Thirteen Weeks Ended | ||||||||
| March 28, 2021 | March 29, 2020 | |||||||
| (Actual) | (Proforma) | |||||||
| Revenues | $ | 6,649 | $ | 4,423 | ||||
| Net loss | $ | (2,432 | ) | $ | (4,612 | ) | ||
The proforma information above reflects the combination of the Company’s results as disclosed in the accompanying consolidated statements of operations for the thirteen weeks ended March 29, 2020, together with the results of the Merged Entities for the thirteen weeks ended March 29, 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 31, 2018 (the beginning of the Company’s 2019 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 $24,730,000. 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):
| 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 |
Revenues of $2,257,000 and net loss of $26,000 attributed to Johnny Rockets are included in the accompanying consolidated statements of operations for the thirteen weeks ended March 28, 2021. The net loss attributed to Johnny Rockets includes allocations of corporate overhead in accordance with the Company’s allocation methodology.
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 weeks ended March 29, 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.
| Thirteen Weeks Ended | ||||||||
| March 28, 2021 | March 29, 2020 | |||||||
| (Actual) | (Proforma) | |||||||
| Revenues | $ | 6,649 | $ | 7,674 | ||||
| Net (loss) income | $ | (2,432 | ) | $ | (2,357 | ) | ||
The proforma information above reflects the combination of the Company’s unaudited results as disclosed in the accompanying consolidated statements of operations for the thirteen weeks March 29, 2020, together with the unaudited results of Johnny Rockets for the thirteen weeks ended March 29, 2020, with the following adjustments:
| ● | Revenue – The unaudited proforma revenues 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 weeks ended March 29, 2020. | |
| ● | Former parent company management fees have been eliminated from the proforma. |
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| ● | 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 also 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 consolidated balance sheets as of March 28, 2021 and December 27, 2020 (in thousands):
| March 28, 2021 | December 27, 2020 | |||||||
| (Unaudited) | (Audited) | |||||||
| Property, plant and equipment | $ | 1,355 | $ | 1,352 | ||||
| Operating lease right of use assets | 9,215 | 9,479 | ||||||
| Total | $ | 10,570 | $ | 10,831 | ||||
Operating lease liabilities related to the assets classified as held for sale in the amount of $9,656,000 and $9,892,000, have been classified as current liabilities on the accompanying consolidated balance sheet as of March 28, 2021 and December 27, 2020, respectively.
Restaurant operating costs, net of food sales, totaled $427,000 and $539,000 for the thirteen weeks ended March 28, 2021 and March 29, 2020, respectively.
Note 5. NOTES RECEIVABLE
The Elevation Buyer Note was funded in connection with the purchase of Elevation Burger in 2019. The Company loaned $2,300,000 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 $1,903,000, which was net of a discount of $397,000. As of March 28, 2021 and December 27, 2020, the balance of the Elevation Note was $1,850,000 and $1,830,000, respectively, which was net of discounts of $247,000 and $267,000, respectively. During the thirteen weeks ended March 28, 2021 and March 29, 2020, the Company recognized $52,000 and $53,000 in interest income on the Elevation Buyer Note, respectively.
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Note 6. GOODWILL
Goodwill consists of the following (in thousands):
March 28, 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 | ||||
The Company reviewed the carrying value of its goodwill as of December 27, 2020 and recognized impairment charges as deemed necessary at that time. A subsequent review of the carrying value as of March 28, 2021 did not result in additional impairment charges for the thirteen weeks ended as of that date. There were also no impairment charges during the thirteen weeks ended March 29, 2020.
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):
| March
28, 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 | (884 | ) | (804 | ) | ||||
| Ponderosa – cost | 1,477 | 1,477 | ||||||
| Ponderosa – accumulated amortization | (362 | ) | (337 | ) | ||||
| Elevation Burger – cost | 2,450 | 2,450 | ||||||
| Elevation Burger – accumulated amortization | (886 | ) | (761 | ) | ||||
| Johnny Rockets – cost | 6,600 | 6,600 | ||||||
| Johnny Rockets – accumulated amortization | (312 | ) | (162 | ) | ||||
| Total franchise agreements | 12,263 | 12,643 | ||||||
| Total Other Intangible Assets | $ | 47,331 | $ | 47,711 | ||||
The Company reviewed the carrying value of its other intangible assets as of December 27, 2020 and recognized impairment charges as deemed necessary at that time. A subsequent review of the carrying value as of March 28, 2021 did not result in additional impairment charges for the thirteen weeks ended as of that date. There were also no impairment charges during the thirteen weeks ended March 29, 2020.
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The expected future amortization of the Company’s franchise agreements is as follows (in thousands):
| Fiscal year: | ||||
| 2021 | $ | 1,141 | ||
| 2022 | 1,522 | |||
| 2023 | 1,522 | |||
| 2024 | 1,217 | |||
| 2025 | 1,023 | |||
| Thereafter | 5,838 | |||
| Total | $ | 12,263 | ||
Note 8. DEFERRED INCOME
Deferred income is as follows (in thousands):
March 28, 2021 | December 27, 2020 | |||||||
| Deferred franchise fees | $ | 10,742 | $ | 10,003 | ||||
| Deferred royalties | 262 | 291 | ||||||
| Deferred vendor incentives | 315 | 692 | ||||||
| Total | $ | 11,319 | $ | 10,986 | ||||
Note 9. Income Taxes
Effective October 20, 2017, the Company entered into a Tax Sharing Agreement with FCCG that provided that FCCG would, to the extent permitted by applicable law, file consolidated federal, California and Oregon (and possibly other jurisdictions where revenue is generated, at FCCG’s election) income tax returns with the Company and its subsidiaries. Under the Tax Sharing Agreement, the Company would pay FCCG the amount that its current tax liability would have been had it filed a separate return. An inter-company receivable due from FCCG and its affiliates was applied first to reduce excess income tax payment obligations to FCCG under the Tax Sharing Agreement. The Tax Sharing Agreement was terminated in connection with the Merger during the fourth quarter of 2020.
Deferred taxes reflect the net effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for calculating taxes payable. Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not (a likelihood of more than 50 percent) that some portion or all of the deferred tax assets will not be realized. As of March 28, 2021 and December 27, 2020, the Company recorded a valuation allowance against its deferred tax assets in the amount of $678,000 and $513,000, respectively, as it determined that these amounts would not likely be realized.
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Income tax provision related to continuing operations differ from the amounts computed by applying the statutory income tax rate to pretax income as follows (in thousands):
| Thirteen Weeks Ended | Thirteen Weeks Ended | |||||||
| March 28, 2021 | March 29, 2020 | |||||||
| Tax benefit at statutory rate | $ | (538 | ) | $ | (590 | ) | ||
| State and local income taxes | (5 | ) | (38 | ) | ||||
| Foreign taxes | 826 | 121 | ||||||
| Tax credits | (826 | ) | (121 | ) | ||||
| Dividends on preferred stock | 237 | 280 | ||||||
Valuation allowance |
165 | - | ||||||
| Other | 12 | 50 | ||||||
| Total income tax (benefit) expense | $ | (129 | ) | $ | (298 | ) | ||
As of March 28, 2021, the Company’s and its subsidiaries’ annual tax filings for the prior three years are open for audit by Federal and generally, for the prior four years for state tax agencies, based on the filing date for each return. The Company is the beneficiary of indemnification agreements from the prior owners of the subsidiaries for tax liabilities related to periods prior to its ownership of the subsidiaries. Management evaluated the Company’s overall tax positions and has determined that no provision for uncertain income tax positions is necessary as of March 28, 2021.
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NOTE 10. LEASES
As of March 28, 2021, the Company has thirteen operating leases for corporate offices and for certain restaurant properties that are in the process of being refranchised. The leases have remaining terms ranging from 2.6 to 17.8 years. The Company recognized lease expense of $810,000 and $347,000 for the thirteen months ended March 28, 2021 and March 29, 2020, respectively. The weighted average remaining lease term of the operating leases as of March 28, 2021 was 7.4 years.
Operating lease right of use assets and operating lease liabilities relating to the operating leases are as follows (in thousands):
March 28, 2021 | December 27, 2020 | |||||||
| Right of use assets | $ | 13,340 | $ | 13,948 | ||||
| Lease liabilities | $ | 14,297 | $ | 14,651 | ||||
The weighted average discount rate used to calculate the carrying value of the right of use assets and lease liabilities was 9.4% 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 March 28, 2021, including anticipated lease extensions, are as follows (in thousands):
| Fiscal year: | ||||
| 2021 | $ | 2,321 | ||
| 2022 | 3,182 | |||
| 2023 | 3,275 | |||
| 2024 | 3,137 | |||
| 2025 | 2,791 | |||
| Thereafter | 4,855 | |||
| Total lease payments | 19,561 | |||
| Less imputed interest | 5,264 | |||
| Total | $ | 14,297 | ||
Supplemental cash flow information for the thirteen weeks ended March 28, 2021 related to leases is as follows (in thousands):
| Cash paid for amounts included in the measurement of operating lease liabilities: | ||||
| Operating cash flows from operating leases | $ | 810 | ||
Note 11. DEBT
Securitization
On March 6, 2020, the Company completed a whole-business securitization (the “Securitization”) through the creation of a bankruptcy-remote issuing entity, FAT Brands Royalty I, LLC (“FAT Royalty”), in which FAT Royalty issued $20 million of Series 2020-1 Fixed Rates Senior Secured Notes, Class A-2 and $20 million of Series 2020-1 Fixed Rate Senior Subordinated Notes, Class B-2 (collectively the “Series A-2 and B-2 Notes”) pursuant to an indenture and the supplement thereto, each dated March 6, 2020 (collectively, the “Indenture”).
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The Series A-2 and B-2 Notes have the following terms:
| 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 | ||||||||
Net proceeds from the issuance of the Series A-2 and B-2 Notes were $37,389,000, which consisted of the combined face amount of $40,000,000, net of discounts of $246,000 and debt offering costs of $2,365,000. The discount and offering costs are accreted as additional interest expense over the expected term of the Series A-2 and B-2 Notes.
On September 21, 2020, FAT Royalty completed the sale of an additional $40 million of Series 2020-2 Fixed Rate Asset-Backed Notes (the “Series M-2 Notes”), pursuant to the Indenture as amended by the Series 2020-2 Supplement.
The Series M-2 Notes consist of the following:
| Note | Seniority | Issue Amount | Coupon | First Call Date | Final Legal Maturity Date | |||||||||||
| M-2 | Subordinated | $ | 40,000,000 | 9.75 | % | 4/27/2021 | 4/27/2026 | |||||||||
Net proceeds from the issuance of the Series M-2 Notes were $35,371,000, which consists of the face amount of $40,000,000, net of discounts of $3,200,000 and debt offering costs of $1,429,000. The discount and offering costs are accreted as additional interest expense over the expected term of the Series M-2 Notes.
The Series M-2 Notes are subordinate to the Series A-2 and B-2 Notes. The Series A-2 and B-2 Notes and the Series M-2 Notes (collectively, the “2020 Securitization Notes”) issued under the Indenture, as amended, are secured by an interest in substantially all of the assets of FAT Royalty, including the Johnny Rockets companies, that have been contributed to FAT Royalty and are obligations only of FAT Royalty under the Indenture and not obligations of the Company.
While the 2020 Securitization Notes are outstanding, scheduled payments of principal and interest are required to be made on a quarterly basis, with the scheduled principal payments of $1,000,000 per quarter on each of the Series A-2 and Series B-2 Notes and $200,000 per quarter on the Series M-2 Notes beginning the second quarter of 2021.
In connection with the Securitization, FAT Royalty and each of the Franchise Entities (as defined in the Indenture) entered into a Management Agreement with the Company, dated as of the Closing Date (the “Management Agreement”), pursuant to which the Company agreed to act as manager of FAT Royalty and each of the Franchise Entities. The Management Agreement provides for a management fee payable monthly by FAT Royalty to the Company in the amount of $200,000, subject to three percent (3%) annual increases (the “Management Fee”). The primary responsibilities of the manager are to perform certain franchising, distribution, intellectual property and operational functions on behalf of the Franchise Entities pursuant to the Management Agreement.
The 2020 Securitization Notes are secured by substantially all of the assets of FAT Royalty, including the equity interests in the Franchise Entities. The restrictions placed on the Company’s subsidiaries require that FAT Royalty’s principal and interest obligations have first priority, after the payment of the Management Fee and certain other FAT Royalty expenses (as defined in the Indenture), and amounts are segregated monthly to ensure appropriate funds are reserved to pay the quarterly principal and interest amounts due. The amount of monthly cash flow that exceeds the required monthly debt service is generally remitted to the Company. Once the required obligations are satisfied, there are no further restrictions, including payment of dividends, on the cash flows of the subsidiaries.
The 2020 Securitization Notes have not been and will not be registered under the Securities Act of 1933, as amended (the “Securities Act”), or the securities laws of any jurisdiction.
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The 2020 Securitization Notes are subject to certain financial and non-financial covenants, including a debt service coverage ratio calculation, as defined in the Indenture. If certain covenants are not met, the 2020 Securitization Notes may become partially or fully due and payable on an accelerated schedule. In addition, FAT Royalty may voluntarily prepay, in part or in full, the 2020 Securitization Notes in accordance with the provisions in the Indenture. As of March 28, 2021, FAT Royalty was in compliance with these covenants.
As of March 28, 2021, the recorded balance of the 2020 Securitization Notes was $73,682,000, which is net of debt offering costs of $3,216,000 and original issue discount of $3,102,000. As of December 27, 2020, the recorded balance of the 2020 Securitization Notes was $73,369,000, which was net of debt offering costs of $3,374,000 and original issue discount of $3,257,000. The Company recognized interest expense on the 2020 Securitization Notes of $2,063,000 for the thirteen weeks ended March 28, 2021, which includes $158,000 for amortization of debt offering costs and $155,000 for amortization of the original issue discount. The average effective interest rate of the 2020 Securitization Notes, including the amortization of debt offering costs and original issue discount, was 11.2% for the thirteen weeks ended March 28, 2021.
The 2020 Securitization Notes were repaid in full in April 2021 (see Note 21).
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 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 $3,500,000 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 $26,771,000. This consisted of $24,000,000 in principle, approximately $2,120,000 in accrued interest and $651,000 in penalties and fees.
The Company recognized interest expense on the Loan and Security Agreement of $1,783,000 for the thirteen weeks ended March 29, 2020, which includes $212,000 for amortization of all unaccreted debt offering costs at the time of the repayment and $650,000 in penalties and fees.
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 $7,510,000, 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 financial statements of the Company at $6,185,000, which is net of a loan discount of $1,295,000 and debt offering costs of $30,000.
As of March 28, 2021, the carrying value of the Elevation Note was $5,987,000 which is net of the loan discount of $807,000 and debt offering costs of $53,000. As of December 27, 2020, the carrying value of the Elevation Note was $5,919,000 which is net of the loan discount of $872,000 and debt offering costs of $56,000. The Company recognized interest expense relating to the Elevation Note during the thirteen months ended March 28, 2021 in the amount of $171,000, which included amortization of the loan discount of $65,000 and amortization of $3,000 in debt offering costs. The Company recognized interest expense relating to the Elevation Note during the thirteen weeks ended March 29, 2020 in the amount of $189,000, which included amortization of the loan discount of $71,000 and amortization of $3,000 in debt offering costs. The effective interest rate for the Elevation Note during the thirteen weeks ended March 28, 2021 was 11.5%.
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The Elevation Note is a general unsecured obligation of Company and is subordinated in right of payment to all indebtedness of the Company arising under any agreement or instrument to which Company or any of its Affiliates is a party that evidences indebtedness for borrowed money that is senior in right of payment.
Paycheck Protection Program Loans
During 2020, the Company received loan proceeds in the amount of approximately $1,532,000 under the Paycheck Protection Program (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.
At inception, the PPP Loans and EIDL Loans related to FAT Brands Inc. as well as five restaurant locations that were part of the Company’s refranchising program. While the Company currently believes that its use of the loan proceeds will meet the conditions for forgiveness of the loans, there can be no assurance that the Company will be eligible for forgiveness of the loans, in whole or in part. Any unforgiven portion of the PPP Loans is payable over two years at an interest rate of 1%, with a deferral of payments for the first six months. As of March 28, 2021 and December 27, 2020, the balance remaining on the PPP Loans and EIDL Loans was $1,186,000 and $1,183,000 related to FAT Brands Inc., as the five restaurant locations were closed or refranchised during the second and third quarters of 2020.
Subsequent to March 28, 2021, the PPP Loans and EIDL Loans were forgiven (see Note 21).
Assumed Debt from Merger
The following debt of FCCG (the “FCCG Debt”) was assumed by Fog Cutter Acquisition LLC, a subsidiary of the Company, as part of the Merger (in thousands):
| March 28, 2021 | ||||
| Note payable to a private lender. The note bears interest at a fixed rate of 12% and is unsecured. Interest is due monthly in arrears. The note matures on May 21, 2021. | $ | 1,978 | ||
| Note payable to a private lender. The note bears interest at a fixed rate of 12% and is unsecured. Interest is due monthly in arrears. The note matures on May 21, 2021. | 2,871 | |||
| Note payable to a private lender. The note bears interest at a fixed rate of 15%. The note matures May 21, 2021. | 17 | |||
| Note payable to a private lender. The note bears interest at a fixed rate of 12%. Interest is due monthly in arrears. The note matures May 21, 2021. | 779 | |||
| Consideration payable to former FCCG shareholders issued in redemption of fractional shares of FCCG’s stock. The consideration is unsecured and non-interest bearing and is due and payable on May 21, 2021. | 6,864 | |||
| Total | $ | 12,509 | ||
Subsequent to March 28, 2021, the FCCG Debt was repaid in full (see Note 21).
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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, plus 99,000 additional warrants pursuant to the underwriter’s overallotment option (the “2020 Series B Offering Warrants”), to purchase common stock at $5.00 per share. In the Underwriting Agreement, the Company agreed to pay the underwriters an underwriting discount of 8.0% of the gross proceeds received by the Company in the Offering and issue five-year warrants exercisable for 1% of the number of Series B Preferred Stock shares and the number of 2020 Series B Offering Warrants sold in the Offering.
In connection with the Offering, on July 15, 2020 the Company filed an Amended and Restated Certificate of Designation of Rights and Preferences of Series B Cumulative Preferred Stock with the Secretary of State of Delaware, designating a total of 850,000 shares of Series B Preferred Stock (the “Certificate of Designation”), and on July 16, 2020 entered into a Warrant Agency Agreement with VStock Transfer, LLC, to act as the Warrant Agent for the Series B Offering Warrants (the “Warrant Agency Agreement”).
The Certificate of Designation amends and restates the terms of the Series B Cumulative Preferred Stock issued in October 2019 (the “Original Series B Preferred”). At the time of the Offering, there were 57,140 shares of the Original Series B Preferred outstanding, together with warrants to purchase 34,284 shares of the Company’s common stock at an exercise price of $8.50 per share (the “Series B Warrants”).
The Offering closed on July 16, 2020 with net proceeds to the Company of $8,122,000, which was net of $878,000 in underwriting and offering costs.
Holders of Series B Cumulative Preferred Stock shall be entitled to receive, when, as and if declared by the FAT Board or a duly authorized committee thereof, in its sole discretion, out of funds of the Company legally available for the payment of distributions, cumulative preferential cash dividends at a rate per annum equal to the 8.25% multiplied by $25.00 per share stated liquidation preference of the Series B Preferred Stock. The dividends shall accrue without interest and accumulate, whether or not earned or declared, on each issued and outstanding share of the Series B Preferred Stock from (and including) the original date of issuance of such share and shall be payable monthly in arrears on a date selected by the Company each calendar month that is no later than twenty (20) days following the end of each calendar month.
If the Company fails to pay dividends on the Series B Preferred Stock in full for any twelve accumulated, accrued and unpaid dividend periods, the dividend rate shall increase to 10% until the Company has paid all accumulated accrued and unpaid dividends on the Series B Preferred Stock in full and has paid accrued dividends during the two most recently completed dividend periods in full, at which time the 8.25% dividend rate shall be reinstated.
The Company may redeem the Series B Preferred Stock, in whole or in part, at the option of the Company, for cash, at the following redemption price per share, plus any unpaid dividends:
| (i) | After July 16, 2020 and on or prior to July 16, 2021: $27.50 per share. | |
| (ii) | After July 16, 2021 and on or prior to July 16, 2022: $27.00 per share. | |
| (iii) | After July 16, 2022 and on or prior to July 16, 2023: $26.50 per share. | |
| (iv) | After July 16, 2023 and on or prior to July 16, 2024: $26.00 per share. | |
| (v) | After July 16, 2024 and on or prior to July 16, 2025: $25.50 per share. | |
| (vi) | After July 16, 2025: $25.00 per share. |
As a result of the amended and restated terms of the Series B Cumulative Preferred Stock, the Company classified the Series B Preferred Stock as equity as of July 15, 2020.
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Concurrent with the Offering, the holders of the outstanding 57,140 shares of Original Series B Preferred became subject to the new terms of the Certificate of Designation. As a result, the recorded value of the new Series B Stock was $1,136,000 with $292,000 allocated to the 2020 Series B Offering Warrants. The original holders were also issued 3,537 shares of new Series B Preferred Shares in payment of $88,000 accrued and outstanding dividends relating to the Original Series B Preferred at a price of $25 per share.
The Company entered into an agreement to exchange 15,000 shares of Series A Fixed Rate Cumulative Preferred Stock owned by FCCG for 60,000 shares of Series B Preferred Stock valued at $1,500,000, pursuant to a Settlement, Redemption and Release Agreement. The Company also agreed to issue 14,449 shares of Series B Preferred Stock valued at $361,224 as consideration for accrued dividends due to FCCG.
The Company entered into an agreement to exchange all of the outstanding shares of Series A-1 Fixed Rate Cumulative Preferred Stock for 168,001 shares of Series B Preferred Stock valued at $4,200,000, pursuant to a Settlement, Redemption and Release Agreement with the holders of such shares.
In connection with the acquisition of FCCG by the Company, in December 2020 the Company declared a special stock dividend (the “Special Dividend”) payable only to holders of our 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 $8,885,000.
As of March 28, 2021, the Series B Preferred Stock consisted of 1,183,272 shares outstanding with a balance of $21,267,000. The Company declared preferred dividends to the holders of the Series B Preferred Stock totaling $610,000 during the thirteen weeks ended March 28, 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 $8,000,000 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”). |
| (ii) | On June 27, 2018, the Company entered into a Note Exchange Agreement, as amended, under which it agreed with FCCG to exchange all but $950,000 of the remaining balance of the Company’s outstanding Promissory Note issued to the FCCG on October 20, 2017, in the original principal amount of $30,000,000 (the “Note”). At the time, the Note had an estimated outstanding balance of principal plus accrued interest of $10,222,000 (the “Note Balance”). On June 27, 2018, $9,272,053 of the Note Balance was exchanged for shares of capital stock of the Company and warrants in the following amounts (the “Exchange Shares”): |
| ● | $2,000,000 of the Note Balance was exchanged 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”); and |
| ● | $7,272,053 of the Note Balance was exchanged for 1,010,420 shares of common stock of the Company, representing an exchange price of $7.20 per share, which was the closing trading price of the common stock on June 26, 2018. |
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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 valued at $25.00 per share. |
The Company classifies the Series A Preferred Stock as debt.
As of March 28, 2021, there were 80,000 shares of Series A Preferred Stock outstanding, with a balance of $7,970,000 which is net of debt offering costs and discounts of $30,000.
The Company recognized interest expense on the Series A Preferred Stock of $288,000 for the thirteen weeks ended March 28, 2021, which includes accretion expense of $9,000 as well as $1,000 for the amortization of debt offering costs. The Company recognized interest expense on the Series A Preferred Stock of $355,000 for the thirteen weeks ended March 29, 2020, which includes accretion expense of $6,000 and $1,000 for the amortization of debt offering costs. The year-to-date effective interest rate for the Series A Preferred Stock for 2021 was 14.5%.
Note 13. Related Party Transactions
During the thirteen weeks ended March 28, 2021, there were no reportable related party transactions. For the thirteen weeks ended March 29, 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 $11,906,000. Subsequent to the issuance of the Original Note, the Company and certain of its direct or indirect subsidiaries made additional intercompany advances in the aggregate amount of $10,523,000. Pursuant to the Intercompany Agreement, the revolving credit facility bore interest at a rate of 10% per annum, had a five-year term with no prepayment penalties, and had a maximum capacity of $35,000,000. All additional borrowings under the Intercompany Agreement were subject to the approval of the Board of Directors, in advance, on a quarterly basis and may have been subject to other conditions as set forth by the Company. The initial balance under the Intercompany Agreement totaled $21,067,000 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 March 29, 2020, the balance receivable under the Intercompany Agreement was $26,854,000.
During the thirteen weeks ended March 29, 2020, the Company recorded a receivable from FCCG in the amount of $121,000 under the Tax Sharing Agreement, which was added to the intercompany receivable.
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Series B Cumulative Preferred Stock
On October 3 and October 4, 2019, the Company completed the initial closing of its continuous public offering (the “Series B Preferred Offering”) of up to $30,000,000 of units (the “Series B Units”) at $25.00 per Series B Unit, with each Series B Unit comprised of one share of 8.25% Series B Cumulative Preferred Stock (“Series B Preferred Stock”) and 0.60 warrants (the “Series B Warrants”) to purchase common stock at $8.50 per share, exercisable for five years. At the initial closing of the Preferred Offering, the Company completed the sale of 43,080 Series B Units for gross proceeds of $1,077,000.
As of March 29, 2020, the following reportable related persons participated in the initial closing of the Company’s Preferred Offering:
| ● | Andrew Wiederhorn, the Company’s Chief Executive Officer, acquired 20,000 Series B Units for $500,000 comprised of 20,000 shares of Series B Preferred Stock and 12,000 Series B Warrants to purchase 12,000 shares of the Company’s Common Stock at $8.50 per share, and | |
| ● | Squire Junger, a member of the Company’s Board of Directors, acquired 5,000 Series B Units for $125,000 comprised of 5,000 shares of Series B Preferred Stock and 3,000 Series B Warrants to purchase 3,000 shares of the Company’s Common Stock at $8.50 per share. | |
| ● | In aggregate, Mr. Wiederhorn, Mr. Junger, and other related parties acquired 33,000 Series B Units for $825,000 comprised of 33,000 shares of Series B Preferred Stock and 19,800 Series B Warrants to purchase 19,800 shares of the Company’s Common Stock at $8.50 per share. |
Note 14. SHAREHOLDERS’ EQUITY
As of March 28, 2021 and December 27, 2020, the total number of authorized shares of common stock was 25,000,000, and there were 12,029,264 and 11,926,264 shares of common stock outstanding, respectively.
Below are the changes to the Company’s common stock during the thirteen weeks ended March 28, 2021:
| ● | The Company issued 103,000 shares of common stock between February 10, 2021 and February 17, 2021 in satisfaction of the exercise of certain 2020 Series B Offering Warrants. The proceeds to the Company from the exercise of the options totaled $515,000. |
Note 15. 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.
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. The Company’s stock option activity for thirteen weeks ended March 28, 2021 is summarized as follows:
| Number of Shares | Weighted Average Exercise Price | Weighted
Average Remaining Contractual Life (Years) | ||||||||||
| Stock options outstanding at December 27, 2020 | 656,105 | $ | 8.21 | 7.5 | ||||||||
| Grants | - | $ | - | - | ||||||||
| Forfeited | - | $ | - | - | ||||||||
| Expired | - | $ | - | - | ||||||||
| Stock options outstanding at March 28, 2021 | 656,105 | $ | 8.21 | 7.5 | ||||||||
| Stock options exercisable at March 28,2021 | 453,566 | $ | 9.34 | 7.1 | ||||||||
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The range of assumptions used in the Black-Scholes valuation model to record the stock-based compensation are as follows:
Including Non-Employee Options | ||||
| Expected dividend yield | 0% - 10.43 | % | ||
| Expected volatility | 30.23% - 31.73 | % | ||
| Risk-free interest rate | 0.32% - 2.85 | % | ||
| Expected term (in years) | 5.50 – 5.75 |
The Company recognized share-based compensation expense in the amount of $37,000 and $15,000, respectively, during the thirteen weeks ended March 28, 2021 and March 29, 2020. As of March 28, 2021, there remains $124,000 of related share-based compensation expense relating to non-vested grants, which will be recognized over the remaining vesting period, subject to future forfeitures.
Note 16. WARRANTS
Outstanding Warrants
As of March 28, 2021, the Company had the following outstanding warrants to purchase shares of its common stock:
| ● | Warrants issued on October 20, 2017 to purchase 81,700 shares of the Company’s common stock granted to the selling agent in the Company’s Initial Public Offering (the “Common Stock Warrants”). The Common Stock Warrants are exercisable commencing April 20, 2018 through October 20, 2022. The exercise price for the Common Stock Warrants is $14.69 per share, and the Common Stock Warrants were valued at $124,000 at the date of grant. The Common Stock Warrants provide that upon exercise, the Company may elect to redeem the Common Stock Warrants in cash by paying the difference between the applicable exercise price and the then-current fair market value of the common stock. |
| ● | Warrants issued on June 7, 2018 to purchase 102,125 shares of the Company’s common stock at an exercise price of $7.83 per share (the “Subscription Warrants”). The Subscription Warrants were issued as part of the Subscription Agreement (see Note 12). The Subscription Warrants were valued at $87,000 at the date of grant. The Subscription Warrants may be exercised at any time or times beginning on the issue date and ending on the five-year anniversary of the issue date. |
| ● | Warrants issued on June 27, 2018 to purchase 25,530 shares of the Company’s common stock at an exercise price of $7.83 per share (the “Exchange Warrants”). The Exchange Warrants were issued as part of the Exchange (See Note 12). The Exchange Warrants were valued at $25,000 at the date of grant. The Exchange Warrants may be exercised at any time or times beginning on the issue date and ending on the five-year anniversary of the issue date. | |
| ● | Warrants issued on July 3, 2018 to purchase 57,439 shares of the Company’s common stock at an exercise price of $7.83 per share (the “Hurricane Warrants”). The Hurricane Warrants were issued as part of the acquisition of Hurricane. The Hurricane Warrants were valued at $58,000 at the date of grant. The Hurricane Warrants may be exercised at any time or times beginning on the issue date and ending on the five-year anniversary of the issue date. | |
| ● | Warrants issued on July 3, 2018 to purchase 40,904 shares of the Company’s common stock at an exercise price of $7.20 per share (the “Placement Agent Warrants”). The Placement Agent Warrants were issued to the placement agents of the $16 million credit facility with FB Lending, LLC (See Note 11). The remaining Placement Agent Warrants had been valued at $48,000 at the date of grant. The Placement Agent Warrants may be exercised at any time or times beginning on the issue date and ending on the five-year anniversary of the issue date. |
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| ● | Warrants issued on June 19, 2019, in connection with the acquisition of Elevation Burger (See Note 3), to purchase 46,875 shares of the Company’s common stock at an exercise price of $8.00 per share (the “Elevation Warrant”), exercisable for a period of five years, but only in the event of a merger of the Company and FCCG, commencing on the second business day following the potential merger and ending on the five year anniversary thereafter. The Elevation Warrants were not valued at the date of grant due to the contingency relating to their exercise. | |
| ● | Warrants issued between October 3, 2019 and December 29, 2019, in connection with the sale of Series B Units, to purchase 60 shares of the Company’s common stock at an exercise price of $8.50 per share (the “Series B Warrants”), exercisable for a period of five years from October 3, 2019. These warrants have not yet been presented by the holders for exchange with 2020 Series B Offering Warrants (See Note 12). | |
| ● | Warrants issued on July 16, 2020, in connection with Series B Preferred Stock Offering (See Note 12), to purchase 1,796,910 shares of the Company’s common stock at an exercise price of $5.00 per share (the “2020 Series B Offering Warrants”), exercisable beginning on December 24 ,2020, and will expire on July 16, 2025. The Series B Offering Warrants were valued at $1,926,000 at the date of grant. Subsequent to March 28, 2021, on May 3, 2021, the exercise price of the 2020 Series B Offering Warrants decreased from $5.00 per share to $4.8867 per share based on the cash dividend payable to holders of the Company’s common stock as of such date (See Note 17). | |
| ● | Warrants issued on July 16, 2020, to purchase 2020 Series B Offering Warrants (the “Series B Underwriter Warrants”), which would grant the holder the right to purchase 18,990 shares of the Company’s common stock at an exercise price of $5.00 per share, exercisable beginning on December 24, 2020 and expiring on July 16, 2025. The exercise price to purchase the 2020 Series B Offering Warrant is $0.01 per underlying share of common stock. These warrants were valued at $64,000 at the date of grant. |
The Company’s warrant activity for the thirteen weeks ended March 28, 2021 is as follows:
| Number
of Shares | Weighted
Average Exercise Price | Weighted
Average Remaining Contractual Life (Years) | ||||||||||
| Warrants outstanding at December 27, 2020 | 2,273,533 | $ | 5.68 | 4.1 | ||||||||
| Grants | - | $ | - | - | ||||||||
| Exercised | (103,000 | ) | $ | (5.00 | ) | (4.3 | ) | |||||
| Warrants outstanding at March 28, 2021 | 2,170,533 | $ | 5.71 | 4.0 | ||||||||
| Warrants exercisable at March 28, 2021 | 2,170,533 | $ | 5.71 | 4.0 | ||||||||
The range of assumptions used to establish the value of the warrants using the Black-Scholes valuation model are as follows:
| Warrants | ||||
| Expected dividend yield | 4.00% - 6.63 | % | ||
| Expected volatility | 30.23% - 31.73 | % | ||
| Risk-free interest rate | 0.99% - 1.91 | % | ||
| Expected term (in years) | 3.80 - 5.00 | |||
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In addition to the warrants to purchase common stock described above, the Company has also granted the following warrants on other securities to the underwriters in connection with the Series B Preferred Stock Offering (See Note 12):
| ● | Warrants issued on July 16, 2020, to purchase 3,600 shares of the Company’s Series B Preferred Stock at an exercise price of $24.95 per share (the “Series B Preferred Warrants”), exercisable beginning on the earlier of one year from the date of issuance or the consummation of a consolidation, merger or other similar business combination transaction involving the Company (or any of its subsidiaries) and its parent company, FCCG, and will expire on July 16, 2025. The Series B Preferred Warrants were valued at $2,000 at the date of grant. |
Note 17. DIVIDENDS ON COMMON STOCK
During the thirteen weeks ended March 28, 2021, there were no dividends declared or paid on the Company’s common stock. Subsequent to the end of that period, 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 shareholders of record as of May 3, 2021, for a total of $1,590,000.
Note 18. Commitments and Contingencies
Litigation
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 (“SBN”) filed a complaint against Fog Cutter Capital Group, Inc. (“FCCG”) in New York state court for an indemnification claim (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 $651,290, which included $225,030 in interest dating back to March 2012. SBN then obtained a sister state judgment in Los Angeles Superior Court, Case No. BS172606 (the “California case”), which included the $651,290 judgment from the NY case, plus additional statutory interest and fees, for a total judgment of $656,543. 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 $668,954. In May 2019, the parties agreed to settle the matter for $580,000, which required the immediate payment of $100,000, and the balance to be paid in August 2019. FCCG wired $100,000 to SBN in May 2019, but has not yet paid the remaining balance of $480,000. 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, including those involving the Company’s franchisees. 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. As of March 28,2021, the Company had accrued an aggregate of $5.68 million for the specific matters mentioned above and claims and legal proceedings involving franchisees as of that date.
Operating Leases
The Company leases corporate headquarters located in Beverly Hills, California comprising 12,281 square feet of space, pursuant to a lease that expires on September 29, 2025, as well as an additional 2,915 square feet of space pursuant to a lease amendment that expires on February 29, 2024.
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The Company is operating ten restaurant locations which are now being marketed as part of its refranchising efforts. Each location is subject to a real estate lease.
The Company believes that all existing facilities are in good operating condition and adequate to meet current and foreseeable needs. Additional information related to the Company’s operating leases are disclosed in Note 10.
Note 19. geographic information AND MAJOR FRANCHISEES
Revenues by geographic area are as follows (in thousands):
Thirteen Weeks Ended March 28, 2021 | Thirteen Weeks Ended March 29, 2020 | |||||||
| United States | $ | 4,830 | $ | 3,709 | ||||
| Other countries | 1,819 | 714 | ||||||
| Total revenues | $ | 6,649 | $ | 4,423 | ||||
Revenues are shown based on the geographic location of our licensee restaurants. All Company assets are located in the United States.
During the thirteen weeks ended March 28, 2021 and March 29, 2020, no individual franchisee accounted for more than 10% of the Company’s revenues.
NOTE 20. OPERATING SEGMENTS
With minor exceptions, the Company’s operations are comprised exclusively of franchising a growing portfolio of restaurant brands. The Company’s 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. While each brand could be considered an individual business segment, the nature of the Company’s business is consistent across our portfolio. Consequently, while management assesses the progress of its operations by brand, these operations may be aggregated into one reportable segment in the Company’s financial statements.
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 may operate the restaurants.
The chief operating decision maker (“CODM”) is the Chief Executive Officer. The CODM reviews financial performance and allocates resources at an overall level on a recurring basis. Therefore, management has determined that the Company has one reportable segment.
NOTE 21. SUBSEQUENT EVENTS
Management has evaluated all events and transactions that occurred subsequent to March 28, 2021 through the date of issuance of these consolidated financial statements. During this period, the Company did not have any significant subsequent events except as follows:
Securitization
On April 26, 2021 (the “Closing Date”), FB Royalty completed the issuance and sale in a private offering (the “Offering” as defined in Note 1) of three tranches of fixed rate senior secured notes as follows: (i) 4.75% Series 2021-1 Fixed Rate Senior Secured Notes, Class A-2, in an initial principal amount of $97,104,000; (ii) 8.00% Series 2021-1 Fixed Rate Senior Subordinated Secured Notes, Class B-2, in an initial principal amount of $32,368,000; and (iii) 9.00% Series 2021-1 Fixed Rate Subordinated Secured Notes, Class M-2, in an initial principal amount of $15,000,000 (collectively, the “2021 Securitization Notes”).
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The 2021 Securitization Notes were issued in a securitization transaction pursuant to which substantially all of the assets held by the Issuer and its subsidiaries, including the Company, were pledged as collateral to secure the 2021 Securitization Notes. On the Closing Date, FAT used a portion of the net proceeds of the Offering to repay in full the 2020 Securitization Notes (see Note 11).
The restrictions placed on the Company and other FB Royalty subsidiaries require that the 2021 Securitization Notes 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 FAT.
Common stock dividend
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 shareholders of record as of May 3, 2021, totaling $1,590,000.
Retirement of Fog Cutter debt
In April 2021, obligations totaling approximately $12,509,000 owed by Fog Cutter Capital Group to various lenders and beneficiaries were paid in full (see Note 11).
Forgiveness of PPP Loans
On April 26, 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.
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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 thirteen weeks ended March 28, 2021 and March 29, 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 revenues. 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 March 28, 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, that have approximately 700 locations, including units under construction.
Operating segments
With minor exceptions, our operations are comprised exclusively of franchising a growing portfolio of restaurant brands. Our 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. While each of our brands could be considered an individual business segment, the nature of our business is consistent across our portfolio. Consequently, while our management assesses the progress of our operations by brand, these operations may be aggregated into one reportable segment in the Company’s financial statements.
Our chief operating decision maker (“CODM”) is our Chief Executive Officer. Our CODM reviews financial performance and allocates resources at an overall level on a recurring basis. Therefore, management has determined that the Company has one reportable segment.
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 consolidated results of operations for the thirteen weeks ended March 28, 2021 and March 29, 2020. Certain account balances from the prior period have been reclassified to conform to current period presentation.
(In thousands)
For the Thirteen Weeks Ended
| March 28, 2021 | March 29, 2020 | |||||||
| Consolidated statement of operations data: | ||||||||
| Revenues | ||||||||
| Royalties | $ | 4,898 | $ | 3,309 | ||||
| Franchise fees | 540 | 175 | ||||||
| Advertising fees | 1,188 | 931 | ||||||
| Other operating income | 23 | 8 | ||||||
| Total revenues | 6,649 | 4,423 | ||||||
| Costs and expenses | ||||||||
| General and administrative expenses | 4,926 | 3,531 | ||||||
| Advertising expenses | 1,192 | 931 | ||||||
| Refranchising loss | 427 | 539 | ||||||
| Total costs and expenses | 6,545 | 5,001 | ||||||
| Income (loss) from operations | 104 | (578 | ) | |||||
| Other expense, net | (2,665 | ) | (2,090 | ) | ||||
| Loss before income tax benefit | (2,561 | ) | (2,668 | ) | ||||
| Income tax benefit | (129 | ) | (298 | ) | ||||
| Net loss | $ | (2,432 | ) | $ | (2,370 | ) | ||
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For the thirteen weeks ended March 28, 20210 and March 29, 2020:
Net Loss - Net loss for the thirteen weeks ended March 28, 2021 totaled $2,432,000 consisting of revenues of $6,649,000 less costs and expenses of $6,545,000, other expense of $2,665,000 and income tax benefit of $129,000. Net loss for the thirteen weeks ended March 29, 2020 totaled $2,370,000 consisting of revenues of $4,423,000 less costs and expenses of $5,001,000, other expense of $2,090,000 and income tax benefit of 298,000.
Revenues - Revenues consist of royalties, franchise fees, advertising fees and management fees. We had revenues of $6,649,000 for the thirteen weeks ended March 28, 2021 compared to $4,423,000 for the thirteen weeks ended March 29, 2020. The increase of $2,226,000 reflects the inclusion of revenues from the acquisition of Johnny Rockets, which occurred in September 2020.
Costs and Expenses – Costs and expenses consist primarily of general and administrative costs, advertising expense and refranchising restaurant operating costs, net of associated sales. Our costs and expenses increased from $5,001,000 in the first quarter of 2020 to $6,545,000 in the first quarter of 2021.
For the thirteen weeks ended March 28, 2021, our general and administrative expenses totaled $4,926,000. For the thirteen weeks ended March 29, 2020, our general and administrative expenses totaled $3,531,000. The increase in the amount of $1,395,000 was primarily the result of an increase in compensation expense for the quarter of $587,000 and higher legal fees in the amount of $489,000.
During the first quarter of 2021, our refranchising efforts resulted in restaurant operating costs and expenses, net of associated sales in the amount of $427,000 compared to $539,000 during the comparable period of 2020.
Advertising expenses totaled $1,192,000 during the thirteen weeks ended March 28, 2021 compared to $931,000 during the first quarter of 2020. These expenses generally correspond to the advertising fees recorded as revenue.
Other Expense – Other expense for the thirteen weeks ended March 28, 2021 totaled $2,665,000 compared to $2,090,000 for the period ended March 29, 2020. These expenses consisted primarily of net interest expense of $2,748,000 and $2,074,000 for the 2021 and 2020 periods, respectively.
Income Tax Benefit – We recorded an income tax benefit of $129,000 for the thirteen weeks ended March 28, 2021 compared to an income tax benefit in the amount of $298,000 for the thirteen weeks ended March 29, 2020. These tax results were based on a net loss before taxes of 2,561,000 and $2,668,000 for the thirteen weeks ended March 28, 2021 and March 29, 2020, respectively. Non-deductible interest expense and valuation allowances accounted for the variance between the effective tax rate and the statutory rate.
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 thirteen weeks ended March 28, 2021 consisted of cash on hand at the beginning of the period.
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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, the Company completed the issuance and sale in a private offering (the “Offering”) of three tranches of fixed rate secured notes (see Note 21 of the Financial Statements). 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 of the Financial Statements).
In addition to the liquidity provided by the Offering, we have seen significant 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. As a result, we believe that our liquidity position will be sufficient for the twelve months of operations following the issuance of this Form 10-Q.
Comparison of Cash Flows
Our cash and restricted cash balance was $4,915,000 as of March 28, 2021, compared to $7,211,000 as of December 27, 2020.
The following table summarize key components of our consolidated cash flows for the thirteen weeks ended March 28, 2021 and March 29, 2020:
(In thousands)
For the Thirteen Weeks Ended
| March 28, 2021 | March 29, 2020 | |||||||
| Net cash used in operating activities | $ | (1,246 | ) | $ | (3,371 | ) | ||
| Net cash used in investing activities | (573 | ) | (3,413 | ) | ||||
| Net cash (used in) provided by financing activities | (477 | ) | 12,473 | |||||
| (Decrease) Increase in cash flows | $ | (2,296 | ) | $ | 5,689 | |||
Operating Activities
Net cash from operating activities decreased $13,078,000 in 2020 compared to 2019. There were variations in the components of the cash from operations between the two periods. Our net loss in 2020 was $14,860,000, compared to a net loss in 2019 of $1,018,000. The net positive adjustments to reconcile these net losses to net cash provided by (or used in) operations were $3,376,000 in 2020 compared to $2,612,000 in 2019. The primary components of the adjustments to reconcile the net loss to net cash from operations for each year were as follows:
| For the thirteen weeks ended March 28, 2021: | ||
| ● | A positive adjustment to reconcile cash used in operations due to a decrease in operating lease right of use assets of $605,000. | |
| ● | A positive adjustment to reconcile cash used in operations due to depreciation and amortization of $398,000. | |
| ● | A positive adjustment to reconcile cash used in operations due to an increase in deferred income of $332,000. | |
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| For the thirteen weeks ended March 29, 2020: | ||
| ● | A negative adjustment to reconcile cash used in operations due to an increase in accrued interest receivable from affiliates in the amount of $718,000. | |
| ● | A negative adjustment to reconcile cash used in operations due to a decrease in accrued interest payable of $973,000. | |
Investing Activities
Net cash used in investing activities decreased by $2,840,000 in the thirteen weeks ended March 28, 2021 compared to the prior year primarily due to a decrease in the advances to non-consolidated affiliates.
Financing Activities
Net cash from financing activities decreased by $12,950,000 in the thirteen weeks ended March 28, 2021 compared to the prior year. Proceeds from borrowings were $37,271,000 higher in 2020 due to the sale of the Series A-2 and B-2 Notes. That increase was partially offset by the payoff of prior debt in the amount of $24,149,000 during the first quarter of 2020.
Dividends
Our Board of Directors did not declare any dividends on our common stock during the thirteen weeks ended March 28, 2021. Subsequent to the end of the quarter, 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 shareholders of record as of May 3, 2021. The amount of the dividend totaled $1,590,000.
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 March 6, 2020, we completed a whole-business securitization (the “Securitization”) through the creation of a bankruptcy-remote issuing entity, FAT Brands Royalty I, LLC (“FAT Royalty”) in which FAT Royalty issued $20 million of Series 2020-1 Fixed Rates Senior Secured Notes, Class A-2 and $20 million of Series 2020-1 Fixed Rate Senior Subordinated Notes, Class B-2 (collectively the “Series A-2 and B-2 Notes”) pursuant to an indenture and the supplement thereto each dated March 6, 2020, as amended, (collectively, the “Indenture”).
The Series A-2 and B-2 Notes have the following terms:
| 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 | ||||||||
Net proceeds from the issuance of the Series A-2 and B-2 Notes were $37,389,000, which consists of the combined face amount of $40,000,000, net of discounts of $246,000 and debt offering costs of $2,365,000. The discount and offering costs will be accreted as additional interest expense over the expected term of the Series A-2 and B-2 Notes.
A portion of the proceeds from the Series A-2 and B-2 Notes were used to repay the remaining $26,771,000 in outstanding balance under the Loan and Security Agreement (the “Loan and Security Agreement”) with The Lion Fund, L.P. and The Lion Fund II, L.P. (collectively, “Lion”) and to pay Securitization debt offering costs. The remaining proceeds from the Securitization were available for working capital.
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On September 21, 2020, FAT Royalty completed the sale of an additional $40 million of Series 2020-2 Fixed Rate Asset-Backed Notes (the “Series M-2 Notes”), pursuant to the Indenture as amended by the Series 2020-2 Supplement.
The Series M-2 Notes consist of the following:
| Note | Seniority | Issue Amount | Coupon | First Call Date | Final Legal Maturity Date | |||||||||||
| M-2 | Subordinated | $ | 40,000,000 | 9.75 | % | 4/27/2021 | 4/27/2026 | |||||||||
Net proceeds from the issuance of the Series M-2 Notes were $35,371,000, which consists of the face amount of $40,000,000, net of discounts of $3,200,000 and debt offering costs of $1,429,000. The discount and offering costs will be accreted as additional interest expense over the expected term of the Series M-2 Notes. We used approximately $24,730,000 to acquire Johnny Rockets and the balance of the proceeds were available as working capital.
The Series M-2 Notes are subordinate to the Series A-2 and B-2 Notes. The Series A-2 and B-2 Notes and the Series M-2 Notes (collectively, the “2020 Securitization Notes”) issued under the Indenture, as amended, are secured by an interest in substantially all of the assets of FAT Royalty, including the Johnny Rockets companies, contributed to FAT Royalty and are obligations only of FAT Royalty under the Indenture and not obligations of the Company.
While the 2020 Securitization Notes are outstanding, scheduled payments of principal and interest are required to be made on a quarterly basis, with the scheduled principal payments of $1,000,000 per quarter on each of the Series A-2 and B-2 Notes and $200,000 per quarter on the Series M-2 Notes beginning the second quarter of 2021. It is expected that the Securitization Notes will be repaid prior to the Final Legal Maturity Date, with the anticipated repayment date occurring in January 2023 for the A-2 Notes, October 2023 for the B-2 Notes and April 2026 for the Series M-2 Notes (the “Anticipated Repayment Dates”). If FAT Royalty has not repaid or refinanced the Securitization Notes prior to the applicable Anticipated Repayment Date, additional interest expense will begin to accrue and all additional proceeds will be utilized for additional amortization, as defined in the Indenture.
In connection with the Securitization, FAT Royalty and each of the Franchise Entities (as defined in the Indenture) entered into a Management Agreement with the Company, dated as of the Closing Date (the “Management Agreement”), pursuant to which we agreed to act as manager of FAT Royalty and each of the Franchise Entities. The Management Agreement provides for a management fee payable monthly by FAT Royalty to the Company in the amount of $200,000, subject to three percent (3%) annual increases (the “Management Fee”). The primary responsibilities of the manager are to perform certain franchising, distribution, intellectual property and operational functions on behalf of the Franchise Entities pursuant to the Management Agreement.
The 2020 Securitization Notes are secured by substantially all of the assets of FAT Royalty, including the equity interests in the Franchise Entities. The restrictions placed on the FAT Royalty subsidiaries require that the Securitization principal and interest obligations have first priority, after the payment of the Management Fee and certain other FAT Royalty expenses (as defined in the Indenture), and amounts are segregated monthly to ensure appropriate funds are reserved to pay the quarterly principal and interest amounts due. The amount of monthly cash flow that exceeds the required monthly debt service is generally remitted to the Company. Once the required obligations are satisfied, there are no further restrictions, including payment of dividends, on the cash flows of the subsidiaries.
The 2020 Securitization Notes have not been and will not be registered under the Securities Act or the securities laws of any jurisdiction.
The 2020 Securitization Notes are subject to certain financial and non-financial covenants, including a debt service coverage ratio calculation, as defined in the Indenture. In the event that certain covenants are not met, the 2020 Securitization Notes may become partially or fully due and payable on an accelerated schedule. In addition, FAT Royalty may voluntarily prepay, in part or in full, the Notes in accordance with the provisions in the Indenture. As of March 28, 2021, FAT Royalty was in compliance with these covenants.
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On April 26, 2021 (the “Closing Date”), FB Royalty completed the issuance and sale in a private offering (the “Offering”) of three tranches of fixed rate senior secured notes as follows: (i) 4.75% Series 2021-1 Fixed Rate Senior Secured Notes, Class A-2, in an initial principal amount of $97,104,000; (ii) 8.00% Series 2021-1 Fixed Rate Senior Subordinated Secured Notes, Class B-2, in an initial principal amount of $32,368,000; and (iii) 9.00% Series 2021-1 Fixed Rate Subordinated Secured Notes, Class M-2, in an initial principal amount of $15,000,000 (collectively, the “2021 Securitization Notes”).
The 2021 Notes were issued in a securitization transaction pursuant to which substantially all of the assets held by the Issuer and its subsidiaries, including the Company, were pledged as collateral to secure the 2021 Notes. On the Closing Date, FAT used a portion of the net proceeds of the Offering to repay in full the Securitization Notes (see Note 11 of the Financial Statements).
The restrictions placed on the Company and other FB Royalty subsidiaries require that the 2021 Securitization Notes 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 FAT.
Capital Expenditures
As of March 28, 2021, we do not have any material commitments for capital expenditures.
Critical Accounting Policies and Estimates
Franchise Fees: The franchise arrangement is documented in the form of a franchise agreement. The franchise arrangement requires us to perform various activities to support the brand that do not directly transfer goods and services to the franchisee, but instead represent a single performance obligation, which includes the transfer of the franchise license. The services provided by us are highly interrelated with the franchise license and are considered a single performance obligation. Franchise fee revenue from the sale of individual franchises is recognized over the term of the individual franchise agreement on a straight-line basis. Unamortized non-refundable deposits collected in relation to the sale of franchises are recorded as deferred franchise fees.
The franchise fee may be adjusted at management’s discretion or in a situation involving store transfers between franchisees. Deposits are non-refundable upon acceptance of the franchise application. In the event a franchisee does not comply with their development timeline for opening franchise stores, the franchise rights may be terminated, at which point the franchise fee revenue is recognized in the amount of the non-refundable deposits.
Royalties: In addition to franchise fee revenue, we collect a royalty calculated as a percentage of net sales from our franchisees. Royalties range from 0.75% to 6% and are recognized as revenue when the related sales are made by the franchisees. Royalties collected in advance of sales are classified as deferred income until earned.
Advertising: We require advertising payments based on a percent of net sales from franchisees. We also receive, from time to time, payments from vendors that are to be used for advertising. Advertising funds collected are required to be spent for specific advertising purposes. Advertising revenue and associated expense is recorded on the consolidated statement of operations. Assets and liabilities associated with the related advertising fees are reflected in the Company’s consolidated balance sheets.
Goodwill and other intangible assets: Goodwill and other intangible assets with indefinite lives, such as trademarks, are not amortized but are reviewed for impairment annually, or more frequently if indicators arise. During the thirteen weeks ended March 28, 2021, there were no identified impairments of assets.
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Assets classified as held for sale – Assets are classified as held for sale when we commit to a plan to sell the asset, the asset is available for immediate sale in its present condition and an active program to locate a buyer at a reasonable price has been initiated. The sale of these assets is generally expected to be completed within one year. The combined assets are valued at the lower of their carrying amount or fair value, net of costs to sell and included as current assets on the Company’s consolidated balance sheet. Assets classified as held for sale are not depreciated. However, interest attributable to the liabilities associated with assets classified as held for sale and other expenses continue to be recorded as expenses in the Company’s consolidated statement of operations.
Income taxes: We account for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on the differences between financial reporting and tax reporting bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Realization of deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain.
We utilize a two-step approach to recognize and measure uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon tax authority examination, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon the ultimate settlement.
Share-based compensation: We have a stock option plan which provides for options to purchase shares of our common stock. For grants to employees and directors, we recognize an expense for the value of options granted at their fair value at the date of grant over the vesting period in which the options are earned. Cancellations or forfeitures are accounted for as they occur. Fair values are estimated using the Black-Scholes option-pricing model. For grants to non-employees for services, we revalue the options each reporting period while the services are being performed. The adjusted value of the options is recognized as an expense over the service period. See Note 15 in our consolidated financial statements for more details on our share-based compensation.
Use of estimates: The preparation of 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 disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates.
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. Smaller Reporting Companies are permitted to defer adoption of ASU 2016-13, and its related amendments, until 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 is currently evaluating the impact of the adoption of ASU 2016-13 on its consolidated financial statements but does not expect that the adoption of this standard will have a material impact on its consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Required.
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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 March 28, 2021, have concluded that, in regard to the segregation of duties and the financial close process, our disclosure controls and procedures were not effective.
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 thirteen weeks ended March 28, 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.
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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 (“SBN”) filed a complaint against Fog Cutter Capital Group, Inc. (“FCCG”) in New York state court for an indemnification claim (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 $651,290, which included $225,030 in interest dating back to March 2012. SBN then obtained a sister state judgment in Los Angeles Superior Court, Case No. BS172606 (the “California case”), which included the $651,290 judgment from the NY case, plus additional statutory interest and fees, for a total judgment of $656,543. 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 $668,954. In May 2019, the parties agreed to settle the matter for $580,000, which required the immediate payment of $100,000, and the balance to be paid in August 2019. FCCG wired $100,000 to SBN in May 2019, but has not yet paid the remaining balance of $480,000. 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, including those involving the Company’s franchisees. 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. As of March 28,2021, the Company had accrued an aggregate of $5.68 million for the specific matters mentioned above and claims and legal proceedings involving franchisees as of that date.
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
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
Subsequent to March 28, 2021, on May 3, 2021, the exercise price of the 2020 Series B Offering Warrants decreased from $5.00 per share to $4.8867 per share based on the cash dividend payable to holders of the Company’s common stock as of such date (See Notes 16 and 17 of the Financial Statements).
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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. | ||
| May 12, 2021 | By | /s/ Andrew A. Wiederhorn |
| Andrew A. Wiederhorn | ||
| President and Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| May 12, 2021 | By | /s/ Rebecca D. Hershinger |
| Rebecca D. Hershinger | ||
| Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
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Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
I, Andrew A. Wiederhorn, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of FAT Brands Inc.: | |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: | |
| (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | ||
| (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | ||
| (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | ||
| (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and | ||
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): | |
| (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | ||
| (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: May 12, 2021 | /s/ Andrew A. Wiederhorn |
| Andrew A. Wiederhorn | |
| President and Chief Executive Officer | |
| (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
I, Rebecca D. Hershinger, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of FAT Brands Inc.: | |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: | |
| (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | ||
| (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | ||
| (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | ||
| (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and | ||
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): | |
| (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | ||
| (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: May 12, 2021 | /s/ Rebecca D. Hershinger |
| Rebecca D. Hershinger | |
| Chief Financial Officer | |
| (Principal Financial and Accounting Officer) |
Exhibit 32.1
CERTIFICATIONS OF THE CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Each of the undersigned hereby certifies, in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in his capacity as an officer of FAT Brands Inc., that, to his or her knowledge, the Quarterly Report of FAT Brands Inc. on Form 10-Q for the period ended March 28, 2021 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operation of the company.
| May 12, 2021 | By | /s/ Andrew A. Wiederhorn |
| Andrew A. Wiederhorn | ||
| President and Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| May 12, 2021 | By | /s/ Rebecca D. Hershinger |
| Rebecca D. Hershinger | ||
| Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) |
A signed original of this written statement required by Section 906 has been provided to FAT Brands Inc. and will be retained by FAT Brands Inc. and furnished to the Securities and Exchange Commission or its staff upon request.