Fat Brands, Inc 8-K/A, filed Jan 31, 2022
Fat Brands, Inc (FATAQ)
About this 8-K/A
Fat Brands, Inc filed this 8-K/A on January 31, 2022, reporting on events of December 15, 2021.
Items reported
- Item 9.01: Financial statements and exhibits
UNITED STATES
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CURRENT REPORT
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Explanatory Note
This Current Report on Form 8-K/A amends the Current Report on Form 8-K previously filed by Fat Brands, Inc. (the “Company”) on December 16, 2021 related to the acquisition of Fazoli’s Holdings, LLC (“Fazoli’s). This Current Report on Form 8-K/A includes the financial statements that had been omitted from the previously filed Current Report on Form 8-K as permitted by Item 9.01(a) and (b) of Form 8-K.
On December 15, 2021, the Company acquired Fazoli’s from affiliates of Sentinel Capital Partners. Fazoli’s and its subsidiaries franchise and operate quick-service restaurants offering premium quality Italian food.
The Company is filing this Current Report on Form 8-K/A to provide certain financial statements of Fazoli’s and unaudited pro forma financial information of Fazoli’s and the Company required by Item 9.01 of Form 8-K.
Item 9.01 Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired
The audited consolidated financial statements of Fazoli’s as of and for the years ended March 31, 2021 and April 1, 2020 and the unaudited consolidated financial statements of Fazoli’s as of and for the 26 weeks ended September 29, 2021 and September 30, 2020 are included as Exhibit 99.1 to this Current Report on Form 8-K/A and are incorporated by reference herein.
(b) Pro forma Financial Information
The unaudited pro forma combined financial information of FAT Brands Inc. and its subsidiaries, GFG Holding Inc. and its subsidiaries, Twin Peaks Buyer LLC and its subsidiaries and Fazoli’s Holdings LLC and its subsidiaries with respect to the year ended December 27, 2020 and the 39 weeks ended September 26, 2021 are included as Exhibit 99.2 to this Current Report on Form 8-K/A and are incorporated by reference herein.
(d) Exhibits
The following exhibits are filed herewith:
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: January 31, 2022
| FAT Brands Inc. | ||
| By: | /s/ Kenneth J. Kuick | |
| Kenneth J. Kuick | ||
| Chief Financial Officer | ||
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITOR
We consent to the incorporation by reference in the Registration Statements on Form S-1 (No. 333-239032), Form S-3 (No. 333-261371), Form S-3 (No. 333-261365), Form S-3 (No. 333-256342), Form S-8 (No. 333-239031) and Form S-8 (No. 333-261362) of FAT Brands Inc. of our report dated June 15, 2021 except for Note 14 – Revisions to Previously Issued Consolidated Financial Statements, which is as of January 31, 2022, on the consolidated financial statements of Fazoli’s Group, Inc. and Subsidiaries as of and for the years ended March 31, 2021 and April 1, 2020, which is included in this Current Report on Form 8-K/A of FAT Brands Inc.
| /s/ Crowe LLP | |
| Oak Brook, Illinois | |
| January 31, 2022 | |
Exhibit 99.1
FAZOLI’S GROUP, INC. AND SUBSIDIARIES
Consolidated Financial Statements
Contents
Board of Directors
Fazoli’s Group, Inc. and Subsidiaries
Lexington, Kentucky
Report on the Financial Statements
We have audited the accompanying consolidated financial statements of Fazoli’s Group, Inc. and Subsidiaries, which comprise the consolidated balance sheets as of March 31, 2021 and April 1, 2020, and the related consolidated statements of operations, shareholders’ equity (deficit), and cash flows for the years then ended, and the related notes to the consolidated financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Fazoli’s Group, Inc. and Subsidiaries as of March 31, 2021 and April 1, 2020, and the results of their operations and their cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.
| Crowe LLP |
Oak Brook, Illinois
June 15, 2021 except for Note 14 – Revisions to Previously Issued Consolidated Financial Statements, as to which the date is January 31, 2022
| 1. |
FAZOLI’S GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands except share data)
| September 29, | March 31, | April 1, | ||||||||||
| 2021 | 2021 | 2020 | ||||||||||
| (Unaudited) | ||||||||||||
| ASSETS | ||||||||||||
| Current assets | ||||||||||||
| Cash | $ | 9,054 | $ | 9,104 | $ | 8,568 | ||||||
| Receivables, net | 2,377 | 2,597 | 1,500 | |||||||||
| Inventories | 1,314 | 923 | 609 | |||||||||
| Prepaid expenses and other current assets | 528 | 768 | 473 | |||||||||
| Total current assets | 13,273 | 13,392 | 11,150 | |||||||||
| Property and equipment | ||||||||||||
| Land and improvements | 845 | 838 | 850 | |||||||||
| Buildings and leasehold improvements | 21,887 | 19,865 | 18,245 | |||||||||
| Equipment and smallware | 14,483 | 14,170 | 11,938 | |||||||||
| 37,215 | 34,873 | 31,033 | ||||||||||
| Accumulated depreciation and amortization | (17,800 | ) | (16,534 | ) | (14,235 | ) | ||||||
| Total property and equipment, net | 19,415 | 18,339 | 16,798 | |||||||||
| Goodwill | 3,474 | 3,474 | 3,474 | |||||||||
| Intangible assets, net | 15,973 | 16,885 | 18,711 | |||||||||
| Other assets | 312 | 177 | 165 | |||||||||
| Total assets | $ | 52,447 | $ | 52,267 | $ | 50,298 | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT) | ||||||||||||
| Current liabilities | ||||||||||||
| Current maturities of long-term debt | $ | 2,602 | $ | 2,660 | $ | 5,688 | ||||||
| Accounts payable | 4,122 | 3,857 | 3,095 | |||||||||
| Accrued payroll and bonuses | 2,533 | 4,201 | 1,253 | |||||||||
| Other accrued liabilities | 1,637 | 1,929 | 1,826 | |||||||||
| Accrued gift cards | 871 | 892 | 708 | |||||||||
| Accrued advertising | 1,704 | 1,207 | 157 | |||||||||
| Accrued vacation | 944 | 896 | 848 | |||||||||
| Accrued property taxes | 849 | 706 | 653 | |||||||||
| Lease incentive obligations, current portion | 245 | 245 | 245 | |||||||||
| Obligations under capital leases, current portion | 46 | 63 | 44 | |||||||||
| Total current liabilities | 15,553 | 16,656 | 14,517 | |||||||||
| Long-term debt, net of deferred financing fees and current portion | 24,025 | 25,480 | 28,094 | |||||||||
| Deferred franchising fees | 1,516 | 1,559 | 1,707 | |||||||||
| Deferred rent | 3,598 | 3,527 | 3,228 | |||||||||
| Lease incentive obligations | 3,747 | 3,869 | 4,114 | |||||||||
| Management fee payable | 1,187 | 1,187 | 1,187 | |||||||||
| Other long-term liabilities | 536 | 548 | 38 | |||||||||
| Obligations under capital leases, net of current portion | 1,316 | 1,338 | 32 | |||||||||
| Total liabilities | 51,478 | 54,164 | 52,917 | |||||||||
| Shareholders’ equity (deficit) | ||||||||||||
| Common stock, $.001 par value; authorized 2,900,000 shares; 100 shares issued and outstanding | - | - | - | |||||||||
| Additional paid in capital | 33,770 | 33,758 | 33,717 | |||||||||
| Accumulated deficit | (32,801 | ) | (35,655 | ) | (36,336 | ) | ||||||
| Total shareholders’ equity (deficit) | 969 | (1,897 | ) | (2,619 | ) | |||||||
| Total liabilities and shareholders’ equity (deficit) | $ | 52,447 | $ | 52,267 | $ | 50,298 | ||||||
See accompanying notes to consolidated financial statements.
| 2. |
FAZOLI’S GROUP, INC. AND SUBSIDIARIES
Consolidated STATEMENTS OF OPERATIONS
(In thousands)
| 26 weeks ended | Years ended (52 weeks) | |||||||||||||||
| September 29, | September 30, | March 31, | April 1, | |||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||
| Revenue | ||||||||||||||||
| Company-owned restaurant sales | $ | 45,956 | $ | 36,080 | $ | 75,504 | $ | 64,083 | ||||||||
| Franchise royalties | 4,216 | 3,260 | 6,696 | 6,668 | ||||||||||||
| Advertising | 1,053 | 629 | 1,791 | 1,694 | ||||||||||||
| Franchise fees | 91 | 138 | 265 | 210 | ||||||||||||
| Total revenue | 51,316 | 40,107 | 84,256 | 72,655 | ||||||||||||
| Costs and expenses | ||||||||||||||||
| Restaurant cost of sales | 12,396 | 9,216 | 19,468 | 15,886 | ||||||||||||
| Restaurant operating expenses | 20,524 | 15,729 | 34,512 | 30,346 | ||||||||||||
| Restaurant rent expense | 2,652 | 2,390 | 4,961 | 4,663 | ||||||||||||
| General and administrative | 6,670 | 6,714 | 12,228 | 10,282 | ||||||||||||
| Depreciation and amortization | 2,472 | 2,457 | 4,941 | 5,148 | ||||||||||||
| Advertising | 2,957 | 2,768 | 4,924 | 5,127 | ||||||||||||
| Write-down of long-lived assets, gain/loss and exit costs | 63 | 40 | 503 | 754 | ||||||||||||
| Severance, relocation and recruitment | 2 | 92 | 142 | 198 | ||||||||||||
| Total costs and expenses | 47,736 | 39,406 | 81,679 | 72,404 | ||||||||||||
| Income from operations | 3,580 | 701 | 2,577 | 251 | ||||||||||||
| Other expense | ||||||||||||||||
| Interest expense, net | (619 | ) | (798 | ) | (1,521 | ) | (1,947 | ) | ||||||||
| Debt restructuring | - | - | - | (378 | ) | |||||||||||
| Other, net | (10 | ) | (31 | ) | (73 | ) | (81 | ) | ||||||||
| Total other expense, net | (629 | ) | (829 | ) | (1,594 | ) | (2,406 | ) | ||||||||
| Income (loss) before income taxes | 2,951 | (128 | ) | 983 | (2,155 | ) | ||||||||||
| Income tax expense | 97 | 76 | 302 | 108 | ||||||||||||
| Net income (loss) | $ | 2,854 | $ | (204 | ) | $ | 681 | $ | (2,263 | ) | ||||||
See accompanying notes to consolidated financial statements.
| 3. |
FAZOLI’S GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
(In thousands)
| Additional | ||||||||||||||||
| Common | Paid In | Accumulated | ||||||||||||||
| Stock | Capital | Deficit | Total | |||||||||||||
| Balances at April 4, 2019 | $ | - | $ | 33,640 | $ | (33,302 | ) | $ | 338 | |||||||
| Share based compensation | - | 77 | - | 77 | ||||||||||||
| Cumulative effect adjustment of adopting ASC 606 | - | - | (771 | ) | (771 | ) | ||||||||||
| Net loss | - | - | (2,263 | ) | (2,263 | ) | ||||||||||
| Balances at April 1, 2020 | - | 33,717 | (36,336 | ) | (2,619 | ) | ||||||||||
| Share based compensation | - | 41 | - | 41 | ||||||||||||
| Net income | - | - | 681 | 681 | ||||||||||||
| Balances at March 31, 2021 | 33,758 | (35,655 | ) | (1,897 | ) | |||||||||||
| Share based compensation (unaudited) | - | 12 | - | 12 | ||||||||||||
| Net income (unaudited) | - | - | 2,854 | 2,854 | ||||||||||||
| Balances at September 29, 2021 (unaudited) | $ | - | $ | 33,770 | $ | (32,801 | ) | $ | 969 | |||||||
| Balances at April 1, 2020 | - | 33,717 | (36,336 | ) | (2,619 | ) | ||||||||||
| Share based compensation (unaudited) | - | 29 | - | 29 | ||||||||||||
| Net loss (unaudited) | - | - | (204 | ) | (204 | ) | ||||||||||
| Balances at September 30, 2020 (unaudited) | $ | - | $ | 33,746 | $ | (36,540 | ) | $ | (2,794 | ) | ||||||
See accompanying notes to consolidated financial statements.
| 4. |
FAZOLI’S GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| 26 weeks ended | Years ended (52 weeks) | |||||||||||||||
| September 29, | September 30, | March 31, | April 1, | |||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||
| Cash flows from operating activities | ||||||||||||||||
| Net income (loss) | $ | 2,854 | $ | (204 | ) | $ | 681 | $ | (2,263 | ) | ||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities | ||||||||||||||||
| Depreciation and amortization | 2,472 | 2,457 | 4,941 | 5,148 | ||||||||||||
| Amortization of debt issue costs | 23 | 23 | 45 | 149 | ||||||||||||
| Amortization of lease incentive obligations | (122 | ) | (122 | ) | (245 | ) | (246 | ) | ||||||||
| Write-down of long-lived assets | - | - | 374 | 506 | ||||||||||||
| Loss on disposal of assets | 63 | 45 | 135 | 217 | ||||||||||||
| Stock compensation expense | 12 | 29 | 41 | 77 | ||||||||||||
| Changes in assets and liabilities: | ||||||||||||||||
| Receivables | 220 | (920 | ) | (1,097 | ) | 465 | ||||||||||
| Inventories | (391 | ) | (153 | ) | (314 | ) | (39 | ) | ||||||||
| Other current assets | 240 | (296 | ) | (295 | ) | 279 | ||||||||||
| Other assets | 7 | 6 | (12 | ) | 28 | |||||||||||
| Accounts payable | 265 | 2,071 | 762 | (375 | ) | |||||||||||
| Accrued payroll and bonuses | (1,668 | ) | 1,700 | 2,948 | 260 | |||||||||||
| Other accrued liabilities | (292 | ) | (1,111 | ) | 103 | (1,680 | ) | |||||||||
| Accrued gift cards | (21 | ) | 163 | 184 | 900 | |||||||||||
| Accrued advertising | 497 | 1,547 | 1,050 | (794 | ) | |||||||||||
| Accrued vacation | 48 | 96 | 48 | (11 | ) | |||||||||||
| Accrued property taxes | 143 | 196 | 53 | 648 | ||||||||||||
| Deferred rent | 71 | 173 | 299 | 192 | ||||||||||||
| Deferred franchise fees | (43 | ) | (108 | ) | (148 | ) | (92 | ) | ||||||||
| Management fee | - | - | - | 374 | ||||||||||||
| Other long-term liabilities | (13 | ) | (13 | ) | 510 | (27 | ) | |||||||||
| Net cash from operating activities | 4,365 | 5,579 | 10,063 | 3,716 | ||||||||||||
| Cash flows from investing activities | ||||||||||||||||
| Capital expenditures | (2,841 | ) | (1,451 | ) | (3,783 | ) | (2,194 | ) | ||||||||
| Net cash from investing activities | (2,841 | ) | (1,451 | ) | (3,783 | ) | (2,194 | ) | ||||||||
| Cash flows from financing activities | ||||||||||||||||
| Payment of capital lease obligations | (39 | ) | (16 | ) | (57 | ) | (50 | ) | ||||||||
| Proceeds from long-term debt | - | - | - | 30,000 | ||||||||||||
| Proceeds from revolver | - | - | - | 4,000 | ||||||||||||
| Payments on revolver | - | - | (4,000 | ) | - | |||||||||||
| Payments on long-term debt | (1,535 | ) | (750 | ) | (1,687 | ) | (29,500 | ) | ||||||||
| Deferred financing costs | - | - | - | (196 | ) | |||||||||||
| Net cash from financing activities | (1,574 | ) | (766 | ) | (5,744 | ) | 4,254 | |||||||||
| Net change in cash | (50 | ) | 3,362 | 536 | 5,776 | |||||||||||
| Cash at beginning of period | 9,104 | 8,568 | 8,568 | 2,792 | ||||||||||||
| Cash at end of period | $ | 9,054 | $ | 11,930 | $ | 9,104 | $ | 8,568 | ||||||||
| Cash paid during the period for | ||||||||||||||||
| Interest expense, net of amounts capitalized | $ | 591 | $ | 775 | $ | 1,482 | $ | 1,746 | ||||||||
| Income taxes | 227 | 75 | 155 | 170 | ||||||||||||
| Supplemental disclosure of non-cash investing and financing activities | ||||||||||||||||
| Capital lease | $ | - | $ | - | $ | 1,382 | $ | - | ||||||||
See accompanying notes to consolidated financial statements.
| 5. |
Fazoli’s Group, Inc. (the Company), through its subsidiary, Fazoli’s Joint Venture, Ltd., operates Company-owned “quick casual” Italian restaurants under the “Fazoli’s” name. The Company also franchises its concept through its subsidiary, Fazoli’s Franchising Systems, LLC. At September 29, 2021 (unaudited), March 31, 2021 and April 1, 2020, there were 57, 56 and 51 Company-owned and 159, 154 and 162 domestic franchise restaurants in operation, respectively. Additional subsidiaries owned by the Company include Fazoli’s Restaurant Group Inc., Fazoli’s System Management, LLC and Fazoli’s Promotions, Inc.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis for Presentation: The accompanying annual and interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The consolidated annual and interim period financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
In the opinion of management, the unaudited interim consolidated financial statements contain all normal recurring adjustments considered necessary for a fair presentation of the Company’s financial position at September 29, 2021 and the results of operations and cash flows for the twenty-six weeks ended September 29, 2021 and September 30, 2020. The results for the twenty-six weeks ended September 29, 2021 and September 30, 2020 are not necessarily indicative of the results to be expected for the full year or any other interim period.
Fiscal Year: The Company’s fiscal year is the 52 or 53-week period ending the Wednesday nearest March 31. Fiscal years 2021 and 2020 included 52 weeks. The interim periods ended September 29, 2021 and September 30, 2020 each consist of 26 weeks.
Recently Issued Accounting Standards: In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” (“ASU 2014-09”), which supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, requires more judgment and estimates within the revenue recognition process. On April 4, 2019, the Company adopted ASU 2014-09 and all related amendments (collectively “ASC 606”) using the modified retrospective method applied to those contracts, which were not fully satisfied as of the fiscal year ended April 3, 2019. The Company recognized an adjustment to accumulated deficit of $771,000, related to the cumulative effect of adopting ASC 606 as of April 4, 2019.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, “Leases (Topic 842)” (“Topic 842”). Under Topic 842, a lessee will recognize in the statement of financial position a liability to make lease payments and a right-of-use asset for all leases (with the exception of short-term leases) at the commencement date. The recognition, measurement, and presentation of expenses and cash flows arising from a lease under Topic 842 will not significantly change from current accounting standards. Topic 842 is effective beginning in the first quarter of 2019 with early adoption permitted.
| 6. |
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In July 2018, the FASB issued Accounting Standards Update No. 2018-11 “Leases (Topic 842): Targeted Improvements” (“ASU 2018-11”), which provides for the election of transition methods between the modified retrospective method and the optional transition relief method. The modified retrospective method is applied to all prior reporting periods presented with a cumulative-effect adjustment recorded in the earliest comparative period while the optional transition relief method is applied beginning in the period of adoption with a cumulative-effect adjustment. The Company expects to adopt Topic 842 effective April 1, 2022. The Company is currently evaluating the impact of adoption of Topic 842 on its consolidated financial statements. Management anticipates that it will result in an increase in the Company’s long-term assets and liabilities but will have no material impact to its results of operations or cash flows.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326)-Measurement of Credit Losses on Financial Instruments (“Topic 326”), and later amended Topic 326 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 forecast.
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 companies additional time to implement major FASB standards, including ASU 2016-13. The Company intends to defer adoption of ASU 2016-13, and its related amendments, until the fiscal period beginning after December 15, 2022. The guidance requires a modified retrospective transition approach through a cumulative-effect adjustment to accumulated deficit as of the beginning of the period of adoption. The Company does not expect the adoption of this standard will have a material impact on its condensed consolidated financial statements.
Inventories: Inventories, consisting principally of food and paper products, are valued at the lower of first-in, first-out (FIFO) cost or net realizable value.
Property and Equipment: Property and equipment were initially recorded at fair value as of the date of its most recent change of control (2015). Subsequent additions have been recorded at cost. Expenditures for major renewals and betterments are capitalized while expenditures for maintenance and repairs are expensed as incurred. Property and equipment under capital leases are stated at the present value of minimum lease payments. Depreciation is computed over the estimated useful lives of the assets using the straight-line method. Depreciation expense was approximately $1,559,000 (unaudited) and $1,545,000 (unaudited) for the 26-week periods ended September 29, 2021 and September 30, 2020, respectively, and $3,115,000 and $3,322,000 for the years ended March 31, 2021 and April 1, 2020, respectively.
The Company leases land, buildings, and certain equipment for a number of its restaurants under noncancelable lease agreements. The Company’s leases for its restaurant land and buildings typically have initial terms ranging from 5 to 15 years, and most contain renewal options for one or more 5-year periods. Leasehold improvements are amortized over the term of the applicable lease, including certain renewal periods, or their useful lives, whichever is shorter.
| 7. |
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The estimated useful lives used for financial statement purposes are:
| Land improvements | 15 years |
| Buildings and leasehold improvements | 7–15 years |
| Equipment and small wares | 2-7 years |
Franchise Operations: The Company executes franchise agreements which award the rights to own and operate a single Fazoli’s restaurant at a specific location approved by the Company. The franchise agreements typically require the franchisee to pay an initial fee and continuing fees based upon a percentage of sales.
The Company monitors the financial condition of franchisees and records provisions for estimated losses on receivables when it believes the franchisee will be unable to make required payments. While the Company uses the best information available to make the determination, the ultimate recovery of recorded receivables is also dependent upon future economic events and other conditions which may be beyond the Company’s control. The allowance for doubtful accounts totaled $10,000 (unaudited), $10,000 and $48,000 as of September 29, 2021, March 31, 2021, and April 1, 2020, respectively.
Revenue Recognition: The Company’s revenues consist of sales by Company operated restaurants and fees from franchisees. Revenues from Company operated restaurants are recognized when payment is tendered at the time of sale.
Franchise revenue consists of franchise royalties, initial franchise fees, renewal fees, and advertising fees.
Franchise Royalty Revenue
The Company receives royalty fees from franchisees based on a percentage of each franchised restaurant’s gross receipts, as defined in the franchise agreement, which are recognized as revenue on the accrual basis as earned.
Initial Franchise Fee and Renewal Revenue
For franchise and development agreement fees, the initial franchise services, or exclusivity of the development agreements, are not distinct from the continuing rights or services offered during the term of the franchise agreement and are therefore treated as a single performance obligation. As such, initial franchise and development fees received, and subsequent renewal fees, are recognized over the franchise or renewal term, which is typically fifteen and five years, respectively.
Franchise Advertising Fee Revenue
The Company presents one percent of advertising contributions received from franchisees as franchise advertising fee revenue on a gross basis. The Company acts as an agent for the remaining advertising fees (approximately 3% of franchisee revenues) collected because the remaining advertising fees are required to be expended on advertising based on the franchisee’s direction. Accordingly, the remaining advertising fees collected from franchisees are reported on a net basis.
The Company has adopted a practical expedient available under ASC 606 to exclude from its transaction price all sales and similar taxes collected from its customers.
| 8. |
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Deferred Revenue and Deferred Expenses: The Company’s contract liabilities consist of fees from franchisees upon execution of their respective area development and/or franchise agreements which the Company refers to as deferred revenue. The amounts received are recorded as deferred revenue until the Company satisfies its performance obligations under the franchise and area development agreements. Revenue from franchise and area development agreements are recognized on a straight-line basis over the term of the agreement as the underlying performance obligation is satisfied. Incremental direct costs, such as commissions, are deferred and recognized over the life of the related term of the agreement.
A summary of changes to deferred revenue is as follows (in thousands):
| September 29, | March 31, | April 1, | ||||||||||
| 2021 | 2021 | 2020 | ||||||||||
| (Unaudited) | ||||||||||||
| Balance, beginning of period | $ | 1,718 | $ | 1,870 | $ | 480 | ||||||
| ASC 606 implementation adjustment | - | - | 1,359 | |||||||||
| Franchise fees collected | 48 | 113 | 241 | |||||||||
| Revenue recognition from area development agreements and initial franchise fees | (91 | ) | (265 | ) | (210 | ) | ||||||
| Balance, end of period | $ | 1,675 | $ | 1,718 | $ | 1,870 | ||||||
Deferred franchise fees of $159,000 (unaudited), $159,000 and $163,000 are included in other current liabilities and $1,516,000 (unaudited), $1,559,000 and $1,707,000 are included in deferred franchise fees as of September 29, 2021, March 31, 2021, and April 1, 2020, respectively.
Estimated revenue for future fiscal years is as follows (in thousands) (unaudited):
| Remainder of 2022 | $ | 82 | ||
| 2023 | 157 | |||
| 2024 | 143 | |||
| 2025 | 138 | |||
| 2026 | 145 | |||
| Thereafter | 1,010 | |||
| Total | $ | 1,675 |
A summary of changes to capitalized contract acquisition costs is as follows (in thousands):
| September 29, | March 31, | April 1, | ||||||||||
| 2021 | 2021 | 2020 | ||||||||||
| (Unaudited) | ||||||||||||
| Balance, beginning of year | $ | 160 | $ | 136 | $ | - | ||||||
| ASC 606 implementation adjustment | - | - | 96 | |||||||||
| Commissions paid | 15 | 32 | 56 | |||||||||
| Commissions fees recognized | (16 | ) | (8 | ) | (16 | ) | ||||||
| Balance, end of year | $ | 159 | $ | 160 | $ | 136 | ||||||
| 9. |
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Capitalized contract acquisition costs of $9,000 (unaudited), $9,000 and $4,000 are included in prepaid expenses and other current assets and $150,000 (unaudited), $151,000 and $132,000 are included in other assets as of September 29, 2021, March 31, 2021, and April 1, 2020, respectively.
Estimated amortization expense of capitalized contract acquisition costs for future fiscal years is as follows (in thousands) (unaudited):
| Remainder of 2022 | $ | 5 | ||
| 2023 | 13 | |||
| 2024 | 15 | |||
| 2025 | 15 | |||
| 2026 | 16 | |||
| Thereafter | 95 | |||
| Total | $ | 159 |
Advertising Expenses: Advertising costs include costs of advertising and promotional programs. Advertising costs for Company-owned restaurants are expensed as incurred, except for certain production costs, which are expensed when the advertising first takes place. Advertising expense was approximately $2,957,000 (unaudited) and $2,768,000 (unaudited) for the 26-week periods ended September 29, 2021 and September 30, 2020, respectively, and $4,924,000 and $5,127,000 for the years ended March 31, 2021 and April 1, 2020, respectively.
Income Taxes: The Company uses an estimated annual effective rate based on expected annual income to determine the interim provision for income taxes for the periods ended September 29, 2021 (unaudited) and September 30, 2020 (unaudited). The effective income tax rate includes the estimated domestic state effective income tax rate. The effective income tax rate is also impacted by various permanent items, net of any related valuation allowances, and can vary based on changes in estimated annual income. Discrete items are recorded in the quarter in which they occur. The Company utilizes the asset and liability method of accounting for income taxes for the years ended March 31, 2021 and April 1, 2020.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date. Valuation allowances are established when necessary on a jurisdictional basis to reduce deferred tax assets to the amounts the Company expects to realize.
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on all available positive and negative evidence, the Company believes the deferred tax assets will not be realized and has established a full valuation allowance for all periods presented.
| 10. |
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Management has evaluated all tax positions that could have a significant effect on the financial statements and determined the Company had no uncertain income tax positions as of September 29, 2021 (unaudited), March 31, 2021 and April 1, 2020 and does not expect any changes in uncertain tax positions in the next year. A tax position is recognized as a benefit only if it is more likely than not that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company’s 2018 through 2021 tax years are still open and subject to examination by the relevant tax authorities. The major tax jurisdictions open are federal, Kentucky and Indiana. The Company would recognize interest and penalties related to unrecognized tax benefits in income tax expense. The Company had no amounts accrued for interest or penalties as of September 29, 2021 (unaudited), March 31, 2021 and April 1, 2020.
Rent: Certain of the Company’s operating leases contain predetermined fixed escalations of the minimum rent during the term of the lease. For these leases, the Company recognizes the related rent expense on a straight-line basis over the life of the lease term and records the difference between the amounts charged to operations and amounts paid as deferred rent. When determining the lease term, the Company includes option periods up to a maximum of fifteen years for certain leases when in management’s judgment, failure to renew these leases imposed a penalty on the Company in such an amount that renewal appeared to be reasonably assured. The primary penalty to which the Company is subject is the economic detriment associated with the existence of leasehold improvements which might become impaired if the Company chooses not to continue the use of the leased property.
The Company has lease incentive obligations for tenant improvements that relate to lease obligations. The obligations are amortized on a straight-line basis over the lease term as a reduction of rent expense. Additionally, certain of the Company’s operating leases contain clauses that provide for additional contingent rent based on a percentage of sales greater than certain specified target amounts. The Company recognizes contingent rent expense prior to the achievement of the specified target that triggers the contingent rent, provided achievement of that target is considered probable.
Goodwill: Goodwill resulting from business combinations is generally determined as the excess of the fair value of the consideration transferred, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. The Company tests goodwill for impairment on an annual basis, or more frequently if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount (a triggering event).
In testing goodwill for impairment, Management has the option first to perform a qualitative assessment to determine whether it is more likely than not that goodwill is impaired, or the reporting unit can bypass the qualitative assessment and proceed directly to the quantitative test by comparing the carrying amount, including goodwill, of the entity with its fair value. The excess carrying value over fair value, if any, would represent the impairment loss. No impairment was identified or recorded during the years ended March 31, 2021 and April 1, 2020. And no triggering events were identified during the period ended September 29, 2021 (unaudited).
Intangible Assets: The Company records intangible assets at fair value and amortizes the assets over their useful lives. The carrying values are evaluated for impairment annually or whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable. No impairment has been recorded on intangible assets.
| 11. |
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Deferred Financing Fees: The Company has capitalized costs relating to its debt financing and is amortizing these costs over the life of the related debt using the straight-line method, which approximates the effective interest method. Total accumulated amortization was $76,000 (unaudited), $53,000 and $8,000 at September 29, 2021, March 31, 2021 and April 1, 2020, respectively. Deferred financing fees are included as a direct deduction from the carrying amount of the related debt in the accompanying balance sheet. Amortization expense was $23,000 for each of the 26-week periods ended September 29, 2021 (unaudited) and September 30, 2020 (unaudited), and $45,000 and $149,000 for the years ended March 31, 2021 and April 1, 2020, respectively. Net deferred financing costs are $151,000, $173,000 and $218,000 as of September 29, 2021 (unaudited), March 31, 2021, and April 1, 2020, respectively. During the year ended April 1, 2020, the debt was refinanced resulting in $196,000 of new debt issue costs, $30,000 of debt issue cost carryover and a $41,000 write-off of previous capitalized costs.
Estimated amortization expense for future fiscal years is as follows (in thousands) (unaudited):
| Remainder of 2022 | $ | 23 | ||
| 2023 | 45 | |||
| 2024 | 45 | |||
| 2025 | 38 | |||
| $ | 151 |
Impairment of Long-Lived Assets: The Company reviews long-lived assets whenever changes in circumstances indicate that the carrying amount of an asset or a group of assets may not be recoverable. The Company typically considers a continuous history of operating losses to be its primary indicator of potential impairment. Assets are grouped and evaluated on an individual restaurant basis. The Company deems a restaurant to be impaired if the forecast of undiscounted future cash flows directly related to that restaurant, including disposal value, if any, is less than its carrying amount. If the restaurant is determined to be impaired, the loss is measured as the amount by which the carrying amount of the restaurant exceeds its fair value. The Company generally measures fair value by appraisals or discounting estimated future cash flows, which involves considerable management judgment. Accordingly, actual results could vary significantly from such estimates. The Company recorded write-downs of long-lived assets of approximately $374,000 and $506,000 for the years ended March 31, 2021 and April 1, 2020, respectively. The charges represent reductions of the carrying amounts of certain underperforming restaurants to their estimated fair value. No changes in circumstances occurred that would require a review as of September 29, 2021 (unaudited).
Costs Associated with Exit or Disposal Activities: The Company applies FASB ASC 420 - Exit or Disposal Cost Obligations (“ASC 420”), in accounting for the closing of restaurants. Costs addressed by ASC 420 include costs to terminate a contract that is not a capital lease, costs of involuntary employee termination benefits pursuant to a one-time benefit arrangement and relocation costs. The Company incurred exit cost expenses of approximately $0 for the 26-week periods ended September 29, 2021 (unaudited) and September 30, 2020 (unaudited), and $9,000 and $43,000 for the years ended March 31, 2021 and April 1, 2020, respectively. The charges principally related to two closed restaurants.
| 12. |
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Gift Cards: Revenue from stored value cards sold are recognized upon redemption in the restaurant or when breakage is recorded. Until the redemption occurs or breakage is recorded, the outstanding balances of stored value cards are included in accrued liabilities on the consolidated balance sheets.
Breakage is recorded as income based on historical customer usage patterns in jurisdictions that do not subject gift cards to escheatment laws. For the 26-week period ended September 29, 2021 and for the years ended March 31, 2021 and April 1, 2020, $62,000 (unaudited), $51,000 and $72,000 of unredeemed gift card balances were recognized as income and are included in total revenue on the consolidated statements of operations. Gift cards are deactivated after 5 years of no activity.
Use of Estimates: The preparation of the consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the year. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment; valuation allowances for receivables and deferred income taxes; carrying value of intangible assets; and obligations related to self-insurance reserves. Actual results could differ from those estimates.
Concentration of Credit Risk: The Company maintains cash balances at one financial institution in excess of the insurance limits provided by the Federal Deposit Insurance Corporation.
NOTE 3 – INTANGIBLE ASSETS
Intangible assets are as follows as of September 29, 2021 (unaudited), March 31, 2021 and April 1, 2020 (in thousands):
| Gross | Net | |||||||||||
| Carrying | Accumulated | Carrying | ||||||||||
| Amount | Amortization | Amount | ||||||||||
| September 29, 2021 (unaudited) | ||||||||||||
| Trade name | $ | 19,936 | $ | 8,307 | $ | 11,629 | ||||||
| Franchise agreement | 7,446 | 3,102 | 4,344 | |||||||||
| Total intangible assets | $ | 27,382 | $ | 11,409 | $ | 15,973 | ||||||
| March 31, 2021 | ||||||||||||
| Trade name | $ | 19,936 | $ | 7,643 | $ | 12,293 | ||||||
| Franchise agreement | 7,446 | 2,854 | 4,592 | |||||||||
| Total intangible assets | $ | 27,382 | $ | 10,497 | $ | 16,885 | ||||||
| April 1, 2020 | ||||||||||||
| Trade name | $ | 19,936 | $ | 6,313 | $ | 13,623 | ||||||
| Franchise agreement | 7,446 | 2,358 | 5,088 | |||||||||
| Total intangible assets | $ | 27,382 | $ | 8,671 | $ | 18,711 | ||||||
| 13. |
NOTE 3 – INTANGIBLE ASSETS (Continued)
The trade name and franchise agreements are amortized over a useful life of fifteen years. Amortization expense was $913,000 for each of the 26-week periods ended September 29, 2021 (unaudited) and September 30, 2020 (unaudited), and $1,825,000 for each of the years ended March 31, 2021 and April 1, 2020. Expected future amortization expense for future fiscal years for intangible assets is as follows (in thousands) (unaudited):
| Remainder of 2022 | $ | 913 | ||
| 2023 | 1,825 | |||
| 2024 | 1,825 | |||
| 2025 | 1,825 | |||
| 2026 | 1,825 | |||
| Thereafter | 7,760 | |||
| $ | 15,973 |
NOTE 4 – LONG-TERM DEBT
Effective January 1, 2020, the Company’s previous senior bank debt was paid in full and security was released. New facilities were outstanding as of April 1, 2020 as included in the schedule below. Long-term debt consists of the following at September 29, 2021 (unaudited), March 31, 2021 and April 1, 2020 (in thousands):
| September 29, | March 31, | April 1, | ||||||||||
| 2021 | 2021 | 2020 | ||||||||||
| (Unaudited) | ||||||||||||
| Term loan (original balance of $30.0 million) with a financial institution, bearing interest at variable rates (4.00%, 4.00% and 4.95% at September 29, 2021 (unaudited), March 31, 2021 and April 1, 2020, respectively), payable in quarterly installments of $563 through December 2023 and $750 thereafter, due January 31, 2025. | $ | 26,778 | $ | 28,313 | $ | 30,000 | ||||||
| $4.0 million revolving loan with a financial institution bearing interest at variable rates, due January 31, 2025 | - | - | 4,000 | |||||||||
| Capital lease obligations (see Note 5). | 1,362 | 1,401 | 76 | |||||||||
| 28,140 | 29,714 | 34,076 | ||||||||||
| Less current maturities of long-term debt | (2,602 | ) | (2,660 | ) | (5,688 | ) | ||||||
| Less current maturities of capital lease obligations | (46 | ) | (63 | ) | (44 | ) | ||||||
| Less deferred financing fees | (151 | ) | (173 | ) | (218 | ) | ||||||
| Long-term portion of debt and capital leases | $ | 25,341 | $ | 26,818 | $ | 28,126 | ||||||
Interest on the term and revolving loans accrue at a per annum rate equal to the Adjusted LIBOR Rate plus the Applicable Margin and otherwise at a per annum rate equal to the Base Rate plus the Applicable Margin. At April 1, 2020, the Applicable Margin for Adjusted LIBOR Rate Loans was 3.50%. The Applicable Margin on Base Rate Loans is 2.50%. Beginning June 30, 2020, the minimum all-in rate of 4.0% was in effect.
| 14. |
NOTE 4 – LONG-TERM DEBT (continued)
The financing agreement also requires payment of a Commitment Fee equal to 0.275% per annum of the unused Revolving Loan. All debt obligations share or shared a common collateral pool consisting of all of the property and assets and interest therein of the Company’s wholly owned subsidiaries.
The financing agreement includes covenants limiting capital expenditures, other indebtedness, restricted payments, acquisitions, investments, mergers, voluntary payments on other debt and sales of assets, among other matters. The financing agreement also contains financial covenants specifying certain leverage ratios and fixed charge coverage ratios. On March 31, 2020, the Company entered into a consent and forbearance agreement with their lender. The Company requested the regularly scheduled term loan payment due on April 1, 2020 to be deferred until the maturity date. The lender consented to the deferral. There have been no other events, and the consent and forbearance agreement expired on July 2, 2020. At September 29, 2021 (unaudited) and March 31, 2021 the Company was in compliance with all financial covenant requirements.
Maturities of long-term debt, excluding capital leases, are as follows (in thousands) (unaudited):
| Remainder of 2022 | $ | 1,477 | ||
| 2023 | 2,250 | |||
| 2024 | 2,438 | |||
| 2025 | 20,613 | |||
| $ | 26,778 |
NOTE 5 – LEASES
The Company leases various restaurant locations and one corporate office location, which generally have renewal clauses of 5 to 20 years exercisable at the Company’s option, under noncancelable operating leases expiring at various dates through February 2037. The following summarizes total expenses incurred for all operating leases (in thousands):
| September 29, | March 31, | April 1, | ||||||||||
| 2021 | 2021 | 2020 | ||||||||||
| (Unaudited) | ||||||||||||
| Operating leases: | ||||||||||||
| Base rent expense | $ | 2,557 | $ | 4,969 | $ | 4,768 | ||||||
| Contingent rentals | 161 | 154 | 57 | |||||||||
| Total | $ | 2,718 | $ | 5,123 | $ | 4,825 | ||||||
| 15. |
NOTE 5 – LEASES (Continued)
The following is a schedule of future anticipated minimum lease payments required for leases that have initial or remaining noncancelable terms in excess of one year as of September 29, 2021 (in thousands) (unaudited):
| Capital | Operating | |||||||
| Remainder of 2022 | $ | 82 | $ | 2,674 | ||||
| 2023 | 93 | 5,400 | ||||||
| 2024 | 88 | 5,452 | ||||||
| 2025 | 88 | 5,448 | ||||||
| 2026 | 88 | 5,451 | ||||||
| Thereafter | 1,595 | 40,701 | ||||||
| Total | 2,034 | $ | 65,126 | |||||
| Less amount representing interest | (672 | ) | ||||||
| Total obligations under capital leases | $ | 1,362 | ||||||
Capital leased assets totaled $1,615,000, $1,615,000, and $239,000 as of September 29, 2021 (unaudited), March 31, 2021 and April 1, 2020, respectively. Accumulated depreciation totaled $315,000, $252,000, and $166,000 as of September 29, 2021 (unaudited), March 31, 2021 and April 1, 2020, respectively.
The Company has negotiated leases with landlords resulting in cash proceeds for tenant improvements. The proceeds are included in lease incentive obligations on the balance sheet and are amortized on a straight-line basis as a reduction of rent expense over the life of the lease.
NOTE 6 – INCOME TAXES
Income tax expense consists of the following (in thousands):
| March 31, | April 1, | |||||||
| 2021 | 2020 | |||||||
| Current: | ||||||||
| State and local | $ | 302 | $ | 108 | ||||
| 302 | 108 | |||||||
| Deferred: | ||||||||
| Federal | 456 | 476 | ||||||
| State and local | (591 | ) | 175 | |||||
| Valuation allowance | 135 | (651 | ) | |||||
| - | - | |||||||
| $ | 302 | $ | 108 | |||||
| 16. |
NOTE 6 – INCOME TAXES (Continued)
Income tax expense differs from the amounts computed by applying the United States Federal income tax rate of 21% to pretax income as a result of the following:
| March 31, | April 1, | |||||||
| 2021 | 2020 | |||||||
| Federal income tax expense (benefit) at statutory rate | $ | 207 | $ | (452 | ) | |||
| Increase (decrease) in income taxes resulting from: | ||||||||
| State and local taxes, net of Federal income tax benefit | (306 | ) | (81 | ) | ||||
| Change in valuation allowance | 135 | 651 | ||||||
| Other | 266 | (10 | ) | |||||
| $ | 302 | $ | 108 | |||||
Deferred income taxes are comprised of the following at March 31, 2021 and April 1, 2020 (in thousands):
| March 31, | April 1, | |||||||
| 2021 | 2020 | |||||||
| Gift cards and other advance payments | $ | 421 | $ | 434 | ||||
| Property and equipment | (1,391 | ) | (1,181 | ) | ||||
| Deferred rent | 903 | 827 | ||||||
| Deferred franchise fees | 449 | 495 | ||||||
| Accrued liabilities | 730 | 238 | ||||||
| Accrued vacation | 229 | 209 | ||||||
| Net operating loss carryforwards | 5,069 | 5,595 | ||||||
| General business credit | 144 | 143 | ||||||
| Intangible assets | (4,321 | ) | (4,791 | ) | ||||
| Transaction costs | 910 | 911 | ||||||
| Lease incentives | 1,053 | 1,116 | ||||||
| Other | 29 | 94 | ||||||
| Deferred tax asset | 4,225 | 4,090 | ||||||
| Less valuation allowance | (4,225 | ) | (4,090 | ) | ||||
| Net deferred income taxes | $ | - | $ | - | ||||
At March 31, 2021, the Company had net operating loss carryforwards for federal income tax purposes of approximately $19,469,000 which expire from 2027 to 2036.
The effective income tax rates were 3.29% and (59.64)% for the six months ended September 29, 2021 and September 30, 2020 (unaudited), respectively. The effective income tax rates were 47.47% and (4.32)% for the years ended March 31, 2021 and April 1, 2020, respectively. The difference between the effective tax rate and the statutory tax rate is primarily due to the valuation allowance. The increase in the effective tax rate for the six months ended September 29, 2021 (unaudited) primarily resulted from the Company generating pre-tax income compared to pre-tax losses in the prior six-month period ending September 30, 2020 (unaudited). Similarly, the increase in the effective tax rate for the year ended March 31, 2021 primarily resulted from the Company generating pre-tax income compared to pre-tax losses in the prior year ended April 1, 2020.
| 17. |
NOTE 7 – Common Stock and Preferred Stock
The Company has the authority to issue 3,000,000 shares of stock, consisting of 2,900,000 shares of common stock and 100,000 shares of preferred stock. As of September 29, 2021 (unaudited), March 31, 2021 and April 1, 2020, there were no shares of preferred stock outstanding. The Company has 100 shares of voting common stock outstanding. The 2,900,000 shares of Common Stock the Company is authorized to issue consists of 1,200,000 shares of voting common stock and 1,700,000 shares of non-voting common stock. The voting and non-voting common stock shall have the same rights and preferences and shall be treated as one class of common stock with the exception that the non-voting common stock shall not have any voting power. In addition to common and preferred stock, the Company has the authority to issue 1,866,697 restricted Class C non-voting shares of which 1,586,813 have been issued as of all periods presented. Refer to Note 8 - Restricted Stock Grants, for additional information.
NOTE 8 – RESTRICTED STOCK GRANTS
The Company has outstanding at September 29, 2021 (unaudited), March 31, 2021 and April 1, 2020 restricted stock grants for 1,586,813 Class C non-voting common shares of the Company’s stock. The restricted stock grants were valued at the date of grant at approximately $0.24 per share. The restricted stock grants vest over a 5-year period with 20% vesting one year after the grant date and pro-rata on a monthly basis thereafter. Total shares vested were 1,477,474, 1,451,170, and 1,279,314 as of September 29, 2021 (unaudited), March 31, 2021 and April 1, 2020, respectively.
| Weighted-Average | ||||||||
| Grant-Date | ||||||||
| Shares | Fair Value | |||||||
| Nonvested Shares: | ||||||||
| Nonvested at April 4, 2019 | 624,861 | $ | 0.24 | |||||
| Vested | (317,362 | ) | 0.24 | |||||
| Nonvested at March 31, 2020 | 307,499 | 0.24 | ||||||
| Vested | (171,856 | ) | 0.24 | |||||
| Nonvested at March 31, 2021 | 135,643 | 0.24 | ||||||
| Vested | (26,304 | ) | 0.24 | |||||
| Nonvested at September 29, 2021 (unaudited) | 109,339 | |||||||
Compensation expense related to the restricted stock grants was $12,000 and $29,000 for the 26-week periods ended September 29, 2021 (unaudited) and September 30, 2020 (unaudited), respectively, and $41,000 and $77,000 for the years ended March 31, 2021 and April 1, 2020, respectively. As of September 29, 2021 (unaudited), there was $86,000 of total unrecognized compensation cost related to unvested share-based compensation granted under the plans.
NOTE 9 – EMPLOYEE BENEFITS
The Company has a 401(k) Profit Sharing Plan (“the 401(k) Plan”), which is a defined contribution plan available to employees of the Company who meet certain eligibility requirements. Participants may elect to contribute up to 50% of their eligible compensation on a pretax basis. The Company matches 100% of employee contributions of the first 3% of eligible employee compensation plus 50% of employee contributions on the next 2% of eligible compensation. The Company pays for certain of the 401(k) Plan’s administrative expenses and the 401(k) Plan pays for certain administrative expenses through forfeitures. Profit sharing expense was $198,000 (unaudited) and $154,000 (unaudited) for the 26-week periods ended September 29, 2021 and September 30, 2020, and $301,000 and $291,000 for the years ended March 31, 2021 and April 1, 2020, respectively.
| 18. |
NOTE 10 – Commitments and Contingencies
The Company is involved in various claims and legal actions arising in the normal course of business. In the opinion of management, the ultimate disposition of these matters will not have a material effect on the Company’s consolidated results of operations, financial position or liquidity.
NOTE 11 – RELATed-party Transactions and Balances
Management Services Agreement: The Company has entered into a Management Services Agreement with Sentinel Capital Partners, LLC (Sentinel), the Company’s owner through December 14, 2021. Pursuant to the terms of this agreement, Sentinel provided advisory and consulting services to the Company in exchange for an annual fee of $500,000.
The Company made payments aggregating $500,000 during the fiscal years ended March 31, 2021 and April 1, 2020. Payments of approximately $250,000 were made during each of the 26-week periods ended September 29, 2021 (unaudited) and September 30, 2020 (unaudited). As of September 29, 2021 (unaudited), March 31, 2021 and April 1, 2020, accrued management fees totaled $1,187,000. As of September 29, 2021 (unaudited), March 31, 2021 and April 1, 2020 there were no anticipated payments on the existing accrued management fee balance as the term loan agreement only permits $500,000 to be paid annually. This annual limit allows only current fees to be paid. As such, the previous management fee liability is classified as long term on the consolidated balance sheets. The Company also agreed to reimburse Sentinel for any reasonable out-of-pocket expenses incurred in the performance of its duties under this agreement. This agreement shall remain in effect until the parties mutually agree in writing to its termination or the date in which Sentinel elects to terminate this agreement in writing. This agreement was terminated and all balances settled upon acquisition by FAT Brands Inc. on December 15, 2021 as further described in Note 13 – Events Subsequent to the Date of the Independent Auditor’s Report.
The Company had the following related party balances and transactions as of September 29, 2021 (unaudited), March 31, 2021 and April 1, 2020 (in thousands):
| September 29, | March 31, | April 1, | ||||||||||
| 2021 | 2021 | 2020 | ||||||||||
| (Unaudited) | ||||||||||||
| Management fees and expenses to Sentinel | ||||||||||||
| Capital, LLC | $ | 267 | $ | 525 | $ | 513 | ||||||
| Management fees payable to Sentinel Capital, LLC | 1,187 | 1,187 | 1,187 | |||||||||
NOTE 12 – RISKS AND UNCERTAINTIES
In March 2020 the World Health Organization declared the novel coronavirus 2019 (COVID-19) a pandemic and the United States declared it a National Public Health Emergency, which resulted in mandatory restaurant closures, capacity limitations, social distancing guidelines or other restrictions mandated by governments in certain jurisdictions. The Company has not experienced significant extended negative effects as a result of the COVID-19 pandemic. However, the success of the Company and its franchisees is dependent upon the willingness of consumers to continue to dine at restaurants. As of March 31, 2021, all franchised restaurants were open and operating. It is uncertain how the conditions surrounding COVID-19 will continue to change, including decisions by state and local governments that may the occupancy and operations of restaurants.
| 19. |
NOTE 13 – SUBSEQUENT EVENTS
Management has performed an analysis of activities and transactions subsequent to March 31, 2021 to determine the need for any adjustments to or disclosures within the financial statements for the year ended March 31, 2021. Management has performed their initial analysis through June 15, 2021, the date the financial statements were originally available to be issued. Management considered subsequent events related to the reissuance of the March 31, 2021 financial statements to include the adjustments related to the impacts of applying the Private Company Council Alternative (“PCC”) to amortize goodwill through January 31, 2022 the date the financial statements were available to be reissued. Management considered subsequent events related to the September 29, 2021 interim financial statements through January 31, 2022, the date the interim financial statements were available to be issued.
On December 15, 2021, the Company was acquired by FAT Brands Inc. pursuant to the Agreement and Plan of Merger. The aggregate consideration was approximately $130 million, subject to customary adjustments.
NOTE 14 – REVISIONS TO PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS
These revised consolidated financial statements are prepared in order to meet the requirements prescribed in Regulation S-X (as a result of the December 15, 2021 acquisition by FAT Brands Inc. described in Note 13 – Subsequent Events), which specifies the form and content of the consolidated financial statements and related notes. These consolidated financial statements are intended to replace in their entirety, the original audited consolidated financial statements for the years ended March 31, 2021 and April 30, 2020 that were available to be issued on June 15, 2021. Changes have been made to those previously issued financial statements for the years ended March 31, 2021 and April 30, 2020 as detailed below.
The Company originally accounted for its goodwill under the PCC alternative, which allowed for the Company to assess qualitatively if any indicators of impairment exist on an annual basis and amortize the amount ratably over a 10-year period. Gross goodwill was previously recorded of approximately $3,473,000 in connection with a 2015 change in control, which was previously amortized. As a result, these consolidated financial statements have been updated to reflect the reversal of approximately $347,000 of amortization expense for each of the years ended March 31, 2021 and April 30, 2020, and the cumulative impact to total shareholders’ equity (deficit) was approximately $1,304,000 as of April 4, 2019. In addition, historical goodwill impairment testing was reperformed over goodwill under the new basis of accounting. The policy disclosures reflected in Note 2 – Summary of Significant Accounting Policies are inclusive of the new policies applied by the Company.
| 20. |
Exhibit 99.2
Unaudited Pro Forma Condensed Combined Financial Statements
On December 15, 2021, FAT Brands, Inc. (“the Company”) completed the acquisition of Fazoli’s Holdings, LLC (“Fazoli’s”) for a total purchase price of $137.1 million in net cash (the “Fazoli’s Acquisition”).
On October 1, 2021, the Company completed the acquisition of Twin Peaks Buyer LLC (“Twin Peaks”) for a total purchase price of $300.0 million, comprised of $222.1 million in net cash, a note payable in the amount of $10.4 million and 2,847,393 shares of the Company’s Series B Cumulative Preferred Stock (the “Twin Peaks Acquisition”).
On July 22, 2021, the Company completed the acquisition of GFG Holding Inc. (“GFG”) for a total purchase price of $447.7 million paid by the Company in the form of $355.2 million in cash, 3,089,245 shares of the Company’s Series B Cumulative Preferred Stock and 1,964,865 shares of the Company’s Common Stock (the “GFG Acquisition” and, together with the Twin Peaks Acquisition and the Fazoli’s Acquisition, the “Acquisitions”).
The following unaudited pro forma condensed combined balance sheet as of September 26, 2021 gives effect to the Twin Peaks Acquisition and the Fazoli’s Acquisition as if they had occurred on September 26, 2021, and the following unaudited pro forma condensed combined statements of operations for the thirty-nine weeks ended September 26, 2021 and for the year ended December 27, 2020 give effect to the Acquisitions as if they had occurred on December 30, 2019 (the “Pro Forma Financial Statements”). The Pro Forma Financial Statements are based on historical financial information of the entities, as adjusted to give effect to the Acquisitions. The Pro Forma Financial Statements have been prepared in accordance with Article 11 of Regulation S-X.
The following Pro Forma Financial Statements do not reflect the financial condition at the date or results of operations of the Company for the periods indicated. The assumptions used and pro forma adjustments derived from such assumptions are based on currently available information, and in many cases are based on estimates and preliminary information. The assumptions underlying the pro forma adjustments are described in the accompany notes to the unaudited pro forma combined financial statements. However, the Pro Forma Financial Statements may not be indicative of our future performance and do not necessarily reflect what our financial condition and results of operations would have been had the acquisition to which the pro forma adjustments relate occurred on the dates indicated above.
| 1. |
Unaudited Pro Forma Combined Balance Sheet
As of September 26, 2021
(in thousands)
| Historical Results | TP Transaction | Historical Results | Fazoli’s Transaction | |||||||||||||||||||||||||||||
| Fat Brands, Inc. | TP | Accounting Adjustments (Note 5) | Pro Forma | Fazoli’s | Accounting Adjustments (Note 5) | Pro Forma Combined | ||||||||||||||||||||||||||
| ASSETS | ||||||||||||||||||||||||||||||||
| Current assets: | ||||||||||||||||||||||||||||||||
| Cash | $ | 23,565 | $ | 11,947 | $ | (1,428 | ) | (a) | $ | 34,084 | $ | 9,054 | $ | (1,822 | ) | (h) | $ | 41,316 | ||||||||||||||
| Restricted cash | 13,557 | 5,000 | (1,250 | ) | (b) | 17,307 | - | 1,822 | (i) | 19,129 | ||||||||||||||||||||||
| Accounts receivable | 14,255 | 1,650 | - | 15,905 | 2,377 | - | 18,282 | |||||||||||||||||||||||||
| Trade and other notes receivable | 224 | - | - | 224 | - | - | 224 | |||||||||||||||||||||||||
| Inventory | - | 1,215 | - | 1,215 | 1,314 | - | 2,529 | |||||||||||||||||||||||||
| Assets classified as held for sale | 5,591 | - | - | 5,591 | - | - | 5,591 | |||||||||||||||||||||||||
| Prepaids and other current assets | - | (107 | ) | 107 | (c) | - | 528 | (528 | ) | (c)(d) | - | |||||||||||||||||||||
| Other current assets | 6,290 | - | - | 6,290 | - | 832 | (c) | 7,122 | ||||||||||||||||||||||||
| Total current assets | 63,482 | 19,705 | (2,571 | ) | 80,616 | 13,273 | 304 | 94,193 | ||||||||||||||||||||||||
| Noncurrent restricted cash | 6,406 | - | - | 6,406 | - | - | 6,406 | |||||||||||||||||||||||||
| Notes receivable | 2,054 | - | - | 2,054 | - | - | 2,054 | |||||||||||||||||||||||||
| Other intangible assets, net | 322,688 | 88,110 | 100,065 | (d) | 510,863 | 15,973 | 63,627 | (d) | 590,463 | |||||||||||||||||||||||
| Goodwill | 185,861 | 2,634 | 83,581 | (e) | 272,076 | 3,474 | 46,067 | (e) | 321,617 | |||||||||||||||||||||||
| Deferred income tax asset, net | 15,069 | - | - | 15,069 | - | (537 | ) | (c) | 14,532 | |||||||||||||||||||||||
| Operating lease right of use assets | 12,604 | - | 27,005 | (f) | 39,609 | - | 79,119 | (f) | 118,728 | |||||||||||||||||||||||
| Property and equipment, net | 10,227 | 32,086 | 3,122 | (d) | 45,435 | 19,415 | 4,430 | (d) | 69,280 | |||||||||||||||||||||||
| Other assets | 1,417 | 11,521 | (9,493 | ) | (d) | 3,445 | 312 | - | 3,757 | |||||||||||||||||||||||
| Total assets | $ | 619,808 | $ | 154,056 | $ | 201,709 | $ | 975,573 | $ | 52,447 | $ | 193,010 | $ | 1,221,030 | ||||||||||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||||||||||
| Current liabilities: | ||||||||||||||||||||||||||||||||
| Accounts payable | $ | 12,859 | $ | 3,149 | $ | - | $ | 16,008 | $ | 4,122 | $ | - | $ | 20,130 | ||||||||||||||||||
| Accrued expenses and other liabilities | 25,646 | 10,393 | 107 | (c) | 36,146 | 8,829 | (2,891 | ) | (d) | 42,084 | ||||||||||||||||||||||
| Accrued interest payable | 5,644 | - | - | 5,644 | - | - | 5,644 | |||||||||||||||||||||||||
| Accrued advertising | 6,012 | - | - | 6,012 | - | 1,704 | (c) | 7,716 | ||||||||||||||||||||||||
| Deferred income, current portion | 1,746 | 837 | - | 2,583 | - | - | 2,583 | |||||||||||||||||||||||||
| Dividend payable on preferred shares | 16 | - | - | 16 | - | - | 16 | |||||||||||||||||||||||||
| Liabilities related to assets classified as held for sale | 4,906 | - | - | 4,906 | - | - | 4,906 | |||||||||||||||||||||||||
| Current portion of operating lease liability | 4,784 | - | 4,801 | (f) | 9,585 | - | 6,181 | (f) | 15,766 | |||||||||||||||||||||||
| Current portion of long-term debt | 605 | 1,300 | (1,300 | ) | (g) | 605 | 2,602 | (2,602 | ) | (j) | 605 | |||||||||||||||||||||
| Total current liabilities | 62,218 | 15,679 | 3,608 | 81,505 | 15,553 | 2,392 | 99,450 | |||||||||||||||||||||||||
| Deferred income - noncurrent | 11,354 | 2,510 | - | 13,864 | 1,516 | (72 | ) | (d) | 15,308 | |||||||||||||||||||||||
| Long-term debt, net of current portion | 485,470 | 63,633 | 173,301 | (g) | 722,404 | 24,025 | 113,067 | (j) | 859,496 | |||||||||||||||||||||||
| Operating lease liability, net of current portion | 10,858 | - | 19,184 | (f) | 30,042 | - | 78,592 | (f) | 108,634 | |||||||||||||||||||||||
| Other liabilities | 1,117 | 9,493 | (9,493 | ) | 1,117 | 10,384 | - | 11,501 | ||||||||||||||||||||||||
| Acquisition purchase price payable | 800 | - | 10,350 | 11,150 | - | - | 11,150 | |||||||||||||||||||||||||
| Total liabilities | 571,817 | 91,315 | 196,950 | 860,082 | 51,478 | 193,979 | 1,105,539 | |||||||||||||||||||||||||
| Redeemable preferred stock | 66,810 | - | 67,500 | (a) | 134,310 | - | - | 134,310 | ||||||||||||||||||||||||
| Stockholders’ equity: | ||||||||||||||||||||||||||||||||
| Preferred stock | 37,908 | - | - | 37,908 | - | - | 37,908 | |||||||||||||||||||||||||
| Common stock | (23,931 | ) | - | - | (23,931 | ) | - | - | (23,931 | ) | ||||||||||||||||||||||
| Accumulated deficit | (32,875 | ) | (7,127 | ) | 7,127 | (32,875 | ) | (32,801 | ) | 32,801 | (32,875 | ) | ||||||||||||||||||||
| Noncontrolling interests | 79 | - | - | 79 | - | - | 79 | |||||||||||||||||||||||||
| Additional paid-in capital | - | 69,868 | (69,868 | ) | - | 33,770 | (33,770 | ) | - | |||||||||||||||||||||||
| Total stockholders’ deficit | (18,819 | ) | 62,741 | (62,741 | ) | (18,819 | ) | 969 | (969 | ) | (18,819 | ) | ||||||||||||||||||||
| Total liabilities, non-controlling interests and stockholders’ equity | $ | 619,808 | $ | 154,056 | $ | 201,709 | $ | 975,573 | $ | 52,447 | $ | 193,010 | $ | 1,221,030 | ||||||||||||||||||
| 2. |
Unaudited Pro Forma Combined Statement of Operations
For the Thirty Nine Weeks Ended September 26, 2021
(in thousands, except share and per share amounts)
| Historical Results | Historical Results | Historical Results | ||||||||||||||||||||||||||||||||||||||||||||
| Fat Brands Inc. | GFG | GFG Transaction Accounting Adjustments (Note 5) | Pro Forma | TP | TP Transaction Accounting Adjustments (Note 5) | Pro Forma as Adjusted | Fazoli’s | Fazoli’s Transaction Accounting Adjustments (Note 5) | Pro Forma as Further Adjusted | |||||||||||||||||||||||||||||||||||||
| Revenues | ||||||||||||||||||||||||||||||||||||||||||||||
| Royalties | $ | 24,800 | $ | 15,770 | $ | - | $ | 40,570 | $ | 9,918 | $ | - | $ | 50,488 | $ | 6,034 | $ | - | $ | 56,522 | ||||||||||||||||||||||||||
| Restaurant sales | 4,113 | - | 21,782 | (aa) | 25,895 | 81,404 | - | 107,299 | 66,313 | - | 173,612 | |||||||||||||||||||||||||||||||||||
| Company store revenue | - | 21,782 | (21,782 | ) | (aa) | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||
| Factory revenue | 5,480 | 16,114 | - | 21,594.0 | - | - | 21,594 | - | - | 21,594 | ||||||||||||||||||||||||||||||||||||
| Advertising fees | 8,043 | - | - | 8,043.0 | 5,147 | - | 13,190 | 1,531 | - | 14,721 | ||||||||||||||||||||||||||||||||||||
| Franchise fees | 2,109 | 559 | - | 2,668.0 | 198 | - | 2,866 | 170 | - | 3,036 | ||||||||||||||||||||||||||||||||||||
| Licensing and other revenue | - | 381 | - | 381.2 | - | - | 381 | - | - | 381 | ||||||||||||||||||||||||||||||||||||
| Management fees and other income | 148 | - | - | 148.0 | 532 | - | 680 | - | - | 680 | ||||||||||||||||||||||||||||||||||||
| Total revenues | 44,693 | 54,606 | - | 99,299 | 97,198 | - | 196,497 | 74,048 | - | 270,545 | ||||||||||||||||||||||||||||||||||||
| Costs and expenses | ||||||||||||||||||||||||||||||||||||||||||||||
| General and administrative expense | 23,375 | 27,727 | (1,494 | ) | (aa) | 49,608 | 8,227 | - | 57,835 | 7,943 | 36 | (aa) | 65,814 | |||||||||||||||||||||||||||||||||
| Restaurant operating expenses | 3,904 | - | (3,904 | ) | (aa) | - | 69,902 | (69,902 | ) | (aa) | - | 31,770 | (31,770 | ) | (aa) | - | ||||||||||||||||||||||||||||||
| Cost of revenues | - | 11,661 | 7,377 | (aa) | 19,038 | - | 69,902 | (aa) | 88,940 | - | 53,366 | (aa) | 142,306 | |||||||||||||||||||||||||||||||||
| Factory operating expenses | 3,473 | - | (3,473 | ) | (aa) | - | - | - | - | - | - | (aa) | - | |||||||||||||||||||||||||||||||||
| Restaurant rent expense | - | - | - | (aa) | - | - | - | - | 3,920 | (3,920 | ) | (aa) | - | |||||||||||||||||||||||||||||||||
| Cost of sales | - | - | - | - | - | - | - | 17,676 | (17,676 | ) | (aa) | - | ||||||||||||||||||||||||||||||||||
| Advertising expense | 8,043 | - | - | 8,043 | 5,679 | - | 13,722 | 3,951 | - | 17,673 | ||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | - | 1,705 | 3,609 | (aa)(cc) | 5,314 | 6,168 | (259 | ) | (cc) | 11,222 | 3,797 | (550 | ) | (cc) | 14,469 | |||||||||||||||||||||||||||||||
| Acquisition costs | 2,985 | - | - | 2,985 | - | - | 2,985 | - | - | 2,985 | ||||||||||||||||||||||||||||||||||||
| Refranchising (gain) loss | (679 | ) | - | - | (679 | ) | - | - | (679 | ) | - | - | (679 | ) | ||||||||||||||||||||||||||||||||
| Impairment of assets | - | - | - | - | - | - | - | 501 | - | 501 | ||||||||||||||||||||||||||||||||||||
| Other expense (income) | - | (710 | ) | 710 | (aa) | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||
| Total other income (expense) | 41,101 | 40,383 | 2,825 | 84,309 | 89,976 | (259 | ) | 174,026 | 69,558 | (514 | ) | 243,070 | ||||||||||||||||||||||||||||||||||
| Income (Loss) from operations | 3,592 | 14,223 | (2,825 | ) | 14,991 | 7,222 | 259 | 22,472 | 4,490 | 514 | 27,476 | |||||||||||||||||||||||||||||||||||
| Other income (expense) | ||||||||||||||||||||||||||||||||||||||||||||||
| Interest expense, net | (11,939 | ) | (11,876 | ) | (42 | ) | (bb) | (23,857 | ) | (4,480 | ) | (10,520 | ) | (ee) | (38,857 | ) | (994 | ) | (7,813 | ) | (ff) | (47,663 | ) | |||||||||||||||||||||||
| Net loss on extinguishment of debt | (6,418 | ) | - | - | (6,418 | ) | - | - | (6,418 | ) | - | - | (6,418 | ) | ||||||||||||||||||||||||||||||||
| Interest expense related to preferred shares | (725 | ) | - | - | (725 | ) | - | - | (725 | ) | - | - | (725 | ) | ||||||||||||||||||||||||||||||||
| Other expense | 189 | 4,565 | - | 4,754 | 9,354 | - | 14,108 | (29 | ) | - | 14,079 | |||||||||||||||||||||||||||||||||||
| Total other income (expense) | (18,893 | ) | (7,311 | ) | (42 | ) | (26,246 | ) | 4,874 | (10,520 | ) | (31,891 | ) | (1,023 | ) | (7,813 | ) | (40,727 | ) | |||||||||||||||||||||||||||
| (Loss) income before income tax expense | (15,301 | ) | 6,912 | (2,866 | ) | (11,255 | ) | 12,096 | (10,261 | ) | (9,420 | ) | 3,467 | (7,299 | ) | (13,252 | ) | |||||||||||||||||||||||||||||
| Income tax expense (benefit) | (3,303 | ) | 1,032 | (745 | ) | (dd) | (3,016 | ) | 210 | (2,668 | ) | (dd) | (5,474 | ) | 399 | (1,888 | ) | (6,963 | ) | |||||||||||||||||||||||||||
| Net income | (11,998 | ) | 5,880 | (2,121 | ) | (8,239 | ) | 11,886 | (7,593 | ) | (3,946 | ) | 3,068 | (5,411 | ) | (6,288 | ) | |||||||||||||||||||||||||||||
| Net loss attributable to noncontrolling interest | (19 | ) | - | - | (19 | ) | - | - | (19 | ) | - | - | (19 | ) | ||||||||||||||||||||||||||||||||
| Net income attributable to the Company | $ | (11,979 | ) | $ | 5,880 | $ | (2,121 | ) | $ | (8,220 | ) | $ | 11,886 | $ | (7,593 | ) | $ | (3,927 | ) | $ | 3,068 | $ | (5,411 | ) | $ | (6,269 | ) | |||||||||||||||||||
| Basic and diluted loss per common share | $ | (0.85 | ) | $ | (0.51 | ) | $ | (0.24 | ) | $ | (0.39 | ) | ||||||||||||||||||||||||||||||||||
| Basic and diluted weighted average shares outstanding | 14,094,772 | 16,059,637 | 16,059,637 | 16,059,637 | ||||||||||||||||||||||||||||||||||||||||||
| 3. |
Unaudited Pro Forma Combined Condensed Statement of Operations
For the Year Ended December 27, 2020
(in thousands, except share and per share amounts)
| Historical Results | Historical Results | Historical Results | ||||||||||||||||||||||||||||||||||||||||||||
| Fat Brands, Inc. | GFG | GFG Transaction Accounting Adjustments (Note 5) | Pro Forma | TP | TP Transaction Accounting Adjustments (Note 5) | Pro Forma as Adjusted | Fazoli’s | Fazoli’s Transaction Accounting Adjustments (Note 5) | Pro Forma as Further Adjusted | |||||||||||||||||||||||||||||||||||||
| Revenues | ||||||||||||||||||||||||||||||||||||||||||||||
| Royalties | $ | 13,420 | $ | 24,840 | $ | - | $ | 38,260 | $ | - | $ | 803 | (aa) | $ | 39,063 | $ | 6,696 | $ | - | $ | 45,759 | |||||||||||||||||||||||||
| Restaurant sales | - | - | 63,729 | (aa) | 63,729 | 75,538 | - | 139,267 | 75,504 | - | 214,771 | |||||||||||||||||||||||||||||||||||
| Company store revenue | - | 63,729 | (63,729 | ) | (aa) | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||
| Factory revenue | - | 24,267 | - | 24,267 | - | - | 24,267 | - | - | 24,267 | ||||||||||||||||||||||||||||||||||||
| Advertising fees | 3,527 | - | - | 3,527 | - | 6,084 | (aa) | 9,611 | 1,791 | - | 11,402 | |||||||||||||||||||||||||||||||||||
| Marketing fees | - | - | - | - | 6,084 | (6,084 | ) | (aa) | - | - | - | - | ||||||||||||||||||||||||||||||||||
| Franchise fees | 1,130 | 888 | - | 2,018 | - | 8,643 | (aa) | 10,661 | 265 | - | 10,926 | |||||||||||||||||||||||||||||||||||
| Franchise and royalty fees | - | - | - | - | 9,446 | (9,446 | ) | (aa) | - | - | - | - | ||||||||||||||||||||||||||||||||||
| Licensing and other revenue | - | 612 | (612 | ) | (aa) | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||
| Management fees and other income | 41 | - | 612 | (aa) | 653 | 1,322 | - | 1,975 | - | - | 1,975 | |||||||||||||||||||||||||||||||||||
| Total revenues | 18,118 | 114,336 | - | 132,454 | 92,390 | - | 224,844 | 84,256 | - | 309,100 | ||||||||||||||||||||||||||||||||||||
| Costs and expenses | ||||||||||||||||||||||||||||||||||||||||||||||
| General and Adminstrative expense | 14,876 | 73,987 | 3,230 | (aa) | 92,093 | 9,958 | - | 102,051 | 12,228 | 142 | (aa) | 114,421 | ||||||||||||||||||||||||||||||||||
| Cost of revenues | - | 23,099 | - | 23,099 | - | 75,337 | (aa) | 98,436 | - | - | 98,436 | |||||||||||||||||||||||||||||||||||
| Advertising expense | 5,218 | - | - | 5,218 | - | - | 5,218 | 4,924 | 61,903 | (aa) | 72,045 | |||||||||||||||||||||||||||||||||||
| Restaurant operating expenses | - | - | - | - | 25,391 | (25,391 | ) | (aa) | - | 34,512 | (34,512 | ) | (aa) | - | ||||||||||||||||||||||||||||||||
| Restaurant rent expense | - | - | - | - | - | - | - | 4,961 | (4,961 | ) | (aa) | - | ||||||||||||||||||||||||||||||||||
| Severance, relocation and recruitment | - | - | - | - | - | - | - | 142 | (142 | ) | (aa) | - | ||||||||||||||||||||||||||||||||||
| Cost of sales | - | - | - | - | 20,810 | (20,810 | ) | (aa) | - | 19,468 | (19,468 | ) | (aa) | - | ||||||||||||||||||||||||||||||||
| Labor expenses | - | - | - | - | 29,136 | (29,136 | ) | (aa) | - | - | - | - | ||||||||||||||||||||||||||||||||||
| Refranchising (gain) loss | 3,827 | - | - | 3,827 | - | - | 3,827 | - | - | 3,827 | ||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | - | 4,074 | 6,819 | (aa)(cc) | 10,893 | 8,232 | (253 | ) | (cc) | 18,872 | 4,941 | (617 | ) | (cc) | 23,196 | |||||||||||||||||||||||||||||||
| Impairment of assets | 9,295 | 24,476 | - | 33,771 | - | - | 33,771 | 503 | - | 34,274 | ||||||||||||||||||||||||||||||||||||
| Other expense (income) | - | 4,402 | (4,402 | ) | (aa) | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||
| Total costs and expenses | 33,216 | 130,038 | 5,647 | 168,901 | 93,527 | (253 | ) | 262,175 | 81,679 | (617 | ) | 343,237 | ||||||||||||||||||||||||||||||||||
| Income (Loss) from operations | (15,098 | ) | (15,702 | ) | (5,647 | ) | (36,447 | ) | (1,137 | ) | 253 | (37,331 | ) | 2,577 | 617 | (34,137 | ) | |||||||||||||||||||||||||||||
| Other income (expense) | ||||||||||||||||||||||||||||||||||||||||||||||
| Interest expense, net | (3,375 | ) | (20,911 | ) | (2,924 | ) | (bb) | (27,210 | ) | (6,892 | ) | (13,108 | ) | (ee) | (47,210 | ) | (1,521 | ) | (10,222 | ) | (ff) | (58,953 | ) | |||||||||||||||||||||||
| Interest expense related to preferred shares | (1,544 | ) | - | - | (1,544 | ) | - | - | (1,544 | ) | - | - | (1,544 | ) | ||||||||||||||||||||||||||||||||
| Change in fair value of derivative liability | 887 | - | - | 887 | (344 | ) | - | 543 | - | - | 543 | |||||||||||||||||||||||||||||||||||
| Gain on contingent consideration payable adjustment | 1,680 | - | - | 1,680 | - | - | 1,680 | - | - | 1,680 | ||||||||||||||||||||||||||||||||||||
| Earnout liability adjustment | - | - | - | - | 5,200 | - | 5,200 | - | - | 5,200 | ||||||||||||||||||||||||||||||||||||
| Net loss on extinguishment of debt | (88 | ) | - | - | (88 | ) | - | - | (88 | ) | - | - | (88 | ) | ||||||||||||||||||||||||||||||||
| Loss on disposal of assets | - | - | - | - | (3,051 | ) | - | (3,051 | ) | - | - | (3,051 | ) | |||||||||||||||||||||||||||||||||
| Other expense | (1,011 | ) | (94 | ) | - | (1,105 | ) | (4,051 | ) | - | (5,156 | ) | (73 | ) | - | (5,229 | ) | |||||||||||||||||||||||||||||
| Total other income (expense) | (3,451 | ) | (21,005 | ) | (2,924 | ) | (27,380 | ) | (9,138 | ) | (13,108 | ) | (49,626 | ) | (1,594 | ) | (10,222 | ) | (61,442 | ) | ||||||||||||||||||||||||||
| Income (Loss) before income tax expense | (18,549 | ) | (36,707 | ) | (8,571 | ) | (63,827 | ) | (10,275 | ) | (12,855 | ) | (86,957 | ) | 983 | (9,605 | ) | (95,579 | ) | |||||||||||||||||||||||||||
| Income tax expense (benefit) | (3,689 | ) | (8,375 | ) | (2,228 | ) | (dd) | (14,292 | ) | - | (3,342 | ) | (dd) | (17,635 | ) | 302 | (2,497 | ) | (dd) | (19,830 | ) | |||||||||||||||||||||||||
| Net income | $ | (14,860 | ) | $ | (28,332 | ) | $ | (6,343 | ) | $ | (49,535 | ) | $ | (10,275 | ) | $ | (9,512 | ) | $ | (69,322 | ) | $ | 681 | $ | (7,108 | ) | $ | (75,749 | ) | |||||||||||||||||
| Basic and diluted loss per common share | $ | (1.25 | ) | $ | (3.57 | ) | $ | (5.00 | ) | $ | (5.46 | ) | ||||||||||||||||||||||||||||||||||
| Basic and diluted weighted average shares outstanding | 11,897,952 | 13,862,817 | 13,862,817 | 13,862,817 | ||||||||||||||||||||||||||||||||||||||||||
| 4. |
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
NOTE 1 – BASIS OF PRESENTATION
The Pro Forma Financial Statements are based on historical financial statements of the entities, as adjusted to give effect to the Acquisitions. The pro forma condensed combined balance sheet as of September 26, 2021 gives effect to the Twin Peaks Acquisition and the Fazoli’s Acquisition as if they had occurred on September 26, 2021. The pro forma condensed combined statements of operations for the thirty-nine weeks ended September 26, 2021 and for the year ended December 27, 2020 give effect to the Acquisitions as if they had occurred on December 30, 2019 (the beginning of the Company’s 2020 fiscal year). In addition to the historical financial statements included as exhibits to this Form 8-K/A, the Pro Forma Financial Statements should be read in conjunction with the following information or documents filed with the U.S. Securities and Exchange Commission (the “SEC”): the Company’s Form 10-K as of December 27, 2020 filed with the SEC on March 29, 2021, the Form 10-Q as of September 26, 2021 filed with the SEC on November 8, 2021, the Form 8-K filed with the SEC on July 26, 2021, the Form 8-K/A filed with the SEC on October 5, 2021, the Form 8-K filed with the SEC on October 6, 2021, the Form 8-K/A filed with the SEC on October 15, 2021 and the Form 8-K filed with the SEC on December 16, 2021.
Fazoli’s most recent fiscal year ended March 31, 2021 and the historical results of operations are presented in the pro forma combined condensed statement of operations for the year ended December 27, 2020, the Company’s most recent fiscal year end. Fazoli’s historical results presented in the pro forma combined condensed statement of operations for the nine months ended September 26, 2021 include the period from December 31, 2020 through March 31, 2021, representing Fazoli’s fourth quarter. As a result, the results of operations for the period from December 31, 2020 through March 31, 2021 are included in both the fiscal year and subsequent interim period results. Total revenues and net income for this period were $22.7 million and $0.6 million, respectively.
NOTE 2 – PRELIMINARY PURCHASE PRICE ALLOCATION
The Pro Forma Financial Statements include various assumptions, including those related to the preliminary purchase price allocations of the assets acquired and liabilities assumed of GFG, Twin Peaks and Fazoli’s on preliminary estimates of fair value by management and third-party valuation experts. The final purchase price allocations may vary based on final appraisals, valuations and analyses of the fair value of the acquired assets and assumed liabilities as well as final post-closing adjustments, if any. Accordingly, the pro forma adjustments are preliminary and may be subject to change.
The preliminary assessment of the fair value of the net assets and liabilities acquired by the Company through the Twin Peaks Acquisition was estimated at $310.3 million. The preliminary allocation of the consideration to the net tangible and intangible assets acquired is presented in the table below (in millions):
| Cash | $ | 9.8 | ||
| Accounts receivable | 1.6 | |||
| Inventory | 1.2 | |||
| Goodwill | 86.2 | |||
| Other intangible assets, net | 188.2 | |||
| Below market leases | 3.0 | |||
| Other assets | 2.0 | |||
| Fixed assets | 35.2 | |||
| Accounts payable | (3.1 | ) | ||
| Accrued expenses and other liabilities | (10.5 | ) | ||
| Deferred income – current | (0.8 | ) | ||
| Deferred income – noncurrent | (2.5 | ) | ||
| Total net identifiable assets | $ | 310.3 |
| 5. |
The preliminary assessment of the fair value of the net assets and liabilities acquired by the Company through the Fazoli’s Acquisition was estimated at $137.1 million. The preliminary allocation of the consideration to the net tangible and intangible assets acquired is presented in the table below (in millions):
| Cash | $ | 9.1 | ||
| Accounts receivable | 2.4 | |||
| Inventory | 1.3 | |||
| Other current assets | 0.3 | |||
| Goodwill | 49.5 | |||
| Other intangible assets, net | 79.6 | |||
| Other assets | 0.3 | |||
| Fixed assets | 23.8 | |||
| Accounts payable | (4.1 | ) | ||
| Accrued expenses and other liabilities | (7.6 | ) | ||
| Above market leases | (5.7 | ) | ||
| Deferred income – noncurrent | (1.4 | ) | ||
| Other liabilities | (10.4 | ) | ||
| Total net identifiable assets | $ | 137.1 |
NOTE 3 – IDENTIFIABLE INTANGIBLE ASSETS
Our preliminary valuation estimates of the identifiable intangible assets acquired in connection with the Twin Peaks Acquisition are based on initial valuations performed by management and third-party experts. However, these estimates are preliminary, as we have not completed our analysis of all the facts surrounding the business acquired and therefore have not finalized the accounting for these transactions. Our preliminary estimate of identifiable intangible assets total $188.2 million, comprised of $161.8 million in trademarks, $26.0 million in franchise agreements and $0.4 million in liquor licenses.
Our preliminary valuation estimates of the identifiable intangible assets acquired in connection with the Fazoli’s Acquisition are based on initial valuations performed by management and third-party experts. However, these estimates are preliminary, as we have not completed our analysis of all the facts surrounding the business acquired and therefore have not finalized the accounting for these transactions. Our preliminary estimate of identifiable intangible assets total $79.6 million, comprised of $65.1 million in trademarks and $14.5 million in franchise agreements.
NOTE 4 – GOODWILL
Our preliminary valuation estimates of goodwill in the amount of $86.2 million related to the Twin Peaks acquisition and $49.5 million related to the Fazoli’s acquisition are based on the excess of the estimated purchase price paid for Twin Peaks and Fazoli’s over the estimated fair market value of the identifiable assets and liabilities acquired. These estimates are preliminary and will be refined once the valuation process is completed.
| 6. |
NOTE 5 – PRO FORMA ADJUSTMENTS
The pro forma adjustments are based on our preliminary estimates and assumptions that are subject to change. The following adjustments have been reflected in the Pro Forma Financial Statements:
Balance Sheet Pro Forma Adjustments
(a)
|
Consideration of $300.3 million for the Twin Peaks Acquisition was in the form of $222.1 million in net cash, a $10.4 million promissory note and 2,847,393 shares of the Company’s Series B Cumulative Preferred Stock ($67.5 million). | |
| (b) | Represents $3.8 million of restricted cash consisting of funds required to be held in trust in connection with the issuance of the Twin Peaks Notes (see (g) below). | |
| (c) | Represents reclassifications that have been made to the historical presentation to conform to the financial statement presentation of the Company. | |
| (d) | Reflects the adjustment of historical tangible and intangible assets acquired by the Company to their estimated fair values. The estimates of fair value may differ from amounts the Company will calculate after completing a detailed valuation analysis, and the difference could have a material effect on the accompanying unaudited pro forma condensed combined financial statements. | |
| (e) | Reflects adjustment to record goodwill resulting from the Acquisitions. | |
| (f) | As non-public companies, Twin Peaks and Fazoli’s were not yet required to adopt ASU 2016-02, Leases (Topic 842), requiring a lessee to recognize on the balance sheet the assets and liabilities for the rights and obligations created by leases with a term of more than twelve months. However, as a part of the Company’s consolidated group, Twin Peaks and Fazoli’s adopted ASU 2016-02 as of the dates of the Acquisitions. Accordingly, the Pro Forma Financial Statements have been adjusted to record an operating lease right of use asset and an operating lease liability. Twin Peaks and Fazoli’s have certain operating leases for corporate offices and for company-owned restaurant properties. | |
| (g) | The net increase to debt reflects the issuance of new debt of $250.0 million of fixed rate asset backed notes comprised of aggregate principal amounts of $150.0 million of Class A-2 notes bearing interest at 7.00%, $50.0 million of Class B-2 notes bearing interest at 9.00% and $50.0 million of Class M-2 notes bearing interest at 10.00% (net proceeds of $236.9 million), collectively, the “Twin Peaks Notes.” Twin Peak’s outstanding debt was also extinguished upon consummation of the Twin Peaks Acquisition. | |
| (h) | Consideration of $137.1 million for the Fazoli’s Acquisition was in the form of net cash. | |
(i)
|
Represents $1.8 million of restricted cash consisting of funds required to be held in trust in connection with the issuance of the Fazoli’s Notes (see (j) below). | |
(j)
|
The net increase to debt reflects the issuance of new debt of $149.1 million of fixed rate asset backed notes comprised of aggregate principal amounts of $99.1 million of Class A-2 notes bearing interest at 6.00%, $19.2 million of Class B-2 notes bearing interest at 7.00% and $30.8 million of Class M-2 notes bearing interest at 9.00% (net proceeds of $137.1 million), collectively, the “Fazoli’s Notes.” Fazoli’s outstanding debt was also extinguished upon consummation of the Fazoli’s Acquisition. |
Statement of Operations Pro Forma Adjustments
| (aa) | Represents reclassifications that have been made to the historical presentation to conform to the financial statement presentation of the Company and the presentation of depreciation and amortization expense separately due to its materiality. | |
(bb)
|
Represents the net increase to interest expense resulting from interest on the GFG Notes to finance the GFG Acquisition. | |
| (cc) | Represents the adjustment to reflect the amortization related to amortizing intangible assets (see (d) above). | |
| (dd) | Represents the income tax expense effect based on a statutory income tax rate of 26%. | |
(ee)
(ff) |
Represents the net increase to interest expense resulting from interest on the Twin Peaks Notes to finance the Twin Peaks Acquisition.
Represents the net increase to interest expense resulting from interest on the Fazoli’s Notes to finance the Fazoli’s Acquisition. |
| 7. |