Fat Brands, Inc 10-Q for FY2023 Q3
Fat Brands, Inc (FATAQ)
10-Q
2023-10-31
For: 2023-09-24
View Original
Added on
April 12, 2026
About this 10-Q
Fat Brands, Inc filed this 10-Q on October 31, 2023, covering the quarter ended September 24, 2023 (FY2023 Q3).
Headline figures
Quarter ended September 24, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $109.37M
- up 6.0% from $103.22M a year earlier
- Net loss
- $24.66M
- compared with a net loss of $23.44M a year earlier
- Diluted EPS
- -$1.59
- compared with -$1,520.00 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended September 24, 2023
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
Commission file number 001-38250
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(Address of principal executive offices, including zip code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | o | Accelerated filer | o | ||||||||
| x | Smaller reporting company | ||||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes o No x
As of October 24, 2023, there were 15,518,518 shares of Class A common stock and 1,270,805 shares of Class B common stock outstanding.
FAT BRANDS INC.
QUARTERLY REPORT ON FORM 10-Q
September 24, 2023
TABLE OF CONTENTS
2
PART I — FINANCIAL INFORMATION (UNAUDITED)
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FAT BRANDS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| September 24, 2023 | December 25, 2022 | ||||||||||
| Audited | |||||||||||
| Assets | |||||||||||
| Current assets | |||||||||||
| Cash | $ | $ | |||||||||
| Restricted cash | |||||||||||
Accounts receivable, net of allowances of $ as of September 24, 2023 and December 25, 2022, respectively | |||||||||||
| Inventory | |||||||||||
| Assets classified as held-for-sale | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Non-current restricted cash | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Goodwill | |||||||||||
| Other intangible assets, net | |||||||||||
| Property and equipment, net | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Stockholders’ Deficit | |||||||||||
| Liabilities | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued expenses and other liabilities | |||||||||||
| Deferred income, current portion | |||||||||||
| Accrued advertising | |||||||||||
| Accrued interest payable | |||||||||||
| Dividend payable on preferred shares | |||||||||||
| Liabilities related to assets classified as held-for-sale | |||||||||||
| Operating lease liability, current portion | |||||||||||
| Redeemable preferred stock | |||||||||||
| Long-term debt, current portion | |||||||||||
| Acquisition purchase price payable | |||||||||||
| Total current liabilities | |||||||||||
| Deferred income, net of current portion | |||||||||||
| Deferred income tax liabilities, net | |||||||||||
| Operating lease liability, net of current portion | |||||||||||
| Long-term debt, net of current portion | |||||||||||
| Other liabilities | |||||||||||
| Total liabilities | |||||||||||
3
Commitments and contingencies (Note 13) | |||||||||||
| Stockholders’ deficit | |||||||||||
Preferred stock, $ | |||||||||||
Class A common stock and Class B common stock and additional paid-in capital as of September 24, 2023: $ | ( | ( | |||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total stockholders’ deficit | ( | ( | |||||||||
| Total liabilities and stockholders’ deficit | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
FAT BRANDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||
| September 24, 2023 | September 25, 2022 | September 24, 2023 | September 25, 2022 | ||||||||||||||||||||
| Revenue | |||||||||||||||||||||||
| Royalties | $ | $ | $ | $ | |||||||||||||||||||
| Restaurant sales | |||||||||||||||||||||||
| Advertising fees | |||||||||||||||||||||||
| Factory revenues | |||||||||||||||||||||||
| Franchise fees | |||||||||||||||||||||||
| Other revenue | |||||||||||||||||||||||
| Total revenue | |||||||||||||||||||||||
| Costs and expenses | |||||||||||||||||||||||
| General and administrative expense | |||||||||||||||||||||||
| Cost of restaurant and factory revenues | |||||||||||||||||||||||
| Depreciation and amortization | |||||||||||||||||||||||
| Refranchising loss | |||||||||||||||||||||||
| Acquisition costs | |||||||||||||||||||||||
| Advertising fees | |||||||||||||||||||||||
| Total costs and expenses | |||||||||||||||||||||||
| Income from operations | |||||||||||||||||||||||
| Other (expense) income, net | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Interest expense related to preferred shares | ( | ( | ( | ( | |||||||||||||||||||
| Net loss on extinguishment of debt | ( | ( | |||||||||||||||||||||
| Other (expense) income, net | ( | ||||||||||||||||||||||
| Total other expense, net | ( | ( | ( | ( | |||||||||||||||||||
| Loss before income tax (benefit) provision | ( | ( | ( | ( | |||||||||||||||||||
| Income tax (benefit) provision | ( | ||||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Dividends on preferred shares | ( | ( | ( | ( | |||||||||||||||||||
| $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||
| Basic and diluted loss per common share | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Basic and diluted weighted average shares outstanding | |||||||||||||||||||||||
| Cash dividends declared per common share | $ | $ | $ | $ | |||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
FAT BRANDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
(in thousands)
For the Thirty-Nine Weeks Ended September 24, 2023
| Common Stock | Preferred Stock | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Class A Shares | Class B Shares | Class A Par Value | Class B Par Value | Additional Paid-In Capital | Total Common Stock | Shares | Par Value | Additional Paid-In Capital | Total Preferred Stock | Accumulated Deficit | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 25, 2022 | $ | $ | $ | ( | $ | ( | $ | $ | $ | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common and preferred stock | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends paid on common stock | — | — | — | — | ( | ( | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends paid on Series B preferred stock | — | — | — | — | — | — | — | — | ( | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 24, 2023 | $ | $ | $ | ( | $ | ( | $ | $ | $ | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
For the Thirty-Nine Weeks Ended September 25, 2022
| Common Stock | Preferred Stock | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Class A Shares | Class B Shares | Class A Par Value | Class B Par Value | Additional Paid-In Capital | Total Common Stock | Shares | Par Value | Additional Paid-In Capital | Total Preferred Stock | Accumulated Deficit | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 26, 2021 | $ | $ | $ | ( | $ | ( | $ | $ | $ | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common and preferred stock | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends paid on common stock | — | — | — | — | ( | ( | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in lieu of cash - director fees | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends paid on Series B preferred stock | — | — | — | — | — | — | — | — | ( | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of Series B preferred stock put option | — | — | — | — | — | — | — | — | ( | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 25, 2022 | $ | $ | $ | ( | $ | ( | $ | $ | $ | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
6
For the Thirteen Weeks Ended September 24, 2023
| Common Stock | Preferred Stock | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Class A Shares | Class B Shares | Class A Par Value | Class B Par Value | Additional Paid-In Capital | Total Common Stock | Shares | Par Value | Additional Paid-In Capital | Total Preferred Stock | Accumulated Deficit | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 25, 2023 | $ | $ | $ | ( | $ | ( | $ | $ | $ | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common and preferred stock | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends paid on common stock | — | — | — | — | ( | ( | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends paid on Series B preferred stock | — | — | — | — | — | — | — | — | ( | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 24, 2023 | $ | $ | $ | ( | $ | ( | $ | $ | $ | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
For the Thirteen Weeks Ended September 25, 2022
| Common Stock | Preferred Stock | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Class A Shares | Class B Shares | Class A Par Value | Class B Par Value | Additional Paid-In Capital | Total Common Stock | Shares | Par Value | Additional Paid-In Capital | Total Preferred Stock | Accumulated Deficit | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 26, 2022 | $ | $ | $ | ( | $ | ( | $ | $ | $ | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common and preferred stock | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends paid on common stock | — | — | — | — | ( | ( | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in lieu of cash - director fees | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends paid on Series B preferred stock | — | — | — | — | — | — | — | — | ( | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 25, 2022 | $ | $ | $ | ( | $ | ( | $ | $ | $ | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
FAT BRANDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Thirty-Nine Weeks Ended September 24, 2023 and September 25, 2022
| 2023 | 2022 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash used in operations: | |||||||||||
| Deferred income taxes | ( | ||||||||||
| Depreciation and amortization | |||||||||||
| Share-based compensation | |||||||||||
| Accretion of loan fees and interest | |||||||||||
| Adjustments of purchase price liability | ( | ||||||||||
| Net loss on extinguishment of debt | |||||||||||
| Provision for bad debts | ( | ||||||||||
| Change in: | |||||||||||
| Accounts receivable | ( | ||||||||||
| Inventory | |||||||||||
| Other current and noncurrent assets | ( | ( | |||||||||
| Operating lease assets and liabilities | |||||||||||
| Deferred income | ( | ||||||||||
| Accounts payable | ( | ||||||||||
| Accrued expenses and other liabilities | |||||||||||
| Accrued advertising | ( | ||||||||||
| Accrued interest payable | |||||||||||
| Other current and noncurrent liabilities | ( | ( | |||||||||
| Total adjustments | |||||||||||
| Net cash used in operating activities | ( | ( | |||||||||
| Cash flows from investing activities: | |||||||||||
| Acquisitions, net of cash acquired | ( | ( | |||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Payments received on notes receivable | |||||||||||
| Other | |||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from borrowings, net of issuance costs | |||||||||||
| Repayments of borrowings | ( | ( | |||||||||
| Change in operating lease liabilities | ( | ||||||||||
| Proceeds from issuance of common and preferred shares | |||||||||||
| Dividends paid on redeemable preferred stock | ( | ||||||||||
| Dividends paid on common shares | ( | ( | |||||||||
| Dividends paid on preferred shares | ( | ( | |||||||||
| Net cash provided by financing activities | |||||||||||
| Net increase (decrease) in cash and restricted cash | ( | ||||||||||
| Cash and restricted cash at beginning of the period | |||||||||||
| Cash and restricted cash at end of the period | $ | $ | |||||||||
| Supplemental disclosures of cash flow information: | |||||||||||
| Cash paid for interest | $ | $ | |||||||||
| Cash paid for income taxes | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND RELATIONSHIPS
Organization and Nature of Business
FAT Brands Inc. (the "Company" or "FAT") is a leading multi-brand restaurant company that develops, markets, acquires and manages quick-service, fast casual, casual dining and polished casual dining restaurant concepts around the world. As of September 24, 2023, the Company owned seventeen restaurant brands: Round Table Pizza, Fatburger, Marble Slab Creamery, Johnny Rockets, Fazoli's, Twin Peaks, Great American Cookies, Hot Dog on a Stick, Buffalo’s Cafe & Express, Hurricane Grill & Wings, Pretzelmaker, Elevation Burger, Native Grill & Wings, Yalla Mediterranean and Ponderosa and Bonanza Steakhouses. As of September 24, 2023, the Company had approximately 2,300 locations open and under construction, of which approximately 95 % were franchised.
Each franchising subsidiary licenses the right to use its brand name and provides franchisees with operating procedures and methods of merchandising. Upon signing a franchise agreement, the franchisor is committed to provide training, some supervision and assistance and access to operations manuals. As needed, the franchisor will also provide advice and written materials concerning techniques of managing and operating the restaurants.
The Company's operations have historically been comprised primarily of franchising a growing portfolio of restaurant brands. This growth strategy is centered on expanding the footprint of existing brands and acquiring new brands through a centralized management organization which provides substantially all executive leadership, marketing, training and accounting services. As part of these ongoing franchising efforts, the Company will, from time to time, make opportunistic acquisitions of operating restaurants and may convert them to franchise locations. During the refranchising period the Company may operate the restaurants and classifies the operational activities as refranchising gains or losses and the assets and associated liabilities as held-for sale. Through recent acquisitions, the Company also operates "company-owned" restaurant locations of certain brands.
Liquidity
The Company recognized income from operations of $25.5 million and $14.7 million during the thirty-nine weeks ended September 24, 2023 and September 25, 2022, respectively. The Company has a history of net losses and an accumulated deficit of $242.5 million as of September 24, 2023. Additionally, the Company had negative working capital of $102.3 million. Of this amount, $91.8 million represents redeemable preferred stock as discussed in Note 9. Since the Company did not deliver the applicable cash proceeds at the related due dates, the amount accrues interest until the payments are completed. The Company had $88.0 million of unrestricted cash at September 24, 2023 and plans on the combination of cash flows from operations, cash on hand, $139.9 million of issued but not sold aggregate principal amount of fixed rate secured notes and $78.4 million aggregate principal amount of repurchased but not re-sold fixed rate secured notes (see Note 8) to be sufficient to cover any working capital requirements for the next twelve months from the date of this report. If the Company does not achieve its operating plan, additional forms of financing may be required through the issuance of debt or equity. Although management believes it will have access to financing, no assurances can be given that such financing will be available on acceptable terms, in a timely manner or at all.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation – The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Our revenues are derived primarily from two sales channels, franchised restaurants and company-owned locations, which we operate as one reportable segment.
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. In the opinion of the Company, all adjustments considered necessary for the fair presentation of the Company’s results of operations, financial position and cash flows for the periods presented have been included and are of a normal, recurring nature. These financial statements should be read in conjunction with the audited financial statements and the related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended December 25, 2022.
9
Employee Retention Tax Credits - On March 27, 2020, the U.S. government enacted the Coronavirus Aid Relief and Security Act (the "CARES Act") to provide certain relief as a result of the COVID-19 pandemic. The CARES Act provides tax relief, along with other stimulus measures, including a provision for an Employee Retention Credit ("ERC"). As there is no authoritative guidance under U.S. GAAP on accounting for government assistance to for-profit business entities, the Company accounts for the ERC by analogy to International Accounting Standard, Accounting for Government Grants and Disclosure of Government Assistance ("IAS 20"). During 2022, the Company filed with the Internal Revenue Service credits totaling $22.0 million, $21.5 million of which was filed during the thirty-nine weeks ended September 25, 2022. During the fourth quarter of 2022, in accordance with IAS 20, the Company fully reserved the amounts claimed until such time that it has been determined that the Company has reasonable assurance that the credits will be realized. During the thirty-nine weeks ended September 24, 2023, the Company received $13.7 13.7
Recently Adopted Accounting Standards
In March 2022, the Financial Accounting Standards Board (the "FASB") issued ASU No. 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The purpose of this amendment is to enhance disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. It requires that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases. The amendments should be applied prospectively and are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company adopted ASC No. 2022-02 for the fiscal year beginning December 26, 2022, which did not have an effect on the Company's condensed consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326)-Measurement of Credit Losses on Financial Instruments. This guidance replaced the previous incurred loss impairment methodology. Under the new guidance, on initial recognition and at each reporting period, an entity is required to recognize an allowance that reflects its current estimate of credit losses expected to be incurred over the life of the financial instrument based on historical experience, current conditions and reasonable and supportable forecasts. In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates (“ASU 2019-10”). The purpose of this amendment was to create a two-tier rollout of major updates, staggering the effective dates between larger public companies and all other entities. This granted certain classes of companies, including Smaller Reporting Companies (“SRCs”), additional time to implement major FASB standards, including ASU 2016-13. Larger public companies had an effective date for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All other entities were permitted to defer adoption of ASU 2016-13, and its related amendments, until fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company meets the definition of an SRC and adopted the deferral period for ASU 2016-13. The guidance requires a modified retrospective transition approach through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption, if applicable. The Company adopted ASU No. 2016-13 for the fiscal year beginning December 26, 2022. The adoption did not require an adjustment to retained earnings and did not have an effect on the Company's condensed consolidated financial statements.
10
NOTE 3. REFRANCHISING
As part of its ongoing franchising efforts, the Company may, from time to time, sell operating restaurants built or acquired by the Company in order to convert them to franchise locations or acquire existing franchised locations to resell them to another franchisee across all of its brands.
The following assets used in the operation of certain restaurants meet all of the criteria requiring that they be classified as held-for-sale, and have been classified accordingly in the accompanying condensed consolidated balance sheets as of September 24, 2023 and December 25, 2022 (in millions):
| September 24, 2023 | December 25, 2022 | ||||||||||
| Property and equipment | $ | $ | |||||||||
| Operating lease right-of-use assets | |||||||||||
| Total | $ | $ | |||||||||
Operating lease liabilities related to the assets classified as held-for-sale in the amount of $3.3 million and $4.1 million have been classified as current liabilities in the accompanying condensed consolidated balance sheets as of September 24, 2023 and December 25, 2022, respectively.
The following table highlights the operating results of the Company's refranchising program (in millions):
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||
| September 24, 2023 | September 25, 2022 | September 24, 2023 | September 25, 2022 | ||||||||||||||||||||
| Restaurant costs and expenses, net of revenue | $ | $ | $ | $ | |||||||||||||||||||
| Gains on store sales or closures | ( | ||||||||||||||||||||||
| Refranchising loss | $ | $ | $ | $ | |||||||||||||||||||
NOTE 4. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following (in millions):
| September 24, 2023 | December 25, 2022 | ||||||||||
| Real estate | $ | $ | |||||||||
| Equipment | |||||||||||
| $ | $ | ||||||||||
| Accumulated depreciation | ( | ( | |||||||||
| Property and equipment, net | $ | $ | |||||||||
Depreciation expense during the thirteen weeks ended September 24, 2023 and September 25, 2022 was $3.2 million and $3.0 million, respectively. Depreciation expense during the thirty-nine weeks ended September 24, 2023 and September 25, 2022 was $9.9 million and $8.8 million, respectively.
Upon retirement or other disposal of property and equipment, the cost and related amounts of accumulated depreciation are eliminated from the asset and accumulated depreciation accounts, respectively. The difference, if any, between the net asset value and the proceeds, is recorded in earnings.
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NOTE 5. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Changes in Carrying Value of Goodwill and Other Intangible Assets (in millions)
| Amortizing Intangible Assets | Non-Amortizing Intangible Assets | ||||||||||||||||
| Goodwill | Trademarks | ||||||||||||||||
| December 25, 2022 | $ | $ | $ | ||||||||||||||
| Amortization | ( | — | — | ||||||||||||||
| Acquisition | — | — | |||||||||||||||
| September 24, 2023 | $ | $ | $ | ||||||||||||||
Gross Carrying Value and Accumulated Amortization of Other Intangible Assets (in millions)
| September 24, 2023 | December 25, 2022 | |||||||||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||||||||||||||||
| Amortizing intangible assets | ||||||||||||||||||||||||||||||||||||||
| Franchise agreements | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||
| Customer relationships | ( | ( | ||||||||||||||||||||||||||||||||||||
| Other | ( | ( | ||||||||||||||||||||||||||||||||||||
| $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||
| Non-amortizing intangible assets | ||||||||||||||||||||||||||||||||||||||
| Trademarks | ||||||||||||||||||||||||||||||||||||||
| Total amortizing and non-amortizing intangible assets, net | $ | $ | ||||||||||||||||||||||||||||||||||||
Amortization expense for the thirteen weeks ended September 24, 2023 and September 25, 2022 was $3.8 million and $3.9 million, respectively. Amortization expense for the thirty-nine weeks ended September 24, 2023 and September 25, 2022 was $11.3 million and $11.3 million, respectively.
The expected future amortization of definite-life intangible assets by fiscal year (in millions):
| Fiscal Year: | |||||
| Remainder of 2023 | $ | ||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| Thereafter | |||||
| Total | $ | ||||
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NOTE 6. INCOME TAXES
The following table presents the Company’s provision (benefit) for income taxes (in millions):
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||||||||||||
| September 24, 2023 | September 25, 2022 | September 24, 2023 | September 25, 2022 | |||||||||||||||||||||||
| (Benefit) provision for income taxes | $ | ( | $ | $ | $ | |||||||||||||||||||||
| Effective tax rate | % | ( | % | ( | % | ( | % | |||||||||||||||||||
The difference between the statutory tax rate of 21 5.0 % and (4.2 )% in the thirteen weeks and thirty-nine weeks ended September 24, 2023, respectively, was primarily due to increases in the valuation allowance, nondeductible expenses and the impact of state income taxes.
The difference between the statutory tax rate of 21 2.3 )% and (9.5 )% in the thirteen weeks and thirty-nine weeks ended September 25, 2022, respectively, was primarily due to increases in the valuation allowance, nondeductible expenses and the impact of state income taxes.
NOTE 7. LEASES
The Company recognized lease expense of $4.6 14.1 million and $13.9 million for the thirty-nine weeks ended September 24, 2023 and September 25, 2022, respectively.
Operating lease right-of-use assets and operating lease liabilities relating to the operating leases are as follows (in millions):
| September 24, 2023 | December 25, 2022 | ||||||||||
| Operating lease right-of-use assets | $ | $ | |||||||||
| Right-of-use assets classified as held-for-sale | |||||||||||
| Total right-of-use assets | $ | $ | |||||||||
| Operating lease liabilities | $ | $ | |||||||||
| Lease liabilities related to assets held-for-sale | |||||||||||
| Total operating lease liabilities | $ | $ | |||||||||
The contractual future maturities of the Company’s operating lease liabilities as of September 24, 2023, including anticipated lease extensions, are as follows (in millions):
| Fiscal year: | |||||
| Remainder of 2023 | $ | ||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| Thereafter | |||||
| Total lease payments | $ | ||||
| Less: imputed interest | ( | ||||
| Total | $ | ||||
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The current portion of the operating lease liability as of September 24, 2023 was $14.7 million.
Supplemental cash flow information for the thirty-nine weeks ended September 24, 2023 related to leases was as follows (in millions):
| Thirty-Nine Weeks Ended | |||||||||||
| September 24, 2023 | September 25, 2022 | ||||||||||
| Cash paid for amounts included in the measurement of operating lease liabilities: | |||||||||||
| Operating cash flows from operating leases | $ | $ | |||||||||
NOTE 8. DEBT
Long-term debt consisted of the following (in millions):
| September 24, 2023 | December 25, 2022 | |||||||||||||||||||||||||||||||||||||
| Final Maturity | Anticipated Repayment Date | Rate | Face Value | Book Value | Book Value | |||||||||||||||||||||||||||||||||
| Senior Debt | ||||||||||||||||||||||||||||||||||||||
| FB Royalty Securitization | 4/25/2051 | 7/25/2026 | % | $ | $ | $ | ||||||||||||||||||||||||||||||||
| GFG Royalty Securitization | 7/25/2051 | 7/25/2026 | % | |||||||||||||||||||||||||||||||||||
| Twin Peaks Securitization | 7/25/2051 | 1/25/2025 | % | |||||||||||||||||||||||||||||||||||
| Fazoli's/Native Securitization | 7/25/2051 | 1/25/2025 | % | |||||||||||||||||||||||||||||||||||
| FB Resid Securitization | 7/25/2027 | % | ||||||||||||||||||||||||||||||||||||
| Senior Subordinated Debt | ||||||||||||||||||||||||||||||||||||||
| FB Royalty Securitization | 4/25/2051 | 7/25/2026 | % | |||||||||||||||||||||||||||||||||||
| GFG Royalty Securitization | 7/25/2051 | 7/25/2026 | % | |||||||||||||||||||||||||||||||||||
| Twin Peaks Securitization | 7/25/2051 | 1/25/2025 | % | |||||||||||||||||||||||||||||||||||
| Fazoli's/Native Securitization | 7/25/2051 | 1/25/2025 | % | |||||||||||||||||||||||||||||||||||
| FB Resid Securitization | 7/25/2027 | % | ||||||||||||||||||||||||||||||||||||
| Subordinated Debt | ||||||||||||||||||||||||||||||||||||||
| FB Royalty Securitization | 4/25/2051 | 7/25/2026 | % | |||||||||||||||||||||||||||||||||||
| GFG Royalty Securitization | 7/25/2051 | 7/25/2026 | % | |||||||||||||||||||||||||||||||||||
| Twin Peaks Securitization | 7/25/2051 | 1/25/2025 | % | |||||||||||||||||||||||||||||||||||
| Fazoli's/Native Securitization | 7/25/2051 | 1/25/2025 | % | |||||||||||||||||||||||||||||||||||
| Total Securitized Debt | ||||||||||||||||||||||||||||||||||||||
| Elevation Note | 7/19/2026 | N/A | % | |||||||||||||||||||||||||||||||||||
| Equipment Notes | 5/5/2027 to 3/7/2029 | N/A | ||||||||||||||||||||||||||||||||||||
| Twin Peaks Construction Loan | 8/5/2023 | N/A | % | |||||||||||||||||||||||||||||||||||
| Twin Peaks Construction Loan II | 1/9/2024 | N/A | % | |||||||||||||||||||||||||||||||||||
| Total Debt | $ | |||||||||||||||||||||||||||||||||||||
| Current portion of long-term debt | ( | ( | ||||||||||||||||||||||||||||||||||||
| Long-term Debt | $ | $ | ||||||||||||||||||||||||||||||||||||
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Terms of Outstanding Debt
FB Royalty Securitization
On April 26, 2021, FAT Brands Royalty I, LLC ("FB Royalty"), a special purpose, wholly-owned subsidiary of FAT Brands Inc., completed the issuance and sale of three tranches of fixed rate secured notes with a total aggregate principal amount of $144.5 million.
On July 6, 2022, FB Royalty issued an additional $76.5 million aggregate principal amount of three tranches of fixed rate secured notes. Of the $76.5 million aggregate principal amount, $30.0 million was sold privately during the third quarter of 2022, resulting in net proceeds of $27.1 million (net of debt offering costs of $0.6 million and original issue discount of $2.3 million). The remaining $46.5 million in aggregate principal was sold privately on October 21, 2022, when the Company entered into an Exchange Agreement with the Twin Peaks sellers and redeemed 1,821,831 shares of the Company's 8.25 % Series B Cumulative Preferred Stock at a price of $23.69 per share, plus accrued and unpaid dividends to the date of redemption, in exchange for $46.5 million aggregate principal amount of secured debt ($43.2 million net of debt offering costs and original issue discount).
Prior to the redemption, the Twin Peaks sellers held 2,847,393 shares of Series B Cumulative Preferred Stock.
Pursuant to the Exchange Agreement, (i) at any time prior to July 25, 2023, the Company may call from the Twin Peaks sellers all or a portion of the Class M-2 Notes at the outstanding principal balance multiplied by 0.86 , plus any accrued plus unpaid interest thereon; (ii) at any time on or after the date of the Exchange Agreement, the Company may call from the Twin Peaks sellers, and at any time on or after July 25, 2023, the Twin Peaks sellers may put to the Company, all or a portion of the Class A-2 Notes and/or Class B-2 Notes at the outstanding principal balance multiplied by 0.94 , plus any accrued plus unpaid interest thereon; and (iii) at any time on or after July 25, 2023, the Company may call from the Twin Peaks sellers, and the Twin Peaks sellers may put to the Company, all or a portion of the Class M-2 Notes at the outstanding principal balance multiplied by 0.91 , plus any accrued plus unpaid interest thereon. If the Company does not remit the applicable call price or put price upon a duly exercised call or put, as applicable, the amount owed by the Company will accrue interest at 10 % per annum, which interest is due and payable in cash monthly by the Company. On July 13, 2023, pursuant to the Exchange Agreement, the Twin Peaks sellers exercised their put option. As of September 24, 2023, the outstanding principal balance owned by the Twin Peaks sellers and subject to the put/call option was $17.3 million.
The FB Royalty securitization notes are generally secured by a security interest in substantially all the assets of FB Royalty and its subsidiaries.
GFG Royalty Securitization
In connection with the acquisition of GFG, on July 22, 2021, FAT Brands GFG Royalty I, LLC ("GFG Royalty"), a special purpose, wholly-owned subsidiary of FAT Brands, completed the issuance and sale in a private offering of three tranches of fixed rate secured notes with a total aggregate principal amount of $331.7 million. Immediately following the closing of the acquisition of GFG the Company contributed the franchising subsidiaries of GFG to GFG Royalty, pursuant to a Contribution Agreement.
On December 15, 2022, GFG Royalty issued an additional $113.5 million aggregate principal amount of three tranches of fixed rate secured notes. Of the $113.5 million aggregate principal amount, $25.0 million was sold privately during the fourth quarter of 2022. In January 2023, an additional $40.0 million aggregate principal amount was sold privately, resulting in net proceeds of $34.8 million. On September 20, 2023, an additional $2.8 million aggregate principal amount was sold privately resulting in net proceeds of $2.5 million. The remaining $45.7 million in aggregate principal amount was issued to FAT Brands, Inc., pending sale to third party investors.
The GFG Royalty securitization notes are generally secured by a security interest in substantially all the assets of GFG Royalty and its subsidiaries.
Twin Peaks Securitization
In connection with the acquisition of Twin Peaks on October 1, 2021, the Company completed the issuance and sale in a private offering through its special purpose, wholly-owned subsidiary, FAT Brands Twin Peaks I, LLC, of three tranches of fixed rate secured notes with a total aggregate principal amount of $250.0 million. Immediately following the closing of the acquisition of Twin Peaks the Company contributed the franchising subsidiaries of Twin Peaks to FAT Brands Twin Peaks I, LLC, pursuant
15
to a Contribution Agreement. The Twin Peaks securitization notes are generally secured by a security interest in substantially all the assets of FAT Brands Twin Peaks I, LLC and its subsidiaries.
On September 8, 2023, FAT Brands Twin Peaks I, LLC issued an additional $98.0 million aggregate principal amount of two tranches of fixed rate secured notes to FAT Brands Inc., pending sale to third party investors. Of the $98.0 million aggregate principal amount, $48.0 million was sold privately during the third quarter of 2023 resulting in net proceeds of $45.2 million. A portion of the proceeds was used to purchase $14.9 million aggregate principal amount of outstanding Securitization Notes, which will be held pending re-sale to third party investors. In connection with the bonds repurchased, the Company recognized a $2.7 million net loss on extinguishment of debt. The remaining $50.0 million in aggregate principal of notes issued by FAT Twin Peaks I, LLC was issued to a wholly-owned subsidiary of FAT Brands, Inc., pending sale to third party investors.
Fazoli's / Native Securitization
In connection with the acquisition of Fazoli's and Native Grill & Wings on December 15, 2021, the Company completed the issuance and sale in a private offering through its special purpose, wholly-owned subsidiary, FAT Brands Fazoli's Native I, LLC, of three tranches of fixed rate secured notes with a total aggregate principal amount of $193.8 million. Immediately following the closing of the acquisition of Fazoli's and Native the Company contributed the franchising subsidiaries of these entities to FAT Brands Fazoli's Native I, LLC, pursuant to a Contribution Agreement. The Fazoli's/Native securitization notes are generally secured by a security interest in substantially all the assets of FAT Brands Fazoli's Native I, LLC and its subsidiaries.
FB Resid Holdings 1, LLC
On July 8, 2023, FB Resid Holdings I, LLC (“FB Resid”), a special purpose, wholly-owned subsidiary of FAT Brands, completed the issuance of two tranches of fixed rate secured notes with a total aggregate principal amount of $150.0 million. Of the $150.0 million aggregate principal amount, $105.8 million was sold privately, resulting in net proceeds of $105.3 million. A portion of the proceeds was used to purchase $64.6 million of outstanding Securitization Notes, which will be held pending re-sale to third party investors. The remaining $44.2 million in aggregate principal of notes issued by FB Resid was issued to a wholly-owned subsidiary of FAT Brands, Inc., pending sale to third party investors.
Terms and Debt Covenant Compliance
The FAT Royalty securitization notes, the GFG Royalty securitization notes, the Twin Peaks securitization notes, the Fazoli's/Native securitization notes and the FB Resid notes (collectively, the "Securitization Notes") require that the principal (if any) and interest obligations be segregated to ensure appropriate funds are reserved to pay the quarterly principal and interest amounts due. The amount of monthly cash flow that exceeds the required monthly interest reserve is generally remitted to the Company. Interest payments are required to be made on a quarterly basis. Beginning July 26, 2023, additional interest equal to 1.0 % per annum and principal payments equal to 2.0 % per annum of the initial principal amount on the FAT Royalty securitization notes, the GFG Royalty securitization notes, the Twin Peaks securitization notes and the Fazoli's/Native securitization notes will be made on the scheduled quarterly payment dates.
The material terms of the Securitization Notes contain covenants which are standard and customary for these types of agreements, including the following financial covenants: (i) debt service coverage ratio, (ii) leverage ratio and (iii) senior leverage ratio. As of September 24, 2023, the Company was in compliance with these covenants.
Elevation Note
On June 19, 2019, the Company completed the acquisition of Elevation Burger. A portion of the purchase price included the issuance to the Seller of a convertible subordinated promissory note (the “Elevation Note”) with a principal amount of $7.5 million, bearing interest at 6.0 % per annum and maturing in July 2026. The Elevation Note is convertible, under certain circumstances, into shares of the Company’s common stock at $12.00 per share.
The Elevation Note is a general unsecured obligation of Company and is subordinated in right of payment to all indebtedness of the Company arising under any agreement or instrument to which Company or any of its Affiliates is a party that evidences indebtedness for borrowed money that is senior in right of payment.
Equipment Financing (Twin Peaks)
16
During fiscal year 2022, an indirect subsidiary of the Company entered into certain equipment financing arrangements to borrow up to $1.4 million, the proceeds of which will be used to purchase certain equipment for a new Twin Peaks restaurant and to retrofit existing restaurants with equipment (the "Equipment Financing"). The Equipment Financing has maturity dates between August 10, 2027 and April 1, 2028, and bear interest at fixed rates between 7.99 % and 8.49 % per annum. The Equipment Financing is secured by certain equipment of the Twin Peaks restaurant.
Construction Loan Agreement (Twin Peaks)
On December 5, 2022, an indirect subsidiary of the Company entered into a construction loan agreement to borrow up to $4.5 million, the proceeds of which will be used for a new corporate Twin Peaks restaurant (the "Construction Loan"). The Construction Loan has an initial maturity of August 5, 2023, with an optional six-month extension, bearing interest at the greater of the 3-month Secured Overnight Financing Rate (SOFR) plus 360 basis points, or 8 % per year, and is secured by land and building.
On March 9, 2023, an indirect subsidiary of the Company entered into a construction loan agreement to borrow up to $4.5 million, the proceeds of which will be used for a new corporate Twin Peaks in Sarasota, Florida (the "Sarasota Construction Loan"). The Sarasota Construction Loan has an initial maturity of January 9, 2024, with an optional three-month extension, bearing interest at the greater of the 3-month Overnight Financing Rate (SOFR) plus 575 basis points or 4 % per year and is secured by land and building.
NOTE 9. REDEEMABLE PREFERRED STOCK
GFG Preferred Stock Consideration
On July 22, 2021, the Company completed the acquisition of GFG. A portion of the consideration paid included 3,089,245 newly issued shares of the Company’s Series B Cumulative Preferred Stock valued at $67.3 million (the "GFG Preferred Stock Consideration"). Additionally, on July 22, 2021, the Company entered into a put/call agreement with the GFG sellers, pursuant to which the Company may purchase, or the GFG Sellers may require the Company to purchase, the GFG Preferred Stock Consideration for $67.5 million plus any accrued but unpaid dividends on or before August 20, 2022 (extended from the original date of April 22, 2022), subject to the other provisions of the Put/Call Agreement. Since the Company did not deliver the applicable cash proceeds to the GFG Sellers by that date, the amount accrues interest at the rate of 5 % per annum until repayment is completed. On March 22, 2022, the Company received a put notice on the GFG Preferred Stock Consideration and reclassified the GFG Preferred Stock Consideration from redeemable preferred stock to current liabilities on its consolidated balance sheet. As of September 24, 2023, the carrying value of the redeemable preferred stock was $67.5 million.
On September 16, 2022, the Company entered into an agreement with one of the GFG sellers who held 1,544,623 put preferred shares. Pursuant to the agreement, effective August 23, 2022, the interest rate applicable to such holder's 1,544,623 put shares was increased from 5 % to 10 % per annum, payable monthly in arrears. During the thirteen and thirty-nine weeks ended September 24, 2023, the Company paid $0.8 million and $2.5 million of interest, respectively.
On March 9, 2023, the Company entered into an agreement with the second GFG seller who held 1,544,623 put preferred shares. Pursuant to the agreement, effective August 23, 2022, the interest rate applicable to such holder's 1,544,623 put shares was increased from 5 % to 10 % per annum, payable on the date of redemption.
Twin Peaks Preferred Stock Consideration
On October 1, 2021, the Company completed the acquisition of Twin Peaks. A portion of the consideration paid included 2,847,393 shares of the Company’s 8.25 % Series B Cumulative Preferred Stock (the "Twin Peaks Preferred Stock Consideration") valued at $67.5 million.
On October 1, 2021, the Company and the Twin Peaks Seller entered into a Put/Call Agreement (the “Put/Call Agreement”) pursuant to which the Company was granted the right to call from the Twin Peaks Seller, and the Twin Peaks Seller was granted the right to put to the Company, the Initial Put/Call Shares at any time until March 31, 2022 for a cash payment of $42.5 million, and the Secondary Put/Call Shares at any time until September 30, 2022 for a cash payment of $25.0 million (the Initial Put/call Shares together with the Secondary Put/Call Shares total $67.5 million), plus any accrued but unpaid dividends on such shares. Unpaid balances, when due, accrue interest at a rate of 10.0 % per annum until repayment is completed. On October 7, 2021, the Company received a put notice on the Initial Put/Call Shares and the Secondary Put/Call Shares.
On October 21, 2022, the Company entered into an Exchange Agreement with the Twin Peaks Seller and redeemed 1,821,831 shares of the Company’s 8.25 % Series B Cumulative Preferred Stock at a price of $23.69 per share, plus accrued and unpaid
17
dividends to the date of redemption in exchange for $46.5 million aggregate principal amount of secured debt ($43.2 million net of debt offering costs and original issue discount) as discussed in Note 8.
As of September 24, 2023, the carrying value of the Twin Peaks Preferred Stock Consideration totaled $24.3 million. The Company recognized interest expense relating to the Twin Peaks Preferred Stock Consideration for the thirteen weeks and thirty-nine weeks ended September 24, 2023 in the amount of $0.6 million and $1.8 million, respectively.
NOTE 10. SHARE-BASED COMPENSATION
Effective September 30, 2017, the Company adopted the 2017 Omnibus Equity Incentive Plan (the “Plan”). The Plan was amended on December 20, 2022 to increase the number of shares available for issuance under the Plan. The Plan is a comprehensive incentive compensation plan under which the Company can grant equity-based and other incentive awards to officers, employees and directors of, and consultants and advisers to, FAT Brands Inc. and its subsidiaries. The Plan provides a maximum of 5,000,000 shares available for grant.
The Company has periodically issued stock options under the Plan. All of the stock options issued by the Company to date have included a vesting period of three years , with one-third of each grant vesting annually. As of September 24, 2023, there were 2,916,198 shares of stock options outstanding with a weighted average exercise price of $9.44 .
During the thirteen and thirty-nine weeks ended September 24, 2023, the Company granted a total of 188,180 and 755,087 stock options under the Plan with a grant date fair value of $0.5 million and $1.5 million, respectively. The related compensation expense will be recognized over the vesting period. There were no new grants during the thirty-nine weeks ended September 25, 2022.
NOTE 11. WARRANTS
The Company’s warrant activity for the thirty-nine weeks ended September 24, 2023 was as follows:
| Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | |||||||||||||||
| Warrants exercisable at December 25, 2022 | $ | ||||||||||||||||
| Granted | $ | ||||||||||||||||
| Exercised | ( | $ | |||||||||||||||
| Warrants outstanding and exercisable at September 24, 2023 | $ | ||||||||||||||||
During the thirty-nine weeks ended September 24, 2023, 209,047 warrants were exercised in exchange for 194,839 shares of common stock with net proceeds to the Company of $0.3 million.
NOTE 12. COMMON STOCK
On July 11, 2023, the Board of Directors declared a cash dividend of $0.14 per share of Class A common stock and Class B common stock, payable on September 1, 2023 to stockholders of record as of August 15, 2023, for a total of $2,337,176 .
On November 14, 2022, we entered into an ATM Sales Agreement (the "Sales Agreement") with ThinkEquity LLC (the "Agent"), pursuant to which we may offer and sell from time to time through the Agent up to $21,435,000 maximum aggregate
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NOTE 13. COMMITMENTS AND CONTINGENCIES
Litigation and Investigations
James Harris and Adam Vignola, derivatively on behalf of FAT Brands Inc. v. Squire Junger, James Neuhauser, Edward Rensi, Andrew Wiederhorn, Fog Cutter Holdings, LLC and Fog Cutter Capital Group, Inc., and FAT Brands Inc., nominal defendant (Delaware Chancery Court, Case No. 2021-0511)
On June 10, 2021, plaintiffs James Harris and Adam Vignola (“Plaintiffs”), putative stockholders of the Company, filed a shareholder derivative action in the Delaware Court of Chancery nominally on behalf of the Company against the Company’s current and former directors (Squire Junger, James Neuhauser, Edward Rensi and Andrew Wiederhorn (the “Individual Defendants”)), and the Company’s majority stockholders, Fog Cutter Holdings, LLC and Fog Cutter Capital Group, Inc. (collectively with the Individual Defendants, “Defendants”). Plaintiffs assert claims of breach of fiduciary duty, unjust enrichment and waste of corporate assets arising out of the Company’s December 2020 merger with Fog Cutter Capital Group, Inc. Defendants filed a motion to dismiss Plaintiffs’ complaint, which the Court denied in an oral ruling on February 11, 2022 and subsequent written order on May 25, 2022. On April 7, 2022, the Court entered a Scheduling Order setting forth the key dates and deadlines that would govern the litigation, including a discovery cutoff of March 24, 2023 and trial date of February 5-9, 2024. To date, the parties have engaged in substantial written discovery, though no depositions have been taken. On February 3, 2023, the Company’s board of directors appointed a Special Litigation Committee (“SLC”), which retained independent counsel and moved for a six-month stay of the action pending resolution of the SLC's investigation, which the Court granted on February 17, 2023. On April 5, 2023, the Court granted Plaintiffs’ motion to lift the stay of the proceedings, and entered a Second Amended Pre-Trial Scheduling Order resetting key dates and deadlines, including a fact discovery cutoff of August 4, 2023, and a trial date to be set sometime after May 10, 2024. On May 4, 2023, a new SLC was appointed, and on May 8, 2023, the new SLC moved for a six-month stay of the action pending resolution of its investigation. Two days later, on May 10, 2023, the United States of America moved for a partial stay of discovery pending its own investigation. On May 31, 2023, the Court granted the United States of America’s Motion, except that it granted a six-month stay of all proceedings in the action, and on that basis deemed the SLC’s motion to be moot. Defendants dispute the allegations of the lawsuit and intend to vigorously defend against the claims. We cannot predict the outcome of this lawsuit. This lawsuit does not assert any claims against the Company. However, subject to certain limitations, we are obligated to indemnify our directors in connection with defense costs for the lawsuit and any related litigation, which may exceed coverage provided under our insurance policies, and thus could have an adverse effect on our financial condition. The lawsuit and any related litigation also may be time-consuming and divert the attention and resources of our management.
James Harris and Adam Vignola, derivatively on behalf of FAT Brands Inc. v. Squire Junger, James Neuhauser, Edward Rensi, Andrew Wiederhorn and Fog Cutter Holdings, LLC, and FAT Brands Inc., nominal defendant (Delaware Chancery Court, Case No. 2022-0254)
On March 17, 2022, plaintiffs James Harris and Adam Vignola (“Plaintiffs”), putative stockholders of the Company, filed a shareholder derivative action in the Delaware Court of Chancery nominally on behalf of the Company against the Company’s current and former directors (Squire Junger, James Neuhauser, Edward Rensi and Andrew Wiederhorn (the “Individual Defendants”)), and the Company’s majority stockholder, Fog Cutter Holdings, LLC (collectively with the Individual Defendants, “Defendants”). Plaintiffs assert claims of breach of fiduciary duty in connection with the Company’s June 2021 recapitalization transaction. On May 27, 2022, Defendants filed a motion to dismiss Plaintiff's complaint (the "Motion"). Argument on the Motion was heard on November 17, 2022, and again on February 23, 2023, and the Court took its decision under advisement. The Court denied the motion on April 5, 2023. On May 2, 2023, the Court entered a pre-trial scheduling order setting key dates and deadlines that will govern the litigation, including a fact discovery cutoff of February 2, 2024, and a trial date to be set sometime after October 15, 2024. On July 21, 2023, the Company’s board of directors appointed a Special Litigation Committee (“SLC”), which retained independent counsel and moved for a six-month stay of the action pending resolution of the SLC’s investigation. On August 10, 2023, the parties filed a stipulation to stay the case for six months, conditioned upon Defendants continuing to review the documents in response to Plaintiffs' First Requests for Production and to produce non-privileged responsive documents to the SLC and to Plaintiffs no later than December 1, 2023. The Court granted the stipulation the same day. In accordance with the stipulation, Defendants have been reviewing documents for production to the SLC and Plaintiffs. Defendants dispute the allegations of the lawsuit and intend to vigorously defend against the claims. As this matter is still in the early stages, we cannot predict the outcome of this lawsuit. This lawsuit does not assert any claims against the Company. However, subject to certain limitations, we are obligated to indemnify our directors in connection with defense costs for the lawsuit and any related litigation, which may exceed coverage provided under our insurance policies, and
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thus could have an adverse effect on our financial condition. The lawsuit and any related litigation also may be time-consuming and divert the attention and resources of our management.
Government Investigations
In December 2021, the U.S. Attorney’s Office for the Central District of California (the “U.S. Attorney”) and the U.S. Securities and Exchange Commission (the “SEC”) informed the Company that they had opened investigations relating to the Company and our former Chief Executive Officer, Andrew Wiederhorn, and were formally seeking documents and materials concerning, among other things, the Company’s December 2020 merger with Fog Cutter Capital Group Inc., transactions between those entities and Mr. Wiederhorn, as well as compensation, extensions of credit and other benefits or payments received by Mr. Wiederhorn or his family from those entities. From August 23, 2022 until March 28, 2023, our Board of Directors maintained a Special Review Committee (the “SRC”) comprised of directors other than Mr. Wiederhorn to oversee a review of the issues raised by the U.S. Attorney and SEC investigations. The Company intends to cooperate with the U.S. Attorney and the SEC regarding these matters and is continuing to actively respond to inquiries and requests from the U.S. Attorney and the SEC. We believe that the Company is not currently a target of the U.S. Attorney’s investigation. At this stage, we are not able to reasonably estimate or predict the outcome or duration of either of the U.S. Attorney’s or the SEC’s investigations.
Stratford Holding LLC v. Foot Locker Retail Inc. (U.S. District Court for the Western District of Oklahoma, Case No. 5:12-cv-772-HE)
In 2012 and 2013, two property owners in Oklahoma City, Oklahoma sued numerous parties, including Foot Locker Retail Inc. and our subsidiary Fog Cutter Capital Group Inc. (now known as Fog Cutter Acquisition, LLC), for alleged environmental contamination on their properties, stemming from dry cleaning operations on one of the properties. The property owners seek damages in the range of $12.0 million to $22.0 million. From 2002 to 2008, a former Fog Cutter subsidiary managed a lease portfolio, which included the subject property. Fog Cutter denies any liability, although it did not timely respond to one of the property owners’ complaints and several of the defendants’ cross-complaints and thus is in default. The parties are currently conducting discovery. The court has vacated the current trial date and has not yet reset the trial date. The Company is unable to predict the ultimate outcome of this matter, however, reserves have been recorded on the balance sheet relating to this litigation. There can be no assurance that the defendants will be successful in defending against these actions.
SBN FCCG LLC v FCCGI (Los Angeles Superior Court, Case No. BS172606)
SBN FCCG LLC (“SBN”) filed a complaint against Fog Cutter Capital Group, Inc. (“FCCG”) in New York state court for an indemnification claim (the “NY case”) stemming from an earlier lawsuit in Georgia regarding a certain lease portfolio formerly managed by a former FCCG subsidiary. In February 2018, SBN obtained a final judgment in the NY case for a total of $0.7 million, which included $0.2 million in interest dating back to March 2012. SBN then obtained a sister state judgment in Los Angeles Superior Court, Case No. BS172606 (the “California case”), which included the $0.7 million judgment from the NY case, plus additional statutory interest and fees, for a total judgment of $0.7 million. In May 2018, SBN filed a cost memo, requesting an additional $12,411 in interest to be added to the judgment in the California case, for a total of $0.7 million. In May 2019, the parties agreed to settle the matter for $0.6 million, which required the immediate payment of $0.1 million, and the balance to be paid in August 2019. FCCG wired $0.1 million to SBN in May 2019, but has not yet paid the remaining balance of $0.5 million. The parties have not entered into a formal settlement agreement, and they have not yet discussed the terms for the payment of the remaining balance.
SBN FCCG LLC v FCCGI (Supreme Court of the State of New York, County of New York, Index No. 650197/2023)
On January 13, 2023, SBN filed another complaint against FCCG in New York state court for an indemnification claim stemming from a lawsuit in Oklahoma City regarding the same lease portfolio formerly managed by Fog Cap, and a bankruptcy proceedings involving Fog Cap. SBN alleges that under a February 2008 stock purchase agreement, Fog Cutter is required to indemnify SBN and its affiliates. According to the complaint, SBN has, at the time of filing the complaint, incurred costs subject to indemnification of approximately $12 million. FCCG has filed a motion to dismiss the complaint, or alternatively to stay the case, which motion is currently pending before the court. We are unable at this time to express any opinion as to the outcome of this matter or as to the possible range of loss, if any.
The Company is involved in other claims and legal proceedings from time-to-time that arise in the ordinary course of business, including those involving the Company’s franchisees. The Company does not believe that the ultimate resolution of these actions will have a material adverse effect on its business, financial condition, results of operations, liquidity or capital resources. As of September 24, 2023, the Company had accrued an aggregate of $5.1 million for the specific matters mentioned above and claims and legal proceedings involving franchisees as of that date.
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NOTE 14. GEOGRAPHIC INFORMATION
Revenue by geographic area was as follows (in millions):
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||
| September 24, 2023 | September 25, 2022 | September 24, 2023 | September 25, 2022 | ||||||||||||||||||||
| United States | $ | $ | $ | $ | |||||||||||||||||||
| Other countries | |||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | |||||||||||||||||||
Revenue is shown based on the geographic location of our company-owned and franchisees’ restaurants. All assets are located in the United States.
During the thirty-nine weeks ended September 24, 2023 and September 25, 2022, no individual franchisee accounted for more than 10% of the Company’s revenue.
NOTE 15. SUBSEQUENT EVENTS
Acquisition of Barbeque Integrated, Inc.
On September 25, 2023, the Company completed the acquisition of Barbeque Integrated, Inc. from Barbeque Holding LLC. Barbeque Integrated Inc. is the operator of a chain of barbeque restaurants located in the Eastern and Midwest United States. The net purchase price was $31.8 million (after certain customary adjustments), comprised of cash, and is subject to further adjustments with respect to working capital, to be finalized no later than 75 days after closing.
Restaurant Properties Sale Leaseback Transaction
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our results of operations, financial condition, and liquidity and capital resources should be read in conjunction with our financial statements and related notes for the thirteen weeks and thirty-nine weeks ended September 24, 2023 and September 25, 2022, as applicable. Certain statements made or incorporated by reference in this report and our other filings with the Securities and Exchange Commission, in our press releases, and in statements made by or with the approval of authorized personnel constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and are subject to the safe harbor created thereby. Forward-looking statements reflect intent, belief, current expectations, estimates or projections about, among other things, our industry, management’s beliefs, and future events and financial trends affecting us. Words such as “anticipates”, “expects”, “intends”, “plans”, “believes”, “seeks”, “estimates”, “may”, “will”, and variations of these words or similar expressions are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Although we believe the expectations reflected in any forward-looking statements are reasonable, such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. These differences can arise as a result of the risks described in the section entitled “Item 1A. Risk Factors” in our Annual Report on Form 10-K filed on February 24, 2023 “Item 1A. Risk Factors” and elsewhere in this report, as well as other factors that may affect our business, results of operations, or financial condition. Forward-looking statements in this report speak only as of the date hereof, and forward-looking statements in documents incorporated by reference speak only as of the date of those documents. Unless otherwise required by law, we undertake no obligation to publicly update or revise these forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks and uncertainties, we cannot assure you that the forward-looking statements contained in this report will, in fact, transpire.
Executive Overview
Business overview
FAT Brands Inc. is a leading multi-brand restaurant franchising company that develops, markets, and acquires primarily quick-service, fast casual, casual dining and polished casual restaurant concepts around the world. As of September 24, 2023, the Company owned seventeen restaurant brands: Round Table Pizza, Fatburger, Marble Slab Creamery, Johnny Rockets, Fazoli's, Twin Peaks, Great American Cookies, Hot Dog on a Stick, Buffalo’s Cafe & Express, Hurricane Grill & Wings, Pretzelmaker, Elevation Burger, Native Grill & Wings, Yalla Mediterranean and Ponderosa and Bonanza Steakhouses. As of September 24, 2023, the Company had approximately 2,300 locations open or under construction, of which approximately 95% were franchised.
Under our franchised business model, we generate revenue by charging franchisees an initial franchise fee as well as ongoing royalties. This asset light franchisor model provides the opportunity for strong profit margins and an attractive free cash flow profile while minimizing restaurant operating company risk, such as long-term real estate commitments or capital investments. Our scalable management platform enables us to add new stores and restaurant concepts to our portfolio with minimal incremental corporate overhead cost, while taking advantage of significant corporate overhead synergies. The acquisition of additional brands and restaurant concepts as well as expansion of our existing brands are key elements of our growth strategy.
Our revenues are derived primarily from two sales channels, franchised restaurants and company owned restaurants, which we operate as one segment. The primary sources of revenues are the sale of food and beverages at our company restaurants and the collection of royalties, franchise fees and advertising revenue from sales of food and beverages at our franchised restaurants.
Results of Operations
We operate on a 52-week or 53-week fiscal year ending on the last Sunday of the calendar year. In a 52-week fiscal year, each quarter contains 13 weeks of operations. In a 53-week fiscal year, each of the first, second and third quarters includes 13 weeks of operations and the fourth quarter includes 14 weeks of operations, which may cause our revenue, expenses and other results of operations to be higher due to an additional week of operations. The 2023 fiscal year is a 53-week year. The 2022 fiscal year was a 52-week year.
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Results of Operations of FAT Brands Inc.
The following table summarizes key components of our condensed consolidated results of operations for the thirteen weeks and thirty-nine weeks ended September 24, 2023 and September 25, 2022.
(dollars in thousands)
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||
| September 24, 2023 | September 25, 2022 | September 24, 2023 | September 25, 2022 | ||||||||||||||||||||
| Statements of Operations Data: | |||||||||||||||||||||||
| Revenue | |||||||||||||||||||||||
| Royalties | $ | 23,930 | $ | 22,833 | $ | 69,166 | $ | 65,396 | |||||||||||||||
| Restaurant sales | 62,578 | 61,352 | 187,957 | 179,473 | |||||||||||||||||||
| Advertising fees | 9,960 | 9,479 | 28,979 | 28,408 | |||||||||||||||||||
| Factory revenues | 9,323 | 7,839 | 28,174 | 24,588 | |||||||||||||||||||
| Franchise fees | 2,477 | 754 | 4,042 | 2,763 | |||||||||||||||||||
| Other revenue | 1,098 | 965 | 3,503 | 2,782 | |||||||||||||||||||
| Total revenue | 109,366 | 103,222 | 321,821 | 303,410 | |||||||||||||||||||
| Costs and expenses | |||||||||||||||||||||||
| General and administrative expense | 24,458 | 28,751 | 62,820 | 74,188 | |||||||||||||||||||
| Cost of restaurant and factory revenues | 59,168 | 55,257 | 177,757 | 159,901 | |||||||||||||||||||
| Depreciation and amortization | 7,040 | 6,895 | 21,217 | 20,076 | |||||||||||||||||||
| Refranchising loss | 408 | 122 | 746 | 1,123 | |||||||||||||||||||
| Acquisition costs | — | — | — | 383 | |||||||||||||||||||
| Advertising fees | 11,671 | 11,185 | 33,808 | 33,038 | |||||||||||||||||||
| Total costs and expenses | 102,745 | 102,210 | 296,348 | 288,709 | |||||||||||||||||||
| Income from operations | 6,621 | 1,012 | 25,473 | 14,701 | |||||||||||||||||||
| Total other expense, net | (32,587) | (23,933) | (86,774) | (65,292) | |||||||||||||||||||
| Loss before income tax (benefit) provision | (25,966) | (22,921) | (61,301) | (50,591) | |||||||||||||||||||
| Income tax (benefit) provision | (1,310) | 516 | 2,572 | 4,789 | |||||||||||||||||||
| Net loss | $ | (24,656) | $ | (23,437) | $ | (63,873) | $ | (55,380) | |||||||||||||||
For the Thirty-Nine Weeks Ended September 24, 2023 and September 25, 2022:
Revenue - Revenue consists of royalties, franchise fees, advertising fees, restaurant sales, factory revenue and other revenue. Total revenue increased $18.4 million, or 6.1%, in the first three quarters of 2023 to $321.8 million compared to $303.4 million in the same period of 2022, driven by system-wide sales growth and revenues from new restaurant openings.
Costs and expenses – Costs and expenses consist of general and administrative expense, cost of restaurant and factory revenues, depreciation and amortization, refranchising net loss and advertising fees. Costs and expenses increased $7.6 million, or 2.6%, in the first three quarters of 2023 to $296.3 million compared to the same period in the prior year, primarily due to increased activity from Company owned restaurants and the Company's factory as well as professional fees related to certain litigation matters, partially offset by the recognition of Employee Retention Credits.
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General and administrative expense decreased $11.4 million, or 15.3%, in the first three quarters of 2023 compared to $74.2 million in the same period in the prior year, primarily due to the recognition of $13.7 million in Employee Retention Credits during the first three quarters of 2023, partially offset by professional fees related to certain litigation matters.
Cost of restaurant and factory revenues increased $17.9 million, or 11.2%, in the first three quarters of 2023, primarily due to higher company-owned restaurant and dough factory revenues and the recognition of $11.7 million in Employee Retention Credits recognized during the first three quarters of 2022.
Depreciation and amortization increased $1.1 million, or 5.7% in the first three quarters of 2023 compared to the same period in the prior year, primarily due to depreciation of new property and equipment at company-owned restaurant locations.
Refranchising net loss in the first three quarters of 2023 of $0.7 million was comprised of $0.8 million in restaurant operating costs, net of food sales, partially offset by $0.1 million in net gains related to the sale or closure of refranchised restaurants. Refranchising losses in the first three quarters of 2022 were $1.1 million and were comprised of restaurant operating costs, net of food sales.
Advertising expenses increased $0.8 million in the first three quarters of 2023 compared to the prior year period. These expenses vary in relation to advertising revenues.
Total other expense, net, for the first three quarters of 2023 and 2022 was $86.8 million and $65.3 million, respectively, which is inclusive of interest expense of $84.2 million and $69.2 million, respectively. This increase is primarily due to new debt offerings which occurred in the second half of fiscal year 2022 and first three quarters of 2023. Total other expense, net for the first three quarters of 2023 also consisted of a $2.7 million net loss on the extinguishment of debt.
Income tax (benefit) provision – The effective rate was (4.2)% and (9.5)% for the first three quarters of 2023 and 2022, respectively. The difference in effective rate was primarily due to increases in our valuation allowance.
For the Thirteen Weeks Ended September 24, 2023 and September 25, 2022:
Revenue - Revenue consists of royalties, franchise fees, advertising fees, restaurant sales, factory revenue and other revenue. Total revenue increased $6.2 million, or 6.0%, in the third quarter of 2023 to $109.4 million compared to $103.2 million in the same period of 2022, driven by system-wide sales growth and revenues from new restaurant openings.
Costs and expenses – Costs and expenses consist of general and administrative expense, cost of restaurant and factory revenues, depreciation and amortization, refranchising net loss and advertising fees. Costs and expenses increased $0.5 million, or 0.5%, in the second quarter of 2023 to $102.7 million compared to the same period in the prior year. This increase is due to increased activity from Company owned restaurants and the Company's factory, as well as professional fees related to certain litigation matters.
General and administrative expense decreased $4.3 million, or 14.9%, in the third quarter of 2023 compared to the same period in the prior year, primarily due to the recognition of $1.0 million in Employee Retention Credits during the third quarter of 2023 and lower professional fees related to certain litigation matters.
Cost of restaurant and factory revenues increased $3.9 million, or 7.1%, in the third quarter of 2023, primarily due to higher company-owned restaurant and dough factory revenues and the recognition of $1.6 million in Employee Retention Credits recognized during the third quarter of 2022.
Depreciation and amortization increased $0.1 million, or 2.1% in the third quarter of 2023 compared to the same period in the prior year, primarily due to depreciation of new property and equipment at company-owned restaurant locations.
Refranchising net loss in the third quarter of 2023 and 2022 of $0.4 million and $0.1 million, respectively, was comprised of restaurant operating costs, net of food sales.
Advertising expenses in the third quarter of 2023 increased $0.5 million compared to the prior year period. These expenses vary in relation to advertising revenues.
Total other expense, net, for the third quarter of 2023 and 2022 was $32.6 million and $23.9 million, respectively, which is inclusive of interest expense of $29.7 million and $24.5 million, respectively. This increase is primarily due to new debt
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offerings which occurred in the second half of fiscal year 2022 and first three quarters of 2023. Total other expense, net for the third quarter of 2023 also consisted of a $2.7 million net loss on extinguishment of debt.
Income tax (benefit) provision – The effective rate was 5.0% and (2.3)% for the second quarter of 2023 and 2022, respectively. The difference in effective rate was primarily due to increases in our valuation allowance.
Liquidity and Capital Resources
Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund business operations, acquisitions and expansion of franchised restaurant locations and for other general business purposes. Our primary sources of funds for liquidity during the thirty-nine weeks ended September 24, 2023 consisted of cash on hand at the beginning of the period and net proceeds of $109.3 million from the sale of secured debt as discussed in Note 8 of the accompanying condensed consolidated financial statements.
We are involved in a world-wide expansion of franchise locations, which will require significant liquidity, primarily from our franchisees. If real estate locations of sufficient quality cannot be located and either leased or purchased, the timing of restaurant openings may be delayed. Additionally, if we or our franchisees cannot obtain capital sufficient to fund this expansion, the extent or timing of restaurant openings may be reduced or delayed.
We also may acquire additional restaurant concepts. These acquisitions typically require capital investments in excess of our normal cash on hand. We would expect that future acquisitions will necessitate financing with additional debt or equity transactions. If we are unable to obtain acceptable financing, our ability to acquire additional restaurant concepts likely would be negatively impacted.
We have liabilities of $91.8 million relating to put options exercised by others on our Series B Cumulative Preferred Stock. The Company has contractual options pursuant to the put/call agreements to extend this repayment via incremental interest payments and there are capital market options that the Company may consider. We believe that we have sufficient liquidity to meet our liquidity needs and capital resource requirements for at least the next twelve months primarily through currently available cash and cash equivalents, cash flows from operations and access to the capital markets.
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Comparison of Cash Flows
Our cash and restricted cash balance was $138.8 million as of September 24, 2023, compared to $68.8 million as of December 25, 2022.
The following table summarizes key components of our condensed consolidated cash flows for the 39 weeks ended September 24, 2023 and September 25, 2022:
For the Thirty-Nine Weeks Ended
(in millions)
| September 24, 2023 | September 25, 2022 | ||||||||||
| Net cash used in operating activities | $ | (23.0) | $ | (36.6) | |||||||
| Net cash used in investing activities | (14.3) | (14.4) | |||||||||
| Net cash provided by financing activities | 107.4 | 13.2 | |||||||||
| Net cash flows | $ | 70.1 | $ | (37.8) | |||||||
Operating Activities
Net cash used in operating activities decreased $13.6 million in the thirty-nine weeks ended September 24, 2023 compared to 2022, primarily due to the receipt of Employee Retention Credits in the first and second quarter of 2023, partially offset by higher debt service costs associated with our securitizations and by changes in working capital.
Investing Activities
Net cash used in investing activities was $14.3 million in the thirty-nine weeks ended September 24, 2023, compared to net cash used in investing activities of $14.4 million in the comparable period of 2022.
Financing Activities
Net cash provided by financing activities was $107.4 million in the thirty-nine weeks ended September 24, 2023 and was primarily comprised of proceeds from borrowings, partially offset by repurchases of previously issued securitized notes and dividends paid on our Class A and Class B Common Stock and our Series B Cumulative Preferred Stock.
Dividends
On July 11, 2023, the Board of Directors declared a cash dividend of $0.14 per share of Class A and Class B Common Stock, payable on September 1, 2023 to stockholders of record as of August 15, 2023, for a total of $2,337,176.
The declaration and payment of future dividends, as well as the amount thereof, are subject to the discretion of our Board of Directors. The amount and size of any future dividends will depend upon our future results of operations, financial condition, capital levels, cash requirements, and other factors. There can be no assurance that we will declare and pay dividends in future periods.
Capital Expenditures
As of September 24, 2023, we do not have any material commitments for capital expenditures.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements and accompanying notes are prepared in accordance with GAAP. Preparing condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by the application of our accounting policies. Our significant accounting policies are described in our Annual Report on Form 10-K for the year ended December 25, 2022. Critical accounting estimates are those that require application of management’s most difficult, subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. While we apply our judgment based on assumptions believed to be reasonable under the circumstances, actual results could vary from these
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assumptions. It is possible that materially different amounts would be reported using different assumptions. Our critical accounting estimates are identified and described in our annual consolidated financial statements and the related notes included in our Annual Report on Form 10-K for our fiscal year ended December 25, 2022.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Required.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our principal executive officers and principal financial officer, after evaluating the effectiveness of the Company’s “Disclosure Controls and Procedures” (as defined in the Securities and Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of September 24, 2023, have concluded that, in regard to the segregation of duties and the financial close process, our Disclosure Controls and Procedures were effective.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting in connection with an evaluation that occurred during the thirteen weeks ended September 24, 2023 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
Inherent Limitations Over Internal Controls
We do not expect that our Disclosure Controls and Procedures will prevent all erro
r and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedures are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of frauds, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a description of our material pending legal proceedings, please see Note 13, Commitments and Contingencies, to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, which Note is incorporated by reference in this Item 1.
ITEM 1A. RISK FACTORS
You should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” and elsewhere in our Annual Report on Form 10-K filed on February 24, 2023, which could materially affect our business, financial condition, cash flows or future results. There have been no material changes in such factors discussed in our Annual Report. The risks described in our Annual Report are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
During the fiscal quarter ended September 24, 2023, no director or officer of the Company adopted or terminated a "Rule 10-b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement," as each term is defined in Item 408(a) of Regulation S-K
ITEM 6. EXHIBITS
Exhibit Number | Incorporated By Reference to | Filed Herewith | ||||||||||||||||||||||||||||||
Description | Form | Exhibit | Filing Date | |||||||||||||||||||||||||||||
| 4.1 | 8-K | 4.1 | 07/13/2023 | |||||||||||||||||||||||||||||
| 4.2 | 8-K | 4.2 | 07/13/2023 | |||||||||||||||||||||||||||||
| 10.1 | 8-K | 10.1 | 07/13/2023 | |||||||||||||||||||||||||||||
| 10.2 | 8-K | 10.1 | 07/21/2023 | |||||||||||||||||||||||||||||
| 10.3 | 8-K | 10.2 | 07/21/2023 | |||||||||||||||||||||||||||||
31.1 | X | |||||||||||||||||||||||||||||||
31.2 | X | |||||||||||||||||||||||||||||||
32.1 | X | |||||||||||||||||||||||||||||||
101.INS | Inline XBRL Instance Document | X (Furnished) | ||||||||||||||||||||||||||||||
101.SCH | Inline XBRL Taxonomy Extension Schema Document | X (Furnished) | ||||||||||||||||||||||||||||||
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | X (Furnished) | ||||||||||||||||||||||||||||||
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | X (Furnished) | ||||||||||||||||||||||||||||||
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | X (Furnished) | ||||||||||||||||||||||||||||||
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | X (Furnished) | ||||||||||||||||||||||||||||||
28
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| FAT BRANDS INC. | ||||||||
| October 31, 2023 | By | /s/ Kenneth J. Kuick | ||||||
| Kenneth J. Kuick | ||||||||
Co-Chief Executive Officer and Chief Financial Officer | ||||||||
| (Principal Financial Officer and duly authorized signatory for the registrant) | ||||||||
29
Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
I, Kenneth J. Kuick, certify that:
1.I have reviewed this quarterly report on Form 10-Q of FAT Brands Inc.:
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: October 31, 2023 | /s/ Kenneth J. Kuick | ||||
| Kenneth J. Kuick | |||||
| Co-Chief Executive Officer and Chief Financial Officer | |||||
| (Principal Executive and Financial Officer) | |||||
Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
I, Robert G. Rosen, certify that:
1.I have reviewed this quarterly report on Form 10-Q of FAT Brands Inc.:
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: October 31, 2023 | /s/ Robert G. Rosen | ||||
| Robert G. Rosen | |||||
| Co-Chief Executive Officer and Head of Debt Capital Markets | |||||
| (Principal Executive Officer) | |||||
Exhibit 32.1
CERTIFICATIONS OF THE CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Each of the undersigned hereby certifies, in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in his capacity as an officer of FAT Brands Inc., that, to his or her knowledge, the Quarterly Report of FAT Brands Inc. on Form 10-Q for the period ended September 24, 2023 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operation of the company.
| Date: October 31, 2023 | By | /s/ Kenneth J. Kuick | ||||||
| Kenneth J. Kuick | ||||||||
| Co-Chief Executive Officer and Chief Financial Officer | ||||||||
| (Principal Executive, Financial and Accounting Officer) | ||||||||
| Date: October 31, 2023 | By | /s/ Robert G. Rosen | ||||||
| Robert G. Rosen | ||||||||
| Co-Chief Executive Officer and Head of Debt Capital Markets | ||||||||
| (Principal Executive Officer) | ||||||||
A signed original of this written statement required by Section 906 has been provided to FAT Brands Inc. and will be retained by FAT Brands Inc. and furnished to the Securities and Exchange Commission or its staff upon request.